<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1999
REGISTRATION NO. 333-57681
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
POST-EFFECTIVE AMENDMENT NO. 3 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
WRL SERIES LIFE
CORPORATE ACCOUNT
(EXACT NAME OF TRUST)
WESTERN RESERVE LIFE ASSURANCE
CO. OF OHIO
(NAME OF DEPOSITOR)
570 CARILLON PARKWAY
ST. PETERSBURG, FLORIDA 33716
(COMPLETE ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
COPY TO:
<TABLE>
<S> <C>
THOMAS E. PIERPAN, ESQ. STEPHEN E. ROTH, ESQ.
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO SUTHERLAND ASBILL & BRENNAN LLP
570 CARILLON PARKWAY 1275 PENNSYLVANIA AVENUE, N.W.
ST. PETERSBURG, FLORIDA 33716 WASHINGTON, DC 20004-2415
(NAME AND COMPLETE ADDRESS OF AGENT FOR
SERVICE)
</TABLE>
------------------------
It is proposed that this filing will become effective:
[X] Immediately upon filing pursuant to paragraph (b)
[ ] On (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1).
[ ] On (date) pursuant to paragraph (a)(1) of Rule 485.
SECURITIES BEING OFFERED: Variable Adjustable Life Insurance Policies
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PART I
<PAGE> 3
VARIABLE ADJUSTABLE LIFE INSURANCE POLICY
ISSUED BY
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
AND
WRL SERIES LIFE CORPORATE ACCOUNT
Western Reserve Life Assurance Co. of Ohio ("Western Reserve") is offering
the variable adjustable life insurance policy (the "Policy") described in this
prospectus. Certain Policy provisions may vary based on the state where Western
Reserve issues the Policy. Western Reserve designed the Policy to provide:
(1) insurance protection on the life of the insured person named in
the Policy, and
(2) flexibility regarding premium payments and the amount of life
insurance benefits payable under the Policy.
A purchaser of a Policy ("Owner," "you," or "your") may allocate amounts
under the Policy to one or more of the subaccounts of the WRL Series Life
Corporate Account (the "Separate Account"). Each subaccount invests its assets
in one of the following corresponding mutual fund portfolios (each, a
"Portfolio"):
<TABLE>
<CAPTION>
BT INSURANCE FUNDS TRUST FIDELITY VARIABLE INSURANCE PRODUCTS FUNDS PIMCO VARIABLE INSURANCE TRUST
------------------------ ------------------------------------------ ------------------------------
<S> <C> <C>
Small Cap Index Fund Growth Opportunities Portfolio Short-Term Bond Portfolio
Equity 500 Index Fund Contrafund(R) Portfolio Total Return Bond Portfolio
EAFE(R) Equity Index Fund Growth Portfolio StocksPLUS Growth and Income Portfolio
Balanced Portfolio Mid-Cap Growth Portfolio
High Income Portfolio Small-Cap Value Portfolio
Money Market Portfolio
T. ROWE PRICE EQUITY SERIES, INC. T. ROWE PRICE INTERNATIONAL SERIES, INC. JANUS ASPEN SERIES
- ------------------------------------------ ------------------------------------------ --------------------------------------
T. Rowe Price International Stock
T. Rowe Price Mid-Cap Growth Portfolio Portfolio Growth Portfolio
T. Rowe Price Equity Income Portfolio Capital Appreciation Portfolio
T. Rowe Price New America Growth Portfolio Worldwide Growth Portfolio
High-Yield Portfolio
</TABLE>
The prospectuses describing the Portfolios accompany this prospectus and
provide information on the investment objectives and risks of investing in the
Portfolios. The Owner bears the entire investment risk for amounts allocated to
a subaccount. The Policy has no guaranteed minimum value.
The Policy provides a life insurance benefit payable after the insured
person's death, and a Cash Value (total of amounts in the subaccounts and
amounts securing Policy loans) that you may obtain by partially withdrawing
amounts from the Policy or by completely surrendering the Policy. The amount of
the life insurance benefit may, and the Cash Value will, vary daily with the
investment results of the subaccounts and any additional premium payments.
However, as long as the Policy remains in force, Western Reserve guarantees that
the life insurance benefit will never be less than the Face Amount of the Policy
through age 100. While you are not required to make additional premium payments
under the Policy, additional premium payments may be necessary to prevent lapse
if there is insufficient Cash Value.
The Policy provides a free-look period whereby you may cancel the Policy
within 20 days after receiving it. Certain states may require a free-look period
longer than 20 days. It may not be to your advantage to replace existing
insurance with this Policy.
CURRENT PROSPECTUSES FOR THE PORTFOLIOS MUST ACCOMPANY OR PRECEDE THIS
PROSPECTUS. PLEASE READ THIS PROSPECTUS AND THE PROSPECTUSES FOR THE PORTFOLIOS
CAREFULLY AND RETAIN BOTH FOR FUTURE REFERENCE. CERTAIN PORTFOLIOS MAY NOT BE
AVAILABLE IN ALL STATES.
INTERESTS IN THE POLICY AND SHARES OF THE PORTFOLIOS ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR DEPOSITORY
INSTITUTION, AND THE POLICY IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THE POLICY INVOLVES INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF PREMIUMS INVESTED.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
POLICY OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospectus dated September 23, 1999
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<S> <C>
DEFINITIONS................................................. 4
SUMMARY..................................................... 6
INVESTMENT EXPERIENCE INFORMATION........................... 11
Rates of Return........................................... 11
ILLUSTRATIONS OF CASH VALUE, NET CASH VALUE AND LIFE
INSURANCE BENEFITS........................................ 12
OTHER PERFORMANCE DATA...................................... 16
WESTERN RESERVE AND THE SEPARATE ACCOUNT.................... 16
Western Reserve........................................... 16
The Separate Account...................................... 17
FACTS ABOUT THE POLICY...................................... 20
Availability of the Policy................................ 20
Applying for a Policy..................................... 20
Free-Look Period.......................................... 20
Premiums.................................................. 20
Policy Lapse and Reinstatement............................ 21
Allocation of Net Premiums and Cash Value................. 22
Policy Values............................................. 22
Transfer Privileges....................................... 23
Surrenders and Partial Withdrawals........................ 25
Loans..................................................... 25
Life Insurance Benefits................................... 27
Duration of the Policy.................................... 30
When Insurance Coverage Takes Effect...................... 30
Payment Options........................................... 31
CHARGES AND DEDUCTIONS...................................... 31
Percent of Premium Load................................... 31
Deferred Sales Charge..................................... 32
Monthly Deductions........................................ 32
Administrative Charges.................................... 33
Portfolio Expenses........................................ 34
OTHER POLICY PROVISIONS AND BENEFITS........................ 34
Ownership................................................. 34
Assignment................................................ 34
Western Reserve's Right to Contest the Policy............. 34
Suicide Exclusion......................................... 35
Misstatement of Age or Sex................................ 35
Modification of the Policy................................ 35
Payments by Western Reserve............................... 35
Reports to Owners......................................... 36
Claims of Creditors....................................... 36
Dividends................................................. 36
Supplemental Benefits and/or Riders....................... 36
FEDERAL TAX CONSIDERATIONS.................................. 37
Tax Status of the Policies................................ 37
Tax Treatment of Policy Benefits.......................... 37
</TABLE>
2
<PAGE> 5
<TABLE>
<S> <C>
OTHER INFORMATION ABOUT THE POLICIES AND WESTERN RESERVE.... 39
Sale of the Policies...................................... 39
Voting Privileges......................................... 39
Western Reserve's Directors and Executive Officers........ 40
Additional Information.................................... 41
Experts................................................... 41
Legal Matters............................................. 41
Legal Proceedings......................................... 41
Year 2000 Matters......................................... 41
Financial Statements...................................... 42
</TABLE>
This prospectus does not constitute an offering in any jurisdiction in
which such offering may not lawfully be made. No dealer, salesperson or other
person is authorized to give any information or make any representations in
connection with this offering other than those contained in this prospectus,
and, if given or made, you must not rely on such other information or
representations.
This Policy is not available in the State of New York.
3
<PAGE> 6
DEFINITIONS
Accumulation Unit -- A unit of measurement used to calculate values under
the Policy.
Administrative Office -- Western Reserve's administrative office located at
4333 Edgewood Road NE, Cedar Rapids, Iowa 52499, (610) 439-5253.
Attained Age -- The Insured's age on the Effective Date, plus the number of
complete Policy Years since the Effective Date.
Beneficiary -- The person(s) to whom Western Reserve pays the Life
Insurance Benefit proceeds upon the Insured's death.
Cash Value -- During the free look period, the Cash Value is the amount in
the General Account. After the free look period, the Cash Value is the sum of
the value of the Policy's accumulation units in each Subaccount and the Loan
Account.
Code -- The Internal Revenue Code of 1986, as amended.
Due Proof of Death -- Proof of death satisfactory to Western Reserve. Due
Proof of Death may consist of the following: (1) a certified copy of the death
record; (2) a certified copy of a court decree reciting a finding of death; or
(3) any other proof satisfactory to Western Reserve.
Effective Date -- The date shown in the Policy when insurance coverage is
effective and monthly deductions commence under the Policy. Western Reserve uses
the Effective Date to determine Policy Months, Policy Years, and Policy
Anniversaries. If the Effective Date would fall on the 29th, 30th or 31st day of
any month, the Effective Date will be the 28th day of the month.
Face Amount -- A dollar amount the Owner selects that is shown in the
Policy and used to determine the Life Insurance Benefit.
General Account -- Western Reserve's assets other than those allocated to
the Separate Account or any other separate account Western Reserve establishes.
Indebtedness -- The Loan Amount plus any accrued loan interest.
Insured -- The person whose life is insured by the Policy.
Issue Age -- The Insured's age on the Effective Date.
Lapse -- Termination of the Policy at the expiration of the Late Period
while the Insured is still living.
Late Period -- A 62-day period during which an Owner may make premium
payments to cover the overdue (and other specified) monthly deductions and
thereby prevent the Policy from lapsing.
Life Insurance Benefit -- The amount payable to the Beneficiary under a
Life Insurance Benefit Option before adjustments if the Insured dies while the
Policy is in force.
Life Insurance Benefit Option -- One of three options that an Owner may
select for the computation of the Life Insurance Benefit Proceeds.
Life Insurance Benefit Proceeds -- The total amount payable to the
Beneficiary if the Insured dies while the Policy is in force. The Life Insurance
Benefit Proceeds include reductions for any outstanding Indebtedness and any due
and unpaid charges.
Loan Account -- A portion of the General Account to which Western Reserve
transfers Cash Value to provide collateral for any loan taken under the Policy.
Loan Account Value -- The Cash Value in the Loan Account.
Loan Amount -- The Loan Amount on the last Policy Anniversary plus any new
loans minus any loan repayments. On each Policy Anniversary, Western Reserve
adds unpaid loan interest to the Loan Amount.
4
<PAGE> 7
Monthly Deduction Day -- The same date in each succeeding month as the
Effective Date. Whenever the Monthly Deduction Day falls on a date other than a
Valuation Day, Western Reserve will deem the Monthly Deduction Day to be the
next Valuation Day.
Net Cash Value -- The amount payable on surrender of the Policy. It is
equal to the Cash Value as of the date of surrender minus any outstanding Policy
loan and any loan interest due, plus refund of premium load at surrender, if
applicable.
Net Premium -- The portion of any premium available for allocation to the
Subaccounts equal to the premium paid less the applicable percent of premium
load.
1940 Act -- The Investment Company Act of 1940, as amended.
NYSE -- New York Stock Exchange.
Owner -- The owner of the Policy, as shown in Western Reserve's records.
All of the rights and benefits of the Policy belong to the Owner, unless
otherwise stated in the Policy.
Planned Premium -- The premium the Owner selects as a level amount that he
or she plans to pay on a quarterly, semi-annual or annual basis over the life of
the Policy.
Policy Anniversary -- The same date in each Policy Year as the Effective
Date.
Policy Month -- A one-month period beginning on the Monthly Deduction Day.
Policy Year -- A twelve-month period beginning on the Effective Date or on
a Policy Anniversary.
Portfolio(s) -- A series of a mutual fund in which a corresponding
Subaccount invests its assets.
SEC -- U.S. Securities and Exchange Commission.
Separate Account -- WRL Series Life Corporate Account, a separate
investment account Western Reserve established to receive and invest Net
Premiums allocated under the Policy.
Settlement Option -- The manner in which an Owner or Beneficiary elects to
receive the amount of any surrender or partial withdrawal or the Life Insurance
Benefit Proceeds.
Subaccount -- A subdivision of the Separate Account, whose assets are
invested in a corresponding Portfolio.
Subaccount Value -- The Cash Value in a Subaccount.
Target Premium -- An amount of premium used to determine the percent of
premium load. It is equal to the seven-pay limit defined in Section 7702(A) of
the Code.
Valuation Day -- For each Subaccount, each day on which the New York Stock
Exchange is open for business except for days that a Subaccount's corresponding
Portfolio does not value its shares. Currently, there are no days when the New
York Stock Exchange is open for business and a Portfolio does not value its
shares.
Valuation Period -- The period that starts at the close of regular trading
on the New York Stock Exchange on any Valuation Day and ends at the close of
regular trading on the next succeeding Valuation Day.
5
<PAGE> 8
SUMMARY
The following summary of prospectus information provides a brief overview
of the more significant aspects of the Policy. You should read this summary in
conjunction with the detailed information appearing elsewhere in this
prospectus.
Under Western Reserve's current rules, Western Reserve will offer the
Policy to corporations and partnerships that meet the following conditions at
issue:
- a minimum of five (5) Policies are issued, each on the life of a
different Insured; or
- the aggregate annualized first-year planned periodic premium for all
Policies is at least $100,000.
1. WHAT IS THE POLICY'S OBJECTIVE?
The Policy's provides for:
- the payment of a minimum Life Insurance Benefit to a Beneficiary
upon the Insured's death;
- the accumulation of Cash Value; and
- surrender rights and Policy loan privileges.
The Policy allows Owners to allocate Net Premiums to one or more
Subaccounts of the Separate Account. Each Subaccount invests in a designated
Portfolio. Western Reserve does not guarantee the amount and/or duration of the
life insurance coverage and the Cash Value of the Policy, both of which may
increase or decrease depending upon the investment experience of the
Subaccounts. Accordingly, the Owner bears the investment risk of any
depreciation in value of the underlying assets of the Separate Account but reaps
the benefits of any appreciation in value. (See Allocation of Net Premiums and
Cash Value -- Allocation of Net Premiums, p. 21.)
2. WHAT LIFE INSURANCE BENEFIT OPTIONS ARE AVAILABLE UNDER THE POLICY?
The Policy provides the payment of benefits upon the death of the Insured.
The Policy contains three Life Insurance Benefit (also known as death benefit)
options.
- Under Life Insurance Benefit Option 1, the Life Insurance Benefit is
the greater of the Face Amount of the Policy, or a specified
percentage multiplied by the Cash Value of the Policy on the date of
death of the Insured.
- Under Life Insurance Benefit Option 2, the Life Insurance Benefit is
the greater of the Face Amount of the Policy plus the Cash Value of
the Policy on the date of death of the Insured, or a specified
percentage multiplied by the Cash Value of the Policy on the date of
death of the Insured.
- Under Life Insurance Benefit Option 3, the Life Insurance Benefit is
the greater of the Face Amount of the Policy plus the cumulative
premiums paid less cumulative partial withdrawals, or a specified
percentage multiplied by the Cash Value of the Policy on the date of
death of the Insured.
Western Reserve may pay benefits under the Policy in a lump sum or under
one of the settlement options set forth in the Policy. (See Payment Options, p.
31.)
Certain optional insurance benefits are available under the Policy. Western
Reserve will deduct the cost of these optional insurance benefits from Cash
Value as part of the monthly deduction. (See Charges and Deductions -- Monthly
Deductions, p. 32.)
3. HOW MAY THE AMOUNT OF THE LIFE INSURANCE BENEFIT AND CASH VALUE VARY?
Under any Life Insurance Benefit Option, as long as the Policy remains in
force, the Life Insurance Benefit will not be less than the current Face Amount
of the Policy. The Life Insurance Benefit may, however,
6
<PAGE> 9
exceed the Face Amount under certain circumstances. The amount by which the Life
Insurance Benefit exceeds the Face Amount depends upon the option chosen and the
Cash Value of the Policy. The amount of Life Insurance Benefit Proceeds will
reflect reductions for any outstanding Indebtedness and any due and unpaid
charges, and additions for any additional insurance benefits added by rider.
(See Facts About the Policy -- Life Insurance Benefits, p. 26.)
The Policy's Cash Value will reflect the amount and frequency of premium
payments, the investment experience of the chosen Subaccounts, any partial
withdrawals, and any charges imposed in connection with the Policy. The Owner
bears the entire investment risk for amounts allocated to the Separate Account.
Western Reserve does not guarantee a minimum Cash Value. (See Facts About the
Policy -- Policy Values, p. 22.)
4. MAY AN OWNER ADJUST THE AMOUNT OF THE LIFE INSURANCE BENEFIT?
The Owner has significant flexibility to adjust the Life Insurance Benefit
payable by changing the Life Insurance Benefit Option type, and by increasing or
decreasing the Face Amount of the Policy or adding riders to increase the total
Life Insurance Benefit payable. You may not change the Life Insurance Benefit
Option type during the first Policy Year. (See Life Insurance
Benefits -- Changing the Life Insurance Benefit Option, p. 29.) Owners also may
not change the Face Amount during the first Policy Year. Any increase in the
Face Amount will require additional evidence of insurability satisfactory to
Western Reserve, and will result in additional charges. (See Facts About the
Policy -- Life Insurance Benefits, p. 26; and Monthly Deductions -- Cost of
Insurance, p. 32.)
5. WHAT FLEXIBILITY DOES AN OWNER HAVE REGARDING PREMIUMS?
An Owner has considerable flexibility concerning the amount and frequency
of premiums. Western Reserve will require the Owner to pay an initial premium
before insurance coverage is in force. Thereafter, an Owner may, subject to
certain restrictions, make premium payments in any amount and at any frequency.
(See Premiums, p. 20.)
Each Owner will determine a schedule for premium payments ("Planned
Periodic Premium"). The schedule will provide a premium payment of a level
amount at a fixed interval over a specified period of time. Your Policy will
prescribe the amount and frequency of Planned Periodic Premiums and you may
change them upon written request. (See Premiums, p. 20.)
Failing to pay Planned Periodic Premiums will not itself cause the Policy
to lapse, and paying Planned Periodic Premiums will not guarantee that the
Policy remains in force. Additional premiums may be necessary to prevent lapse
if the Net Cash Value is insufficient to pay certain monthly charges, and a Late
Period expires without the Owner making a sufficient payment. (See Policy Lapse
and Reinstatement -- Lapse, p. 21.)
6. WHEN WILL THE POLICY LAPSE?
The Policy will Lapse when Net Cash Value is insufficient to pay the
monthly deduction, and a Late Period expires without the Owner making a
sufficient payment. (See Charges and Deductions -- Monthly Deductions, p. 32;
and Policy Lapse and Reinstatement, p. 21.) Such a Lapse could happen if the
investment experience has been sufficiently unfavorable and results in a
decrease in the Net Cash Value, or the Net Cash Value has decreased because the
Owner did not pay enough premiums to offset the monthly charges.
7. HOW ARE NET PREMIUMS ALLOCATED?
The portion of the premium available for allocation ("Net Premium") equals
the premium paid less the applicable percent of premium load. (See Charges and
Deductions -- Percent of Premium Load, p. 31.) The Owner initially determines
the allocation of the Net Premium among the Subaccounts of the Separate Account,
each of which invests in shares of a designated Portfolio. Each Portfolio has a
different investment objective. (See Investments of the Separate Account, p.
17.)
Until the end of the free-look period, Western Reserve will allocate all
premiums to the General Account, notwithstanding the allocation instructions in
the application. (See Free-Look Period, p. 20.) You may change
7
<PAGE> 10
the allocation of future Net Premiums without charge at any time by providing
Western Reserve with written notification from the Owner, or by calling the
Administrative Office at (610) 439-5253.
An Owner may transfer Cash Value among the Subaccounts, subject to certain
restrictions. The transfer will be effective on the first Valuation Date on or
following the day the Administrative Office receives appropriate notice of such
transfer, based on the price next determined following receipt of the notice.
(See Transfer Privileges, p. 23.)
8. IS THERE A "FREE-LOOK" PERIOD?
The Policy provides a free-look period whereby the Owner may cancel the
Policy within 20 days after receiving it. Certain states require a free-look
period longer than 20 days, either for all Owners or for certain classes of
Owners. In most states, Western Reserve will refund the greater of the Policy's
Cash Value as of the date the Policy is returned or the amount of premiums paid,
less any partial withdrawals. (See Free-Look Period, p. 20.) Under ordinary
circumstances, the refunded amount will be the premiums paid less partial
withdrawals.
9. MAY THE POLICY BE SURRENDERED?
The Owner may totally surrender the Policy at any time and receive the Net
Cash Value of the Policy. If the Owner surrenders the Policy during the first
three Policy Years, Western Reserve will refund a portion of the Percent of
Premium Load charged in that Policy Year. (See Charges and Deductions -- Percent
of Premium Load, p. 31.)
Subject to certain limitations, the Owner may also make partial withdrawals
from the Policy at any time after the first Policy Year. (See Surrenders and
Partial Withdrawals, p. 24.) If Life Insurance Benefit Option 1 is in effect,
partial withdrawals will reduce the Policy's Face Amount by the amount of the
partial withdrawal. If Life Insurance Benefit Option 3 is in effect and total
partial withdrawals are greater than the sum of the premiums, the Face Amount is
reduced by the amount of the partial withdrawals minus the sum of the premiums;
otherwise the Face Amount is not reduced.
10. WHAT IS THE LOAN PRIVILEGE?
After the first Policy Anniversary, an Owner may obtain a Policy loan in
any amount (minimum $500) which is not greater than 90% of the Cash Value less
any already outstanding loan. Western Reserve retains the right to permit a
Policy loan prior to the first Policy Anniversary for certain Policies. A loan
taken from, or secured by, a Policy may be treated as a taxable distribution,
and also may be subject to a penalty tax. (See Federal Tax Considerations, p.
37.)
The guaranteed annual interest rate on a Policy loan is 6.0% and is due on
each Policy Anniversary for the prior Policy Year and on the date the loan is
repaid. The current annual interest rate on a Policy loan is 4.25% in Policy
Years 1-15, 4.15% in Policy Years 16-30, and 4.10% for Policy Years 31+. (See
Loans -- Interest Rate Charged, page 25.) Western Reserve will transfer the
requested amount of a loan, plus interest for one year in advance, from the
Subaccounts to the Loan Account and credit this amount at the end of each Policy
Year with interest at a rate of 4% per year. Upon repayment of a loan, Western
Reserve will transfer amounts in the Loan Account in excess of the outstanding
value of the loan to the Subaccounts in the same manner as Net Premium
allocations.
There are risks involved in taking a Policy loan, a few of which include
the potential for a Policy to lapse if projected earnings, taking into account
any outstanding loans, are not achieved, as well as adverse tax consequences
which occur if a Policy lapses with loans outstanding. (See Federal Tax
Considerations -- Tax Treatment of Policy Benefits, p. 37.)
11. WHAT CHARGES AND DEDUCTIONS ARE ASSESSED UNDER THE POLICY?
Western Reserve assesses certain charges and deductions under the Policy to
compensate for services and benefits provided, costs and expenses incurred, and
risks assumed by Western Reserve in connection with the
8
<PAGE> 11
Policies. Some charges are assessed as percentages of Cash Value or premium
payments, and others are assessed as a flat dollar amount. The charges and
deductions under the Policy include the following:
PERCENT OF PREMIUM LOAD. During the first Policy Year, Western Reserve
deducts 11.5% of each premium received up to the Target Premium, and 3.0% of
each premium received in excess of the Target Premium. During Policy Years 2-7,
Western Reserve deducts 11.5% of each premium received up to the Target Premium,
and 7.5% of each premium received in excess of the Target Premium. In Policy
Years 8+, Western Reserve deducts 4.5% of all premiums received. Under most
circumstances, the Target Premium is the maximum premium an Owner can pay in a
Policy Year without the Policy becoming a Modified Endowment Contract. Premiums
paid in excess of the Target Premium may have adverse tax consequences. (See
Federal Tax Considerations -- Tax Treatment of Policy Benefits, p. 37.) If the
Owner surrenders the Policy during the first three Policy Years, Western Reserve
will refund a portion of the Percent of Premium Load charged in that Policy
Year. (See Charges and Deductions -- Percent of Premium Load, p. 31.)
DEFERRED SALES CHARGE. On each Policy Anniversary during Policy Years
2 - 7, Western Reserve deducts a deferred sales charge equal to 1.5% of premiums
paid up to the Target Premium during the first Policy Year. Western Reserve will
also deduct 1% of the amount of any decrease in excess premium (not including
Section 1035 monies) received in Policy Years 2-7 from the excess premium
received in the first Policy Year.
MONTHLY DEDUCTION. Each month, Western Reserve makes a Monthly Deduction
from the Cash Value to cover the cost of administering the Policies (Monthly
Policy Charge), the cost of providing insurance protection under the Policy
(i.e., the cost of insurance charge) including any insurance benefits provided
by rider, and the mortality and expense risk charge.
MONTHLY POLICY CHARGE. Western Reserve deducts a monthly charge equal to
$16.50 in the first Policy Year, and $4.00 (current, $10 maximum) in subsequent
Policy Years to compensate Western Reserve for the cost of administering the
Policies.
MORTALITY AND EXPENSE RISK CHARGE. On each Monthly Deduction Day, Western
Reserve currently deducts a mortality and expense risk charge equal to an annual
rate of 0.25% of the Cash Value in the Subaccounts in Policy Years 1-15, and
0.15% of the Cash Value in the Subaccounts in Policy Years 16-30, and 0.10% of
the Cash Value in the Subaccounts in subsequent Policy Years. The maximum annual
rate of this charge in any Policy Year is 0.90% of the Cash Value in the
Subaccounts.
TRANSFER CHARGE. Western Reserve reserves the right to apply a $25
transfer charge for each transfer after the first 12 transfers in any Policy
Year.
PARTIAL WITHDRAWAL CHARGE. Western Reserve deducts a charge equal to the
lesser of $25 or 2% of the amount requested to cover administrative expenses
associated with each partial withdrawal.
PORTFOLIO EXPENSES. The Portfolios incur investment advisory fees and
other expenses that are reflected as an annual rate of the average daily net
assets of each Portfolio. The levels of the fees and expenses for the year ended
December 31, 1998 vary among the Portfolios and are described below and in the
prospectuses for the Portfolios:
<TABLE>
<CAPTION>
MANAGEMENT FEE OTHER TOTAL ANNUAL
(AFTER WAIVER EXPENSES (AFTER WAIVER EXPENSES (AFTER WAIVER
PORTFOLIO OR REIMBURSEMENT) OR REIMBURSEMENT) OR REIMBURSEMENT)
--------- ----------------- ---------------------- ----------------------
<S> <C> <C> <C>
BT Small Cap Index(1)............ 0.35% 0.10% 0.45%
BT Equity 500 Index(1)........... 0.20% 0.10% 0.30%
BT EAFE(R) Equity Index(1)....... 0.45% 0.20% 0.65%
Fidelity VIP Growth
Opportunities(2)............... 0.59% 0.11% 0.70%
Fidelity VIP Contrafund(R)(2).... 0.59% 0.07% 0.66%
Fidelity VIP Growth(2)........... 0.59% 0.07% 0.66%
Fidelity VIP Balanced(2)......... 0.44% 0.14% 0.58%
Fidelity VIP High Income......... 0.58% 0.12% 0.70%
Fidelity VIP Money Market........ 0.20% 0.10% 0.30%
PIMCO Short-Term Bond(3)......... 0.35% 0.25% 0.60%
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
MANAGEMENT FEE OTHER TOTAL ANNUAL
(AFTER WAIVER EXPENSES (AFTER WAIVER EXPENSES (AFTER WAIVER
PORTFOLIO OR REIMBURSEMENT) OR REIMBURSEMENT) OR REIMBURSEMENT)
--------- ----------------- ---------------------- ----------------------
<S> <C> <C> <C>
PIMCO Total Return Bond(3)....... 0.40% 0.25% 0.65%
PIMCO StocksPLUS Growth and
Income(3)...................... 0.40% 0.25% 0.65%
PIMCO Mid-Cap Growth(3).......... 0.60% 0.25% 0.85%
PIMCO Small-Cap Value(3)......... 0.70% 0.25% 0.95%
T. Rowe Price Mid-Cap Growth(5).. 0.85% 0.00% 0.85%
T. Rowe Price Equity Income(5)... 0.85% 0.00% 0.85%
T. Rowe Price New America
Growth(5)...................... 0.85% 0.00% 0.85%
T. Rowe Price International
Stock(5)....................... 1.05% 0.00% 1.05%
Janus Aspen Series Growth(4)..... 0.65% 0.03% 0.68%
Janus Aspen Series Capital
Appreciation(4)................ 0.70% 0.22% 0.92%
Janus Aspen Series Worldwide
Growth(4)...................... 0.65% 0.07% 0.72%
Janus Aspen Series High
Yield(4)....................... 0.00% 1.00% 1.00%
</TABLE>
- ---------------
(1) For the year ended December 31, 1998, the investment adviser voluntarily
agreed to waive a portion of its management fee with respect to each
Portfolio so that each Portfolio's total annual expenses would not exceed
the amounts shown in the table. Without such waiver, each Portfolio's total
annual expenses would have been equal to the following: Small Cap
Index -- 1.58%; Equity 500 Index -- 1.19%; and EAFE(R) Equity
Index -- 1.66%.
(2) A portion of the brokerage commissions that certain Portfolios paid was used
to reduce each of these Portfolio's expenses. In addition, certain
Portfolio's entered into arrangements with their custodian whereby credits
realized as a result of uninvested cash balances were used to reduce
custodian expenses. Without these reductions, the total annual expenses
would have been equal to the following: Growth Opportunities -- 0.71%,
Contrafund(R) -- 0.70%, Growth -- 0.68%, Balanced -- 0.59%.
(3) PIMCO has agreed to reduce its administrative fee, subject to potential
reimbursement, to the extent that total Portfolio operating expenses would
exceed, due to organizational expenses and the payment by the Portfolio of
its pro rata portion of the Trustees' fees, the fees listed above. Absent
this agreement, the total annual expenses would have been equal to the
following: Short-Term Bond -- 0.62%, Total Return Bond -- 0.75%, StocksPLUS
Growth and Income -- 0.72%, Mid-Cap Growth -- 0.87%, Small-Cap
Value -- 0.97%. Other Expenses are based on estimates for the current fiscal
year for Short-Term Bond, Mid-Cap Growth and Small-Cap Value.
(4) Janus' expenses are stated with contractual waivers and fee reductions by
Janus Capital. Fee reductions for Growth, Capital Appreciation and Worldwide
Growth Portfolios reduce the Management Fee to the level of the
corresponding Janus retail fund. Other waivers are first applied against the
Management Fee and then against Other Expenses. Janus Capital has agreed to
continue the waivers and fee reductions until at least the next annual
renewal of the advisory agreement. Absent this agreement, the total annual
expenses would have been equal to the following: Growth -- 0.75%, Capital
Appreciation -- 0.97%, Worldwide Growth -- 0.74%, High-Yield -- 2.11%.
(5) Management fee includes operating expenses.
12. ARE TRANSFERS PERMITTED AMONG THE SUBACCOUNTS?
An Owner may transfer Cash Value among the Subaccounts of the Separate
Account. Each Policy Year, you may make 12 Cash Value transfers without
incurring any charge. Each additional transfer in a Policy Year may be subject
to a transfer charge of $25. Western Reserve may at any time revoke or modify
the transfer privilege. (See Transfer Privileges, p. 23.)
10
<PAGE> 13
13. WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF PURCHASING A POLICY?
Western Reserve intends for the Policy to satisfy the definition of a life
insurance contract under Section 7702 of the Code. Under certain circumstances,
a Policy may be treated as a "modified endowment contract" depending upon the
amount of premiums paid in relation to the Life Insurance Benefit. (See Tax
Treatment of Policy Benefits -- Modified Endowment Contracts, p. 38.) If the
Policy is a modified endowment contract, then all pre-death distributions,
including Policy loans and loans secured by a Policy, will be treated first as a
distribution of taxable income to the extent of any gain and then as a return of
basis or investment in the contract. In addition, any distributions of gains
generally will be subject to a 10% penalty tax.
If the Policy is not a modified endowment contract, distributions generally
will be treated first as a return of basis or investment in the Policy and then
as disbursing taxable income. Moreover, Policy loans and loans secured by a
Policy will generally not be treated as distributions but there is uncertainty
as to the tax treatment of loans from the Policy after the first Policy Year.
Finally, neither distributions nor loans from a Policy that is not a modified
endowment contract are subject to the 10% penalty tax. For further elaboration
on the tax consequences of a Policy, see Federal Tax Considerations, p. 37.
In recent years, Congress has adopted new rules relating to life insurance
owned by businesses. Any business contemplating the purchase of a new life
insurance contract or a change in an existing life insurance contract should
consult a tax adviser. You should consult a tax adviser with respect to
legislative developments and their effect on the Policy. (See Federal Tax
Considerations, p. 37.)
INVESTMENT EXPERIENCE INFORMATION
The information provided in this section shows the historical investment
experience of the Portfolios and hypothetical illustrations of the Policy based
on the historical investment experience of the Portfolios. It does not represent
or project future investment performance.
The Policies became available for sale and the Separate Account began
operations in December of 1998. The Portfolios' dates of inception are indicated
in the table below. The rates of return shown below depict the actual investment
experience of each Portfolio for the periods shown. The actual rate of return in
each calendar year was assumed to be uniformly earned throughout that year. The
actual performance of the Portfolios has and will vary throughout the year.
Rates of Return
The rates of return shown below are based on the Portfolios' actual
investment performance, after the deduction of investment advisory fees and
other expenses of the Portfolios. The rates are average annual compounded rates
of return for the periods ended on December 31, 1998.
These rates of return do not reflect the percent of premium load, deferred
sales loads, or monthly deductions from Cash Value. Accordingly, these rates of
return do not illustrate how actual investment performance will affect benefits
under the Policies. Moreover, these rates of return are not an estimate,
projection or guarantee of future performance.
11
<PAGE> 14
AVERAGE ANNUAL COMPOUNDED RATES OF RETURN FOR
THE PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
10 YEARS OR
SINCE
PORTFOLIO (DATE OF INCEPTION) 1 YEAR 5 YEARS INCEPTION*
- ----------------------------- ------ ------- ---------------
<S> <C> <C> <C>
BT Small Cap Index (8/25/97)........................... (2.18)% N/A 2.07%
BT Equity 500 Index (10/1/97).......................... 28.71 % N/A 24.25%
BT EAFE(R) Equity Index (10/1/97)...................... 21.60 % N/A 9.82%
Fidelity VIP Growth Opportunities (1/3/95)............. 24.61 % N/A 26.26%*
Fidelity VIP Contrafund(R) (1/3/95).................... 29.98 % N/A 28.62%*
Fidelity VIP Growth (10/9/86).......................... 39.49 % 21.74% 19.41%
Fidelity VIP Balanced (1/3/95)......................... 17.64 % N/A 15.86%*
Fidelity VIP High Income (9/19/85)..................... (4.33)% 8.80% 11.08%
Fidelity VIP Money Market (4/1/82)..................... 5.46 % 5.30% 5.67%
PIMCO Short-Term Bond**................................ N/A N/A N/A
PIMCO Total Return Bond (12/31/97)..................... 8.61 % N/A N/A
PIMCO StocksPLUS Growth and Income (12/31/97).......... 30.11 % N/A N/A
PIMCO Mid-Cap Growth**................................. N/A N/A N/A
PIMCO Small-Cap Value**................................ N/A N/A N/A
T. Rowe Price Mid-Cap Growth (12/31/96)................ 22.08 % N/A 20.43%*
T. Rowe Price Equity Income (3/31/94).................. 9.07 % N/A 20.49%*
T. Rowe Price New America Growth (3/31/94)............. 18.51 % N/A 22.56%*
T. Rowe Price International Stock (3/31/94)............ 15.86 % N/A 9.66%*
Janus Aspen Series Growth (9/13/93).................... 35.66 % 21.41% 20.91%*
Janus Aspen Series Capital Appreciation (5/1/97)....... 58.11 % N/A 51.65%*
Janus Aspen Series Worldwide Growth (9/13/93).......... 28.92 % 21.32% 24.06%*
Janus Aspen Series High Yield (5/1/96)................. 1.26 % N/A 10.97%*
</TABLE>
- ---------------
** Inception date for these Portfolios was after 12/31/98.
Additional information regarding the Portfolios' investment performance
appears in the prospectuses for the Portfolios.
ILLUSTRATIONS OF CASH VALUE, NET CASH VALUE AND LIFE INSURANCE BENEFITS
The following illustrations have been prepared to show how certain values
under a hypothetical Policy would change with varying levels of assumed
investment performance over an extended period of time. In particular, the
illustrations show how the Cash Value, Net Cash Value and Life Insurance Benefit
under a Policy with Life Insurance Benefit Option 3 covering an Insured of the
male sex, non-tobacco and Age 35 on the Effective Date, would vary over time if
premiums were paid annually and the return on the assets in the Portfolios were
a uniform gross annual rate (before any expenses) of 0%, 6% or 12%. THE
HYPOTHETICAL INVESTMENT RATES OF RETURN ARE FOR PURPOSES OF ILLUSTRATION ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF
RETURN. Actual rates of return for a particular Policy may be more or less than
the hypothetical investment rates of return and will depend on a number of
factors including the investment allocations made by an Owner, prevailing rates
and rates of inflation. Also, values would be different from those shown if the
gross annual investment returns averaged 0%, 6%, and 12% over a period of years
but fluctuated above and below those averages for individual Policy Years.
The illustrations assume that the assets in the Portfolios are subject to
an annual expense ratio of 0.71% of the average daily net assets. This annual
expense ratio is based on the average of the expense ratios of each of the
Portfolios for the last fiscal year and take into account current expense
reimbursement arrangements. (Such reimbursement arrangements were in effect
during the last fiscal year.) For information on Portfolio expenses, see the
prospectuses for the Portfolios.
The illustrations also reflect the application of the percent of premium
load, the monthly Policy charge, the deduction of the deferred sales load, and
the monthly deduction from Cash Value for the hypothetical Insured. Western
Reserve's current cost of insurance charge, mortality and expense risk charges,
and monthly Policy charge and the higher guaranteed maximum cost of insurance,
mortality and expense risk and monthly Policy charges Western Reserve has the
contractual right to charge are reflected in separate illustrations on
12
<PAGE> 15
each of the following pages. All the illustrations reflect the fact that no
other charges for Federal or state income taxes are currently made against the
Separate Account and assume no Loan Account Value or charges for supplemental
benefits.
After deduction of Portfolio expenses, the illustrated gross annual
investment rates of return of 0%, 6% and 12% would correspond to approximate net
annual rates for the Separate Account of -0.748%, 5.252% and 11.252%,
respectively. Net annual rates of return for the Separate Account are not equal
to net annual rates of return for the Policy because the Separate Account rates
do not reflect all charges to the Policy.
The illustrations are based on Western Reserve's sex distinct rates for
non-tobacco users. Upon request, Western Reserve will furnish a comparable
illustration based upon the proposed Insured's individual circumstances. Such
illustrations may assume different hypothetical rates of return than those
illustrated in the following illustrations.
13
<PAGE> 16
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
HYPOTHETICAL ILLUSTRATIONS
MALE ISSUE AGE 35
<TABLE>
<S> <C> <C>
Face Amount: $250,000 Guaranteed Issue Class
Annual Premium: $10,320 Life Insurance Benefit Option III
</TABLE>
USING CURRENT COST OF INSURANCE RATES, M&E RISK CHARGES, AND MONTHLY POLICY
CHARGES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIFE INSURANCE BENEFIT
---------------------------------------------
ASSUMING HYPOTHETICAL GROSS AND NET
ANNUAL INVESTMENT RETURN OF
END OF PREMIUMS ---------------------------------------------
POLICY ACCUMULATED 0% (GROSS) 6% (GROSS) 12% (GROSS)
YEAR AT 5% -.748% (NET) 5.252% (NET) 11.252% (NET)
------ ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
1.................... 10,836 260,320 260,320 260,320
2.................... 22,214 270,640 270,640 270,640
3.................... 34,160 280,960 280,960 280,960
4.................... 46,705 291,280 291,280 291,280
5.................... 59,876 301,600 301,600 301,600
6.................... 73,706 311,920 311,920 311,920
7.................... 88,227 322,240 322,240 322,240
8.................... 103,474 332,560 332,560 360,573
9.................... 119,484 342,880 342,880 418,939
10................... 136,294 353,200 353,200 481,427
15................... 233,825 404,800 510,099 849,532
20................... 358,303 456,400 677,268 1,364,866
30................... 719,931 559,600 1,017,600 3,126,108
40................... 1,308,986 662,800 1,425,914 6,956,312
50................... 2,268,495 766,000 1,969,030 15,694,059
60................... 3,831,433 lapse 2,744,805 36,440,764
</TABLE>
<TABLE>
<CAPTION>
CASH VALUE NET CASH VALUE
--------------------------------------------- ---------------------------------------------
ASSUMING HYPOTHETICAL GROSS AND NET ASSUMING HYPOTHETICAL GROSS AND NET
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF --------------------------------------------- ---------------------------------------------
POLICY 0% (GROSS) 6% (GROSS) 12% (GROSS) 0% (GROSS) 6% (GROSS) 12% (GROSS)
YEAR -.748% (NET) 5.252% (NET) 11.252% (NET) -.748% (NET) 5.252% (NET) 11.252% (NET)
------ ------------ ------------ ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
1.................... 8,750 9,220 9,755 9,370 9,839 10,374
2.................... 17,457 18,874 20,551 18,076 19,493 21,170
3.................... 26,095 28,963 32,485 26,714 29,583 33,104
4.................... 34,681 39,528 45,702 34,681 39,528 45,702
5.................... 43,223 50,600 60,354 43,223 50,600 60,354
6.................... 51,726 62,210 76,603 51,726 62,210 76,603
7.................... 60,181 74,378 94,623 60,181 74,378 94,623
8.................... 69,463 88,053 115,568 69,463 88,053 115,568
9.................... 78,676 102,375 138,722 78,676 102,375 138,722
10................... 87,821 117,377 164,309 87,821 117,377 164,309
15................... 132,384 203,227 338,459 132,384 203,227 338,459
20................... 175,108 310,674 626,085 175,108 310,674 626,085
30................... 248,439 605,714 1,860,778 248,439 605,714 1,860,778
40................... 279,895 1,040,813 5,077,600 279,895 1,040,813 5,077,600
50................... 150,876 1,654,647 13,188,285 150,876 1,654,647 13,188,285
60................... lapse 2,518,169 33,431,893 lapse 2,518,169 33,431,893
</TABLE>
- ---------------
The hypothetical rates of return shown above are illustrative only and should
not be deemed a representation of past or future investment rates of return.
Actual rates of return may be more or less than those shown and will depend on a
number of factors, including the investment allocations made by an Owner and the
actual investment experience of the Portfolios. The Cash Value, Net Cash Value
and Life Insurance Benefit for a Policy would be different from those shown if
the actual rates of return averaged 0.00%, 6.00%, and 12.00% over a period of
years, but also fluctuated above or below those averages for individual Policy
Years. No representations can be made that these hypothetical rates of return
can be achieved for any one year or sustained over any period of time.
14
<PAGE> 17
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE HYPOTHETICAL ILLUSTRATIONS MALE ISSUE AGE 35
<TABLE>
<S> <C> <C>
Face Amount: $250,000 Guaranteed Issue Class
Annual Premium: $10,320 Life Insurance Benefit Option III
</TABLE>
USING GUARANTEED COST OF INSURANCE RATES, M&E RISK CHARGES, AND MONTHLY POLICY
CHARGES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIFE INSURANCE BENEFIT
---------------------------------------------
ASSUMING HYPOTHETICAL GROSS AND
NET ANNUAL INVESTMENT RETURN OF
END OF PREMIUMS ---------------------------------------------
POLICY ACCUMULATED 0% (GROSS) 6% (GROSS) 12% (GROSS)
YEAR AT 5% -.748% (NET) 5.252% (NET) 11.252% (NET)
- ------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
1.................... 10,836 260,320 260,320 260,320
2.................... 22,214 270,640 270,640 270,640
3.................... 34,160 280,960 280,960 280,960
4.................... 46,705 291,280 291,280 291,280
5.................... 59,876 301,600 301,600 301,600
6.................... 73,706 311,920 311,920 311,920
7.................... 88,227 322,240 322,240 322,240
8.................... 103,474 332,560 332,560 332,560
9.................... 119,484 342,880 342,880 381,386
10................... 136,294 353,200 353,200 435,757
15................... 233,825 404,800 448,148 741,445
20................... 358,303 456,400 571,883 1,132,492
30................... 719,931 559,600 773,892 2,275,930
40................... 1,308,986 662,800 942,342 4,262,361
50................... 2,268,495 lapse 1,093,600 7,789,454
60................... 3,831,433 lapse 1,265,291 14,425,070
</TABLE>
<TABLE>
<CAPTION>
CASH VALUE NET CASH VALUE
--------------------------------------------- ---------------------------------------------
ASSUMING HYPOTHETICAL GROSS AND NET ASSUMING HYPOTHETICAL GROSS AND NET
ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
END OF --------------------------------------------- ---------------------------------------------
POLICY 0% (GROSS) 6% (GROSS) 12% (GROSS) 0% (GROSS) 6% (GROSS) 12% (GROSS)
YEAR -.748% (NET) 5.252% (NET) 11.252% (NET) -.748% (NET) 5.252% (NET) 11.252% (NET)
- ------ ------------ ------------ ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
1.................... 8,312 8,767 9,288 8,931 9,387 9,907
2.................... 16,430 17,789 19,398 17,050 18,408 20,017
3.................... 24,427 27,153 30,500 25,046 27,772 31,120
4.................... 32,297 36,868 42,695 32,297 36,868 42,695
5.................... 40,032 46,944 56,089 40,032 46,944 56,089
6.................... 47,625 57,388 70,804 47,625 57,388 70,804
7.................... 55,069 68,214 86,977 55,069 68,214 86,977
8.................... 63,230 80,351 105,732 63,230 80,351 105,732
9.................... 71,224 92,937 126,287 71,224 92,937 126,287
10................... 79,044 105,989 148,723 79,044 105,989 148,723
15................... 115,256 178,545 295,396 115,256 178,545 295,396
20................... 145,167 262,332 519,492 145,167 262,332 519,492
30................... 168,854 460,650 1,354,720 168,854 460,650 1,354,720
40................... 49,638 687,841 3,111,213 49,638 687,841 3,111,213
50................... lapse 918,991 6,545,760 lapse 918,991 6,545,760
60................... lapse 1,160,817 13,234,010 lapse 1,160,817 13,234,010
</TABLE>
- ---------------
The hypothetical rates of return shown above are illustrative only and should
not be deemed a representation of past or future investment rates of return.
Actual rates of return may be more or less than those shown and will depend on a
number of factors, including the investment allocations made by an Owner and the
actual investment experience of the Portfolios. The Cash Value, Net Cash Value
and Life Insurance Benefit for a Policy would be different from those shown if
the actual rates of return averaged 0.00%, 6.00%, and 12.00% over a period of
years, but also fluctuated above or below those averages for individual Policy
Years. No representations can be made that these hypothetical rates of return
can be achieved for any one year or sustained over any period of time.
15
<PAGE> 18
OTHER PERFORMANCE DATA
Western Reserve may compare the performance of each Subaccount in
advertising and sales literature to the performance of other variable life
issuers in general, or to the performance of particular types of variable life
insurance policies investing in mutual funds, or investment series of mutual
funds, with investment objectives similar to each of the Subaccounts whose
performance is reported by Lipper Analytical Services, Inc. ("Lipper") and
Morningstar, Inc. ("Morningstar") or reported by other services, companies,
individuals or other industry or financial publications of general interest,
such as Forbes, Money, The Wall Street Journal, Business Week, Barron's,
Kiplinger's Personal Finance and Fortune. Lipper and Morningstar are widely used
independent research services which monitor and rank the performance of variable
life insurance policies in each of the major categories of investment objectives
on an industry-wide basis.
Lipper's and Morningstar's rankings include variable annuity contracts as
well as variable life insurance policies. The performance analyses prepared by
Lipper and Morningstar rank such policies and contracts on the basis of total
return, assuming reinvestment of distributions, but do not take sales charges,
redemption fees or certain expense deductions at the separate account level into
consideration.
Western Reserve may also compare the performance of each Subaccount in
advertising and sales literature to the S&P 500, a widely used measure of stock
market performance, or other widely recognized indices. Unmanaged indices may
assume the reinvestment of dividends, but usually do not reflect any "deduction"
for the expense of operating or managing an investment portfolio.
In addition, Western Reserve may, as appropriate, compare each Subaccount's
performance to that of other types of investments such as certificates of
deposit, savings accounts and U.S. Treasuries, or to certain interest rate and
inflation indices, such as the Consumer Price Index, which is published by the
U.S. Department of Labor and measures the average change in prices over time of
a fixed "market basket" of certain specified goods and services. Similar
comparisons of Subaccount performance may also be made with appropriate indices
measuring the performance of a defined group of securities widely recognized by
investors as representing a particular segment of the securities markets. For
example, Subaccount performance may be compared with Donoghue Money Market
Institutional Average (money market rates), Lehman Brothers Corporate Bond Index
(corporate bond interest rates) or Lehman Brothers Government Bond Index (long-
term U.S. Government obligation interest rates).
WESTERN RESERVE AND THE SEPARATE ACCOUNT
WESTERN RESERVE
Western Reserve was originally incorporated under the laws of Ohio on
October 1, 1957. Western Reserve engages in the business of writing life
insurance policies and annuity contracts. Western Reserve is admitted to do
business in 49 states, the District of Columbia, Guam, and Puerto Rico. Western
Reserve's main office is located in St. Petersburg, Florida; however, the
mailing address is P.O. Box 5068, Clearwater, FL 33758-5068. Western Reserve's
Administrative Office for this Policy is located at 4333 Edgewood Road NE, Cedar
Rapids, Iowa 52499.
Western Reserve is a wholly owned subsidiary of First AUSA Life Insurance
Company ("First AUSA"), a stock life insurance company which is a wholly-owned
subsidiary of AEGON USA, Inc. ("AEGON USA"). AEGON USA is a financial services
holding company whose primary emphasis is on life and health insurance and
annuity and investment products. AEGON USA is a wholly-owned indirect subsidiary
of AEGON N.V., a Netherlands corporation, which is a publicly traded
international insurance group.
IMSA. We are a charter member of the Insurance Marketplace Standards
Association ("IMSA"). IMSA is an independent, voluntary organization of life
insurance companies. IMSA promotes high ethical standards in the sales,
advertising and servicing of individual life insurance and annuity products.
Companies must undergo a rigorous self and independent assessment of their
practices to become a member of IMSA. The IMSA logo in our sales literature
shows our ongoing commitment to these standards.
PUBLISHED RATINGS. Western Reserve may from time to time publish in
advertisements, sales literature and reports to Owners, the ratings and other
information assigned to it by one or more independent rating organizations such
as A.M. Best Company ("A.M. Best"), Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Insurance Rating Services ("Standard & Poor's"), and Duff &
Phelps Credit Rating Co.
16
<PAGE> 19
("Duff & Phelps"). A.M. Best's and Moody's ratings reflect their current opinion
of the relative financial strength and operating performance of an insurance
company in comparison to the norms of the life/health insurance industry.
Standard & Poor's and Duff & Phelps provide ratings which measure the
claims-paying ability of insurance companies. These ratings are opinions of an
operating insurance company's financial capacity to meet the obligations of its
insurance policies in accordance with their terms and should not be considered
as bearing on the investment performance of assets held in the Separate Account.
Claims-paying ability ratings do not refer to an insurer's ability to meet
non-policy obligations (i.e., debt/commercial paper). The ratings also do not
relate to the performance of the Portfolios.
THE SEPARATE ACCOUNT
Western Reserve established WRL Series Life Corporate Account (the
"Separate Account") as a separate account on December 8, 1997. The Separate
Account meets the definition of a "separate account" under the Federal
securities laws and its fiscal year ends on December 31. The Separate Account
will receive and invest the Net Premiums paid under this Policy.
The assets of the Separate Account are the property of Western Reserve. The
Code of Ohio, under which Western Reserve established the Separate Account,
provides that the assets in the Separate Account attributable to the Policies
are not chargeable with liabilities arising out of any other business which
Western Reserve may conduct. The assets of the Separate Account shall, however,
be available to cover the liabilities of the General Account of Western Reserve
to the extent that the Separate Account's assets exceed its liabilities arising
under the Policies.
The Separate Account is currently divided into Subaccounts. Each Subaccount
invests exclusively in shares of a single Portfolio. Income and both realized
and unrealized gains or losses from the assets of each Subaccount of the
Separate Account are credited to or charged against that Subaccount without
regard to income, gains or losses from any other Subaccount of the Separate
Account or arising out of any other business Western Reserve may conduct.
Where permitted by applicable law, Western Reserve may make the following
changes to the Separate Account:
1. Any changes required by the 1940 Act or other applicable law or
regulation;
2. Combine separate accounts, including the Separate Account;
3. Add new subaccounts to or remove existing subaccounts from the
Separate Account or combine Subaccounts;
4. Make Subaccounts (including new subaccounts) available to such
classes of Policies as Western Reserve may determine;
5. Add new portfolios or remove existing Portfolios;
6. Substitute new portfolios for any existing Portfolios if shares of
the Portfolio are no longer available for investment or if Western
Reserve determines that investment in a Portfolio is no longer
appropriate in light of the purposes of the Separate Account;
7. Deregister the Separate Account under the 1940 Act if such
registration is no longer required; and
8. Operate the Separate Account as a management investment company
under the 1940 Act or as any other form permitted by law.
Western Reserve will not make any such changes without any necessary
approval of the SEC and applicable state insurance departments. Western Reserve
will notify Owners of any changes.
INVESTMENTS OF THE SEPARATE ACCOUNT. The Subaccounts of the Separate
Account invest in shares of the corresponding Portfolios. Each Portfolio is part
of a series mutual fund which is registered with the SEC as an open-end
diversified management investment company. Such registration does not involve
supervision of the management or investment practices or policies of the
Portfolios by the SEC.
The assets of each Portfolio are held separate from the assets of the other
Portfolios, and each Portfolio has investment objectives and policies which are
different from those of the other Portfolios. Thus, each Portfolio operates as a
separate investment fund, and the income or losses of one Portfolio generally
have no
17
<PAGE> 20
effect on the investment performance of any other Portfolio. Certain Subaccounts
and corresponding Portfolios may not be available to residents of some states.
The paragraphs below summarize each Portfolio's investment objectives and
policies. There is no assurance that any of the Portfolios will achieve its
stated objective. The information below also identifies the investment adviser
(and, where applicable, the investment sub-adviser) to each Portfolio. More
detailed information, including a description of risks, can be found in the
prospectuses for the Portfolios which should be read carefully.
BT INSURANCE FUNDS TRUST
(managed by Bankers Trust
Global Investment
Management) - SMALL CAP INDEX seeks to replicate as closely as
possible (before deduction of expenses) the return
of the Russell 2000 Small Stock Index(R) ("Russell
2000"), an index consisting of 2,000
small-capitalization common stocks. This Portfolio
will include the common stock of companies included
in the Russell 2000, on the basis of
computer-generated statistical data, that are deemed
representative of the industry diversification of
the entire Russell 2000.
- EQUITY 500 INDEX seeks to replicate as closely as
possible (before deduction of expenses) the total
return of the Standard & Poor's 500 Composite Stock
Price Index(R) ("S&P 500"), an index emphasizing
large-capitalization stocks. This Portfolio will
include the common stock of those companies included
in the S&P 500, other than Bankers Trust New York
Corporation, selected on the basis of computer
generated statistical data, that are deemed
representative of the industry diversification of
the entire S&P 500.
- EAFE(R) EQUITY INDEX seeks to replicate as closely
as possible (before deduction of expenses) the total
return of the Europe, Australia, Far East Index (the
"EAFE Index"), a capitalization-weighted index
containing approximately 1,100 equity securities of
companies located outside the United States.
FIDELITY VARIABLE INSURANCE
PRODUCTS FUNDS -- INITIAL
CLASS
(managed by Fidelity
Management & Research
Company) - GROWTH OPPORTUNITIES seeks to provide capital
growth.
- CONTRAFUND(R) seeks long-term capital appreciation.
- GROWTH seeks to achieve capital appreciation.
- BALANCED seeks both income and growth of capital.
- HIGH INCOME seeks a high level of current income
while also considering growth of capital.
- MONEY MARKET seeks as high a level of current income
as is consistent with preservation of capital and
liquidity.
PIMCO VARIABLE INSURANCE
TRUST (managed by Pacific
Investment Management
Company and PIMCO Advisors
L.P.) - SHORT-TERM BOND seeks to obtain maximum current
income consistent with preservation of capital and
daily liquidity.
- TOTAL RETURN BOND seeks to maximize total return,
consistent with preservation of capital and prudent
investment management.
- STOCKSPLUS GROWTH AND INCOME seeks to achieve a
total return which exceeds the total return
performance of the S&P 500.
- MID-CAP GROWTH seeks growth of capital.
- SMALL-CAP VALUE seeks long-term growth of capital
and income.
18
<PAGE> 21
T. ROWE PRICE EQUITY
SERIES,
INC. (managed by T. Rowe
Price Associates, Inc.) - T. ROWE PRICE MID-CAP GROWTH seeks to provide
long-term capital appreciation by investing in
mid-cap stocks with potential for above-average
earnings growth.
- T. ROWE PRICE EQUITY INCOME seeks to provide
substantial dividend income as well as long-term
growth of capital through investments in the common
stocks of established companies.
- T. ROWE PRICE NEW AMERICA GROWTH seeks to provide
long-term growth of capital by investing primarily
in the common stocks of U.S. growth companies
operating in service industries.
T. ROWE PRICE INTERNATIONAL
SERIES, INC. (managed by
Rowe
Price-Fleming
International, Inc.) - T. ROWE PRICE INTERNATIONAL STOCK seeks long-term
growth of capital through investments primarily in
the common stocks of established, non-U.S.
companies.
JANUS ASPEN SERIES (managed
by Janus Capital
Corporation) - GROWTH seeks long-term growth of capital in a manner
consistent with the preservation of capital. It
pursues its objective by investing primarily in
common stocks selected for their growth potential.
Although the Portfolio can invest in companies of
any size, it generally invests in larger, more
established companies.
- CAPITAL APPRECIATION seeks long-term growth of
capital. It pursues its objective by investing
primarily in common stocks selected for their growth
potential. The Portfolio may invest in companies of
any size, from larger, well established companies to
smaller, emerging growth companies.
- WORLDWIDE GROWTH seeks long-term growth of capital
in a manner consistent with the preservation of
capital. It pursues its objective by investing
primarily in common stocks of companies of any size
throughout the world. The Portfolio normally invests
in issuers from at least five different countries,
including the United States. The Portfolio may at
times invest in fewer than five countries or even a
single country.
- HIGH YIELD seeks to obtain high current income.
Capital appreciation is a secondary objective when
consistent with its primary objective. It pursues
its objectives by normally investing 65% of its
assets in high-yield/high-risk fixed-income
securities, and may at times invest all of its
assets in these securities.
Shares of certain Portfolios are sold to separate accounts of insurance
companies that may or may not be affiliated with Western Reserve or each other.
In addition, shares of certain Portfolios are also sold to separate accounts to
serve as the underlying investment for both variable life insurance policies and
variable annuity contracts. It is possible that a material conflict may arise
between the interests of Owners of the Policies and owners of other variable
life insurance policies or variable annuity contracts whose accumulation values
are allocated to a Portfolio. Material conflicts could result from, for example,
(1) changes in state insurance laws, (2) changes in Federal income tax laws, or
(3) differences in voting instructions between those given by variable life
insurance policy owners and those given by variable annuity contract owners.
Although neither Western Reserve nor the Portfolios currently foresee any such
disadvantages, Western Reserve and each Portfolio's Board of Directors intend to
monitor events in order to identify any material conflicts and to determine what
action to take. Such action could include the sale of Portfolio shares by one or
more of the separate accounts, which could have adverse consequences. If the
Board of Directors were to conclude that separate funds should be established
for variable life and variable annuity separate accounts, Western Reserve will
bear the attendant expenses, but variable life insurance policy owners and
variable annuity contract owners would no longer have the economies of scale
resulting from a larger combined fund.
19
<PAGE> 22
FACTS ABOUT THE POLICY
AVAILABILITY OF THE POLICY
Under Western Reserve's current rules, Western Reserve will offer the
Policy to corporations and partnerships that meet the following conditions at
issue:
- a minimum of five (5) Policies are issued, each on the life of a
different Insured; or
- the aggregate annualized first-year planned periodic premium for all
Policies is at least $100,000.
APPLYING FOR A POLICY
To purchase a Policy, Western Reserve must receive a completed application
at the Administrative Office. Under Western Reserve's current rules, the minimum
Face Amount of a Policy is generally $25,000. Western Reserve will generally
issue Policies to Insureds who supply satisfactory evidence of insurability
sufficient to Western Reserve. Acceptance is subject to Western Reserve's
underwriting rules and Western Reserve reserves the right to reject an
application for any reason permitted by law.
FREE-LOOK PERIOD
An Owner may cancel a Policy for a refund during the "free-look period" by
returning it to Western Reserve or to the sales representative who sold it. The
free-look period expires 20 days after delivery of the Policy. Certain states
may require a free-look period longer than 20 days. If you decide to cancel the
Policy, Western Reserve will treat the Policy as if it had never been issued.
Within seven calendar days after receiving the returned Policy, Western Reserve
will refund an amount equal to the greater of the Cash Value as of the date the
Policy is returned, or the premiums paid less any partial withdrawals. Under
ordinary circumstances, the refunded amount will be the premiums paid less
partial withdrawals.
PREMIUMS
PREMIUM FLEXIBILITY. Owners are not required to adhere to any rigid and
inflexible premium schedule. Western Reserve may require the Owner to pay an
initial premium. Thereafter, up to age 100 and subject to the maximum premium
limitations described below, an Owner may make unscheduled premium payments at
any time in any amount. When making premium payments during the first Policy
Year, an Owner should consider the effect of the sales charge (since Western
Reserve deducts a lower percentage of each premium received in excess of the
Target Premium during the first Policy Year than in subsequent Policy Years),
and the deferred sales charge (because Western Reserve deducts this charge based
on a percentage of premiums paid in the first year). See Charges and
Deductions -- Percent of Premium Load; and Deferred Sales Charge.
PLANNED PERIODIC PREMIUMS. Each Owner will determine a Planned Periodic
Premium schedule that provides for the payment of a level premium at a fixed
interval over a specified period of time. The Owner is not required to pay
premiums in accordance with this schedule. Furthermore, the Owner has
considerable flexibility to alter the amount, frequency, and the time period
over which Planned Periodic Premiums are paid.
The payment of a Planned Periodic Premium will not guarantee that the
Policy remains in force. Instead, the duration of the Policy depends upon the
Policy's Net Cash Value. Thus, even if Planned Periodic Premiums are paid by the
Owner, the Policy will nonetheless lapse any time Net Cash Value is insufficient
to pay certain monthly charges, and a Late Period expires without a sufficient
payment being made.
PREMIUM LIMITATIONS. In no event may the total of all premiums paid, both
scheduled and unscheduled, exceed the current maximum premium limitations which
qualify the Policy as life insurance according to Federal tax laws. If you pay a
premium which would result in total premiums exceeding the current maximum
premium limitation, Western Reserve will only accept that portion of the premium
which will make total premiums equal the maximum. Western Reserve will return
any part of the premium in excess of that amount, and will not accept any
further premiums until allowed by the current maximum premium limitations set
forth under Federal tax laws.
PAYMENT OF PREMIUMS. Any payment made by check or money order must be
payable to Western Reserve Life Assurance Co. of Ohio. Western Reserve will
treat payments made by the Owner as a premium payment unless clearly marked as
loan repayments. Western Reserve will deduct certain charges from each premium
payment. (See Charges and Deductions, p. 31.) As an accommodation to Owners,
Western Reserve will accept transmittal of initial and subsequent premiums of at
least $1,000 by wire transfer. For an initial premium, the wire transfer must be
accompanied by a simultaneous telephone facsimile transmission ("fax")
20
<PAGE> 23
of a completed application. An initial premium accepted via wire transfer with
fax will be allocated in accordance with current procedures explained in the
section entitled Allocation of Net Premiums and Cash Value -- Allocation of Net
Premiums. An initial premium made by wire transfer not accompanied by a
simultaneous fax, or accompanied by a fax of an incomplete application will be
applied at the unit value next determined not later than two business days after
receipt of an appropriate fax or a complete application. However, if Western
Reserve cannot obtain the fax or essential information within five business
days, Western Reserve shall inform the applicant of the reasons for the delay,
and will return the initial premium to the applicant unless the applicant
specifically consents to allow Western Reserve to retain the initial premium
until the required fax or essential information is received.
If Western Reserve later receives the application with original signature
and the allocation instructions in that application, for any reason, are
inconsistent with those previously designated on the fax, Western Reserve will
reallocate the initial premium on the first Valuation Day on or following the
date the Policy is issued, in accordance with the allocation instructions in the
application with original signature.
Owners wishing to make payments via bank wire should instruct their banks
to wire Federal Funds as follows: .
First National Bank of Maryland
ABA #052000113
For credit to account of Western Reserve #89487643
Include your name and Policy number on all correspondence.
POLICY LAPSE AND REINSTATEMENT
LAPSE. The failure to make a Planned Periodic Premium payment will not
itself cause the Policy to Lapse. Lapse will only occur where Net Cash Value is
insufficient to cover the monthly deduction, and a Late Period expires without
the Owner making a sufficient payment. If the Net Cash Value is insufficient to
cover the monthly deduction, the Owner must pay during the Late Period a payment
at least sufficient to provide a Net Premium to cover the sum of the monthly
deductions due within the Late Period. Such a lapse could happen if the
investment experience has been sufficiently unfavorable to have resulted in a
decrease in the Net Cash Value, or the Net Cash Value has decreased because not
enough premiums have been paid to offset the monthly charges.
If Net Cash Value is insufficient to cover the monthly deduction, Western
Reserve will notify the Owner and any assignee of record of the minimum payment
needed to keep the Policy in force. The Owner will then have a Late Period of 62
days, measured from the date notice is sent to the Owner, for Western Reserve to
receive sufficient payments. If Western Reserve does not receive a sufficient
payment within the Late Period, the Policy will lapse. If Western Reserve
receives a sufficient payment during the Late Period, Western Reserve will
allocate any resulting Net Premium among the Subaccounts, and will charge any
monthly deductions due to such Subaccounts, in accordance with the Owner's then
current instructions. (See Allocation of Premiums and Cash Value -- Allocation
of Net Premiums, and Charges and Deductions -- Monthly Deductions.) If the
Insured dies during the Late Period, the Life Insurance Benefit Proceeds will
equal the amount of the Life Insurance Benefit Proceeds immediately prior to the
commencement of the Late Period, reduced by any due and unpaid charges.
REINSTATEMENT. You may reinstate a lapsed Policy any time within five
years after the date of Lapse by submitting the following items to Western
Reserve:
1. A written application for reinstatement from the Owner;
2. Evidence of insurability satisfactory to Western Reserve; and
3. A premium that, after the charges against premiums, is large enough
to cover the next two monthly deductions that will become due after
the time of reinstatement.
Western Reserve reserves the right to decline a reinstatement request. Upon
approval of the application for reinstatement, the effective date of
reinstatement will be the first Monthly Deduction Day on or next following the
date Western Reserve approves the application for reinstatement.
21
<PAGE> 24
ALLOCATION OF NET PREMIUMS AND CASH VALUE
NET PREMIUMS. The Net Premium equals the premium paid less any applicable
percent of premium load. (See Charges and Deductions -- Percent of Premium
Load). When an initial premium accompanies the application, monthly deductions
from the Cash Value of the Policy commence on the Effective Date.
ALLOCATION OF NET PREMIUMS. In the application for a Policy, the Owner
will allocate Net Premiums to one or more of the Subaccounts of the Separate
Account. Notwithstanding the allocation in the application, the initial premium,
less charges, will be allocated during the free-look period to the General
Account and will earn interest at an annual rate (minimum 4%) declared by
Western Reserve. At the end of the free-look period, Western Reserve allocates
the Net Premium, including interest earned during the free-look period, to the
Subaccounts as directed in the application. Western Reserve deems the Policy to
be delivered four days after it is mailed for the purpose of allocating the Net
Premium (including interest) at the end of the free-look period. (See Facts
About The Policy -- Free-Look Period.)
The minimum percentage of each premium that you may allocate to any
Subaccount is 1%; percentages must be in whole numbers. You may change the
allocation of future Net Premiums without charge at any time by providing
Western Reserve with written notification from the Owner, or by calling the
Administrative Office. Western Reserve will employ the same procedures to
confirm that such telephone instructions are genuine as it employs regarding
telephone instructions for transfers among Subaccounts. (See Transfer
Privileges.) Upon instructions from the Owner, the registered representative or
agent of record may also change the allocation of future Net Premiums. Western
Reserve reserves the right to limit the number of changes to the allocation of
Net Premiums. Investment returns from the amounts allocated to Subaccounts of
the Separate Account will vary with the investment experience of these
Subaccounts and the Owner bears the entire investment risk.
POLICY VALUES
CASH VALUE. The Cash Value serves as the starting point for calculating
certain values under a Policy. The Cash Value is the sum of all Subaccount
Values and the Loan Account Value and therefore varies to reflect the investment
experience of the Subaccounts. Western Reserve determines the Cash Value on the
date the Policy is issued and on each Valuation Day thereafter. The Cash Value
may be more or less than premiums paid. THERE IS NO GUARANTEED MINIMUM CASH
VALUE.
NET CASH VALUE. The Net Cash Value is the amount payable on surrender of
the Policy. It is equal to the Cash Value as of the date of surrender minus any
outstanding Indebtedness, plus premium load refund, if applicable.
SUBACCOUNT VALUE. The Subaccount Value of any Subaccount as of the end of
the free-look period is equal to the amount of the initial Net Premium allocated
to that Subaccount (including any interest credited during the free-look
period). On subsequent Valuation Days, the Subaccount Value is equal to that
part of any Net Premium allocated to the Subaccount and any Cash Value
transferred to that Subaccount, adjusted by interest income, dividends, net
capital gains or losses, realized or unrealized, and decreased by partial
withdrawals and any Cash Value transferred out of that Subaccount.
ACCUMULATION UNITS. For each Subaccount, Net Premiums allocated to a
Subaccount or amounts of Cash Value transferred to a Subaccount are converted
into Accumulation Units. Western Reserve determines the number of Accumulation
Units credited to a Policy by dividing the dollar amount of any Net Premium or
transfer directed to each Subaccount by the value of an Accumulation Unit for
that Subaccount on the transaction date. Therefore, Net Premiums allocated to or
amounts transferred to a Subaccount under a Policy increase the number of
Accumulation Units of that Subaccount credited to the Policy.
Certain events reduce the number of Accumulation Units of a Subaccount
credited to a Policy:
- Partial withdrawals or transfers of Subaccount Value from a
Subaccount result in the cancellation of the appropriate number of
Accumulation Units of that Subaccount as do:
- surrender of the Policy;
- payment of the Life Insurance Benefit Proceeds;
- Policy loans; and
- the deduction of the monthly deduction.
22
<PAGE> 25
Accumulation Units are canceled as of the end of the Valuation Period in
which Western Reserve receives written notice regarding the event. These events
are referred to as "Policy transactions."
Accumulation Units are bought and sold each time there is a Policy
transaction. Western Reserve determines the number of Accumulation Units in any
Subaccount on any day follows:
1. From the Accumulation Units as of the prior Monthly Deduction Day,
subtract the Accumulation Units sold to pay any partial
withdrawals;
2. Add Accumulation Units bought with Net Premiums received since the
prior Monthly Deduction Day;
3. Subtract Accumulation Units sold to transfer amounts into the Loan
Account;
4. Add Accumulation Units bought with loan repayments;
5. Subtract Accumulation Units sold to transfer amounts to other
Subaccounts;
6. Add Accumulation Units bought from amounts transferred from other
Subaccounts.
The number of Accumulation Units on a Monthly Deduction Day is the result
of steps 1 through 6 above, minus the number of Accumulation Units sold to pay
the monthly deduction charge. If the Monthly Deduction Day is a Policy
Anniversary, Western Reserve will increase the number of Accumulation Units by
Accumulation Units bought with any amounts transferred from the Loan Account.
ACCUMULATION UNIT VALUE. Western Reserve determines the value of an
Accumulation Unit on any Valuation Day by multiplying the value of that
Accumulation Unit on the immediately preceding Valuation Day by the Net
Investment Factor for the Valuation Period.
NET INVESTMENT FACTOR. The Net Investment Factor is an index applied to
measure the investment performance of Accumulation Units of a Subaccount from
one Valuation Period to the next. Western Reserve determines the Net Investment
Factor for any Subaccount for any Valuation Period by dividing 1 by 2, where:
1. is the result of:
a. the net asset value per share of the Portfolio held in the
Subaccount, determined at the end of the current Valuation
Period; plus
b. the per share amount of any dividend or capital gain
distributions made by the Portfolio held in the Subaccount, if
the "ex-dividend" date occurs during the current Valuation
Period; and
2. is the net asset value per share of the Portfolio held in the
Subaccount, determined at the end of the immediately preceding
Valuation Period.
The Net Investment Factor may be greater or less than one; therefore, the
value of an Accumulation Unit may increase or decrease.
TRANSFER PRIVILEGES
GENERAL. Owners may transfer Cash Value among the Subaccounts. The amount
of Cash Value available for transfer from any Subaccount is determined at the
end of the Valuation Period during which the transfer request is received at the
Administrative Office. The net asset value for each share of the corresponding
Portfolio of any Subaccount is determined, once daily, as of the close of the
regular business session of the New York Stock Exchange ("NYSE") (usually 4:00
p.m. Eastern time), which coincides with the end of each Valuation Period. (See
Policy Benefits -- Cash Value -- Valuation Day and Valuation Period.) Therefore,
any transfer request received after the close of the regular business session of
the NYSE, on any day the NYSE is open, will be processed using the net asset
value for each share of the applicable Portfolio determined as of the close of
the regular business session of the NYSE, on the next day the NYSE is open for
business.
The minimum amount that you may transfer is the lesser of $500 or the value
of all remaining Accumulation Units in a Subaccount, unless Western Reserve
agrees otherwise. The Subaccount from which you make a transfer must maintain a
minimum balance of $500 after the transfer is completed. If the value of the
remaining Accumulation Units in a Subaccount would be less than $500, Western
Reserve has the right to include that amount as part of the transfer.
Owners may make up to 12 transfers of Cash Value without charge during any
one Policy Year. After these 12 transfers in a Policy Year, Western Reserve
reserves the right to impose a charge of $25 for each
23
<PAGE> 26
subsequent transfer. Western Reserve will not increase the transfer charge.
Western Reserve will consider all transfers made in any one day a single
transfer and will deduct any transfer charges on a pro-rata basis from each
Subaccount from which a transfer was made. Transfers resulting from Policy
loans, the exercise of exchange privileges, and the reallocation of Cash Value
immediately after the free-look period, will not be treated as a transfer for
the purpose of this charge.
Owners may make transfer requests in writing, or by telephone. Written
requests must be in a form acceptable to Western Reserve. The registered
representative or agent of record for the Policy may, upon instructions from the
Owner for each transfer, make telephone transfers upon request without the
necessity for the Owner to have previously authorized telephone transfers in
writing. Transfer requests made by telephone must be verified by a facsimile
sent to the Administrative Office before the transfer is made. If, for any
reason, an Owner does not want the ability to make transfers by telephone, the
Owner should provide written notice to Western Reserve at the Administrative
Office. All telephone transfers should be made by calling the Administrative
Office.
Western Reserve will not be liable for complying with telephone
instructions it reasonably believes to be authentic, nor for any loss, damage,
cost or expense in acting on such telephone instructions, and Owners will bear
the risk of any such loss. Western Reserve will employ reasonable procedures to
confirm that telephone instructions are genuine. If Western Reserve does not
employ such procedures, it may be liable for losses due to unauthorized or
fraudulent instructions. Such procedures may include, among others, requiring
forms of personal identification prior to acting upon such telephone
instructions, providing written confirmation of such transactions to Owners,
and/or tape recording telephone instructions received from Owners.
Western Reserve may, at any time, revoke or modify the transfer privilege.
Under Western Reserve's current procedures, it will effect transfers and
determine all values in connection with transfers at the end of the Valuation
Period during which the transfer request is received at the Administrative
Office.
ASSET REBALANCING PROGRAM. Western Reserve offers a program under which
the Owner may authorize Western Reserve to transfer Cash Value periodically to
maintain a particular percentage allocation among the Subaccounts. The Cash
Value allocated to each Subaccount will grow or decline in value at different
rates. The asset rebalancing program automatically reallocates the Cash Value in
the Subaccounts at the end of each period to match the Policy's currently
effective Net Premium allocation schedule. The asset rebalancing program is
intended to transfer Cash Value from those Subaccounts that have increased in
value to those Subaccounts that have declined in value. Over time, this method
of investing may help an Owner buy low and sell high. This investment method
does not guarantee gains, nor does it assure that any Subaccount will not have
losses.
To qualify for the asset rebalancing program, a minimum Cash Value of
$10,000 for an existing Policy, or a minimum initial premium of $10,000 for a
new Policy, is required. To participate in the asset rebalancing program, a
properly completed asset rebalancing request form, which is available upon
request, must be received by Western Reserve.
Owners may elect rebalancing to occur on each quarterly, semi-annual or
annual anniversary of the Effective Date. Following receipt of the asset
rebalancing request form, Western Reserve will effect the initial rebalancing of
Cash Value on the next such anniversary, in accordance with the Policy's current
Net Premium allocation schedule. The amounts transferred will be credited at the
unit value next determined on the dates the transfers are made. If a day on
which rebalancing would ordinarily occur falls on a day on which the NYSE is
closed, rebalancing will occur on the next day the NYSE is open.
There is no charge for the asset rebalancing program. Any reallocation
which occurs under the asset rebalancing program will not be counted towards the
12 free transfers allowed during each Policy Year.
The Owner may terminate participation at any time in the asset rebalancing
program by oral or written request to Western Reserve. Participating in the
asset rebalancing program will terminate automatically if any transfer is made
to, or from, any Subaccount, other than on account of a scheduled rebalancing.
If the Owner wishes to resume the asset rebalancing program after it has been
canceled, a new asset rebalancing request form must be completed and sent to
Western Reserve. The Owner may start and stop participation in the asset
rebalancing program at any time; however, Western Reserve reserves the right to
restrict entry into the asset rebalancing program to once per Policy Year.
24
<PAGE> 27
Western Reserve may discontinue, modify, or suspend, the asset rebalancing
program at any time.
SURRENDERS AND PARTIAL WITHDRAWALS
SURRENDERS. At any time while the Insured is still living and the Policy
is in force, the Owner may, by written request, surrender the Policy for its Net
Cash Value (which is the Cash Value less any Indebtedness, plus refund of
premium load, if applicable). A surrender is effective as of the date on which a
written request for surrender is received by Western Reserve. If the Owner
surrenders the Policy during the first three Policy Years, Western Reserve will
refund a portion of the Percent of Premium Load charged against the premium
payments made in the Policy Year of the surrender. Western Reserve will refund
6.0% of the premium paid up to the Target Premium and 3.0% of the premium paid
in excess of the Target Premium. (See Charges and Deductions -- Percent of
Premium Load, p. 31.) Once the Policy is surrendered, all coverage and other
benefits under it cease and it cannot be reinstated. A surrender may have tax
consequences. (See Federal Tax Considerations, p. 37.)
PARTIAL WITHDRAWALS. After the first Policy Year, while the Insured is
still living and the Policy is in force, an Owner may apply for a partial
withdrawal. The request must be made in writing to the Administrative Office and
the amount requested must be at least $500. The maximum amount that may be
requested is the amount that would leave at least $500 remaining in the
Subaccount from which the partial withdrawal is made. The amount withdrawn is
deducted from each of the Subaccounts on a pro rata basis unless you specify
otherwise in a written notice to the Administrative Office. Western Reserve
generally will pay a partial withdrawal request within seven days following the
Valuation Day the request is received.
There is no limit on the number of partial withdrawals that may be made
during a Policy Year. On each partial withdrawal, Western Reserve imposes a
processing charge equal to the lesser of $25 or 2% of the amount requested.
Western Reserve deducts this charge on a pro-rata basis from each of the
Subaccounts unless you provide other written instructions to the Administrative
Office.
If the Owner has selected Life Insurance Benefit Option 1, Western Reserve
will reduce the Face Amount by the amount of the partial withdrawal. If Life
Insurance Benefit Option 2 is in effect, the Face Amount will not be changed by
the amount of the partial withdrawal. If Life Insurance Benefit Option 3 is in
effect and the partial withdrawal is greater than the sum of the premiums paid,
the Face Amount is reduced by the amount of the partial withdrawal minus the sum
of the premiums paid; otherwise the Face Amount is not reduced. Western Reserve
may reject any partial withdrawal if it would cause the Policy to fail to
qualify as a life insurance contract under the Code or regulations or rulings
thereunder. A partial withdrawal may have tax consequences. (See Federal Tax
Considerations, p. 37.)
LOANS
After the first Policy Year as long as the Policy remains in force, the
Owner may borrow money from Western Reserve using the Policy as the only
security for the loan. Western Reserve permits a Policy loan prior to the first
Policy Anniversary for Policies issued pursuant to a transfer of cash values
from another life insurance policy under Section 1035(a) of the Code. The
maximum amount that may be borrowed is 90% of the Cash Value, less any already
outstanding Policy loan. Western Reserve reserves the right to limit the amount
of any Policy loan to not less than $500. Outstanding loans have priority over
the claims of any assignee or other person. The loan may be repaid totally or in
part. A loan which is taken from, or secured by, a Policy may have Federal
income tax consequences. (See Federal Tax Considerations, p. 37.)
When you request a loan, Western Reserve will withdraw an amount equal to
the requested loan amount plus interest in advance for one year from each of the
Subaccounts on a pro-rata basis, unless you specify otherwise in a written
notice to the Administrative Office, and transfer this amount to the Loan
Account until the loan is repaid.
Western Reserve normally will pay the amount of the loan within seven days
after receipt of a proper request in a manner permitted by Western Reserve.
Postponement of loans may take place under certain conditions. Under Western
Reserve's current procedures, at each Policy Anniversary, Western Reserve will
compare the amount of the outstanding loan (including loan interest in advance
until the next Policy Anniversary, if not paid) to the amount in the Loan
Account (including interest credited to the Loan Account during the previous
Policy Year). Western Reserve will also make this comparison any time the Owner
repays all of the loan, or makes a request to borrow an additional amount. At
each such time, if the amount of the
25
<PAGE> 28
outstanding loan exceeds the amount in the Loan Account, Western Reserve will
withdraw the difference from the Subaccounts and transfer it to the Loan Account
in the same manner as when a loan is made. If the amount in the Loan Account
exceeds the amount of the outstanding loan, Western Reserve will withdraw the
difference from the Loan Account and transfer it to the Subaccounts in the same
manner as current Net Premiums are allocated. No charge will be imposed for
these transfers, and these transfers are not treated as transfers in calculating
the transfer charge.
INTEREST RATE CHARGED. The guaranteed annual interest rate on a Policy
loan is 6.0% and is due on each Policy Anniversary for the prior Policy Year and
on the day the loan is repaid. The current annual interest rate on a Policy loan
is 4.25% in Policy Years 1-15, 4.15% in Policy Years 16-30, and 4.10% in
subsequent Policy Years. Loan interest that is unpaid when due will be added to
the amount of the loan and will bear interest at the same rate. On the date of
the Insured's death, the date the Policy ends, the date of a loan repayment, or
any other date Western Reserve specifies, any necessary adjustment will be made
in the loan to reflect any interest accrued since the last Policy Anniversary.
If an annual interest rate lower than 6% is set, any subsequent increase in the
interest rate shall be subject to the following conditions:
(1) The effective date of any increase in the interest rate for Policy
loans shall not be earlier than one year after the effective date
of the establishment of the previous rate.
(2) The amount by which the interest rate may be increased shall not
exceed 1% per year, but the maximum annual interest rate will be
6%.
(3) Western Reserve will give notice of the interest rate in effect
when a loan is made and when sending notice of loan interest due.
(4) If a loan is outstanding 40 days or more before the effective date
of an increase in the annual interest rate, Western Reserve will
notify you of that increase at least 30 days prior to the
effective date of the increase.
(5) Western Reserve will give notice of any increase in the annual
interest rate whenever a loan is made during the 40 days before
the effective date of the increase.
LOAN ACCOUNT INTEREST RATE CREDITED. The amount in the Loan Account will
accrue interest at an effective annual rate of 4%. Western Reserve may credit a
higher rate, but it is not obligated to do so.
EFFECT OF POLICY LOANS. A Policy loan affects the Policy, because the Life
Insurance Benefit Proceeds and Net Cash Value under the Policy are reduced by
the amount of the loan. Repayment of the loan causes the Life Insurance Benefit
Proceeds and Net Cash Value to increase by the amount of the repayment. As long
as a loan is outstanding, an amount equal to the loan plus interest in advance
until the next Policy Anniversary is held in the Loan Account. This amount will
not be affected by the Separate Account's investment performance. Amounts
transferred from the Separate Account to the Loan Account will affect the
Separate Account value because such amounts will be credited with an interest
rate declared by Western Reserve rather than a rate of return reflecting the
investment performance of the Separate Account. There are risks involved in
taking a Policy loan, a few of which include the potential for a Policy to lapse
if projected earnings, taking into account outstanding loans, are not achieved,
as well as possible adverse tax consequences which could occur if a Policy
lapses with loans outstanding.
INDEBTEDNESS. Indebtedness equals the total of all Policy loans plus any
loan interest accrued on the loans. If indebtedness exceeds the Cash Value,
Western Reserve will notify the Owner and any assignee of record. If a
sufficient payment equal to excess indebtedness is not received by Western
Reserve within 31 days from the date notice is sent, the Policy will Lapse and
terminate without value. The Policy, however, may later be reinstated.
REPAYMENT OF INDEBTEDNESS. Indebtedness may be repaid any time. Western
Reserve will treat payments made by the Owner while there is Indebtedness as
premium payments unless the Owner indicates that the payment should be treated
as a loan repayment. If not repaid, Western Reserve may deduct Indebtedness from
any amount payable under the Policy. As Indebtedness is repaid, the Policy's
value in the Loan Account securing the Indebtedness repaid will be transferred
from the Loan Account to the Subaccounts in the same manner as current Net
Premiums are allocated. Western Reserve will allocate the repayment of
Indebtedness at the end of the Valuation Period during which the repayment is
received.
26
<PAGE> 29
LIFE INSURANCE BENEFITS
GENERAL. Owners designate in the initial application one of three Life
Insurance Benefit Options offered under the Policy: Life Insurance Benefit
Option 1 ("Option 1"), Life Insurance Benefit Option 2 ("Option 2"), and Life
Insurance Benefit Option 3 ("Option 3"). As long as the Policy remains in force,
Western Reserve will, upon receiving due proof of the Insured's death, pay the
Life Insurance Benefit Proceeds of a Policy to the named Beneficiary in
accordance with the designated Life Insurance Benefit Option. Western Reserve
will determine the amount of the Life Insurance Benefit Proceeds payable at the
end of the Valuation Period during which the Insured dies. Western Reserve may
pay the proceeds in a lump sum or under one or more of the settlement options
set forth in the Policy. Western Reserve guarantees that as long as the Policy
remains in force, the Life Insurance Benefit under any option will never be less
than the Face Amount of the Policy until age 100 when the death benefit equals
the Cash Value, but the Life Insurance Benefit Proceeds will reflect reductions
for any outstanding Indebtedness and any due and unpaid charges. These proceeds
will be increased by any additional insurance provided by rider. To qualify the
Policy as life insurance under the Code, Owners may choose between two Life
Insurance Benefit Compliance Tests -- either the Guideline Premium Test or the
Cash Value Accumulation Test. Each test involves a set of limitation percentages
that vary by attained age. The limitation percentages, which are used to
determine the Life Insurance Benefit provided, vary from one test to the other.
(See the separate tables below.)
OPTION 1. The Life Insurance Benefit is the greater of the Face Amount of
the Policy or the applicable percentage (the "limitation percentage") times the
Cash Value on the date of death. Accordingly, under Option 1 the Life Insurance
Benefit will remain level unless the limitation percentage times the Cash Value
exceeds the Face Amount, in which case the amount of the Life Insurance Benefit
will vary as the Cash Value varies.
ILLUSTRATION OF OPTION 1. For purposes of this illustration, assume that
the Insured's Attained Age is under 40, that there is no outstanding
indebtedness, and that the Guideline Premium Test is chosen. Under Option 1, a
Policy with a $50,000 Face Amount will generally pay $50,000 in Life Insurance
Benefits. However, because the Life Insurance Benefit must be equal to or be
greater than 250% of Cash Value, any time the Cash Value of the Policy exceeds
$20,000, the Life Insurance Benefit will exceed the $50,000 Face Amount. Each
additional dollar added to Cash Value above $20,000 will increase the Life
Insurance Benefit by $2.50. Similarly, so long as Cash Value exceeds $20,000,
each dollar taken out of Cash Value will reduce the Life Insurance Benefit by
$2.50.
If at any time, however, the Cash Value multiplied by the limitation
percentage is less than the Face Amount, the Life Insurance Benefit will equal
the Face Amount of the Policy.
OPTION 2. The Life Insurance Benefit is equal to the greater of the Face
Amount plus the Cash Value of the Policy or the limitation percentage times the
Cash Value on the date of death. Accordingly, under Option 2 the amount of the
Life Insurance Benefit will always vary as the Cash Value varies.
ILLUSTRATION OF OPTION 2. For purposes of this illustration, assume that
the Insured is under the age of 40, that there is no outstanding indebtedness,
and that the Guideline Premium Test is chosen. Under Option 2, a Policy with a
Face Amount of $50,000 will generally pay a Life Insurance Benefit of $50,000
plus Cash Value. Thus, for example, a Policy with a Cash Value of $10,000 will
have a Life Insurance Benefit of $60,000 ($50,000 + $10,000). The Life Insurance
Benefit under the Guideline Premium Test, however, must be at least 250% of Cash
Value. As a result, if the Cash Value of the Policy exceeds $33,333, the Life
Insurance Benefit will be greater than the Face Amount plus Cash Value. Each
additional dollar of Cash Value above $33,333 will increase the Life Insurance
Benefit by $2.50. Similarly, any time Cash Value exceeds $33,333, each dollar
taken out of Cash Value will reduce the Life Insurance Benefit by $2.50.
If at any time, however, Cash Value multiplied by the limitation percentage
is less than the Face Amount plus the Cash Value, then the Life Insurance
Benefit will be the Face Amount plus the Cash Value of the Policy.
OPTION 3. The Life Insurance Benefit is equal to the greater of the Face
Amount plus cumulative premiums paid less cumulative partial withdrawals, or the
corridor percentage times the Cash Value. Accordingly, under Option 3, the
amount of Life Insurance Benefit will always vary with the premiums paid and
partial withdrawals taken, and may vary as the Cash Value varies.
27
<PAGE> 30
ILLUSTRATION OF OPTION 3. For purposes of this illustration, assume that
the Insured is under the age of 40, that there is no outstanding indebtedness,
and that the Guideline Premium Test is chosen. Under Option 3, a Policy with a
Face Amount of $50,000 will generally pay a Life Insurance Benefit of $50,000
plus premiums. Thus, for example, a Policy with premiums paid of $10,000 will
have a Life Insurance Benefit of $60,000 ($50,000 + $10,000). The Life Insurance
Benefit under the Guideline Premium Test, however, must be at least 250% of Cash
Value. As a result, if the Cash Value of the Policy exceeds $24,000, the Life
Insurance Benefit will be greater than the Face Amount plus Cash Value. Each
additional dollar of Cash Value above $24,000 will increase the Life Insurance
Benefit by $2.50. Similarly, any time Cash Value exceeds $24,000, each dollar
taken out of Cash Value will reduce the Life Insurance Benefit by $2.50.
LIMITATION PERCENTAGES TABLE -- GUIDELINE PREMIUM TEST
<TABLE>
<CAPTION>
INSURED'S
ATTAINED AGE
ON POLICY LIMITATION
ANNIVERSARY PERCENTAGE
------------ ----------
<S> <C>
0-40................. 250
41................. 243
42................. 236
43................. 229
44................. 222
45................. 215
46................. 209
47................. 203
48................. 197
49................. 191
50................. 185
51................. 178
52................. 171
53................. 164
54................. 157
55................. 150
56................. 146
57................. 142
58................. 138
</TABLE>
<TABLE>
<CAPTION>
INSURED'S
ATTAINED AGE
ON POLICY LIMITATION
ANNIVERSARY PERCENTAGE
------------ ----------
<S> <C>
59................. 134
60................. 130
61................. 128
62................. 126
63................. 124
64................. 122
65................. 120
66................. 119
67................. 118
68................. 117
69................. 116
70................. 115
71................. 113
72................. 111
73................. 109
74................. 107
75................. 105
76................. 105
77................. 105
</TABLE>
<TABLE>
<CAPTION>
INSURED'S
ATTAINED AGE
ON POLICY LIMITATION
ANNIVERSARY PERCENTAGE
------------ ----------
<S> <C>
78................. 105
79................. 105
80................. 105
81................. 105
82................. 105
83................. 105
84................. 105
85................. 105
86................. 105
87................. 105
88................. 105
89................. 105
90................. 105
91................. 104
92................. 103
93................. 102
94-99................ 101
100 and older........ 100
</TABLE>
28
<PAGE> 31
LIMITATION PERCENTAGES TABLE -- CASH VALUE ACCUMULATION TEST
<TABLE>
<CAPTION>
INSURED'S
ATTAINED AGE
ON POLICY LIMITATION
ANNIVERSARY PERCENTAGE
- --------------------- --------------
MALE FEMALE
---- ------
<S> <C> <C>
20................... 631 751
21................... 612 727
22................... 595 704
23................... 577 681
24................... 560 659
25................... 542 638
26................... 526 617
27................... 509 597
28................... 493 578
29................... 477 559
30................... 462 541
31................... 447 523
32................... 432 506
33................... 418 489
34................... 404 473
35................... 391 458
36................... 379 443
37................... 366 428
38................... 355 414
39................... 343 401
40................... 332 388
41................... 322 376
42................... 312 364
43................... 302 353
44................... 293 342
45................... 284 332
46................... 275 322
</TABLE>
<TABLE>
<CAPTION>
INSURED'S
ATTAINED AGE
ON POLICY LIMITATION
ANNIVERSARY PERCENTAGE
- --------------------- --------------
MALE FEMALE
---- ------
<S> <C> <C>
47................... 267 312
48................... 259 303
49................... 251 294
50................... 244 285
51................... 237 276
52................... 230 268
53................... 224 261
54................... 218 253
55................... 212 246
56................... 206 239
57................... 201 232
58................... 195 226
59................... 190 219
60................... 186 213
61................... 181 207
62................... 177 201
63................... 172 196
64................... 168 191
65................... 164 186
66................... 161 181
67................... 157 176
68................... 154 172
69................... 151 167
70................... 148 163
71................... 145 159
72................... 142 155
73................... 140 152
</TABLE>
<TABLE>
<CAPTION>
INSURED'S
ATTAINED AGE
ON POLICY LIMITATION
ANNIVERSARY PERCENTAGE
- --------------------- --------------
MALE FEMALE
---- ------
<S> <C> <C>
74................... 137 148
75................... 135 145
76................... 133 142
77................... 131 139
78................... 129 136
79................... 127 134
80................... 125 131
81................... 124 129
82................... 122 127
83................... 121 125
84................... 119 123
85................... 118 121
86................... 117 119
87................... 116 118
88................... 115 117
89................... 114 115
90................... 113 114
91................... 112 113
92................... 111 111
93................... 110 110
94................... 109 109
95................... 107 108
96................... 106 106
97................... 105 105
98................... 103 103
99................... 102 102
100.................. 100 100
</TABLE>
CHOOSING A LIFE INSURANCE BENEFIT OPTION. As described above and assuming
the Life Insurance Benefit is not determined by reference to the limitation
percentage, Option 1 will provide a Face Amount of Life Insurance Benefit which
does not vary with changes in Cash Value. Thus, under Option 1, as Cash Value
increases, Western Reserve's net amount at risk under the Policy will decline.
In contrast, Option 2 involves a constant net amount at risk, assuming that the
Life Insurance Benefit is not determined by reference to the limitation
percentage. The net amount at risk under the Policy for Option 3 is dependent
upon the amount and timing of premiums paid. Consequently, there is no
generalized pattern as with Options 1 and 2. Therefore, assuming sufficiently
positive investment experience, the deduction for cost of insurance under a
Policy with an Option 1 Life Insurance Benefit will be less than under a
corresponding Policy with an Option 2 or 3 Life Insurance Benefit. Because of
this, if investment performance is positive, Cash Value under Option 1 will
increase faster than under Options 2 or 3 but the total Life Insurance Benefit
under Options 2 or 3 will generally be greater. Thus, Option 1 could be
considered more suitable for Owners whose goal is increasing Cash Value based
upon positive investment experience while Options 2 and 3 could be considered
more suitable for Owners whose goal is increasing total Life Insurance Benefit.
CHANGING THE LIFE INSURANCE BENEFIT OPTION. Generally, the Life Insurance
Benefit Option in effect may be changed by the Owner after the first Policy Year
by sending Western Reserve a written request for change. Western Reserve may
require proof of insurability. A change in Life Insurance Benefit Option may
have Federal income tax consequences. Under Western Reserve's current rules, no
change may be made if it would result in a Face Amount less than the minimum
Face Amount set forth in the Policy, or if the Policy would
29
<PAGE> 32
not continue to qualify as life insurance as defined under Section 7702 of the
Code. The effective date of any change will be the Monthly Deduction Day on or
after Western Reserve approves the request. No charges will be imposed for
making a change in Life Insurance Benefit Option. If the Life Insurance Benefit
Option is changed from Option 2 to Option 1, the Face Amount will be increased
by an amount equal to the Cash Value on the effective date of change. If the
Life Insurance Benefit Option is changed from Option 1 to Option 2, the Face
Amount will be decreased by an amount equal to the Cash Value on the effective
date of the change. If the Life Insurance Benefit Option is changed from Option
3 to Option 1, the Face Amount will be increased by the sum of the premiums paid
less the sum of partial withdrawals. If the Life Insurance Benefit Option is
changed from Option 1 to Option 3, the Face Amount will be decreased by the sum
of the premiums paid less the sum of partial withdrawals. Western Reserve will
not allow changes between Options 2 and 3.
HOW LIFE INSURANCE BENEFITS MAY VARY IN AMOUNT. As long as the Policy
remains in force, Western Reserve guarantees that the Life Insurance Benefit
will never be less than the Face Amount of the Policy. These proceeds will be
reduced by any outstanding indebtedness and any due and unpaid charges. The Life
Insurance Benefit may, however, vary with the Policy's Cash Value. Under Option
1, the Life Insurance Benefit will only vary when the Cash Value multiplied by
the limitation percentage exceeds the Face Amount of the Policy. The Life
Insurance Benefit under Option 2 will always vary with the Cash Value because
the Life Insurance Benefit equals either the Face Amount plus the Cash Value or
the limitation percentage times the Cash Value. The Life Insurance Benefit under
Option 3 will always vary with the premiums paid and partial withdrawals taken
and will also vary whenever the Cash Value multiplied by the limitation
percentage exceeds the Face Amount plus cumulative premiums paid less cumulative
partial withdrawals.
CHANGING THE FACE AMOUNT. Subject to certain limitations, an Owner may
increase or decrease the Face Amount of a Policy. A change in Face Amount may
affect the net amount at risk, which may affect an Owner's cost of insurance
charge. A change in Face Amount could also have Federal income tax consequences.
DECREASES. Any decrease in the Face Amount will become effective on the
Monthly Deduction Day on or following receipt of a written request from the
Owner by Western Reserve at the Administrative Office. No requested decrease in
the Face Amount will be permitted during the first Policy Year. The Face Amount
remaining in force after any requested decrease may not be less than $25,000.
If, following the decrease in Face Amount, the Policy would not comply with the
maximum premium limitations required by Federal tax law, the decrease may be
limited to the extent necessary to meet these requirements.
INCREASES. For an increase in the Face Amount, written application must be
submitted. Western Reserve will also require that additional evidence of
insurability be submitted. Western Reserve reserves the right to decline any
increase request. Any increase will become effective on the Monthly Deduction
Day after Western Reserve approves the request for the increase. No increase in
the Face Amount will be permitted during the first Policy Year. An increase need
not be accompanied by an additional premium, but there must be sufficient Net
Cash Value to cover the next monthly deduction after the increase becomes
effective.
DURATION OF THE POLICY
The Policy's duration depends upon the Net Cash Value. The Policy will
remain in force so long as the Net Cash Value is sufficient to pay the monthly
deduction. If the Net Cash Value is insufficient to pay the monthly deduction,
and a Late Period expires without an adequate payment by the Owner, the Policy
will lapse and terminate without value.
WHEN INSURANCE COVERAGE TAKES EFFECT
No life insurance coverage shall take effect unless the proposed Insured is
alive, in the same condition of health as described in the application when the
Policy is delivered to the Owner, and the full initial premium is paid.
30
<PAGE> 33
PAYMENT OPTIONS
The Policy offers a variety of optional ways of receiving proceeds under
the Policy, other than in a lump sum. Any agent authorized to sell the Policy
can explain these options upon request. None of these options vary with the
investment performance of a separate account.
CHARGES AND DEDUCTIONS
The following charges will apply to your Policy under the circumstances
described. The charges are for the services and benefits provided, costs and
expenses incurred and risks assumed by Western Reserve in connection with the
Policies, some of which are described below.
Services and benefits provided by Western Reserve include:
- the Life Insurance Benefits, cash and loan benefits provided by the
Policy;
- investment options, including Net Premium allocations;
- administration of elective options under the Policy; and
- the distribution of reports to Owners.
Costs and expenses Western Reserve incurs include:
- those associated with underwriting applications and changes in Face
Amount and riders;
- various overhead and other expenses associated with providing the
services and benefits relating to the Policy;
- sales and marketing expenses; and
- other costs of doing business, such as federal, state and local
premium and other taxes and fees.
Risks assumed by Western Reserve include the risks that:
- Insureds may live for a shorter period of time than estimated
resulting in the payment of greater Life Insurance Benefits than
expected; and
- the costs of providing the services and benefits under the Policies
will exceed the charges deducted.
PERCENT OF PREMIUM LOAD
Western Reserve deducts certain expenses at the time you make premium
payments. Western Reserve then allocates the remainder of each premium (the Net
Premium) to the Subaccounts as you direct. The expenses deducted from your
premium are intended to compensate Western Reserve for sales expenses and
federal and state tax charges. Premium tax charges imposed by different states
range from 0.0% to 3.5% of premiums.
During the first Policy Year, Western Reserve deducts 11.5% of each premium
received up to the Target Premium, and 3.0% of each premium received in excess
of the Target Premium. During Policy Years 2-7, Western Reserve deducts 11.5% of
each premium received up to the Target Premium, and 7.5% of each premium
received in excess of the Target Premium. After Policy Year 7, Western Reserve
deducts 4.5% of all premiums received. Under most circumstances, the Target
Premium is the maximum premium an Owner can pay in a Policy Year without the
Policy becoming a Modified Endowment Contract. Premiums paid in excess of the
Target Premium may have adverse tax consequences. (See Federal Tax
Considerations -- Tax Treatment of Policy Benefits, p. 37)
Since 3.0% is deducted from each premium in excess of the Target Premium
received by Western Reserve during the first Policy Year, it may be advantageous
to pay such premiums during the first Policy Year rather than after the first
Policy Year when a higher percentage is deducted from premiums in excess of
31
<PAGE> 34
the Target Premium. However, higher premium amounts paid during the first Policy
Year will result in higher amounts being subject to the deferred sales charge in
Policy Years 2 through 7 (See Deferred Sales Charge, below.) An Owner deciding
the appropriate amount and timing of premium payments should consider the
combined effect of the percent of premium load and the deferred sales charge.
PREMIUM LOAD REFUND AT SURRENDER. If the Owner surrenders the Policy during
the first three Policy Years, Western Reserve will refund a portion of the
Percent of Premium Load charged against the premium payments made in the Policy
Year of surrender. Western Reserve will refund 6.0% of the premium paid up to
the Target Premium and 3.0% of the premium paid in excess of the Target Premium.
The refund only applies to premiums paid in the Policy Year of the surrender,
not to all premiums paid since issue. The refund is available only for
surrenders occurring in the first three Policy Years, and is not available for
partial withdrawals or Policy loans.
DEFERRED SALES CHARGE
On each Policy Anniversary during Policy Years 2 through 7, Western Reserve
deducts from the Cash Value a deferred sales charge equal to 1.5% of premiums
paid up to the Target Premium during the first Policy Year to compensate Western
Reserve for a portion of Policy sales expenses. On each Policy Anniversary
during Policy Years 2 through 7, Western Reserve also deducts a deferred sales
charge equal to 1% of the amount of any decrease in excess premium (not
including Section 1035 monies) received in Policy Years 2-7 from the excess
premium received in the first Policy Year. If the Policy is surrendered, this
charge is not deducted for Policy Anniversaries not yet reached.
MONTHLY DEDUCTIONS
Western Reserve deducts the charges listed below from your Cash Value as of
the Effective Date and on each Monthly Deduction Day. The deductions are made
from the Subaccounts in the same proportion that the Subaccount Value in each
Subaccount bears to the total Cash Value as of the Monthly Deduction Day. The
monthly deduction consists of
(1) a monthly Policy charge,
(2) the monthly cost of insurance charge,
(3) the cost of any supplemental benefits provider by riders, and
(4) a factor representing the mortality and expense risk charge.
MONTHLY POLICY CHARGE. During the first Policy Year, the monthly Policy
charge is $16.50 per month. During subsequent Policy Years, the monthly Policy
charge currently is $4 per month and is guaranteed not to exceed $10 per month.
The monthly Policy charge is paid to Western Reserve for performing
administrative services relating to the Policy.
MONTHLY COST OF INSURANCE CHARGE. The monthly cost of insurance charge
compensates Western Reserve for the anticipated cost of paying the amount of the
Life Insurance Benefit that exceeds your Cash Value upon the death of the
Insured. The cost of insurance charge is calculated monthly, and depends on a
number of variables that cause the charge to vary from Policy to Policy and from
Monthly Deduction Day to Monthly Deduction Day. The cost of insurance charge is
calculated for the Face Amount at issue and for any increase in Face Amount. The
monthly cost of insurance charge is equal to (1) multiplied by the result of (2)
minus (3), where:
(1) is the monthly cost of insurance rate per $1,000 of insurance;
(2) is the number of thousands of Life Insurance Benefit for the Policy
(as defined in the applicable Option 1, Option 2 or Option 3)
divided by 1.0032737; and
(3) is the number of thousands of Cash Value as of the Monthly Deduction
Day (before this cost of insurance, and after the mortality and
expense risk charge, any applicable Policy charge and the cost of
any riders are subtracted).
32
<PAGE> 35
The monthly cost of insurance rate for a Policy is based on the sex,
Attained Age, risk class, and number of years that the Policy or increment of
Face Amount has been in force. Western Reserve reviews monthly cost of insurance
rates on an ongoing basis (at least once every year) based on its expectations
as to future mortality experience, investment earnings, persistency, taxes and
other expenses. Any changes in cost of insurance rates are made on a uniform
basis for Insureds of the same class as defined by sex, Attained Age, risk
class, and Policy duration. Western Reserve guarantees that the cost of
insurance rates used to calculate the monthly cost of insurance charge will not
exceed the Guaranteed Maximum Cost of Insurance Rates set forth in the Policy.
In connection with the cost of insurance rates guaranteed in the Policy,
Western Reserve places Insureds into standard tobacco and standard non-tobacco
risk classes. The guaranteed rates for standard classes are based on the 1980
Commissioners' Standard Ordinary Mortality Tables, Male or Female, Tobacco or
Non-Tobacco Mortality Rates ("1980 CSO Tables"). The guaranteed rates for
substandard classes are based on multiples of or additions to the 1980 CSO
Tables. In connection with current cost of insurance rates, Western Reserve
places Insureds into the following risk classes: age, sex, tobacco habit and
health status, medical issue, simplified issue and guaranteed issue.
Cost of insurance rates (whether guaranteed or current) for an Insured in a
non-tobacco class are less than or equal to rates for an Insured of the same age
and sex in a tobacco class. Cost of insurance rates (whether guaranteed or
current) for an Insured in a non-tobacco or tobacco standard class are generally
lower than guaranteed rates for an Insured of the same age and sex and tobacco
status in a substandard class.
Western Reserve does, however, also offer Policies based on unisex
mortality tables if required by state law. Employers and employee organizations
considering purchase of a Policy should consult with their legal advisors to
determine whether purchase of a Policy based on sex-distinct actuarial tables is
consistent with Title VII of the Civil Rights Act of 1964 or other applicable
law. Upon request, Western Reserve may offer Policies with unisex mortality
tables to such prospective purchasers.
SUPPLEMENTAL BENEFIT (RIDER) CHARGES. If any additional benefits are added
to your Policy, Western Reserve will deduct charges for these benefits as part
of the monthly deduction.
MORTALITY AND EXPENSE RISK CHARGE. Western Reserve deducts a monthly
charge from the Cash Value to compensate it for mortality and expense risks that
it assumes under the Policy. In Policy Years 1-15, the monthly charge is
equivalent to an effective annual rate of 0.25%. In Policy Years 16-30, the
monthly charge is equivalent to an effective annual rate of 0.15%. In subsequent
Policy Years, the monthly charge is equivalent to an effective annual rate of
0.10%. The charge is calculated as a percentage of the average Cash Value on
each Valuation Day during the Policy Month preceding the Monthly Deduction Day.
The guaranteed rate for this charge is equivalent to an effective annual rate of
0.90%.
The mortality risk that Western Reserve assumes is the risk that Insureds,
as a group, will live for a shorter period of time than Western Reserve
estimated when it established the guaranteed costs of insurance rates in the
Policy. Because of these guarantees, each Owner is assured that the morbidity of
a particular Insured will not have an adverse effect on the Life Insurance
Benefit Proceeds that a Beneficiary would receive. The expense risk that Western
Reserve assumes is the risk that the monthly Policy charge (and any transfer
charge imposed) may be insufficient to cover the actual expenses of
administering the Policies. Western Reserve may make a profit from the mortality
and expense risk charge, and may use such profit for any lawful purpose
including paying distribution expenses.
ADMINISTRATIVE CHARGES
PARTIAL WITHDRAWAL CHARGE. After the first Policy Year, you may apply for
a partial withdrawal. On each partial withdrawal, Western Reserve imposes a
processing charge equal to the lesser of $25 or 2% of the amount requested.
Western Reserve deducts this charge on a pro-rata basis from the Subaccounts
unless you provide other instructions.
TRANSFER CHARGE. The first 12 transfers during each Policy Year are free.
Western Reserve reserves the right to assess a transfer charge of $25 for each
transfer in excess of 12 during a Policy Year. For the purposes
33
<PAGE> 36
of assessing the transfer charge, each written request of transfer is considered
to be one transfer, regardless of the number of Subaccounts affected by the
transfer. Western Reserve deducts the transfer charge from the amount being
transferred. Transfers due to automatic asset rebalancing, loans or the
expiration of the free-look period do not count as transfers for the purpose of
assessing this charge.
PORTFOLIO EXPENSES
The value of the net assets of each Subaccount reflects the investment
advisory fees and other expenses incurred by the corresponding Portfolio in
which the Subaccount invests. See the prospectuses for the Portfolios and the
Summary of this prospectus for further information on these fees and expenses.
OTHER POLICY PROVISIONS AND BENEFITS
OWNERSHIP
GENERAL. The Policy belongs to the Owner named in the application. An
Owner may exercise all of the rights and options described in the Policy. The
Insured is the Owner unless the application specifies a different person as
Owner.
CHANGING THE OWNER. The Owner may change the Owner by providing written
notice to Western Reserve at any time while the Insured is alive and the Policy
is in force. A change of ownership is effective as of the date that the written
notice is signed; however, Western Reserve is not liable for payments it makes
before it receives a written notice of a change in ownership. Changing the Owner
does not automatically change the Beneficiary. A change in Owner may have
significant tax consequences. You should consult a tax advisor before changing
an Owner.
SELECTING THE BENEFICIARY. The Owner designates the Beneficiary in the
application. Any Beneficiary designation is revocable unless otherwise stated in
the designation. Where more than one Beneficiary is designated, each Beneficiary
shares in any Life Insurance Benefit Proceeds equally unless the Beneficiary
designation states otherwise.
CHANGING THE BENEFICIARY. The Owner may change the Beneficiary by
providing a written notice to Western Reserve at any time while the Insured is
alive and the Policy is in force. Any change of Beneficiary is effective as of
the date the written notice is signed by the Owner but Western Reserve is not
liable for any payments it makes under the Policy prior to the time it receives
written notice of any Beneficiary change.
ASSIGNMENT
While the Insured is living, the Owner may assign his or her rights under
this Policy. Western Reserve is not bound by the assignment unless it receives a
duplicate of the original assignment at the Administrative Office. Western
Reserve is not responsible for the validity or sufficiency of any assignment and
is not liable for any payment it makes before receipt of the duplicate original
assignment. The Owner will maintain any rights of ownership that have not been
assigned. An assignee may not change the Owner or the Beneficiary, and may not
elect or change an optional method of payment. Any amount payable to the
assignee will be paid in one sum. Any claim under any assignment is subject to
proof of interest and the extent of the assignment. An assignment is subject to
any Loan Amount.
WESTERN RESERVE'S RIGHT TO CONTEST THE POLICY
Western Reserve has the right to contest the validity of the Policy or to
resist a claim under it on the basis of any material misrepresentation of a fact
stated in the application or any supplemental application. Western Reserve also
has the right to contest the validity of any increase of Face Amount or other
change to the Policy on the basis of any material misrepresentation of a fact
stated in the application (or supplemental application) for such increase in
coverage or change. In issuing this Policy, Western Reserve relies on all
statements made by or for the Insured in the application or in a supplemental
application. In the absence of fraud, Western Reserve considers statements made
in the application(s) to be representations and not warranties.
34
<PAGE> 37
In the absence of fraud, Western Reserve cannot bring any legal action to
contest the validity of the Policy after it has been in force during the
lifetime of the Insured for two years from the Effective Date, or if reinstated,
for two years from the date of reinstatement. Likewise, Western Reserve cannot
contest any increase in coverage effective after the Effective Date, or any
reinstatement thereof, after such increase or reinstatement has been in force
during the lifetime of the Insured for two years from its effective date.
SUICIDE EXCLUSION
If the Insured commits suicide, while sane or insane, within two years of
the Effective Date, Western Reserve's liability is limited to an amount equal to
the premiums paid, less any indebtedness and less any partial withdrawals paid.
Western Reserve will pay this amount to the Beneficiary in one sum.
If the Insured commits suicide, while sane or insane, within two years from
the effective date of any increase in Face Amount or additional coverage rider,
Western Reserve's liability with respect to that increase is limited to an
amount equal to the cost of insurance attributable to the increase from the
effective date of the increase to the date of death.
MISSTATEMENT OF AGE OR SEX
If the age or sex of the Insured has been stated incorrectly in the
application or any supplemental application, Western Reserve will adjust the
Life Insurance Benefit and any benefits provided by rider or endorsement it pays
under this Policy to the amount that would have been payable at the correct age
and sex based on the most recent deduction for cost of insurance and the cost of
any benefits provided by rider or endorsement. If the age of the Insured has
been overstated or understated, Western Reserve will calculate future monthly
deductions using the cost of insurance (and the cost of benefits provided by
rider or endorsement) based on the Insured's correct age and sex.
MODIFICATION OF THE POLICY
Only the President, one of the Vice Presidents, Secretary or an officer of
Western Reserve may modify this Policy or waive any of Western Reserve's rights
or requirements under this Policy. Any modification or waiver must be in
writing. No agent may bind Western Reserve by making any promise not contained
in this Policy.
Upon notice to the Owner, Western Reserve may modify the Policy to:
1. conform the Policy, Western Reserve's operations, or the Separate
Account's operations to the requirements of any law (or regulation
issued by a government agency) to which the Policy, Western Reserve
or the Separate Account is subject;
2. assure continued qualification of the Policy as a life insurance
contract under the Code; or
3. reflect a change (permitted by the Policy) in the Separate Account's
operation.
In the event of any such modification, Western Reserve will make
appropriate endorsements to the Policy. If any provision of the Policy conflicts
with the laws of a jurisdiction that govern the Policy, the Policy provides that
such provision be deemed to be amended to conform with such laws.
PAYMENTS BY WESTERN RESERVE
Western Reserve usually pays the amounts of any surrender, partial
withdrawals, Life Insurance Benefit Proceeds, or settlement options within seven
business days after receipt of all applicable written notices and/or due proofs
of death. However, Western Reserve can postpone such payments if:
1. the NYSE is closed, other than customary weekend and holiday
closing, or trading on the NYSE is restricted as determined by the
SEC; or
2. the SEC permits, by an order, the postponement for the protection of
Owners; or
35
<PAGE> 38
3. the SEC determines that an emergency exists that would make the
disposal of securities held in the Separate Account or the
determination of their value not reasonably practicable.
If a recent check or draft has been submitted, Western Reserve has the
right to defer payment of surrenders, partial withdrawals, Life Insurance
Benefit Proceeds, or payments under a settlement option until such check or
draft has been honored.
REPORTS TO OWNERS
Within 30 days after each Policy Anniversary, or more often as required by
law, Western Reserve will mail to Owners at their last known address a report
showing the following items as of the end of the report period:
1. the period covered by the report;
2. the current Cash Value and Net Cash Value;
3. the current Subaccount Values, and Loan Account Value;
4. the current Loan Amount;
5. any premium payments, partial withdrawals, or surrenders made, Life
Insurance Benefit Proceeds paid and charges deducted since the last
report;
6. current Net Premium allocations; and
7. any other information required by law.
Owners may request additional copies of reports from Western Reserve, but
Western Reserve reserves the right to charge a fee for such additional copies.
In addition, Western Reserve will send written confirmations of premium payments
and other financial transactions requested by Owners. Owners will also be sent
copies of the annual and semi-annual report to shareholders for each Portfolio
in which they are indirectly invested.
CLAIMS OF CREDITORS
Except as described in the Assignment section above, payments Western
Reserve makes under the Policy are, to the extent permitted by law, exempt from
the claims, attachments, or levies of any creditors.
DIVIDENDS
The Policy is a non-participating policy on which no dividends are payable.
SUPPLEMENTAL BENEFITS AND/OR RIDERS
The following supplemental benefits and/or riders are available and may be
added to a Policy. Monthly charges for these benefits and/or riders are deducted
from Cash Value as part of the monthly deduction. The supplemental benefits
and/or riders available with the Policies provide fixed benefits that do not
vary with the investment experience of the Separate Account.
Term Insurance Rider. The Term Insurance Rider provides term insurance
coverage for the Insured on a basis different from the coverage provided under
the Policy. The Term Insurance Rider may be purchased at the time of application
for the Policy or after the Policy is issued. The Term Insurance Rider increases
the death benefit provided under the Policy by the Face Amount of the rider. The
Term Insurance Rider terminates at age 100. Owners may reduce or cancel coverage
under the Term Insurance Rider separately from reducing the Face Amount of a
Policy. Likewise, the Face Amount of a Policy may be decreased, subject to
certain minimums, without reducing the coverage under the Term Insurance Rider.
36
<PAGE> 39
Western Reserve reserves the right to discontinue the availability of any
riders for new Policies at any time, and also reserves the right to modify the
terms of any riders for new Policies, subject to approval by the state insurance
departments.
FEDERAL TAX CONSIDERATIONS
INTRODUCTION
The following summary provides a general description of the Federal income
tax considerations associated with the Policy and does not purport to be
complete or to cover all tax situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisors should be consulted for more
complete information. This discussion is based upon Western Reserve's
understanding of the present Federal income tax laws. No representation is made
as to the likelihood of continuation of the present Federal income tax laws or
as to how they may be interpreted by the Internal Revenue Service.
TAX STATUS OF THE POLICY
In order to qualify as a life insurance contract for Federal income tax
purposes and to receive the tax treatment normally accorded life insurance
contracts under Federal tax law, a life insurance policy must satisfy certain
requirements which are set forth in the Internal Revenue Code. Guidance as to
how these requirements are to be applied is limited. Nevertheless, Western
Reserve believes that Policies issued on the basis of a standard rate class
should satisfy the applicable requirements. There is less guidance, however,
with respect to Policies issued on a substandard basis and it is not clear
whether such Policies will in all cases satisfy the applicable requirements. If
it is subsequently determined that a Policy does not satisfy the applicable
requirements, Western Reserve may take appropriate steps to bring the Policy
into compliance with such requirements and Western Reserve reserves the right to
modify the Policy as necessary in order to do so.
In certain circumstances, owners of variable life insurance policies have
been considered for Federal income tax purposes to be the owners of the assets
of separate accounts supporting their contracts due to their ability to exercise
investment control over those assets. Where this is the case, the policyowners
have been currently taxed on income and gains attributable to variable account
assets. There is little guidance in this area, and some features of the Policy,
such as the flexibility of Owners to allocate premium payments and policy
values, have not been explicitly addressed in published rulings. While Western
Reserve believes that the Policy does not give Owners investment control over
Separate Account assets, we reserve the right to modify the Policy as necessary
to prevent the Owner from being treated as the owner of the Separate Account
assets supporting the Policy.
In addition, the Code requires that the investments of the Subaccounts be
"adequately diversified" in order for the policy to be treated as a life
insurance contract for Federal income tax purposes. It is intended that the
Subaccounts, through the Portfolios, will satisfy these diversification
requirements.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
IN GENERAL. Western Reserve believes that the death benefit under a Policy
should be excludible from the gross income of the beneficiary. Federal, state
and local estate, inheritance, transfer, and other tax consequences of ownership
or receipt of Policy proceeds depend on the circumstances of each Owner or
beneficiary. A tax advisor should be consulted on these consequences.
Generally, an Owner will not be deemed to be in constructive receipt of the
Cash Value until there is a distribution. When distributions from a Policy
occur, or when loans are taken out from or secured by a Policy, the tax
consequences depend on whether the Policy is classified as a "modified endowment
contract."
37
<PAGE> 40
MODIFIED ENDOWMENT CONTRACTS. Under the Internal Revenue Code, certain
life insurance contracts are classified as "modified endowment contracts," with
less favorable tax treatment than other life insurance contracts. Due to the
flexibility of the Policy as to premium payments and benefits, the individual
circumstances of each Policy will determine whether it is classified as a
modified endowment contract. The rules are too complex to be summarized here,
but generally depend on the amount of premium payments made during the first
seven Policy Years. Certain changes in a Policy after it is issued could also
cause it to be classified as a modified endowment contract. A current or
prospective Owner should consult with a competent advisor to determine whether a
Policy transaction will cause the Policy to be classified as a modified
endowment contract.
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT
CONTRACTS. Policies classified as modified endowment contracts are subject to
the following tax rules:
(1) All distributions other than death benefits from a modified
endowment contract, including distributions upon surrender and withdrawals,
will be treated first as distributions of gain taxable as ordinary income
and as tax-free recovery of the Owner's investment in the policy only after
all gain has been distributed.
(2) Loans taken from or secured by a Policy classified as a modified
endowment contract are treated as distributions and taxed accordingly.
(3) A 10 percent additional income tax is imposed on the amount
subject to tax except where the distribution or loan is made when the Owner
has attained age 59 1/2 or is disabled, or where the distribution is part
of a series of substantially equal periodic payments for the life (or life
expectancy) of the Owner or the joint lives (or joint life expectancies) of
the Owner and the Owner's beneficiary or designated beneficiary.
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED
ENDOWMENT CONTRACTS. Distributions other than death benefits from a Policy that
is not classified as a modified endowment contract are generally treated first
as a recovery of the Owner's investment in the Policy and only after the
recovery of all investment in the Policy as taxable income. However, certain
distributions which must be made in order to enable the Policy to continue to
qualify as a life insurance contract for Federal income tax purposes if Policy
benefits are reduced during the first 15 policy years may be treated in whole or
in part as ordinary income subject to tax.
The tax consequences of loans from or secured by a Policy that is not a
modified endowment contract may be uncertain. You should consult a tax advisor
before taking out a Policy loan.
Finally, neither distributions from nor loans from or secured by a Policy
that is not a modified endowment contract are subject to the 10 percent
additional income tax.
INVESTMENT IN THE POLICY. Your investment in the Policy is generally your
aggregate premiums. When a distribution is taken from the Policy, your
investment in the Policy is reduced by the amount of the distribution that is
tax-free.
POLICY LOAN INTEREST. In general, interest on a Policy loan will not be
deductible.
MULTIPLE POLICIES. All modified endowment contracts that are issued by
Western Reserve (or its affiliates) to the same Owner during any calendar year
are treated as one modified endowment contract for purposes of determining the
amount includible in the Owner's income when a taxable distribution occurs.
OTHER POLICY OWNER TAX MATTERS. Businesses can use the Policy in various
arrangements, including nonqualified deferred compensation or salary continuance
plans, split dollar insurance plans, executive bonus plans, tax exempt and
nonexempt welfare benefit plans, retiree medical benefit plans and others. The
tax consequences of such plans may vary depending on the particular facts and
circumstances. If you are purchasing the Policy for any arrangement the value of
which depends in part on its tax consequences, you should consult a qualified
tax advisor. In recent years, moreover, Congress has adopted new rules relating
to life insurance owned by businesses, and the Administration has recently
proposed legislation that would
38
<PAGE> 41
further affect life insurance owned by businesses and non-natural person. Any
business or non-natural person contemplating the purchase of a new Policy or a
change in an existing Policy should consult a tax advisor.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is
always the possibility that the tax treatment of the Policy could change by
legislation or otherwise. Consult a tax advisor with respect to legislative
developments and their effect on the Policy.
POSSIBLE CHARGES FOR WESTERN RESERVE'S TAXES
At the present time, Western Reserve makes no charge for any Federal, state
or local taxes (other than the charge for state premium taxes) that may be
attributable to the Subaccounts or to the policies. Western Reserve reserves the
right to charge the Subaccounts for any future taxes or economic burden Western
Reserve may incur.
OTHER INFORMATION ABOUT THE POLICIES AND WESTERN RESERVE
SALE OF THE POLICIES
The Policy will be sold by individuals who, in addition to being licensed
as life insurance agents for Western Reserve, are also registered
representatives of AFSG Securities Corporation ("AFSG"), the principal
underwriter of the Policies, or of broker-dealers who have entered into written
sales agreements with the principal underwriter. AFSG, which is located at 4333
Edgewood Road, N.E., Cedar Rapids, Iowa 52499 was incorporated in Pennsylvania
on March 12, 1986, is registered with the SEC under the Securities Exchange Act
of 1934 as a broker-dealer, and is a member of the National Association of
Securities Dealers, Inc. No amounts will be retained by AFSG for acting as
principal underwriter for the Policies. The maximum sales commission payable to
Western Reserve agents or other registered representatives will be approximately
14% of all premiums up to the Target Premium and 3% of all premiums in excess
thereof. In addition, certain production, persistency and managerial bonuses may
be paid.
VOTING PRIVILEGES
Western Reserve is the legal owner of shares held by the Subaccounts and as
such has the right to vote on all matters submitted to shareholders of the
Portfolios. However, as required by law, Western Reserve votes Portfolio shares
held in the Subaccounts at regular and special shareholder meetings of the
Portfolios in accordance with instructions received from persons having voting
interests in the corresponding Subaccounts.
The number of votes that an Owner has the right to instruct is calculated
separately for each Subaccount, and may include fractional votes. While the
Insured is still living and the Policy is in force, an Owner holds a voting
interest in each Subaccount to which Net Premiums are allocated. For each Owner,
the number of votes attributable to a Subaccount is determined by dividing the
Owner's Subaccount Value by the net asset value per share of the Portfolio in
which that Subaccount invests. The net asset value per share of each Portfolio
is the value for each share of a Portfolio on any Valuation Day. The method of
computing the net asset value per share is described in the prospectuses for the
Portfolios.
The number of votes available to an Owner or person receiving payments
under the Policy is determined as of the date coinciding with the date
established by the Portfolio for determining shareholders eligible to vote at
the relevant meeting of the Portfolio's shareholders. Voting instructions will
be solicited by written communication prior to such meeting in accordance with
procedures established for the Portfolio. Each Owner or other person having a
voting interest in a Subaccount will receive proxy materials and reports
relating to any meeting of shareholders of the Portfolio in which that
Subaccount invests.
Portfolio shares as to which no timely instructions are received and shares
held by Western Reserve in a Subaccount as to which no Owner or other person has
a beneficial interest are voted in proportion to the voting instructions that
are received with respect to all Policies participating in that Subaccount.
Voting instructions
39
<PAGE> 42
to abstain on any item to be voted upon will be applied to reduce the total
number of votes eligible to be cast on a matter. Certain actions affecting the
Separate Account may require Owner approval. In that case, an Owner will be
entitled to vote in proportion to his or her Subaccount Value.
Western Reserve may, if required by state insurance regulators, disregard
voting instructions if such instructions would require Portfolio shares to be
voted so as to cause a change in sub-classification or investment objectives of
a Portfolio, or to approve or disapprove an investment management agreement or
an investment advisory agreement. In addition, Western Reserve may under certain
circumstances disregard voting instructions that would require changes in an
investment management agreement, investment manager, an investment advisory
agreement or an investment adviser of a Portfolio, provided that Western Reserve
reasonably disapproves of such changes in accordance with applicable regulations
under the 1940 Act. If Western Reserve ever disregards voting instructions, you
will be advised of that action and of the reasons for such action in the next
semi-annual report for the appropriate Portfolio.
WESTERN RESERVE'S DIRECTORS AND EXECUTIVE OFFICERS
Western Reserve is managed by a board of directors. The following table
sets forth the name, address and principal occupations during the past five
years of each of Western Reserve's directors and executive officers.
JOHN R. KENNEY(1), CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE
OFFICER AND PRESIDENT. Chairman of the Board of Directors (1987 -- present) and
Chief Executive Officer (1982 -- present), President (1978 -- 1987 and December,
1992 -- present), Director (1978 -- present), Western Reserve Life Assurance Co.
of Ohio; Chairman of the Board of Directors (1985 -- present), President (March,
1993 -- present), WRL Series Fund, Inc.; Chairman of the Board (September,
1996 -- present), WRL Investment Management, Inc.; Chairman of the Board
(September, 1996 -- present), WRL Investment Services, Inc.; Chairman of the
Board of Directors (February, 1997 -- present), AEGON Asset Management Services,
Inc., Largo, Florida; Chairman of the Board of Directors and Chief Executive
Officer (1988 -- February, 1991), President (1988 -- 1989), Director
(1976 -- February, 1991), Executive Vice President (1972 -- 1988), Pioneer
Western Corporation (financial services), Largo, Florida; Trustee
(1987 -- present), Chairman (December, 1989 to September, 1990 and November,
1990 to present) and President and Chief Executive Officer (November, 1986 to
September, 1990), IDEX Mutual Funds, of St. Petersburg, Florida.
ALAN M. YAEGER(1), EXECUTIVE VICE PRESIDENT, ACTUARY AND CHIEF FINANCIAL
OFFICER. Executive Vice President (June, 1993 -- present), Chief Financial
Officer (December, 1995 -- present), Senior Vice President (1981 -- June, 1993)
and Actuary (1972 -- present), Western Reserve Life Assurance Co. of Ohio;
Director (September, 1996 -- present), WRL Investment Management, Inc.; Director
(September, 1996 -- present), WRL Investment Services, Inc.; Executive Vice
President (September, 1993 -- present), WRL Series Fund, Inc.
WILLIAM H. GEIGER(1), SENIOR VICE PRESIDENT, SECRETARY AND CORPORATE
COUNSEL. Senior Vice President, Secretary and Corporate Counsel (March,
1998 -- present); Senior Vice President, Secretary and General Counsel (July,
1990 -- March, 1998) of Western Reserve Life Assurance Co. of Ohio; Vice
President, Secretary and General Counsel of Pioneer Western Corporation
(financial services) and Secretary of its subsidiaries (May, 1990 -- February,
1991); Vice President and Assistant Secretary (November, 1990 -- present) and
Secretary (June, 1990 -- September, 1990) IDEX Mutual Funds, of St. Petersburg,
Florida.
ALLAN J. HAMILTON(1), VICE PRESIDENT, TREASURER AND CONTROLLER. Vice
President and Controller (1987 -- present), Treasurer (February,
1997 -- present), Assistant Vice President and Assistant Controller
(1983 -- 1987), Western Reserve Life Assurance Co. of Ohio; Treasurer and
Principal Financial Officer (February, 1997 -- present), WRL Series Fund, Inc.;
Vice President and Controller (1988 to February 1991), Pioneer Western
Corporation (financial services), St. Petersburg , Florida.
PATRICK S. BAIRD, DIRECTOR, 4333 Edgewood Road, NE, Cedar Rapids, Iowa
52499, Director (February, 1991 to present), Western Reserve Life Assurance Co.
of Ohio; Vice President and Chief Tax Officer (1984 -- present), Chief Financial
Officer (1992 -- present) AEGON USA, Inc., formerly known as Life Investors,
Inc., (financial services holding company), Cedar Rapids, Iowa.
40
<PAGE> 43
JACK E. ZIMMERMAN, DIRECTOR, 507 St. Michel Circle, Kettering, Ohio 45429,
Director (1987 -- present), Western Reserve Life Assurance Co. of Ohio; Trustee,
IDEX Mutual Funds; retired from Martin Marietta Corporation (1993), Dayton,
Ohio.
LYMAN H. TREADWAY, DIRECTOR, 30195 Chagrin Blvd. Ste. 210N, Cleveland, Ohio
44124, Director (September, 1994 -- present), Western Reserve Life Assurance Co.
of Ohio; Consultant (1988 -- 1993), Cleveland, Ohio.
JAMES R. WALKER, DIRECTOR, 3320 Office Park Dr., Dayton, Ohio 45439,
Director (June, 1996 -- present) Western Reserve Life Assurance Co. of Ohio;
Self-employed, Public Accountant (1996 -- present); Partner, C.P.A.
(1990 -- 1995), Walker-Davis C.P.A.'s, Dayton, Ohio.
- ----------------
(1) The principal business address is Western Reserve Life Assurance Co. of
Ohio, P.O. Box 5068, Clearwater, Florida 33758-5068.
ADDITIONAL INFORMATION
A registration statement under the Securities Act of 1933 has been filed
with the SEC relating to the offering described in this prospectus. This
prospectus does not include all the information set forth in the registration
statement. The omitted information may be obtained at the SEC's principal office
in Washington, D.C. by paying the SEC's prescribed fees.
EXPERTS
The statutory-basis balance sheets of Western Reserve as of December 31,
1998 and 1997, and the related statutory-basis statements of operations, changes
in capital and surplus, and cash flows for each of the three years in the period
ended December 31, 1998, and the statutory-basis schedules as of December 31,
1998 and for each of the three years in the period ended December 31, 1998, have
been audited by Ernst & Young LLP, independent accountants, whose report thereon
is set forth elsewhere herein. Such financial statements and schedules are
included in this prospectus in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing. Actuarial matters
included in this prospectus have been examined by Kenneth Turnquist whose
opinion is filed as an exhibit to the registration statement.
LEGAL MATTERS
Sutherland Asbill & Brennan LLP of Washington, D.C. has provided advice on
certain matters relating to the federal securities laws.
LEGAL PROCEEDINGS
Western Reserve, like other life insurance companies, is involved in
lawsuits. Western Reserve is not aware of any class action lawsuits naming it as
a defendant or involving the Separate Account. In some lawsuits involving other
insurers, substantial damages have been sought and/or material settlement
payments have been made. Although the outcome of any litigation cannot be
predicted with certainty, Western Reserve believes that at the present time
there are no pending or threatened lawsuits that are reasonably likely to have a
material adverse impact on the Separate Account or Western Reserve.
YEAR 2000 MATTERS
In May 1996, Western Reserve adopted and presently has in place a Year 2000
Project Plan (the "Plan") to review and analyze existing hardware and software
systems, as well as voice and data communications systems, to determine if they
are Year 2000 compliant. As of March 1, 1999, substantially all of Western
Reserve's mission-critical systems are Year 2000 compliant. The Plan remains on
track as we continue with the validation of our mission-critical and
non-mission-critical systems, including revalidation testing in 1999. In
addition, we have undertaken aggressive initiatives to test all systems that
interface with any third parties and other business partners. All of these steps
are aimed at allowing current operations to remain unaffected by the Year 2000
date change.
41
<PAGE> 44
As of the date of this prospectus, Western Reserve has identified and made
available what it believes are the appropriate resources of hardware, people and
dollars, including the engagement of outside third parties, to ensure that the
Plan will be completed.
The actions taken by management under the Plan are intended to reduce
significantly Western Reserve's risk of a material business interruption based
on the Year 2000 issues. It should be noted that the Year 2000 computer problem,
and its resolution, is complex and multifaceted, and any company's success
cannot be conclusively known until the Year 2000 is reached. In spite of its
efforts or results, Western Reserve's ability to function unaffected to and
through the Year 2000 may be adversely affected by actions, or failure to act,
of third parties beyond our knowledge or control. See the Portfolios'
prospectuses for information on their preparation for Year 2000.
This statement is a Year 2000 Readiness Disclosure pursuant to section 3(9)
of the Year 2000 Information and Readiness Disclosure Act, 15 U.S.C. Section 1
(1998).
FINANCIAL STATEMENTS
No financial statements of the Separate Account are included herein because
no Policies had been sold as of June 30, 1999. The financial statements of
Western Reserve appear on the following pages. The financial statements of
Western Reserve should be distinguished from financial statements of the
Separate Account and should be considered only as bearing upon Western Reserve's
ability to meet its obligations under the Policies.
42
<PAGE> 45
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
BALANCE SHEET -- STATUTORY BASIS
AS OF JUNE 30, 1999
(IN THOUSANDS)(UNAUDITED)
<TABLE>
<S> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments........................ $ 24,641
Bonds.................................................. 166,709
Common stock, at market................................ 1,804
Mortgage loans on real estate.......................... 9,810
Home office properties, at cost less accumulated
depreciation.......................................... 34,869
Investment real estate................................. 11,208
Policy loans........................................... 142,414
Due from broker........................................ 230
----------
Total cash and invested assets.................... 391,685
Premiums deferred and uncollected........................... 954
Accrued investment income................................... 2,263
Transfers from separate accounts............................ 398,966
Cash surrender value of life insurance policies............. 46,511
Federal income tax benefit.................................. 827
Other assets................................................ 14,866
Separate account assets..................................... 8,399,303
----------
Total admitted assets............................. $9,255,375
==========
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life................................................. $ 261,009
Annuity.............................................. 265,059
Policy and contract claim reserves..................... 11,525
Other policyholders' funds............................. 30,636
Remittances and items not allocated.................... 13,957
Asset valuation reserve................................ 3,574
Interest maintenance reserve........................... 9,331
Short-term note payable to affiliate................... 30,300
Payable to affiliate................................... 37,838
Other liabilities...................................... 45,704
Separate account liabilities........................... 8,394,230
----------
Total liabilities................................. 9,103,163
Capital and surplus:
Common stock, $1.00 par value, 1,500 shares authorized,
issued and outstanding................................ 1,500
Paid-in surplus........................................ 120,107
Unassigned surplus..................................... 30,605
----------
Total capital and surplus......................... 152,212
----------
Total liabilities and capital and surplus......... $9,255,375
==========
</TABLE>
43
<PAGE> 46
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENT OF OPERATIONS -- STATUTORY BASIS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)(UNAUDITED)
<TABLE>
<S> <C>
Revenues:
Premiums and other considerations, net of reinsurance
Life................................................. $268,789
Annuity.............................................. 509,074
Net investment income.................................. 19,810
Amortization of interest maintenance reserve........... 927
Commissions and expense allowances on reinsurance
ceded................................................. 15,280
Other income........................................... 83,474
--------
897,354
Benefits and expenses:
Benefits paid or provided for:
Life................................................. 18,512
Surrender benefits................................... 331,456
Other benefits....................................... 17,097
Increase (decrease) in aggregate reserves for
policies and contracts:
Life.............................................. 29,164
Annuity........................................... (359)
Other............................................. (2,568)
--------
393,302
Insurance expenses:
Commissions.......................................... 122,007
General insurance expenses........................... 53,655
Taxes, licenses and fees............................. 8,426
Transfer to separate accounts........................ 300,927
Other expenses....................................... (107)
--------
484,908
--------
878,210
--------
Gain from operations before federal income tax expense and
net realized capital losses on investments................ 19,144
Federal income tax expense.................................. 7,561
--------
Gain from operations before net realized capital losses on
investments............................................... 11,583
Net realized capital losses on investments (net of related
federal income taxes and amounts transferred to interest
maintenance reserve)...................................... (169)
--------
Net income.................................................. $ 11,414
========
</TABLE>
44
<PAGE> 47
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENT OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
(IN THOUSANDS)(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
CAPITAL
COMMON PAID-IN UNASSIGNED AND
STOCK SURPLUS SURPLUS SURPLUS
------ -------- ---------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1999........................... $1,500 $120,107 $21,973 $143,580
Net gain........................................ 0 0 11,414 11,414
Net unrealized gains............................ 0 0 716 716
Change in non-admitted assets................... 0 0 1,137 1,137
Change in asset valuation reserve............... 0 0 (726) (726)
Change in surplus in separate accounts.......... 0 0 (2,990) (2,990)
Other adjustments............................... 0 0 (919) (919)
------ -------- ------- --------
Balance at June 30, 1999............................. $1,500 $120,107 $30,605 $152,212
====== ======== ======= ========
</TABLE>
45
<PAGE> 48
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENT OF CASH FLOW -- STATUTORY BASIS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)(UNAUDITED)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Premiums and other considerations, net of reinsurance....... $876,637
Net investment income....................................... 20,079
Life and accident and health claims......................... (15,869)
Surrender benefits to policyholders......................... (331,493)
Other benefits to policyholders............................. (17,579)
Commissions, other expenses and other taxes................. (191,328)
Federal income taxes, excluding tax on capital gains........ (13,804)
Other, net.................................................. (10,769)
Net transfers to separate accounts.......................... (339,836)
--------
Net cash used in operating activities.................. (23,962)
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Bonds and preferred stocks............................. 49,302
Mortgage loans on real estate.......................... 105
--------
49,407
Cost of investments acquired:
Bonds and preferred stocks............................. 30,439
Real estate............................................ 286
Policy loans........................................... 29,432
Other.................................................. 555
--------
60,712
--------
Net cash used in investing activities....................... (11,305)
FINANCING ACTIVITIES
Borrowed money.............................................. (13,900)
--------
Net cash used in financing activities....................... (13,900)
--------
Decrease in cash and short-term investments................. (49,167)
Cash and short-term investments at beginning of year........ 73,808
--------
Cash and short-term investments at end of year.............. $ 24,641
========
</TABLE>
46
<PAGE> 49
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY BASIS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited statutory basis financial statements have been
prepared in accordance with statutory accounting principles for interim
financial information and the instructions to Article 10 of Regulation S-X.
Accordingly, they do not include all the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six month period ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. For further information, refer to the accompanying statutory
basis financial statements and notes thereto for the year ended December 31,
1998.
47
<PAGE> 50
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
FINANCIAL STATEMENTS -- STATUTORY BASIS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. 49
Audited Financial Statements
Balance Sheets -- Statutory Basis........................... 50
Statements of Operations -- Statutory Basis................. 51
Statements of Changes in Capital and Surplus -- Statutory
Basis..................................................... 52
Statements of Cash Flows -- Statutory Basis................. 53
Notes to Financial Statements -- Statutory Basis............ 54
</TABLE>
48
<PAGE> 51
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Western Reserve Life Assurance Co. of Ohio
We have audited the accompanying statutory-basis balance sheets of Western
Reserve Life Assurance Co. of Ohio as of December 31, 1998 and 1997, and the
related statutory-basis statements of operations, changes in capital and
surplus, and cash flows for each of the three years in the period ended December
31, 1998. Our audits also included the statutory-basis financial statement
schedules required by Regulation S-X, Article 7. These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits. We
did not audit the "Separate Account Assets" and "Separate Account Liabilities"
in the balance sheets of the Company. The Separate Account financial statements
were audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the data included for the Separate Account, is
based solely upon the reports of the other auditors.
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 and the reports of other auditors provide a
reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company presents
its financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Department of the State of Ohio, which practices
differ from generally accepted accounting principles. The variances between such
practices and generally accepted accounting principles are also described in
Note 1. The effects on the financial statements of these variances are not
reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matters described in the
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of Western Reserve Life Assurance Co. of Ohio at December 31,
1998 and 1997, or the results of its operations or its cash flows for each of
the three years in the period ended December 31, 1998.
However, in our opinion, based on our audits and the reports of other
auditors, the financial statements referred to above present fairly, in all
material respects, the financial position of Western Reserve Life Assurance Co.
of Ohio at December 31, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with accounting practices prescribed or permitted by the Insurance
Department of the State of Ohio. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic statutory-basis
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/s/ ERNST & YOUNG LLP
Des Moines, Iowa
February 19, 1999
49
<PAGE> 52
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
BALANCE SHEETS -- STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments........................ $ 73,808 $ 13,896
Bonds.................................................. 184,697 255,919
Common stocks:
Affiliated entities (cost: 1998 -- $243;
1997 -- $150)....................................... 704 319
Other (cost: 1998 and 1997 -- $302).................. 384 428
Mortgage loans on real estate.......................... 9,916 4,824
Home office properties................................. 34,583 19,964
Investment properties.................................. 11,594 --
Policy loans........................................... 112,982 76,741
Other invested assets.................................. 396 --
---------- ----------
Total cash and invested assets.................... 429,064 372,091
Premiums deferred and uncollected........................... 900 1,928
Accrued investment income................................... 2,867 4,088
Transfers from separate accounts............................ 350,633 279,958
Cash surrender value of life insurance policies............. 45,445 --
Other assets................................................ 9,239 5,221
Separate account assets..................................... 6,999,290 4,814,594
---------- ----------
Total admitted assets............................. $7,837,438 $5,477,880
========== ==========
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life................................................. $ 231,596 $ 186,523
Annuity.............................................. 265,418 296,290
Policy and contract claim reserves..................... 9,233 10,929
Other policyholders' funds............................. 38,080 3,877
Remittances and items not allocated.................... 20,569 9,184
Federal income taxes payable........................... 5,716 2,283
Asset valuation reserve................................ 2,848 2,436
Interest maintenance reserve........................... 9,684 9,134
Short-term note payable to affiliate................... 44,200 8,200
Payable to affiliate................................... 37,907 1,925
Other liabilities...................................... 31,151 19,257
Separate account liabilities........................... 6,997,456 4,812,979
---------- ----------
Total liabilities................................. 7,693,858 5,363,017
Commitments and contingencies
Capital and surplus:
Common stock, $1.00 par value, 1,500 shares authorized,
issued and outstanding................................ 1,500 1,500
Paid-in surplus........................................ 120,107 88,015
Unassigned surplus..................................... 21,973 25,348
---------- ----------
Total capital and surplus......................... 143,580 114,863
---------- ----------
Total liabilities and capital and surplus......... $7,837,438 $5,477,880
========== ==========
</TABLE>
See accompanying notes.
50
<PAGE> 53
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net of
reinsurance:
Life.............................................. $ 476,053 $ 394,370 $ 293,590
Annuity........................................... 794,841 822,149 740,125
Net investment income............................... 36,315 40,013 36,067
Amortization of interest maintenance reserve........ 744 1,576 1,335
Commissions and expense allowances on reinsurance
ceded............................................. 15,333 11 11
Other income........................................ 67,751 3,016 13,398
---------- ---------- ----------
1,391,037 1,261,135 1,084,526
Benefits and expenses:
Benefits paid or provided for:
Life.............................................. 42,982 28,060 21,256
Surrender benefits................................ 551,528 431,939 286,406
Other benefits.................................... 31,280 28,112 23,270
Increase (decrease) in aggregate reserves for
policies and contracts:
Life........................................... 42,940 29,485 80,139
Annuity........................................ (30,872) (35,940) 12,877
Other.......................................... 32,178 794 422
---------- ---------- ----------
670,036 482,450 424,370
Insurance expenses:
Commissions....................................... 205,939 179,106 140,261
General insurance expenses........................ 102,611 70,546 47,406
Taxes, licenses and fees.......................... 15,545 13,101 10,848
Net transfer to separate accounts................. 402,618 519,214 452,471
Other expenses.................................... 59 21 60
---------- ---------- ----------
726,772 781,988 651,046
---------- ---------- ----------
1,396,808 1,264,438 1,075,416
---------- ---------- ----------
Gain (loss) from operations before federal income taxes
(benefit) and realized capital gains (losses) on
investments............................................ (5,771) (3,303) 9,110
Federal income tax expense (benefit)..................... (347) 469 9,297
---------- ---------- ----------
Loss from operations before realized capital gains
(losses) on investments................................ (5,424) (3,772) (187)
Net realized capital gains (losses) on investments (net
of related federal income taxes and amounts transferred
to interest maintenance reserve)....................... 1,494 747 (811)
---------- ---------- ----------
Net loss................................................. $ (3,930) $ (3,025) $ (998)
========== ========== ==========
</TABLE>
See accompanying notes.
51
<PAGE> 54
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
CAPITAL
COMMON PAID-IN UNASSIGNED AND
STOCK SURPLUS SURPLUS SURPLUS
------ -------- ---------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1996........................... $1,500 $ 68,015 $28,424 $ 97,939
Net loss for 1996............................... -- -- (998) (998)
Net unrealized capital gains.................... -- -- 1,294 1,294
Change in non-admitted assets................... -- -- 199 199
Change in asset valuation reserve............... -- -- (120) (120)
Change in surplus in separate accounts.......... -- -- 237 237
Change in reserve valuation..................... -- -- (2,995) (2,995)
------ -------- ------- --------
Balance at December 31, 1996......................... 1,500 68,015 26,041 95,556
====== ======== ======= ========
Net loss for 1997............................... -- -- (3,025) (3,025)
Change in non-admitted assets................... -- -- (702) (702)
Change in asset valuation reserve............... -- -- 3,274 3,274
Change in surplus in separate accounts.......... -- -- (2,115) (2,115)
Change in reserve valuation..................... -- -- (1,872) (1,872)
Capital contribution............................ -- 20,000 -- 20,000
Tax effect of capital loss carry-forward
utilized by affiliates........................ -- -- 3,747 3,747
------ -------- ------- --------
Balance at December 31, 1997......................... 1,500 88,015 25,348 114,863
====== ======== ======= ========
Net loss for 1998............................... -- -- (3,930) (3,930)
Net unrealized capital gains.................... -- -- 248 248
Change in non-admitted assets................... -- -- (1,815) (1,815)
Change in asset valuation reserve............... -- -- (412) (412)
Change in surplus in separate accounts.......... -- -- (341) (341)
Change in reserve valuation..................... -- -- (2,132) (2,132)
Capital contribution............................ -- 32,092 -- 32,092
Settlement of prior period tax returns.......... -- -- 353 353
Tax benefits on stock options exercised......... -- -- 4,654 4,654
------ -------- ------- --------
Balance at December 31, 1998......................... $1,500 $120,107 $21,973 $143,580
====== ======== ======= ========
</TABLE>
See accompanying notes.
52
<PAGE> 55
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums and other considerations, net of reinsurance.... $1,356,732 $1,223,898 $1,046,548
Net investment income.................................... 38,294 43,802 38,666
Life and accident and health claims...................... (44,426) (26,005) (20,655)
Surrender benefits and other fund withdrawals............ (551,528) (431,939) (286,406)
Other benefits to policyholders.......................... (31,231) (28,147) (22,129)
Commissions, other expenses and other taxes.............. (326,080) (262,901) (196,373)
Net transfers to separate accounts....................... (461,982) (596,347) (658,326)
Federal income taxes received (paid)..................... 11,956 5,006 (9,449)
Interest paid............................................ -- (731) --
Other, net............................................... (7,109) (14,901) 28,325
---------- ---------- ----------
Net cash used in operating activities............... (15,374) (88,265) (79,799)
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Bonds and preferred stocks.......................... 143,449 146,963 122,820
Mortgage loans on real estate....................... 221 2,116 132
Real estate......................................... -- -- 4,304
Other............................................... -- -- 175
---------- ---------- ----------
143,670 149,079 127,431
Cost of investments acquired Bonds and preferred
stocks................................................. (68,202) (40,418) (26,826)
Common stocks....................................... (93) (150) (4)
Mortgage loans on real estate....................... (5,313) (891) --
Real estate......................................... (26,213) (12,002) (7,837)
Policy loans........................................ (36,241) (24,137) (15,479)
Other............................................... (414) -- (5)
---------- ---------- ----------
(136,476) (77,598) (50,151)
---------- ---------- ----------
Net cash provided by investing activities................ 7,194 71,481 77,280
FINANCING ACTIVITIES
Issuance of short-term note payable to affiliate......... 36,000 8,200 --
Capital contribution..................................... 32,092 20,000 --
---------- ---------- ----------
Net cash provided by financing activities................ 68,092 28,200 --
---------- ---------- ----------
Increase (decrease) in cash and short-term investments... 59,912 11,416 (2,519)
Cash and short-term investments at beginning of year..... 13,896 2,480 4,999
---------- ---------- ----------
Cash and short-term investments at end of year........... $ 73,808 $ 13,896 $ 2,480
========== ========== ==========
</TABLE>
See accompanying notes.
53
<PAGE> 56
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Western Reserve Life Assurance Co. of Ohio ("the Company") is a stock life
insurance company and is a wholly-owned subsidiary of First AUSA Life Insurance
Company which, in turn, is a wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"). AEGON is a wholly-owned subsidiary of AEGON N.V., a holding company
organized under the laws of The Netherlands.
NATURE OF BUSINESS
The Company operates predominantly in the variable universal life and
variable annuity areas of the life insurance business. The Company is licensed
in 49 states, District of Columbia, Puerto Rico and Guam. Sales of the Company's
products are through financial planners, independent representatives, financial
institutions and stockbrokers. The majority of the Company's new life insurance
written and a substantial portion of new annuities written is done through one
marketing organization; the Company expects to maintain this relationship for
the foreseeable future.
BASIS OF PRESENTATION
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known, which could impact
the amounts reported and disclosed herein.
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Insurance Department of the
State of Ohio ("Insurance Department"), which practices differ from generally
accepted accounting principles. The more significant of these differences are as
follows: (a) bonds are generally reported at amortized cost rather than
segregating the portfolio into held-to-maturity (reported at amortized cost),
available-for-sale (reported at fair value), and trading (reported at fair
value) classifications; (b) acquisition costs of acquiring new business are
expensed as incurred rather than deferred and amortized over the life of the
policies; (c) policy reserves on traditional life products are based on
statutory mortality rates and interest which may differ from reserves based on
reasonable assumptions of expected mortality, interest, and withdrawals which
include a provision for possible unfavorable deviation from such assumptions;
(d) policy reserves on certain investment products use discounting methodologies
utilizing statutory interest rates rather than full account values; (e)
reinsurance amounts are netted against the corresponding asset or liability
rather than shown as gross amounts on the balance sheet; (f) deferred income
taxes are not provided for the difference between the financial statement
amounts and income tax bases of assets and liabilities; (g) net realized gains
or losses attributed to changes in the level of interest rates in the market are
deferred and amortized over the remaining life of the bond or mortgage loan,
rather than recognized as gains or losses in the statement of operations when
the sale is completed; (h) declines in the estimated realizable value of
investments are provided for through the establishment of a formula-determined
statutory investment reserve (reported as a liability) changes to which are
charged directly to surplus, rather than through recognition in the statement of
operations for declines in value, when such declines are judged to be other than
temporary; (i) certain assets designated as "non-admitted assets" have been
charged to surplus rather than being reported as assets; (j) revenues for
universal life and investment products consist of the entire premiums received
rather than policy charges for the cost of insurance, policy administration
charges, amortization of policy initiation fees and surrender charges assessed;
(k) pension expense is recorded as amounts are paid rather than accrued and
expensed during the periods in which the employers provide service;
54
<PAGE> 57
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
and (l) the financial statements of wholly-owned affiliates are not consolidated
with those of the Company. The effects of these variances have not been
determined by the Company, but are presumed to be material.
In 1998, the National Association of Insurance Commissioners (NAIC) adopted
codified statutory accounting principles ("Codification"). Codification will
likely change, to some extent, prescribed statutory accounting practices and may
result in changes to the accounting practices that the Company uses to prepare
its statutory-basis financial statements. Codification will require adoption by
the various states before it becomes the prescribed statutory basis of
accounting for insurance companies domesticated within those states.
Accordingly, before Codification becomes effective for the Company, the State of
Ohio must adopt Codification as the prescribed basis of accounting on which
domestic insurers must report their statutory-basis results to the Insurance
Department. At this time it is unclear whether the State of Ohio will adopt
Codification. However, based on current guidance, management believes that the
impact of Codification will not be material to the Company's statutory-basis
financial statements.
Other significant statutory accounting practices are as follows:
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with remaining maturities of one year or less when
purchased to be cash equivalents.
INVESTMENTS
Investments in bonds (except those to which the Securities Valuation Office
of the NAIC has ascribed a value), mortgage loans on real estate and short-term
investments are reported at cost adjusted for amortization of premiums and
accrual of discounts. Amortization is computed using methods which result in a
level yield over the expected life of the investment. The Company reviews its
prepayment assumptions on mortgage and other asset backed securities at regular
intervals and adjusts amortization rates retrospectively when such assumptions
are changed due to experience and/or expected future patterns. Common stocks of
unaffiliated companies are carried at market and include shares of mutual funds
(money market and other), and the related unrealized capital gains/(losses) are
reported in unassigned surplus without any adjustment for federal income taxes.
Common stocks of the Company's wholly-owned affiliates are recorded at the
equity in net assets. Home office and investment properties are reported at cost
less allowances for depreciation. Depreciation is computed principally by the
straight-line method. Policy loans are reported at unpaid principal. Other
"admitted assets" are valued, principally at cost, as required or permitted by
Ohio Insurance Laws.
Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for anticipated
losses in the event of default by issuers of certain invested assets. These
amounts are determined using a formula prescribed by the NAIC and are reported
as a liability. The formula for the AVR provides for a corresponding adjustment
for realized gains and losses. Under a formula prescribed by the NAIC, the
Company defers, in the Interest Maintenance Reserve (IMR), the portion of
realized gains and losses on sales of fixed income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity of the security.
During 1998, 1997 and 1996, net realized capital gains of $1,294, $3,259
and $2,394, respectively, were credited to the IMR rather than being immediately
recognized in the statements of operations. Amortization
55
<PAGE> 58
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
of these net gains aggregated $744, $1,576 and $1,335 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Interest income is recognized on an accrual basis. The Company does not
accrue income on bonds in default, mortgage loans on real estate in default
and/or foreclosure or which are delinquent more than twelve months, or real
estate where rent is in arrears for more than three months. Further, income is
not accrued when collection is uncertain. No investment income due and accrued
has been excluded for the years ended December 31, 1998, 1997 and 1996, with
respect to such practices.
AGGREGATE RESERVES FOR POLICIES
Life and annuity reserves are developed by actuarial methods and are
determined based on published tables using statutorily specified interest rates
and valuation methods that will provide, in the aggregate, reserves that are
greater than or equal to the minimum required by law.
The aggregate policy reserves for life insurance policies are based
principally upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary
Mortality Tables. The reserves are calculated using interest rates ranging from
2.25 to 5.50 percent and are computed principally on the Net Level Premium
Valuation and the Commissioners' Reserve Valuation Methods. Reserves for
universal life policies are based on account balances adjusted for the
Commissioners' Reserve Valuation Method.
Deferred annuity reserves are calculated according to the Commissioners'
Annuity Reserve Valuation Method including excess interest reserves to cover
situations where the future interest guarantees plus the decrease in surrender
charges are in excess of the maximum valuation rates of interest. Reserves for
immediate annuities and supplementary contracts with life contingencies are
equal to the present value of future payments assuming interest rates ranging
from 5.75 to 8.75 percent and mortality rates, where appropriate, from a variety
of tables.
POLICY AND CONTRACT CLAIM RESERVES
Claim reserves represent the estimated accrued liability for claims
reported to the Company and claims incurred but not yet reported through the
statement date. These reserves are estimated using either individual case-basis
valuations or statistical analysis techniques. These estimates are subject to
the effects of trends in claim severity and frequency. The estimates are
continually reviewed and adjusted as necessary as experience develops or new
information becomes available.
SEPARATE ACCOUNTS
Assets held in trust for purchases of variable universal life and variable
annuity contracts and the Company's corresponding obligation to the contract
owners are shown separately in the balance sheets. The assets in the separate
accounts are valued at market. Income and gains and losses with respect to the
assets in the separate accounts accrue to the benefit of the policyholders and,
accordingly, the operations of the separate accounts are not included in the
accompanying financial statements. The separate accounts do not have any minimum
guarantees and the investment risks associated with market value changes are
borne entirely by the policyholders. The Company received variable contract
premiums of $1,240,858, $1,164,013 and $997,513 in 1998, 1997 and 1996,
respectively. All variable account contracts are subject to discretionary
withdrawal by the policyholder at the market value of the underlying assets less
the current surrender charge. Separate account contractholders have no claim
against the assets of the general account.
56
<PAGE> 59
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
STOCK OPTION PLAN
AEGON N.V. sponsors a stock option plan for eligible employees of the
Company. Under this plan, certain employees have indicated a preference to
immediately sell shares received as a result of their exercise of the stock
options; in these situations, AEGON N.V. has settled such options in cash rather
than issuing stock to these employees. These cash settlements are paid by the
Company and AEGON N.V. subsequently reimburses the Company for such payments.
Under statutory accounting principles, the Company does not record any expense
related to this plan, as the expense is recognized by AEGON N.V. However, the
Company is allowed to record a deduction in the consolidated tax return filed by
the Company and certain affiliates. The tax benefit of this deduction has been
credited directly to surplus.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform to the 1998 presentation.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statutory-basis
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparisons to independent markets and, in many
cases, could not be realized in immediate settlement of the instrument.
Statement of Financial Accounting Standards No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements
and allows companies to forego the disclosures when those estimates can only be
made at excessive cost. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and Short-Term Investments: The carrying amounts reported in the
statutory-basis balance sheet for these instruments approximate their
fair values.
Investment Securities: Fair values for fixed maturity securities
(including redeemable preferred stocks) are based on quoted market
prices, where available. For fixed maturity securities not actively
traded, fair values are estimated using values obtained from independent
pricing services or (in the case of private placements) are estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality, and maturity of the
investments. The fair values for equity securities are based on quoted
market prices.
Mortgage Loans and Policy Loans: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of
the loans. The fair value of policy loans are assumed to equal their
carrying value.
Investment Contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash
flow calculations, based on interest rates currently being offered for
similar contracts with maturities consistent with those remaining for
the contracts being valued.
57
<PAGE> 60
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The following sets forth a comparison of the fair values and carrying
values of the Company's financial instruments subject to the provisions of
Statement of Financial Accounting Standards No. 107:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------------------
1998 1997
--------------------------- ---------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Cash and short-term investments.... $ 73,808 $ 73,808 $ 13,896 $ 13,896
Bonds.............................. 184,697 192,556 255,919 267,763
Common stocks, other than
affiliates....................... 384 384 428 428
Mortgage loans on real estate...... 9,916 10,390 4,824 5,143
Policy loans....................... 112,982 112,982 76,741 76,741
Separate account assets............ 6,999,290 6,999,290 4,814,594 4,814,594
LIABILITIES
Investment contract liabilities.... 297,349 294,105 280,121 276,113
Separate account annuities......... 5,096,680 5,038,296 3,615,255 3,565,557
</TABLE>
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt
securities are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Bonds:
United States Government and
agencies............................. $ 4,749 $ 83 $-- $ 4,832
State, municipal and other
government........................... 3,234 117 -- 3,351
Public utilities....................... 18,792 818 251 19,359
Industrial and miscellaneous........... 96,332 6,685 577 102,440
Mortgage-backed securities............. 61,590 1,235 251 62,574
-------- ------ ------ --------
Total bonds................................. $184,697 $8,938 1,079 $192,556
======== ====== ====== ========
</TABLE>
58
<PAGE> 61
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Bonds:
United States Government and
agencies............................. $ 3,675 $ 9 $ 30 $ 3,654
State, municipal and other
government........................... 3,855 360 -- 4,215
Public utilities....................... 15,794 904 403 16,295
Industrial and miscellaneous........... 121,513 7,700 710 128,503
Mortgage-backed securities............. 111,082 4,198 184 115,096
-------- ------- ------ --------
Total bonds................................. $255,919 $13,171 $1,327 $267,763
======== ======= ====== ========
</TABLE>
The carrying value and fair value of bonds at December 31, 1998 by
contractual maturity are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without penalties.
<TABLE>
<CAPTION>
ESTIMATED
CARRYING FAIR
VALUE VALUE
-------- ---------
<S> <C> <C>
Due in one year or less..................................... $ 2,706 $ 2,743
Due one through five years.................................. 61,340 64,696
Due five through ten years.................................. 43,233 45,352
Due after ten years......................................... 15,828 17,191
-------- --------
123,107 129,982
Mortgage and other asset backed securities.................. 61,590 62,574
-------- --------
$184,697 $192,556
======== ========
</TABLE>
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Interest on bonds........................................ $17,150 $25,723 $33,969
Dividends on equity investments from subsidiary.......... 13,233 10,855 --
Interest on mortgage loans............................... 499 478 559
Rental income on real estate............................. 2,839 1,371 919
Interest on policy loans................................. 6,241 4,656 3,339
Other investment income.................................. 540 26 9
------- ------- -------
Gross investment income.................................. 40,502 43,109 38,795
Investment expenses...................................... (4,187) (3,096) (2,728)
------- ------- -------
Net investment income.................................... $36,315 $40,013 $36,067
======= ======= =======
</TABLE>
59
<PAGE> 62
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS -- (CONTINUED)
Proceeds from sales and maturities of debt securities and related gross
realized gains and losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Proceeds.............................................. $143,449 $146,963 $122,820
======== ======== ========
Gross realized gains.................................. $ 4,641 $ 3,921 $ 2,984
Gross realized losses................................. 899 626 791
-------- -------- --------
Net realized gains.................................... $ 3,742 $ 3,295 $ 2,193
======== ======== ========
</TABLE>
At December 31, 1998, bonds with an aggregate carrying value of $4,297 were
on deposit with certain state regulatory authorities or were restrictively held
in bank custodial accounts for benefit of such state regulatory authorities, as
required by statute.
Realized investment gains (losses) and changes in unrealized gains (losses)
for investments are summarized below:
<TABLE>
<CAPTION>
REALIZED
---------------------------
YEAR ENDED DECEMBER 31
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Debt securities.......................................... $ 3,742 $ 3,295 $ 2,193
Real estate.............................................. -- -- (606)
Other invested assets.................................... (18) -- (4)
------- ------- -------
3,724 3,295 1,583
Tax expense.............................................. (936) (711) --
Transfer to interest maintenance reserve................. (1,294) (3,259) (2,394)
------- ------- -------
Net realized gains (losses).............................. $ 1,494 $ 747 $ (811)
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
CHANGES IN UNREALIZED
--------------------------
YEAR ENDED DECEMBER 31
1998 1997 1996
------- ----- --------
<S> <C> <C> <C>
Debt securities.......................................... $(3,985) $(896) $(14,442)
Common stock............................................. 248 -- (66)
------- ----- --------
Change in unrealized appreciation (depreciation)......... $(3,737) $(896) $(14,508)
======= ===== ========
</TABLE>
Gross unrealized gains (losses) on common stocks were as follows:
<TABLE>
<CAPTION>
UNREALIZED
------------------------
YEAR ENDED DECEMBER 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Unrealized gains............................................ $579 $295 $295
Unrealized losses........................................... (36) -- --
---- ---- ----
Net unrealized gains........................................ $543 $295 $295
==== ==== ====
</TABLE>
60
<PAGE> 63
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS -- (CONTINUED)
During 1998, the Company issued one mortgage loan with an interest rate of
6.71%. The maximum percentage of any one mortgage loan to the value of the
underlying real estate at origination was 75%. The Company requires all
mortgagees to carry fire insurance equal to the value of the underlying
property.
During 1998, 1997 and 1996, no mortgage loans were foreclosed and
transferred to real estate. During 1998 and 1997, the Company held a mortgage
loan loss reserve in the asset valuation reserve of $112 and $54, respectively.
At December 31, 1998, the Company had no investments (excluding U.S.
Government guaranteed or insured issues) which individually represented more
than ten percent of capital and surplus and the asset valuation reserve.
4. REINSURANCE
The Company reinsures portions of certain insurance policies which exceed
its established limits, thereby providing a greater diversification of risk and
minimizing exposure on larger risks. The Company remains contingently liable
with respect to any insurance ceded, and this would become an actual liability
in the event that the assuming insurance company became unable to meet its
obligations under the reinsurance treaty.
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Direct premiums.................................. $1,345,752 $1,219,271 $1,034,757
Reinsurance assumed.............................. 461 2,389 2,063
Reinsurance ceded................................ (75,319) (5,141) (3,105)
---------- ---------- ----------
Net premiums earned.............................. $1,270,894 $1,216,519 $1,033,715
========== ========== ==========
</TABLE>
The Company received reinsurance recoveries in the amount of $5,260, $2,288
and $2,156 during 1998, 1997 and 1996, respectively. At December 31, 1998 and
1997, estimated amounts recoverable from reinsurers that have been deducted from
policy and contract claim reserves totaled $1,003 and $2,721, respectively. The
aggregate reserves for policies and contracts were reduced for reserve credits
for reinsurance ceded at December 31, 1998 and 1997 of $2,849 and $1,369,
respectively.
5. INCOME TAXES
For federal income tax purposes, the Company joins in a consolidated tax
return filing with certain affiliated companies. Under the terms of a
tax-sharing agreement between the Company and its affiliates, the Company
computes federal income tax expense as if it were filing a separate income tax
return, except that tax credits and net operating loss carryforwards are
determined on the basis of the consolidated group. Additionally, the alternative
minimum tax is computed for the consolidated group and the resulting tax, if
any, is allocated back to the separate companies on the basis of the separate
companies' alternative minimum taxable income.
61
<PAGE> 64
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
5. INCOME TAXES -- (CONTINUED)
Federal income tax expense (benefit) differs from the amount computed by
applying the statutory federal income tax rate to gain (loss) from operations
before income taxes (benefit) and realized capital gains (losses) on investments
for the following reasons:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Computed tax (benefit) at federal statutory rate (35%).... $(2,019) $(1,156) $3,189
Deferred acquisition costs -- tax basis................... 9,672 9,164 7,172
Tax reserve valuation..................................... 1,513 (194) (696)
Excess tax depreciation................................... (442) (127) (65)
Amortization of IMR....................................... (260) (552) (467)
Dividend received deduction............................... (6,657) (5,326) --
Prior year over-accrual................................... (2,322) (1,541) (9)
Other, net................................................ 168 201 173
------- ------- ------
Federal income tax expense (benefit)...................... $ (347) $ 469 $9,297
======= ======= ======
</TABLE>
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to realized gains (losses) due to the
differences in book and tax asset bases at the time certain investments are
sold.
Prior to 1984, as provided for under the Life Insurance Company Tax Act of
1959, a portion of statutory income was not subject to current taxation, but was
accumulated for income tax purposes in a memorandum account referred to as the
policyholders' surplus account. No federal income taxes have been provided for
in the financial statements on income deferred in the policyholders' surplus
account ($293 at December 31, 1998). To the extent dividends are paid from the
amount accumulated in the policyholders' surplus account, net earnings would be
reduced by the amount of tax required to be paid. Should the entire amount in
the policyholders' surplus account become taxable, the tax thereon computed at
current rates would amount to approximately $103.
At December 31, 1996, the Company had capital loss carryforwards of
approximately $10,705, which were utilized by the Company's affiliates in the
consolidated tax return filing in 1997. This transaction resulted in a receipt
from the Company's affiliate of $3,747, which was credited directly to
unassigned surplus.
In 1998, the Company reached a final settlement with the Internal Revenue
Service for 1994 and 1995 resulting in a tax refund of $300 and interest
received of $53.
6. POLICY AND CONTRACT ATTRIBUTES
A portion of the Company's policy reserves and other policyholders' funds
relate to liabilities established on a variety of the Company's products,
primarily separate accounts, that are not subject to significant mortality or
morbidity risk; however, there may be certain restrictions placed upon the
amount of funds that
62
<PAGE> 65
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES -- (CONTINUED)
can be withdrawn without penalty. The amount of reserves on these products, by
withdrawal characteristics are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------
1998 1997
--------------------- ---------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal with
market value adjustment.................... $ 12,810 $ 13,812 1%
Subject to discretionary withdrawal at book
value less surrender charge................ 76,289 1% 68,376 2
Subject to discretionary withdrawal at market
value...................................... 5,096,680 94 3,615,255 91
Subject to discretionary withdrawal at book
value (minimal or no charges or
adjustments)............................... 210,270 4 201,457 5
Not subject to discretionary withdrawal
provision.................................. 15,681 1 16,572 1
---------- --- ---------- ---
5,411,730 100% 3,915,472 100%
========== === ========== ===
Less reinsurance ceded....................... 1,131 --
---------- ----------
Total policy reserves on annuities and
deposit fund liabilities................... $5,410,599 $3,915,472
========== ==========
</TABLE>
A reconciliation of the amounts transferred to and from the separate
accounts is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Transfers as reported in the summary of operations
of the separate accounts statement:
Transfers to separate accounts................ $1,240,858 $1,164,013 $997,513
Transfers from separate accounts.............. 847,507 646,477 339,523
---------- ---------- --------
Net transfers to separate accounts................. 393,351 517,536 657,990
Reconciling adjustments -- change in accruals for
investment management, administration fees and
contract guarantees, and separate account
surplus.......................................... 9,267 1,678 (205,519)
---------- ---------- --------
Transfers as reported in the summary of operations
of the life, accident and health annual
statement........................................ $ 402,618 $ 519,214 $452,471
========== ========== ========
</TABLE>
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next anniversary
date. At
63
<PAGE> 66
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES -- (CONTINUED)
December 31, 1998 and 1997, these assets (which are reported as premiums
deferred and uncollected) and the amounts of the related gross premiums and
loadings, are as follows:
<TABLE>
<CAPTION>
GROSS LOADING NET
------ ------- ------
<S> <C> <C> <C>
DECEMBER 31, 1998
Ordinary direct renewal business............................ $1,101 $201 $ 900
------ ---- ------
$1,101 $201 $ 900
====== ==== ======
DECEMBER 31, 1997
Ordinary direct first year business......................... $ 2 $ 1 $ 1
Ordinary direct renewal business............................ 1,350 140 1,210
Group life direct business.................................. 717 -- 717
------ ---- ------
$2,069 $141 $1,928
====== ==== ======
</TABLE>
In 1994, the NAIC enacted a guideline to clarify reserving methodologies
for contracts that require immediate payment of claims upon proof of death of
the insured. Companies were allowed to grade the effects of the change in
reserving methodologies over five years. A direct charge to surplus of $2,132,
$1,872 and $2,995 was made for the years ended December 31, 1998, 1997 and 1996,
respectively, related to the change in reserve methodology.
7. DIVIDEND RESTRICTIONS
The Company is subject to limitations, imposed by the State of Ohio, on the
payment of dividends to its parent company. Generally, dividends during any
twelve month period may not be paid; without prior regulatory approval, in
excess of the lesser of (a) 10 percent of statutory capital and surplus as of
the preceding December 31, or (b) statutory gain from operations for the
preceding year. Subject to the availability of unassigned surplus at the time of
such dividend, the maximum payment which may be made in 1999, without the prior
approval of insurance regulatory authorities, is $14,657.
8. RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit plan sponsored
by AEGON. The Company has no legal obligation for the plan. The Company
recognizes pension expense equal to its allocation from AEGON. The pension
expense is allocated among the participating companies based on the FASB
Statement No. 87 expense as a percent of salaries. The benefits are based on
years of service and the employee's compensation during the highest five
consecutive years of employment. Pension expense aggregated $917, $659 and $581
for the years ended December 31, 1998, 1997 and 1996, respectively. The plan is
subject to the reporting and disclosure requirements of the Employee Retirement
and Income Security Act of 1974.
The Company's employees also participate in a contributory defined
contribution plan sponsored by AEGON which is qualified under Section 401(k) of
the Internal Revenue Service Code. Employees of the Company who customarily work
at least 1,000 hours during each calendar year and meet the other eligibility
requirements are participants of the plan. Participants may elect to contribute
up to fifteen percent of their salary to the plan. The Company will match an
amount up to three percent of the participant's salary. Participants may direct
all of their contributions and plan balances to be invested in a variety of
investment options. The plan is subject to the reporting and disclosure
requirements of the Employee Retirement and Income Security Act of 1974. Pension
expense related to this plan was $632, $448 and $184 for the years ended
December 31, 1998, 1997 and 1996, respectively.
64
<PAGE> 67
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
8. RETIREMENT AND COMPENSATION PLANS -- (CONTINUED)
AEGON sponsors supplemental retirement plans to provide the Company's
senior management with benefits in excess of normal pension benefits. The plans
are noncontributory and benefits are based on years of service and the
employee's compensation level. The plans are unfunded and nonqualified under the
Internal Revenue Code. In addition, AEGON has established incentive deferred
compensation plans for certain key employees of the Company. AEGON also sponsors
an employee stock option plan for individuals employed at least three years and
a stock purchase plan for its producers, with the participating affiliated
companies establishing their own eligibility criteria, producer contribution
limits and company matching formula. These plans have been accrued for or funded
as deemed appropriate by management of AEGON and the Company.
In addition to pension benefits, the Company participates in plans
sponsored by AEGON that provide postretirement medical, dental and life
insurance benefits to employees meeting certain eligibility requirements.
Portions of the medical and dental plans are contributory. The expenses of the
postretirement plans calculated on the pay-as-you-go basis are charged to
affiliates in accordance with an intercompany cost sharing arrangement. The
Company expensed $157, $99 and $98 for the years ended December 31, 1998, 1997
and 1996, respectively.
9. RELATED PARTY TRANSACTIONS
The Company shares certain officers, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1998, 1997
and 1996, the Company paid $12,763, $10,040 and $10,038, respectively, for such
services, which approximates their costs to the affiliates. The Company provides
office space, marketing and administrative services to certain affiliates.
During 1998, 1997 and 1996, the Company received $5,125, $4,395 and $3,271,
respectively, for such services, which approximates their cost. The Company had
a net payable with affiliates of $33,449 and $1,925 at December 31, 1998 and
1997, respectively.
Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rate of 4.74% at December 31, 1998. During 1998,
1997 and 1996, the Company paid net interest of $1,090, $364 and $138,
respectively, to affiliates.
The Company received capital contributions of $32,092 and $20,000 from its
parent in 1998 and 1997, respectively.
At December 31, 1998 and 1997, the Company had short-term note payables to
an affiliate of $44,200 and $8,200, respectively. Interest on these notes ranged
from 5.13% to 5.54% at December 31, 1998 and was 5.60% at December 31. 1997.
During 1998, the Company purchased life insurance policies covering the
lives of certain employees of the Company. Premiums of $43,500 were paid to an
affiliate for these policies. At December 31, 1998, the cash surrender value of
these policies is $45,445.
10. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business.
Although such litigation sometimes includes substantial demands for compensatory
and punitive damages in addition to contract liability, it is management's
opinion, after consultation with counsel and a review of available facts, that
damages arising from such demands will not be material to the Company's
financial position.
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the
65
<PAGE> 68
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
10. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
event of insolvency of other insurance companies. Assessments are charged to
operations when received by the Company except where right of offset against
other taxes paid is allowed by law; amounts available for future offsets are
recorded as an asset on the Company's balance sheet. The future obligation has
been based on the most recent information available from the National
Organization of Life and Health Insurance Guaranty Association. Potential future
obligations for unknown insolvencies are not determinable by the Company. The
Company has established a reserve of $3,489 and $4,007 and an offsetting premium
tax benefit of $828 and $1,070 at December 31, 1998 and 1997, respectively, for
its estimated share of future guaranty fund assessments related to several major
insurer insolvencies. The guaranty fund expense (credit) was $(74), $0 and $212
at December 31, 1998, 1997 and 1996, respectively.
11. YEAR 2000 (UNAUDITED)
The term Year 2000 Issue generally refers to the improper processing of
dates and incorrect date calculations that might occur in computer software and
hardware and embedded systems as the Year 2000 is approached. The use of
computer programs that rely on two-digit date fields to perform computations and
decision-making functions may cause systems to malfunction when processing
information involving dates after 1999. For example, any computer software that
has date-sensitive coding might recognize a code of 00 as the year 1900 rather
than the year 2000.
The Company has developed a Year 2000 Project Plan (the Plan) to address
the Year 2000 issue as it affects the Company's internal IT and non-IT systems,
and to assess Year 2000 issues relating to third parties with whom the Company
has critical relationships.
The Plan for addressing internal systems generally includes an assessment
of internal IT and non-IT systems and equipment affected by the Year 2000 issue;
definition of strategies to address affected systems and equipment; remediation
of identified systems and equipment; internal testing and certification that
each internal system is Year 2000 compliant; and a review of existing and
revised business resumption and contingency plans to address potential Year 2000
issues. The Company has remediated and tested substantially all of its
mission-critical internal IT systems as of December 31, 1998. The Company
continues to remediate and test certain non-critical internal IT systems,
internal non-IT systems and will continue with a revalidation testing program
throughout 1999.
The Company's Year 2000 issues are more complex because a number of its
systems interface with other systems not under the Company's control. The
Company's most significant interfaces and uses of third-party vendor systems are
in the bank, financial services and trust areas. The Company utilizes various
banks to handle numerous types of financial and sales transactions. Several of
these banks also provide trustee and custodial services for the Company's
investment holdings and transactions. These services are critical to a financial
services company such as the Company as its business centers around cash
receipts and disbursements to policyholders and the investment of policyholder
funds. The Company has received written confirmation from its vendor banks
regarding their status on Year 2000. The banks indicate their dedication to
resolving any Year 2000 issues related to their systems and services prior to
December 31, 1999. The Company anticipates that a considerable effort will be
necessary to ensure that its corrected or new systems can properly interface
with those business partners with whom it transmits and receives data and other
information (external systems). The Company has undertaken specific testing
regimes with these third-party business partners and expects to continue working
with its business partners on any interfacing of systems. However, the timing of
external system compliance cannot currently be predicted with accuracy because
the implementation of Year 2000 readiness will vary from one company to another.
The Company does have some exposure to date sensitive embedded technology
such as micro-controllers, but the Company views this exposure as minimal.
Unlike other industries that may be equipment intensive,
66
<PAGE> 69
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS -- STATUTORY-BASIS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
11. YEAR 200 (UNAUDITED) -- (CONTINUED)
like manufacturing, the Company is a life insurance and financial services
organization providing insurance, annuities and pension products to its
customers. As such, the primary equipment and electronic devices in use are
computers and telephone related equipment. This type of hardware can have date
sensitive embedded technology which could have Year 2000 problems. Because of
this exposure, the Company has reviewed its computer hardware and telephone
systems, with assistance from the applicable vendors, and has upgraded, or
replaced, or is in the process of replacing any equipment that will not properly
process date sensitive data in the Year 2000 or beyond.
For the Company, a reasonably likely worst case scenario might include one
or more of the Company's significant policyholder systems being non-compliant.
Such an event could result in a material disruption of the Company's operations.
Specifically, a number of the Company's operations could experience an
interruption in the ability to collect and process premiums or deposits, process
claim payments, accurately maintain policyholder information, accurately
maintain accounting records, and or perform adequate customer service. Should
the worst case scenario occur, it could, dependent upon its duration, have a
material impact on the Company's business and financial condition. Simple
failures can be repaired and returned to production within a matter of hours
with no material impact. Unanticipated failures with a longer service disruption
period could have a more serious impact. For this reason, the Company is placing
significant emphasis on risk management and Year 2000 business resumption
contingency planning in 1999 by modifying its existing business resumption and
disaster recovery plans to address potential Year 2000 issues.
The actions taken by management under the Year 2000 Project Plans are
intended to significantly reduce the Company's risk of a material business
interruption based on the Year 2000 issues. It should be noted that the Year
2000 computer problem, and its resolution, is complex and multifaceted, and any
company's success cannot be conclusively known until the Year 2000 is reached.
In spite of its efforts or results, the Company's ability to function unaffected
to and through the Year 2000 may be adversely affected by actions (or failure to
act) of third parties beyond our knowledge or control. It is anticipated that
there may be problems that will have to be resolved in the ordinary course of
business on and after the Year 2000. However, the Company does not believe that
the problems will have a material adverse affect on the Company's operations or
financial condition.
12. RECONCILIATION OF CAPITAL AND SURPLUS AND NET INCOME
The following table reconciles capital and surplus and net income as
reported in the Annual Statement filed with the Insurance Department of the
State of Ohio, to the amounts reported in the accompanying financial statements:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------
TOTAL CAPITAL
AND SURPLUS NET INCOME/(LOSS)
------------- -----------------
<S> <C> <C>
Amounts reported in Annual Statement................... $148,038 $ 528
Adjustment to federal income tax benefit............... (4,458) (4,458)
-------- -------
Amounts reported herein................................ $143,580 $(3,930)
======== =======
</TABLE>
67
<PAGE> 70
SCHEDULE I
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
SUMMARY OF INVESTMENTS OTHER THAN
INVESTMENTS IN RELATED PARTIES
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST(1) VALUE BALANCE SHEET
------------------ -------- -------- ---------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and government agencies and
authorities......................................... $ 19,899 $ 20,673 $ 19,899
States, municipalities and political subdivisions...... 6,676 6,930 6,676
Public utilities....................................... 18,792 19,359 18,792
All other corporate bonds.............................. 139,330 145,594 139,330
-------- -------- --------
Total fixed maturities......................... 184,697 192,556 184,697
EQUITY SECURITIES
Common stocks:
Affiliated entities.................................... 243 704
Industrial, miscellaneous and all other................ 302 384
-------- --------
Total equity securities........................ 545 1,088
Mortgage loans on real estate............................ 9,916 9,916
Real estate.............................................. 34,583 34,583
Policy loans............................................. 112,982 112,982
Other invested assets.................................... 396 396
Cash and short-term investments.......................... 73,808 73,808
Investment properties.................................... 11,594 11,594
-------- --------
Total investments.............................. $429,655 $429,064
======== ========
</TABLE>
- ---------------
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accruals of discounts.
68
<PAGE> 71
SCHEDULE III
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BENEFITS,
POLICY CLAIMS,
FUTURE POLICY AND NET LOSSES AND OTHER
BENEFITS AND CONTRACT PREMIUM INVESTMENT SETTLEMENT OPERATING
EXPENSES LIABILITIES REVENUE INCOME* EXPENSES EXPENSES*
------------- ----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Individual life............... $221,050 $ 8,624 $ 474,120 $ 9,884 $122,542 $230,368
Group life.................... 10,546 100 1,933 723 1,962 2,281
Annuity....................... 265,418 509 794,841 25,708 545,532 91,505
-------- ------- ---------- ------- -------- --------
$497,014 $ 9,233 $1,270,894 $36,315 $670,036 $324,154
======== ======= ========== ======= ======== ========
YEAR ENDED DECEMBER 31, 1997
Individual life............... $177,088 $ 9,533 $ 390,452 $13,742 $ 88,738 $176,303
Group life.................... 9,435 805 3,918 810 3,986 3,292
Annuity....................... 296,290 591 822,149 25,461 389,726 83,179
-------- ------- ---------- ------- -------- --------
$482,813 $10,929 $1,216,519 $40,013 $482,450 $262,774
======== ======= ========== ======= ======== ========
YEAR ENDED DECEMBER 31, 1996
Individual life............... $145,964 $ 7,017 $ 289,375 $ 8,228 $125,861 $124,181
Group life and health......... 9,202 713 4,215 3,940 3,828 2,818
Annuity....................... 332,230 854 740,125 23,899 294,681 71,576
-------- ------- ---------- ------- -------- --------
$487,396 $ 8,584 $1,033,715 $36,067 $424,370 $198,575
======== ======= ========== ======= ======== ========
</TABLE>
- ---------------
* Allocations of net investment income and other operating expenses are based on
a number of assumptions and estimates, and the results would change if
different methods were applied.
69
<PAGE> 72
SCHEDULE IV
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
REINSURANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Life insurance in force............. $51,064,173 $9,862,460 $ -- $41,201,713 0.0 %
=========== ========== ========== =========== =====
Premiums:
Individual life................ $ 493,633 $ 19,512 $ -- $ 474,121 0.0 %
Group life and health.......... 1,691 220 461 1,932 23.8
Annuity........................ 850,428 55,587 -- 794,841 0.0
----------- ---------- ---------- ----------- -----
$ 1,345,752 $ 75,319 $ 461 $ 1,270,894 .03%
=========== ========== ========== =========== =====
YEAR ENDED DECEMBER 31, 1997
Life insurance in force............. $40,221,361 $6,776,447 $2,692,822 $36,137,736 7.5 %
=========== ========== ========== =========== =====
Premiums:
Individual life................ $ 395,361 $ 4,910 $ -- $ 390,452 0.0 %
Group life and health.......... 1,761 231 2,389 3,918 61.0
Annuity........................ 822,149 -- -- 822,149 0.0
----------- ---------- ---------- ----------- -----
$ 1,219,271 $ 5,141 $ 2,389 $ 1,216,519 0.2 %
=========== ========== ========== =========== =====
YEAR ENDED DECEMBER 31, 1996
Life insurance in force............. $28,168,880 $4,463,986 $2,210,601 $25,915,495 8.5 %
=========== ========== ========== =========== =====
Premiums:
Individual life................ $ 292,239 $ 2,863 $ -- $ 289,376 0.0 %
Group life and health.......... 2,393 242 2,063 4,214 49.0
Annuity........................ 740,125 -- -- 740,125 0.0
----------- ---------- ---------- ----------- -----
$ 1,034,757 $ 3,105 $ 2,063 $ 1,033,715 0.2 %
=========== ========== ========== =========== =====
</TABLE>
70
<PAGE> 73
PART II.
OTHER INFORMATION
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that Section.
REPRESENTATION PURSUANT TO SECTION 26(e) (2) (A)
Western Reserve Life Assurance Co. of Ohio ("Western Reserve") hereby
represents that the fees and charges deducted under the Policies, in the
aggregate, are reasonable in relation to the services rendered, the expenses
expected to be incurred, and the risks assumed by Western Reserve.
STATEMENT WITH RESPECT TO INDEMNIFICATION
Provisions exist under the Ohio General Corporation Law, the Second
Amended Articles of Incorporation of Western Reserve and the Amended Code of
Regulations of Western Reserve whereby Western Reserve may indemnify certain
persons against certain payments incurred by such persons. The following
excerpts contain the substance of these provisions.
Ohio General Corporation Law
SECTION 1701.13 AUTHORITY OF CORPORATION.
(E)(1) A corporation may indemnify or agree to indemnify any person
who was or is a party or is threatened to be made a party, to any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, other than an action by or in the right of
the corporation, by reason of the fact that he is or was a director, officer,
employee, or agent of the corporation, or is or was serving at the request of
the corporation as a director, trustee, officer, employee, or agent of another
corporation (including a subsidiary of this corporation), domestic or foreign,
nonprofit or for profit, partnership, joint venture, trust, or other
enterprise, against expenses, including attorneys' fees, judgments, fines, and
amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit, or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, he had reasonable cause to believe that his conduct was unlawful.
(2) A corporation may indemnify or agree to indemnify any person
who was or is a party, or is threatened to be made a party to any threatened,
pending, or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, officer, employee, or agent of the corporation, or is or was serving
at the request of the corporation as a director, trustee, officer, employee, or
agent of another corporation, domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust, or other enterprise, against expenses,
including attorneys' fees, actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, except that no indemnification shall be
made in respect of any of the following:
1
<PAGE> 74
(a) Any claim, issue, or matter as to which such person
shall have been adjudged to be liable for negligence or misconduct in the
performance of his duty to the corporation unless, and only to the extent that
the court of common pleas, or the court in which such action or suit was
brought determines upon application that, despite the adjudication of
liability, but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses as the court of
common pleas or such other court shall deem proper;
(b) Any action or suit in which the only liability
asserted against a director is pursuant to section 1701.95 of the Revised Code.
(3) To the extent that a director, trustee, officer, employee, or
agent has been successful on the merits or otherwise in defense of any action,
suit, or proceeding referred to in divisions (E)(1) and (2) of this section, or
in defense of any claim, issue, or matter therein, he shall be indemnified
against expenses, including attorneys' fees, actually and reasonably incurred
by him in connection therewith.
(4) Any indemnification under divisions (E)(1) and (2) of this
section, unless ordered by a court, shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of
the director, trustee, officer, employee, or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth
in divisions (E)(1 ) and (2) of this section. Such determination shall be made
as follows:
(a) By a majority vote of a quorum consisting of
directors of the indemnifying corporation who were not and are not parties to
or threatened with any such action, suit, or proceeding;
(b) If the quorum described in division (E)(4)(a) of this
section is not obtainable or if a majority vote of a quorum of disinterested
directors so directs, in a written opinion by independent legal counsel other
than an attorney, or a firm having associated with it an attorney, who has been
retained by or who has performed services for the corporation, or any person to
be indemnified within the past five years;
(c) By the shareholders;
(d) By the court of common pleas or the court in which
such action, suit, or proceeding was brought.
Any determination made by the disinterested directors under division
(E)(4)(a) or by independent legal counsel under division (E)(4)(b) of this
section shall be promptly communicated to the person who threatened or brought
the action or suit by or in the right of the corporation under division (E)(2)
of this section, and within ten days after receipt of such notification, such
person shall have the right to petition the court of common pleas or the court
in which such action or suit was brought to review the reasonableness of such
determination.
(5)(a) Unless at the time of a director's act or omission that is the
subject of an action, suit or proceeding referred to in divisions (E)(1) and
(2) of this section, the articles or the regulations of a corporation state by
specific reference to this division that the provisions of this division do not
apply to the corporation and unless the only liability asserted against a
director in an action, suit, or proceeding referred to in divisions (E)(1) and
(2) of this section is pursuant to section 1701.95 of the Revised Code,
expenses, including attorney's fees, incurred by a director in defending the
action, suit, or proceeding shall be paid by the corporation as they are
incurred, in advance of the final disposition of the action, suit, or
proceeding upon receipt of an undertaking by or on behalf of the director in
which he agrees to do both of the following:
(i) Repay such amount if it is proved by
clear and convincing evidence in a court of competent jurisdiction that his
action or failure to act involved an act or omission
2
<PAGE> 75
undertaken with deliberate intent to cause injury to the corporation or
undertaken with reckless disregard for the best interests of the corporation;
(ii) Reasonably cooperate with the
corporation concerning the action, suit, or proceeding.
(b) Expenses, including attorneys' fees incurred by a
director, trustee, officer, employee, or agent in defending any action, suit,
or proceeding referred to in divisions (E)(1) and (2) of this section, may be
paid by the corporation as they are incurred, in advance of the final
disposition of the action, suit, or proceeding as authorized by the directors
in the specific case upon receipt of an undertaking by or on behalf of the
director, trustee, officer, employee, or agent to repay such amount, if it
ultimately is determined that he is entitled to be indemnified by the
corporation.
(6) The indemnification authorized by this section shall not be
exclusive of, and shall be in addition to, any other rights granted to those
seeking indemnification under the articles or the regulations or any agreement,
vote of shareholders or disinterested directors, or otherwise, both as to
action in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to be a
director, trustee, officer, employee, or agent and shall inure to the benefit
of the heirs, executors, and administrators of such a person.
(7) A corporation may purchase and maintain insurance or furnish
similar protection, including but not limited to trust funds, letters of
credit, or self-insurance on behalf of or for any person who is or was a
director, officer, employee, or agent of the corporation, or is or was serving
at the request of the corporation as a director, trustee, officer, employee, or
agent of another corporation, domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust, or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out
of his status as such, whether or not the corporation would have the power to
indemnify him against such liability under this section. Insurance may be
purchased from or maintained with a person in which the corporation has a
financial interest.
(8) The authority of a corporation to indemnify persons pursuant
to divisions (E)(1 ) and (2) of this section does not limit the payment of
expenses as they are incurred, indemnification, insurance, or other protection
that may be provided pursuant to divisions (E)(5), (6), and (7) of this
section. Divisions (E)(1) and (2) of this section do not create any obligation
to repay or return payments made by the corporation pursuant to divisions
(E)(5), (6), or (7).
(9) As used in this division, references to "corporation" include
all constituent corporations in a consolidation or merger and the new or
surviving corporation, so that any person who is or was a director, officer,
employee, or agent of such a constituent corporation, or is or was serving at
the request of such constituent corporation as a director, trustee, officer,
employee or agent of another corporation, domestic or foreign, nonprofit or for
profit, partnership, joint venture, trust, or other enterprise, shall stand in
the same position under this section with respect to the new or surviving
corporation as he would if he had served the new or surviving corporation in
the same capacity.
Second Amended Articles of Incorporation of Western Reserve
ARTICLE EIGHTH
EIGHTH: (1) The corporation may indemnify or agree to indemnify any
person who was or is a party or is threatened to be made a party, to any
threatened, pending, or completed action, suit, or proceeding, whether civil,
criminal, administrative, or investigative, other than an action by or in the
right of the corporation, by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee, or agent
of another corporation (including a subsidiary of this corporation), domestic
or foreign, nonprofit
3
<PAGE> 76
or for profit, partnership, joint venture, trust, or other enterprise, against
expenses, including attorneys' fees, judgments, fines, and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit, or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit, or proceeding by judgment, order, settlement, conviction, or upon
a plea of nolo contendere or its equivalent, shall not, of itself create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, he had
reasonable cause to believe that his conduct was unlawful.
(2) The corporation may indemnify or agree to indemnify any person
who was or is a party, or is threatened to be made a party to any threatened,
pending, or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, officer, employee, or agent of the corporation, or is or was serving
at the request of the corporation as a director, trustee, officer, employee, or
agent of another corporation (including a subsidiary of this corporation),
domestic or foreign, nonprofit or for profit, partnership, joint venture,
trust, or other enterprise against expenses, including attorneys' fees,
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made in respect of any
claim, issue, or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
corporation unless, and only to the extent that the court of common pleas, or
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability, but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses as the court of common pleas or such other court
shall deem proper.
(3) To the extent that a director, trustee, officer, employee, or
agent has been successful on the merits or otherwise in defense of any action,
suit, or proceeding referred to in sections (1) and (2) of this article, or in
defense of any claim, issue, or matter therein, he shall be indemnified against
expenses, including attorneys' fees, actually and reasonably incurred by him in
connection therewith.
(4) Any indemnification under sections (1) and (2) of this
article, unless ordered by a court, shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of
the director, trustee, officer, employee, or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth
in sections (1) and (2) of this article. Such determination shall be made (a)
by a majority vote of a quorum consisting of directors of the indemnifying
corporation who were not and are not parties to or threatened with any such
action, suit, or proceeding, or (b) if such a quorum is not obtainable or if a
majority vote of a quorum of disinterested directors so directs, in a written
opinion by independent legal counsel other than an attorney, or a firm having
associated with it an attorney, who has been retained by or who has performed
services for the corporation, or any person to be indemnified within the past
five years, or (c) by the shareholders, or (d) by the court of common pleas or
the court in which such action, suit, or proceeding was brought. Any
determination made by the disinterested directors under section (4)(a) or by
independent legal counsel under section (4)(b) of this article shall be
promptly communicated to the person who threatened or brought the action or
suit by or in the right of the corporation under section (2) of this article,
and within ten days after receipt of such notification, such person shall have
the right to petition the court of common pleas or the court in which such
action or suit was brought to review the reasonableness of such determination.
(5) Expenses, including attorneys' fees incurred in defending any
action, suit, or proceeding referred to in sections (1) and (2) of this
article, may be paid by the corporation in advance of the final disposition of
such action, suit, or proceeding as authorized by the directors in the specific
case upon receipt of a written undertaking by or on behalf of the director,
trustee, officer, employee, or agent to repay such amount, unless it shall
ultimately be determined that he is entitled to be indemnified by the
4
<PAGE> 77
corporation as authorized in this article. If a majority vote of a quorum of
disinterested directors so directs by resolution, said written undertaking need
not be submitted to the corporation. Such a determination that a written
undertaking need not be submitted to the corporation shall in no way affect the
entitlement of indemnification as authorized by this article.
(6) The indemnification provided by this article shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under the articles or the regulations or any agreement, vote of
shareholders or disinterested directors, or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
trustee, officer, employee, or agent and shall inure to the benefit of the
heirs, executors, and administrators of such a person.
(7) The Corporation may purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee, or agent of the
corporation, or is or was serving at the request of the corporation as a
director, trustee, officer, employee, or agent of another corporation
(including a subsidiary of this corporation), domestic or foreign, nonprofit or
for profit, partnership, joint venture, trust, or other enterprise against any
liability asserted against him and incurred by him in any such capacity or
arising out of his status as such, whether or not the corporation would have
the power to indemnify him against such liability under this section.
(8) As used in this section, references to "the corporation"
include all constituent corporations in a consolidation or merger and the new
or surviving corporation, so that any person who is or was a director, officer,
employee, or agent of such a constituent corporation, or is or was serving at
the request of such constituent corporation as a director, trustee, officer,
employee or agent of another corporation (including a subsidiary of this
corporation), domestic or foreign, nonprofit or for profit, partnership, joint
venture, trust, or other enterprise shall stand in the same position under this
article with respect to the new or surviving corporation as he would if he had
served the new or surviving corporation in the same capacity.
(9) The foregoing provisions of this article do not apply to any
proceeding against any trustee, investment manager or other fiduciary of an
employee benefit plan in such person's capacity as such, even though such
person may also be an agent of this corporation. The corporation may indemnify
such named fiduciaries of its employee benefit plans against all costs and
expenses, judgments, fines, settlements or other amounts actually and
reasonably incurred by or imposed upon said named fiduciary in connection with
or arising out of any claim, demand, action, suit or proceeding in which the
named fiduciary may be made a party by reason of being or having been a named
fiduciary, to the same extent it indemnifies an agent of the corporation. To
the extent that the corporation does not have the direct legal power to
indemnify, the corporation may contract with the named fiduciaries of its
employee benefit plans to indemnify them to the same extent as noted above. The
corporation may purchase and maintain insurance on behalf of such named
fiduciary covering any liability to the same extent that it contracts to
indemnify.
Amended Code of Regulations of Western Reserve
ARTICLE V
Indemnification of Directors and Officers
Each Director, officer and member of a committee of this Corporation,
and any person who may have served at the request of this Corporation as a
Director, officer or member of a committee of any other corporation in which
this Corporation owns shares of capital stock or of which this Corporation is a
creditor (and his heirs, executors and administrators) shall be indemnified by
the Corporation against all expenses, costs, judgments, decrees, fines or
penalties as provided by, and to the extent allowed by, Article Eighth of the
Corporation's Articles of Incorporation, as amended.
5
<PAGE> 78
RULE 484 UNDERTAKING
Insofar as indemnification for liability arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel, the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
CONTENTS OF REGISTRATION STATEMENT
This registration statement comprises the following papers and documents:
The facing sheet
The Prospectus, consisting of 70 pages
The undertaking to file reports
Representation Pursuant to Section 26(e) (2) (A)
The statement with respect to indemnification
The Rule 484 undertaking
The signatures
Written consent of the following persons:
(a) Sutherland Asbill & Brennan LLP
(b) Ernst & Young LLP
(c) Kenneth Turnquist
(d) Thomas E. Pierpan
The following exhibits:
1. The following exhibits correspond to those required by paragraph A to
the instructions as to exhibits in Form N-8B-2:
A. (1) Resolution of the Board of Directors of Western
Reserve establishing the Separate Account *
(2) Not Applicable
(3) (a) Principal Underwriting Agreement *
(b) Selected Broker Agreement *
(4) Not Applicable
(5) Specimen Variable Adjustable Life Insurance Policy *
(6) (a) Second Amended Articles of Incorporation of
Western Reserve **
(b) Amended Code of Regulations (By-Laws) of
Western Reserve **
(7) Not Applicable
(8) (a) Participation Agreement regarding BT
Insurance Funds Trust ***
(b)(i) Participation Agreement regarding Fidelity
Variable Insurance Products Fund
(ii) Participation Agreement regarding Fidelity
Variable Insurance Products Fund II
(iii) Participation Agreement regarding Fidelity
Variable Insurance Products Fund III
(c) Participation Agreement regarding PIMCO
Variable Insurance Trust
(d) Participation Agreement regarding T. Rowe
Price Equity Series, Inc. and T. Rowe Price
International Series, Inc.
(e) Participation Agreement regarding Janus Aspen
Series
(9) Not Applicable
(10) Application for Variable Adjustable Life Insurance
Policy *
(11) Memorandum describing issuance, transfer and
redemption procedures ***
2. Opinion of Counsel as to the legality of the securities being
registered *
6
<PAGE> 79
3. Not Applicable
4. Not Applicable
5. Opinion and consent as to actuarial matters pertaining to the
securities being registered
6. Consent of Sutherland Asbill & Brennan LLP ****
7. Consent of Ernst & Young LLP
8. Powers of Attorney ***
- ----------------------------------
* Incorporated herein by reference to the initial filing of this Form
S-6 registration statement on June 25, 1998 (File No. 333-57681).
** Incorporated herein by reference to Post-Effective Amendment No. 11 to
Form N-4 Registration Statement dated April 20, 1998 (File No.
33-49556).
*** Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Form S-6 Registration Statement filed November 2, 1998 (File No.
333-57681)
**** Incorporated herein by reference to Post-Effective Amendment No. 2 to
Form S-6 registration statement filed April 30, 1999. (File No.
333-57681)
7
<PAGE> 80
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant,
WRL Series Life Corporate Account, certifies that it meets all of the
requirements for effectiveness of this registration statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned thereunto duly
authorized, and its seal to be hereunto affixed and attested, all in the City of
St. Petersburg and State of Florida on this 10th day of September, 1999.
<TABLE>
<S> <C>
(SEAL) WRL Series Life Corporate Account
-----------------------------------------------------
Registrant
Western Reserve Life Assurance Co. of Ohio
-----------------------------------------------------
Depositor
ATTEST:
/s/ THOMAS E. PIERPAN By: /s/ JOHN R. KENNEY
- -------------------------------------------- -------------------------------------------------
Thomas E. Pierpan John R. Kenney
Vice President, Assistant Secretary Chairman of the Board,
and Associate General Counsel Chief Executive Officer and President
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE AND TITLE DATE
------------------- ----
<S> <C>
/s/ JOHN R. KENNEY September 10, 1999
- -----------------------------------------------------
John R. Kenney, Chairman of the Board, Chief
Executive Officer and President
/s/ ALLAN J. HAMILTON September 10, 1999
- -----------------------------------------------------
Allan J. Hamilton, Vice President, Treasurer and
Controller
/s/ ALAN M. YAEGER September 10, 1999
- -----------------------------------------------------
Alan M. Yaeger, Executive Vice President, Actuary and
Chief Financial Officer
*
- -----------------------------------------------------
Patrick S. Baird, Director
*
- -----------------------------------------------------
James R. Walker, Director
*
- -----------------------------------------------------
Lyman H. Treadway, Director
*
- -----------------------------------------------------
Jack E. Zimmerman, Director
September 10, 1999
- -----------------------------------------------------
*Signed by: /s/ Thomas E. Pierpan
as Attorney-in-fact
</TABLE>
<PAGE> 81
Exhibit Index
<TABLE>
<CAPTION>
Exhibit Description
No. of Exhibit
- ------- ----------
<S> <C>
1.A.(8)(b)(i) Participation Agreement regarding Fidelity
Variable Insurance Products Fund
(ii) Participation Agreement regarding Fidelity
Variable Insurance Products Fund II
(iii) Participation Agreement regarding Fidelity
Variable Insurance Products Fund III
1.A.(8)(c) Participation Agreement regarding PIMCO
Variable Insurance Trust
1.A.(8)(d) Participation Agreement regarding T. Rowe
Price Equity Series, Inc. and T. Rowe Price
International Series, Inc.
1.A.(8)(e) Participation Agreement regarding Janus Aspen
Series
5. Opinion and consent as to actuarial matters
7. Consent of Ernst & Young LLP
</TABLE>
<PAGE> 1
EXHIBIT 1.A.(8)(b)(i)
PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND,
FIDELITY DISTRIBUTORS CORPORATION
and
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
THIS AGREEMENT, made and entered into as of the 14th day of
June, 1999 by and among WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO,
(hereinafter the "Company"), an Ohio corporation, on its own behalf and on
behalf of each segregated asset account of the Company set forth on Schedule A
hereto as may be amended from time to time (each such account hereinafter
referred to as the "Account"), and the VARIABLE INSURANCE PRODUCTS FUND, an
unincorporated business trust organized under the laws of the Commonwealth of
Massachusetts (hereinafter the "Fund") and FIDELITY DISTRIBUTORS CORPORATION
(hereinafter the "Underwriter"), a Massachusetts corporation.
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as the investment vehicle for
separate accounts established for variable life insurance policies and variable
annuity contracts (collectively, the "Variable Insurance Products") to be
offered by insurance companies which have entered into participation agreements
with the Fund and the Underwriter (hereinafter "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into
several series of shares, each representing the interest in a particular
managed portfolio of securities and other assets, any one or more of which may
be made available under this Agreement, as may be amended from time to time by
mutual agreement of the parties hereto (each such series hereinafter referred
to as a "Portfolio"); and
WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission, dated October 15, 1985 (File No. 812-6102), granting
Participating Insurance Companies and variable annuity and variable life
insurance separate accounts exemptions from the provisions of sections 9(a),
13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended,
(hereinafter the "1940 Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by variable annuity
1
<PAGE> 2
and variable life insurance separate accounts of both affiliated and
unaffiliated life insurance companies (hereinafter the "Shared Funding
Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management
investment company under the 1940 Act and its shares are registered under the
Securities Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, Fidelity Management & Research Company (the "Adviser")
is duly registered as an investment adviser under the federal Investment
Advisers Act of 1940 and any applicable state securities law; and
WHEREAS, the Company has registered or will register certain
variable life insurance and variable annuity contracts under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing
segregated asset account, established by resolution of the Board of Directors
of the Company, on the date shown for such Account on Schedule A hereto, to set
aside and invest assets attributable to the aforesaid variable annuity
contracts; and
WHEREAS, the Company has registered or will register each
Account as a unit investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with
the Securities and Exchange Commission ("SEC") under the Securities Exchange
Act of 1934, as amended, (hereinafter the "1934 Act"), and is a member in good
standing of the National Association of Securities Dealers, Inc. (hereinafter
"NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws
and regulations, the Company intends to purchase shares in the Portfolios on
behalf of each Account to fund certain of the aforesaid variable life and
variable annuity contracts and the Underwriter is authorized to sell such
shares to unit investment trusts such as each Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the
Company, the Fund and the Underwriter agree as follows:
ARTICLE I. Sale of Fund Shares
1.1. The Underwriter agrees to sell to the Company those shares
of the Fund which each Account orders, executing such orders on a daily basis
at the net asset value next computed after receipt by the Fund or its designee
of the order for the shares of the Fund. For purposes of this Section 1.1, the
Company shall be the designee of the Fund for receipt of such orders from each
Account and receipt by such designee shall constitute receipt by the Fund;
provided that the Fund receives notice of such order by 9:30 a.m. Boston time
on the next following Business Day. "Business Day" shall mean any day on which
the New York Stock Exchange is open for trading
2
<PAGE> 3
and on which the Fund calculates its net asset value pursuant to the rules of
the Securities and Exchange Commission.
1.2. The Fund agrees to make its shares available indefinitely
for purchase at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates its net asset value
pursuant to rules of the Securities and Exchange Commission and the Fund shall
use reasonable efforts to calculate such net asset value on each day which the
New York Stock Exchange is open for trading. Notwithstanding the foregoing,
the Board of Trustees of the Fund (hereinafter the "Board") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the offering of
shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Board
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, necessary in the best interests of the shareholders
of such Portfolio.
1.3. The Fund and the Underwriter agree that shares of the Fund
will be sold only to Participating Insurance Companies and their separate
accounts. No shares of any Portfolio will be sold to the general public.
1.4. The Fund and the Underwriter will not sell Fund shares to
any insurance company or separate account unless an agreement containing
provisions substantially the same as Articles I, III, V, VII and Section 2.5 of
Article II of this Agreement is in effect to govern such sales.
1.5. The Fund agrees to redeem for cash, on the Company's
request, any full or fractional shares of the Fund held by the Company,
executing such requests on a daily basis at the net asset value next computed
after receipt by the Fund or its designee of the request for redemption. For
purposes of this Section 1.5, the Company shall be the designee of the Fund for
receipt of requests for redemption from each Account and receipt by such
designee shall constitute receipt by the Fund; provided that the Fund receives
notice of such request for redemption on the next following Business Day.
1.6. The Company agrees that purchases and redemptions of
Portfolio shares offered by the then current prospectus of the Fund shall be
made in accordance with the provisions of such prospectus. The Company agrees
that all net amounts available under the variable annuity contracts with the
form number(s) which are listed on Schedule A attached hereto and incorporated
herein by this reference, as such Schedule A may be amended from time to time
hereafter by mutual written agreement of all the parties hereto, (the
"Contracts") shall be invested in the Fund, in such other Funds advised by the
Adviser as may be mutually agreed to in writing by the parties hereto, or in
the Company's general account, provided that such amounts may also be invested
in an investment company other than the Fund if (a) such other investment
company, or series thereof, has investment objectives or policies that are
substantially different from the investment objectives and policies of all the
Portfolios of the Fund; or (b) the Company gives the Fund and the Underwriter
45 days written notice of its intention to make such other investment company
available as a funding vehicle for the Contracts; or (c) such other investment
company was available as a funding vehicle for the Contracts prior to the date
of this
3
<PAGE> 4
Agreement and the Company so informs the Fund and Underwriter prior to their
signing this Agreement (a list of such funds appearing on Schedule C to this
Agreement); or (d) the Fund or Underwriter consents to the use of such other
investment company.
1.7. The Company shall pay for Fund shares on the next Business
Day after an order to purchase Fund shares is made in accordance with the
provisions of Section 1.1 hereof. Payment shall be in federal funds
transmitted by wire. For purpose of Section 2.10 and 2.11, upon receipt by the
Fund of the federal funds so wired, such funds shall cease to be the
responsibility of the Company and shall become the responsibility of the Fund.
1.8. Issuance and transfer of the Fund's shares will be by book
entry only. Stock certificates will not be issued to the Company or any
Account. Shares ordered from the Fund will be recorded in an appropriate title
for each Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or
telephone, followed by written confirmation) to the Company of any income,
dividends or capital gain distributions payable on the Fund's shares. The
Company hereby elects to receive all such income dividends and capital gain
distributions as are payable on the Portfolio shares in additional shares of
that Portfolio. The Company reserves the right to revoke this election and to
receive all such income dividends and capital gain distributions in cash. The
Fund shall notify the Company of the number of shares so issued as payment of
such dividends and distributions.
1.10. The Fund shall make the net asset value per share for
each Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated (normally by 6:30
p.m. Boston time) and shall use its best efforts to make such net asset value
per share available by 7 p.m. Boston time.
ARTICLE II. Representations and Warranties
2.1. The Company represents and warrants that the Contracts are
or will be registered under the 1933 Act; that the Contracts will be issued and
sold in compliance in all material respects with all applicable Federal and
State laws and that the sale of the Contracts shall comply in all material
respects with state insurance suitability requirements. The Company further
represents and warrants that it is an insurance company duly organized and in
good standing under applicable law and that it has legally and validly
established each Account prior to any issuance or sale thereof as a segregated
asset account under Section 1701.54 of the Ohio Revised Code and has registered
or, prior to any issuance or sale of the Contracts, will register each Account
as a unit investment trust in accordance with the provisions of the 1940 Act to
serve as a segregated investment account for the Contracts.
2.2. The Fund represents and warrants that Fund shares sold
pursuant to this Agreement shall be registered under the 1933 Act, duly
authorized for issuance and sold in compliance with the laws of the State of
Ohio and all applicable federal and state securities laws
4
<PAGE> 5
and that the Fund is and shall remain registered under the 1940 Act. The Fund
shall amend the Registration Statement for its shares under the 1933 Act and
the 1940 Act from time to time as required in order to effect the continuous
offering of its shares. The Fund shall register and qualify the shares for
sale in accordance with the laws of the various states only if and to the
extent deemed advisable by the Fund or the Underwriter.
2.3. The Fund represents that it is currently qualified as a
Regulated Investment Company under Subchapter M of the Internal Revenue Code of
1986, as amended, (the "Code") and that it will make every effort to maintain
such qualification (under Subchapter M or any successor or similar provision)
and that it will notify the Company immediately upon having a reasonable basis
for believing that it has ceased to so qualify or that it might not so qualify
in the future.
2.4. The Company represents that the Contracts are currently
treated as endowment or annuity insurance contracts, under applicable
provisions of the Code and that it will make every effort to maintain such
treatment and that it will notify the Fund and the Underwriter immediately upon
having a reasonable basis for believing that the Contracts have ceased to be so
treated or that they might not be so treated in the future.
2.5. (a) With respect to Initial Class shares, the Fund
currently does not intend to make any payments to finance distribution expenses
pursuant to Rule 12b-1 under the 1940 Act or otherwise, although it may make
such payments in the future. The Fund has adopted a "no fee" or "defensive"
Rule 12b-1 Plan under which it makes no payments for distribution expenses. To
the extent that it decides to finance distribution expenses pursuant to Rule
12b-1, the Fund undertakes to have a board of trustees, a majority of whom are
not interested persons of the Fund, formulate and approve any plan under Rule
12b-1 to finance distribution expenses.
(b) With respect to Service Class shares, the Fund has
adopted a Rule 12b-1 Plan under which it makes payments to finance distribution
expenses. The Fund represents and warrants that it has a board of trustees, a
majority of whom are not interested persons of the Fund, which has formulated
and approved the Fund's Rule 12b-1 Plan to finance distribution expenses of the
Fund and that any changes to the Fund's Rule 12b-1 Plan will be approved by a
similarly constituted board of trustees.
2.6. The Fund makes no representation as to whether any aspect
of its operations (including, but not limited to, fees and expenses and
investment policies) complies with the insurance laws or regulations of the
various states except that the Fund represents that the Fund's investment
policies, fees and expenses are and shall at all times remain in compliance
with the laws of the State of Ohio and the Fund and the Underwriter represent
that their respective operations are and shall at all times remain in material
compliance with the laws of the State of Ohio to the extent required to perform
this Agreement.
2.7. The Underwriter represents and warrants that it is a
member in good standing of the NASD and is registered as a broker-dealer with
the SEC. The Underwriter further represents that it will sell and distribute
the Fund shares in accordance with the laws of the State
5
<PAGE> 6
of Ohio and all applicable state and federal securities laws, including without
limitation the 1933 Act, the 1934 Act, and the 1940 Act.
2.8. The Fund represents that it is lawfully organized and
validly existing under the laws of the Commonwealth of Massachusetts and that
it does and will comply in all material respects with the 1940 Act.
2.9. The Underwriter represents and warrants that the Adviser
is and shall remain duly registered in all material respects under all
applicable federal and state securities laws and that the Adviser shall perform
its obligations for the Fund in compliance in all material respects with the
laws of the State of Ohio and any applicable state and federal securities laws.
2.10. The Fund and Underwriter represent and warrant that all
of their directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.11. The Company represents and warrants that all of its
directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
covered by a blanket fidelity bond or similar coverage for the benefit of the
Fund, and that said bond is issued by a reputable bonding company, includes
coverage for larceny and embezzlement, and is in an amount not less than $5
million. The Company agrees to make all reasonable efforts to see that this
bond or another bond containing these provisions is always in effect, and
agrees to notify the Fund and the Underwriter in the event that such coverage
no longer applies.
ARTICLE III. Prospectuses and Proxy Statements; Voting
3.1. The Underwriter shall provide the Company with as many
printed copies of the Fund's current prospectus and Statement of Additional
Information as the Company may reasonably request. If requested by the Company
in lieu thereof, the Fund shall provide camera-ready film containing the Fund's
prospectus and Statement of Additional Information, and such other assistance
as is reasonably necessary in order for the Company once each year (or more
frequently if the prospectus and/or Statement of Additional Information for the
Fund is amended during the year) to have the prospectus for the Contracts and
the Fund's prospectus printed together in one document, and to have the
Statement of Additional Information for the Fund and the Statement of
Additional Information for the Contracts printed together in one document.
Alternatively, the Company may print the Fund's prospectus and/or its Statement
of Additional Information in combination with other fund companies'
prospectuses and statements of additional information. Except as provided in
the following three sentences, all expenses of printing and distributing Fund
prospectuses and Statements of Additional Information shall be the expense of
6
<PAGE> 7
the Company. For prospectuses and Statements of Additional Information
provided by the Company to its existing owners of Contracts in order to update
disclosure annually as required by the 1933 Act and/or the 1940 Act, the cost
of printing shall be borne by the Fund. If the Company chooses to receive
camera-ready film in lieu of receiving printed copies of the Fund's prospectus,
the Fund will reimburse the Company in an amount equal to the product of A and
B where A is the number of such prospectuses distributed to owners of the
Contracts, and B is the Fund's per unit cost of typesetting and printing the
Fund's prospectus. The same procedures shall be followed with respect to the
Fund's Statement of Additional Information.
The Company agrees to provide the Fund or its designee with such
information as may be reasonably requested by the Fund to assure that the
Fund's expenses do not include the cost of printing any prospectuses or
Statements of Additional Information other than those actually distributed to
existing owners of the Contracts.
3.2. The Fund's prospectus shall state that the Statement of
Additional Information for the Fund is available from the Underwriter or the
Company (or in the Fund's discretion, the Prospectus shall state that such
Statement is available from the Fund).
3.3. The Fund, at its expense, shall provide the Company with
copies of its proxy statements, reports to shareholders, and other
communications (except for prospectuses and Statements of Additional
Information, which are covered in Section 3.1) to shareholders in such quantity
as the Company shall reasonably require for distributing to Contract owners.
3.4. If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with
instructions received from Contract owners; and
(iii) vote Fund shares for which no instructions have
been received in a particular separate account in
the same proportion as Fund shares of such
portfolio for which instructions have been received
in that separate account,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law. Participating Insurance Companies shall be responsible for
assuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set
forth on Schedule B attached hereto and incorporated herein by this reference,
which standards will also be provided to the other Participating Insurance
Companies.
3.5. The Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders, and in particular the Fund will either
provide for annual meetings or comply with Section 16(c) of the 1940 Act
(although the Fund is not one of the trusts described in Section 16(c) of that
Act) as well as with Sections 16(a) and, if and when applicable, 16(b).
Further, the
7
<PAGE> 8
Fund will act in accordance with the Securities and Exchange Commission's
interpretation of the requirements of Section 16(a) with respect to periodic
elections of trustees and with whatever rules the Commission may promulgate
with respect thereto.
ARTICLE IV. Sales Material and Information
4.1. The Company shall furnish, or shall cause to be furnished,
to the Fund or its designee, each piece of sales literature or other
promotional material in which the Fund or its investment adviser or the
Underwriter is named, at least fifteen Business Days prior to its use. No such
material shall be used if the Fund or its designee reasonably objects to such
use within fifteen Business Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or
its designee or by the Underwriter, except with the permission of the Fund or
the Underwriter or the designee of either.
4.3. The Fund, Underwriter, or its designee shall furnish, or
shall cause to be furnished, to the Company or its designee, each piece of
sales literature or other promotional material in which the Company and/or its
separate account(s), is named at least fifteen Business Days prior to its use.
No such material shall be used if the Company or its designee reasonably
objects to such use within fifteen Business Days after receipt of such
material.
4.4. The Fund and the Underwriter shall not give any
information or make any representations on behalf of the Company or concerning
the Company, each Account, or the Contracts other than the information or
representations contained in a registration statement or prospectus for the
Contracts, as such registration statement and prospectus may be amended or
supplemented from time to time, or in published reports for each Account which
are in the public domain or approved by the Company for distribution to
Contract owners, or in sales literature or other promotional material approved
by the Company or its designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete
copy of all registration statements, prospectuses, Statements of Additional
Information, reports, proxy statements, sales literature and other promotional
materials, applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to the Fund or its shares,
contemporaneously with the filing of such document with the Securities and
Exchange Commission or other regulatory authorities.
8
<PAGE> 9
4.6. The Company will provide to the Fund at least one complete
copy of all registration statements, prospectuses, Statements of Additional
Information, reports, solicitations for voting instructions, sales literature
and other promotional materials, applications for exemptions, requests for no
action letters, and all amendments to any of the above, that relate to the
Contracts or each Account, contemporaneously with the filing of such document
with the SEC or other regulatory authorities.
4.7. For purposes of this Article IV, the phrase "sales
literature or other promotional material" includes, but is not limited to, any
of the following that refer to the Fund or any affiliate of the Fund:
advertisements (such as material published, or designed for use in, a
newspaper, magazine, or other periodical, radio, television, telephone or tape
recording, videotape display, signs or billboards, motion pictures, or other
public media), sales literature (i.e., any written communication distributed or
made generally available to customers or the public, including brochures,
circulars, research reports, market letters, form letters, seminar texts,
reprints or excerpts of any other advertisement, sales literature, or published
article), educational or training materials or other communications distributed
or made generally available to some or all agents or employees, and
registration statements, prospectuses, Statements of Additional Information,
shareholder reports, and proxy materials.
ARTICLE V. Fees and Expenses
5.1. The Fund and Underwriter shall pay no fee or other
compensation to the Company under this agreement, except that if the Fund or
any Portfolio adopts and implements a plan pursuant to Rule 12b-1 to finance
distribution expenses, then the Underwriter may make payments to the Company or
to the underwriter for the Contracts if and in amounts agreed to by the
Underwriter in writing and such payments will be made out of existing fees
otherwise payable to the Underwriter, past profits of the Underwriter or other
resources available to the Underwriter. No such payments shall be made
directly by the Fund.
5.2. All expenses incident to performance by the Fund under
this Agreement shall be paid by the Fund. The Fund shall see to it that all
its shares are registered and authorized for issuance in accordance with
applicable federal law and, if and to the extent deemed advisable by the Fund,
in accordance with applicable state laws prior to their sale. The Fund shall
bear the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any federal or state law,
and all taxes on the issuance or transfer of the Fund's shares.
5.3. The Company shall bear the expenses of distributing the
Fund's prospectus, proxy materials and reports to owners of Contracts issued by
the Company.
9
<PAGE> 10
ARTICLE VI. Diversification
6.1. The Fund will at all times invest money from the Contracts
in such a manner as to ensure that the Contracts will be treated as variable
contracts under the Code and the regulations issued thereunder. Without
limiting the scope of the foregoing, the Fund will at all times comply with
Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the
diversification requirements for variable annuity, endowment, or life insurance
contracts and any amendments or other modifications to such Section or
Regulations. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps (a) to notify Company of such breach and (b) to
adequately diversify the Fund so as to achieve compliance within the grace
period afforded by Regulation 1.817-5.
ARTICLE VII. Potential Conflicts
7.1. The Board will monitor the Fund for the existence of any
material irreconcilable conflict between the interests of the contract owners
of all separate accounts investing in the Fund. An irreconcilable material
conflict may arise for a variety of reasons, including: (a) an action by any
state insurance regulatory authority; (b) a change in applicable federal or
state insurance, tax, or securities laws or regulations, or a public ruling,
private letter ruling, no-action or interpretative letter, or any similar
action by insurance, tax, or securities regulatory authorities; (c) an
administrative or judicial decision in any relevant proceeding; (d) the manner
in which the investments of any Portfolio are being managed; (e) a difference
in voting instructions given by variable annuity contract and variable life
insurance contract owners; or (f) a decision by an insurer to disregard the
voting instructions of contract owners. The Board shall promptly inform the
Company if it determines that an irreconcilable material conflict exists and
the implications thereof.
7.2. The Company will report any potential or existing
conflicts of which it is aware to the Board. The Company will assist the Board
in carrying out its responsibilities under the Shared Funding Exemptive Order,
by providing the Board with all information reasonably necessary for the Board
to consider any issues raised. This includes, but is not limited to, an
obligation by the Company to inform the Board whenever contract owner voting
instructions are disregarded.
7.3. If it is determined by a majority of the Board, or a
majority of its disinterested trustees, that a material irreconcilable conflict
exists, the Company and other Participating Insurance Companies shall, at their
expense and to the extent reasonably practicable (as determined by a majority
of the disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a
vote of all affected Contract owners and, as appropriate, segregating the
assets of any appropriate group (i.e., annuity contract owners, life insurance
contract owners, or
10
<PAGE> 11
variable contract owners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected contract owners
the option of making such a change; and (2), establishing a new registered
management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a
decision by the Company to disregard contract owner voting instructions and
that decision represents a minority position or would preclude a majority vote,
the Company may be required, at the Fund's election, to withdraw the affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account; provided, however that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the Board.
Any such withdrawal and termination must take place within six (6) months after
the Fund gives written notice that this provision is being implemented, and
until the end of that six month period the Underwriter and Fund shall continue
to accept and implement orders by the Company for the purchase (and redemption)
of shares of the Fund.
7.5. If a material irreconcilable conflict arises because a
particular state insurance regulator's decision applicable to the Company
conflicts with the majority of other state regulators, then the Company will
withdraw the affected Account's investment in the Fund and terminate this
Agreement with respect to such Account within six months after the Board
informs the Company in writing that it has determined that such decision has
created an irreconcilable material conflict; provided, however, that such
withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
disinterested members of the Board. Until the end of the foregoing six month
period, the Underwriter and Fund shall continue to accept and implement orders
by the Company for the purchase (and redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.6 of this
Agreement, a majority of the disinterested members of the Board shall determine
whether any proposed action adequately remedies any irreconcilable material
conflict, but in no event will the Fund be required to establish a new funding
medium for the Contracts. The Company shall not be required by Section 7.3 to
establish a new funding medium for the Contracts if an offer to do so has been
declined by vote of a majority of Contract owners materially adversely affected
by the irreconcilable material conflict. In the event that the Board determines
that any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination, provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are
amended, or Rule 6e-3 is adopted, to provide exemptive relief from any
provision of the Act or the rules promulgated thereunder with respect to mixed
or shared funding (as defined in the Shared Funding Exemptive Order) on terms
and conditions materially different from those contained in the Shared Funding
Exemptive
11
<PAGE> 12
Order, then (a) the Fund and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rules
6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such
rules are applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of
this Agreement shall continue in effect only to the extent that terms and
conditions substantially identical to such Sections are contained in such
Rule(s) as so amended or adopted.
ARTICLE VIII. Indemnification
8.1. Indemnification By The Company
8.1(a). The Company agrees to indemnify and hold harmless the
Fund and each trustee of the Board and officers and each person, if any, who
controls the Fund within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.1)
against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Company) or litigation
(including legal and other expenses), to which the Indemnified Parties may
become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements are related to the sale or acquisition of the
Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statements
or alleged untrue statements of any material fact contained in
the Registration Statement or prospectus for the Contracts or
contained in the Contracts or sales literature for the Contracts
(or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not
apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance upon
and in conformity with information furnished to the Company by
or on behalf of the Fund for use in the Registration Statement
or prospectus for the Contracts or in the Contracts or sales
literature (or any amendment or supplement) or otherwise for use
in connection with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the Registration Statement, prospectus or sales
literature of the Fund not supplied by the Company, or persons
under its control) or wrongful conduct of the Company or persons
under its control, with respect to the sale or distribution of
the Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration
Statement, prospectus, or sales literature of the
12
<PAGE> 13
Fund or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading if such a statement or
omission was made in reliance upon information furnished to the
Fund by or on behalf of the Company; or
(iv) arise as a result of any failure by the Company to
provide the services and furnish the materials under the terms
of this Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company;
as limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(b). The Company shall not be liable under this
indemnification provision with respect to any losses, claims,
damages, liabilities or litigation incurred or assessed against
an Indemnified Party as such may arise from such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in
the performance of such Indemnified Party's duties or by reason
of such Indemnified Party's reckless disregard of obligations or
duties under this Agreement or to the Fund, whichever is
applicable.
8.1(c). The Company shall not be liable under this
indemnification provision with respect to any claim made against
an Indemnified Party unless such Indemnified Party shall have
notified the Company in writing within a reasonable time after
the summons or other first legal process giving information of
the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have
received notice of such service on any designated agent), but
failure to notify the Company of any such claim shall not
relieve the Company from any liability which it may have to the
Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any
such action is brought against the Indemnified Parties, the
Company shall be entitled to participate, at its own expense, in
the defense of such action. The Company also shall be entitled
to assume the defense thereof, with counsel satisfactory to the
party named in the action. After notice from the Company to
such party of the Company's election to assume the defense
thereof, the Indemnified Party shall bear the fees and expenses
of any additional counsel retained by it, and the Company will
not be liable to such party under this Agreement for any legal
or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than
reasonable costs of investigation.
13
<PAGE> 14
8.1(d). The Indemnified Parties will promptly notify the
Company of the commencement of any litigation or proceedings
against them in connection with the issuance or sale of the Fund
Shares or the Contracts or the operation of the Fund.
8.2. Indemnification by the Underwriter
8.2(a). The Underwriter agrees to indemnify and hold harmless
the Company and each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may
become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements are related to the sale or acquisition of the
Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact
contained in the Registration Statement or prospectus
or sales literature of the Fund (or any amendment or
supplement to any of the foregoing), or arise out of
or are based upon the omission or the alleged
omission to state therein a material fact required to
be stated therein or necessary to make the statements
therein not misleading, provided that this agreement
to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged
statement or omission was made in reliance upon and
in conformity with information furnished to the
Underwriter or Fund by or on behalf of the Company
for use in the Registration Statement or prospectus
for the Fund or in sales literature (or any amendment
or supplement) or otherwise for use in connection
with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or
representations contained in the Registration
Statement, prospectus or sales literature for the
Contracts not supplied by the Underwriter or persons
under its control) or wrongful conduct of the Fund,
Adviser or Underwriter or persons under their
control, with respect to the sale or distribution of
the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged
untrue statement of a material fact contained in a
Registration Statement, prospectus, or sales
literature covering the Contracts, or any amendment
thereof or supplement thereto, or the omission or
alleged omission to state therein a material fact
required to be stated therein or necessary to make
the statement or statements therein not misleading,
if such statement or omission was made in reliance
upon information furnished to the Company by or on
behalf of the Fund; or
14
<PAGE> 15
(iv) arise as a result of any failure by the Fund to
provide the services and furnish the materials under
the terms of this Agreement (including a failure,
whether unintentional or in good faith or otherwise,
to comply with the diversification requirements
specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of
any representation and/or warranty made by the
Underwriter in this Agreement or arise out of or
result from any other material breach of this
Agreement by the Underwriter;
as limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith,
or gross negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to each Company or the Account, whichever is
applicable.
8.2(c). The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Underwriter in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Underwriter
of any such claim shall not relieve the Underwriter from any liability which it
may have to the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Underwriter to such party
of the Underwriter's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by
it, and the Underwriter will not be liable to such party under this Agreement
for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable
costs of investigation.
8.2(d). The Company agrees promptly to notify the Underwriter
of the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of the Contracts
or the operation of each Account.
8.3. Indemnification By the Fund
15
<PAGE> 16
8.3(a). The Fund agrees to indemnify and hold harmless the
Company, and each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.3)
against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Fund) or litigation
(including legal and other expenses) to which the Indemnified Parties may
become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements result from the gross negligence, bad faith or
willful misconduct of the Board or any member thereof, are related to the
operations of the Fund and:
(i) arise as a result of any failure by the Fund to
provide the services and furnish the materials under
the terms of this Agreement (including a failure to
comply with the diversification requirements
specified in Article VI of this Agreement);or
(ii) arise out of or result from any material breach of
any representation and/or warranty made by the Fund
in this Agreement or arise out of or result from any
other material breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against an Indemnified Party as such may arise
from such Indemnified Party's willful misfeasance, bad faith, or gross
negligence in the performance of such Indemnified Party's duties or by reason
of such Indemnified Party's reckless disregard of obligations and duties under
this Agreement or to the Company, the Fund, the Underwriter or each Account,
whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Fund will be entitled to participate, at
its own expense, in the defense thereof. The Fund also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Fund to such party of the Fund's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Fund will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the
defense thereof other than reasonable costs of investigation.
16
<PAGE> 17
8.3(d). The Company and the Underwriter agree promptly to
notify the Fund of the commencement of any litigation or proceedings against it
or any of its respective officers or directors in connection with this
Agreement, the issuance or sale of the Contracts, with respect to the operation
of either Account, or the sale or acquisition of shares of the Fund.
ARTICLE IX. Applicable Law
9.1. This Agreement shall be construed and the provisions
hereof interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the
1933, 1934 and 1940 acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
Securities and Exchange Commission may grant (including, but not limited to,
the Shared Funding Exemptive Order) and the terms hereof shall be interpreted
and construed in accordance therewith.
ARTICLE X. Termination
10.1. This Agreement shall continue in full force and effect
until the first to occur of:
(a) termination by any party for any reason by sixty (60) days
advance written notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund
and the Underwriter with respect to any Portfolio based
upon the Company's determination that shares of such
Portfolio are not reasonably available to meet the
requirements of the Contracts; or
(c) termination by the Company by written notice to the Fund
and the Underwriter with respect to any Portfolio in the
event any of the Portfolio's shares are not registered,
issued or sold in accordance with applicable state and/or
federal law or such law precludes the use of such shares as
the underlying investment media of the Contracts issued or
to be issued by the Company; or
(d) termination by the Company by written notice to the Fund
and the Underwriter with respect to any Portfolio in the
event that such Portfolio ceases to qualify as a Regulated
Investment Company under Subchapter M of the Code or under
any successor or similar provision, or if the Company
reasonably believes that the Fund may fail to so qualify;
or
17
<PAGE> 18
(e) termination by the Company by written notice to the Fund
and the Underwriter with respect to any Portfolio in the
event that such Portfolio fails to meet the diversification
requirements specified in Article VI hereof; or
(f) termination by either the Fund or the Underwriter by
written notice to the Company, if either one or both of the
Fund or the Underwriter respectively, shall determine, in
their sole judgment exercised in good faith, that the
Company and/or its affiliated companies has suffered a
material adverse change in its business, operations,
financial condition or prospects since the date of this
Agreement or is the subject of material adverse publicity;
or
(g) termination by the Company by written notice to the Fund
and the Underwriter, if the Company shall determine, in its
sole judgment exercised in good faith, that either the Fund
or the Underwriter or an affiliate of either has suffered a
material adverse change in its business, operations,
financial condition or prospects since the date of this
Agreement or is the subject of material adverse publicity;
or
(h) termination by the Fund or the Underwriter by written
notice to the Company, if the Company gives the Fund and
the Underwriter the written notice specified in Section
1.6(b) hereof and at the time such notice was given there
was no notice of termination outstanding under any other
provision of this Agreement; provided, however any
termination under this Section 10.1(h) shall be effective
forty five (45) days after the notice specified in Section
1.6(b) was given.
10.2. Effect of Termination. Notwithstanding any termination
of this Agreement, the Fund and the Underwriter shall at the option of the
Company, continue to make available additional shares of the Fund pursuant to
the terms and conditions of this Agreement, for all Contracts in effect on the
effective date of termination of this Agreement (hereinafter referred to as
"Existing Contracts"). Specifically, without limitation, the owners of the
Existing Contracts shall be permitted to reallocate investments in the Fund,
redeem investments in the Fund and/or invest in the Fund upon the making of
additional purchase payments under the Existing Contracts. The parties agree
that this Section 10.2 shall not apply to any terminations under Article VII
and the effect of such Article VII terminations shall be governed by Article
VII of this Agreement.
10.3 The Company shall not redeem Fund shares attributable to
the Contracts (as opposed to Fund shares attributable to the Company's assets
held in the Account) except (i) as necessary to implement Contract Owner
initiated or approved transactions, or (ii) as required by state and/or federal
laws or regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act.
Upon request, the Company will promptly furnish to the Fund and the Underwriter
the opinion of counsel for the Company (which counsel shall be reasonably
satisfactory to the Fund and the Underwriter) to the effect that any redemption
pursuant to clause (ii) above is a Legally Required Redemption. Furthermore,
except in cases where permitted under the terms of the Contracts, the Company
shall not prevent Contract Owners from allocating payments to a Portfolio that
was otherwise
18
<PAGE> 19
available under the Contracts without first giving the Fund or the Underwriter
90 days notice of its intention to do so.
ARTICLE XI.Notices
Any notice shall be sufficiently given when sent by registered
or certified mail to the other party at the address of such party set forth
below or at such other address as such party may from time to time specify in
writing to the other party.
If to the Fund:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
If to the Company:
Western Reserve Life Assurance Co. of Ohio
4333 Edgewood Road, NE
Cedar Rapids, IA 52499
Attention: Individual Division, Law Department
If to the Underwriter:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
ARTICLE XII. Miscellaneous
12.1 All persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Board, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund.
12.2 Subject to the requirements of legal process and
regulatory authority, each party hereto shall treat as confidential the names
and addresses of the owners of the Contracts and all information reasonably
identified as confidential in writing by any other party hereto and, except as
permitted by this Agreement, shall not disclose, disseminate or utilize such
names and addresses and other confidential information until such time as it
may come into the public domain without the express written consent of the
affected party.
12.3 The captions in this Agreement are included for
convenience of reference only and in no way define or delineate any of the
provisions hereof or otherwise affect their construction or effect.
19
<PAGE> 20
12.4 This Agreement may be executed simultaneously in two or
more counterparts, each of which taken together shall constitute one and the
same instrument.
12.5 If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
12.6 Each party hereto shall cooperate with each other party
and all appropriate governmental authorities (including without limitation the
SEC, the NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the insurance operations
of the Company are being conducted in a manner consistent with the California
Insurance Regulations and any other applicable law or regulations.
12.7 The rights, remedies and obligations contained in this
Agreement are cumulative and are in addition to any and all rights, remedies
and obligations, at law or in equity, which the parties hereto are entitled to
under state and federal laws.
12.8. This Agreement or any of the rights and obligations
hereunder may not be assigned by any party without the prior written consent of
all parties hereto; provided, however, that the Underwriter may assign this
Agreement or any rights or obligations hereunder to any affiliate of or company
under common control with the Underwriter, if such assignee is duly licensed
and registered to perform the obligations of the Underwriter under this
Agreement. The Company shall promptly notify the Fund and the Underwriter of
any change in control of the Company.
12.9. The Company shall furnish, or shall cause to be
furnished, to the Fund or its designee copies of the following reports:
(a) the Company's annual statement (prepared under
statutory accounting principles) and annual report
(prepared under generally accepted accounting
principles ("GAAP"), if any), as soon as practical
and in any event within 90 days after the end of
each fiscal year;
(b) the Company's quarterly statements (statutory)
(and GAAP, if any), as soon as practical and in
any event within 45 days after the end of each
quarterly period:
(c) any financial statement, proxy statement, notice
or report of the Company sent to stockholders
and/or policyholders, as soon as practical after
the delivery thereof to stockholders;
20
<PAGE> 21
(d) any registration statement (without exhibits) and
financial reports of the Company filed with the
Securities and Exchange Commission or any state
insurance regulator, as soon as practical after
the filing thereof;
(e) any other report submitted to the Company by
independent accountants in connection with any
annual, interim or special audit made by them of
the books of the Company, as soon as practical
after the receipt thereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative.
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
By: s/ John R. Kenney
-----------------
Name: John R. Kenney
Title: President
VARIABLE INSURANCE PRODUCTS FUND
By: s/ Robert C. Pozen
------------------
Robert C. Pozen
Senior Vice President
FIDELITY DISTRIBUTORS CORPORATION
By: s/ Kevin J. Kelly
-----------------
Kevin J. Kelly
Vice President
21
<PAGE> 22
Schedule A
Separate Accounts and Associated Contracts
<TABLE>
<CAPTION>
Name of Separate Account and Policy Form Numbers of Contracts
Date Established by Board of Directors Funded By Separate Account
- -------------------------------------- --------------------------
<S> <C>
WRL Series Life Corporate Account WL694 136 82 598
December 8, 1997
</TABLE>
22
<PAGE> 23
SCHEDULE B
PROXY VOTING PROCEDURE
The following is a list of procedures and corresponding responsibilities for
the handling of proxies relating to the Fund by the Underwriter, the Fund and
the Company. The defined terms herein shall have the meanings assigned in the
Participation Agreement except that the term "Company" shall also include the
department or third party assigned by the Insurance Company to perform the
steps delineated below.
1. The number of proxy proposals is given to the Company by the Underwriter
as early as possible before the date set by the Fund for the shareholder
meeting to facilitate the establishment of tabulation procedures. At
this time the Underwriter will inform the Company of the Record, Mailing
and Meeting dates. This will be done verbally approximately two months
before meeting.
2. Promptly after the Record Date, the Company will perform a "tape run",
or other activity, which will generate the names, addresses and number
of units which are attributed to each contractowner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in Step #2. The Company will use its best efforts to call in
the number of Customers to Fidelity, as soon as possible, but no later
than two weeks after the Record Date.
3. The Fund's Annual Report no longer needs to be sent to each Customer by
the Company either before or together with the Customers' receipt of a
proxy statement. Underwriter will provide the last Annual Report to the
Company pursuant to the terms of Section 3.3 of the Agreement to which
this Schedule relates.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card")
is provided to the Company by the Fund. The Company, at its expense,
shall produce and personalize the Voting Instruction Cards. The Legal
Department of the Underwriter or its affiliate ("Fidelity Legal") must
approve the Card before it is printed. Allow approximately 2-4 business
days for printing information on the Cards. Information commonly found
on the Cards includes:
a. name (legal name as found on account registration)
b. address
c. Fund or account number
d. coding to state number of units
e. individual Card number for use in tracking and verification
of votes (already on Cards as printed by the Fund)
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
23
<PAGE> 24
5. During this time, Fidelity Legal will develop, produce, and the Fund
will pay for the Notice of Proxy and the Proxy Statement (one document).
Printed and folded notices and statements will be sent to Company for
insertion into envelopes (envelopes and return envelopes are provided
and paid for by the Insurance Company). Contents of envelope sent to
Customers by Company will include:
a. Voting Instruction Card(s)
b. One proxy notice and statement (one document)
c. return envelope (postage pre-paid by Company) addressed
to the Company or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a
small, single sheet of paper that requests Customers to
vote as quickly as possible and that their vote is
important. One copy will be supplied by the Fund.)
e. cover letter - optional, supplied by Company and
reviewed and approved in advance by Fidelity Legal.
6. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness
and completeness. Copy of this approval sent to Fidelity Legal.
7. Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the
Company as the shareowner. (A 5-week period is recommended.)
Solicitation time is calculated as calendar days from (but not
including) the meeting, counting backwards.
8. Collection and tabulation of Cards begins. Tabulation usually takes
place in another department or another vendor depending on process used.
An often used procedure is to sort Cards on arrival by proposal into
vote categories of all yes, no, or mixed replies, and to begin data
entry.
Note: Postmarks are not generally needed. A need for postmark
information would be due to an insurance company's internal procedure
and has not been required by Fidelity in the past.
9. Signatures on Card checked against legal name on account registration
which was printed on the Card.
Note: For Example, If the account registration is under "Bertram C.
Jones, Trustee," then that is the exact legal name to be printed on the
Card and is the signature needed on the Card.
24
<PAGE> 25
10. If Cards are mutilated, or for any reason are illegible or are not
signed properly, they are sent back to Customer with an explanatory
letter, a new Card and return envelope. The mutilated or illegible Card
is disregarded and considered to be not received for purposes of vote
tabulation. Any Cards that have "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to
why they did not complete the system. Any questions on those Cards are
usually remedied individually.
11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort
the Cards as they first arrive into categories depending upon their
vote; an estimate of how the vote is progressing may then be calculated.
If the initial estimates and the actual vote do not coincide, then an
internal audit of that vote should occur. This may entail a recount.
12. The actual tabulation of votes is done in units which is then converted
to shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of shares.) Fidelity
Legal must review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to Fidelity
Legal on the morning of the meeting not later than 10:00 a.m. Boston
time. Fidelity Legal may request an earlier deadline if required to
calculate the vote in time for the meeting.
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
Fidelity Legal will provide a standard form for each Certification.
15. The Company will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, Fidelity Legal
will be permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
25
<PAGE> 26
SCHEDULE C
Other investment companies currently available under variable annuities or
variable life insurance issued by the Company:
Federated Insurance Series
Prime Money Fund II
BT Insurance Funds Trust
EAFE Equity Index Fund
Equity 500 Index Fund
Small Cap Index Fund
26
<PAGE> 27
SUB-LICENSE AGREEMENT
Agreement effective as of this 14th of June, 1999, by and between
Fidelity Distributors Corporation (hereinafter called "Fidelity"), a
corporation organized and existing under the laws of the Commonwealth of
Massachusetts, with a principal place of business at 82 Devonshire Street,
Boston, Massachusetts, and Western Reserve Life Assurance Co. of Ohio
(hereinafter called "Company"), a company organized and existing under the laws
of the State of Ohio, with a principal place of business at 570 Carillon
Parkway, St. Petersburg, Florida.
WHEREAS, FMR Corp., a Massachusetts corporation, the parent company of
Fidelity, is the owner of the trademark and the tradename "FIDELITY
INVESTMENTS" and is the owner of a trademark in a pyramid design (hereinafter,
collectively the "Fidelity Trademarks"), a copy of each of which is attached
hereto as Exhibit "A"; and
WHEREAS, FMR Corp. has granted a license to Fidelity (the "Master
License Agreement") to sub-license the Fidelity Trademarks to third parties for
their use in connection with Promotional Materials as hereinafter defined; and
WHEREAS, Company is desirous of using the Fidelity Trademarks in
connection with distribution of "sales literature and other promotional
material" with information, including the Fidelity Trademarks, printed in said
material (such material hereinafter called the Promotional Material). For the
purpose of this Agreement, "sales literature and other promotional material"
shall have the same meaning as in the certain Participation Agreement dated as
of the 14th day of June, 1999, among Fidelity, Company and Variable Insurance
Products Fund (hereinafter "Participation Agreement"); and
WHEREAS, Fidelity is desirous of having the Fidelity Trademarks used in
connection with the Promotional Material.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy whereof is hereby
acknowledged, and of the mutual promises hereinafter set forth, the parties
hereby agree as follows:
1. Fidelity hereby grants to Company a non-exclusive, non-transferable
license to use the Fidelity Trademarks in connection with the promotional
distribution of the Promotional Material and Company accepts said license,
subject to the terms and conditions set forth herein.
2. Company acknowledges that FMR Corp. is the owner of all right, title
and interest in the Fidelity Trademarks and agrees that it will do nothing
inconsistent with the ownership of the Fidelity Trademarks by FMR Corp., and
that it will not, now or hereinafter, contest any registration or application
for registration of the Fidelity Trademarks by FMR Corp., nor will it, now or
hereafter, aid anyone in contesting any registration or application for
registration of the Fidelity Trademarks by FMR Corp.
1
<PAGE> 28
3. Company agrees to use the Fidelity Trademarks only in the form and
manner approved by Fidelity and not to use any other trademark, service mark or
registered trademark in combination with any of the Fidelity Trademarks without
approval by Fidelity.
4. Company agrees that it will place all necessary and proper notices
and legends in order to protect the interests of FMR Corp. and Fidelity therein
pertaining to the Fidelity Trademarks on the Promotional Material including,
but not limited to, symbols indicating trademarks, service marks and registered
trademarks. Company will place such symbols and legends on the Promotional
Material as requested by Fidelity or FMR Corp. upon receipt of notice of same
from Fidelity or FMR Corp.
5. Company agrees that the nature and quality of all of the Promotional
Material distributed by Company bearing the Fidelity Trademarks shall conform
to standards set by, and be under the control of, Fidelity.
6. Company agrees to cooperate with Fidelity in facilitating Fidelity's
control of the use of the Fidelity Trademarks and of the quality of the
Promotional Material to permit reasonable inspection of samples of same by
Fidelity and to supply Fidelity with reasonable quantities of samples of the
Promotional Material upon request.
7. Company shall comply with all applicable laws and regulations and
obtain any and all licenses or other necessary permits pertaining to the
distribution of said Promotional Material.
8. Company agrees to notify Fidelity of any unauthorized use of the
Fidelity Trademarks by others promptly as it comes to the attention of Company.
Fidelity or FMR Corp. shall have the sole right and discretion to commence
actions or other proceedings for infringement, unfair competition or the like
involving the Fidelity Trademarks and Company shall cooperate in any such
proceedings if so requested by Fidelity or FMR Corp.
9. This agreement shall continue in force until terminated by Fidelity.
This agreement shall automatically terminate upon termination of the Master
License Agreement. In addition, Fidelity shall have the right to terminate
this agreement at any time upon notice to Company, with or without cause. Upon
any such termination, Company agrees to cease immediately all use of the
Fidelity Trademarks and shall destroy, at Company's expense, any and all
materials in its possession bearing the Fidelity Trademarks, and agrees that
all rights in the Fidelity Trademarks and in the goodwill connected therewith
shall remain the property of FMR Corp. Unless so terminated by Fidelity, or
extended by written agreement of the parties, this agreement shall expire on
the termination of that certain Participation Agreement.
10. Company shall indemnify Fidelity and FMR Corp. and hold each of
them harmless from and against any loss, damage, liability, cost or expense of
any nature whatsoever, including without limitation, reasonable attorneys' fees
and all court costs, arising out of use of the Fidelity Trademarks by Company.
2
<PAGE> 29
11. In consideration for the promotion and advertising of Fidelity as a
result of the distribution by Company of the Promotional Material, Company
shall not pay any monies as a royalty to Fidelity for this license.
12. This agreement is not intended in any manner to modify the terms
and conditions of the Participation Agreement. In the event of any conflict
between the terms and conditions herein and thereof, the terms and conditions
of the Participation Agreement shall control.
13. This agreement shall be interpreted according to the laws of the
Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties hereunto set their hands and seals, and
hereby execute this agreement, as of the date first above written.
FIDELITY DISTRIBUTORS CORPORATION
By:
---------------------
Name:
---------------------
Title:
---------------------
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
By:
---------------------
Name: John R. Kenney
Title: President
3
<PAGE> 30
EXHIBIT A
<TABLE>
<S> <C>
Int. Cl.: 36
Prior U.S. Cls.: 101 and 102
Reg. No. 1,481,040
United States Patent and Trademark Office Registered Mar. 15, 1988
------------------------------------------------------------------------------------------
</TABLE>
SERVICE MARK
PRINCIPAL REGISTER
FIDELITY
INVESTMENTS
<TABLE>
<S> <C>
FMR CORP. (MASSACHUSETTS CORPORATION) FIRST USE 2-22-1984; IN COMMERCE 2-22-1984.
82 DEVONSHIRE STREET
BOSTON, MA 02109, ASSIGNEE OF FIDELITY DISTRIBUTORS NO CLAIM IS MADE TO THE EXCLUSIVE RIGHT TO USE
CORPORATION (MASSACHUSETTS CORPORATION) BOSTON, MA "INVESTMENTS", APART FROM THE MARK AS SHOWN.
02109
SER. NO. 641,707, FILED 1-28-1987
FOR: MUTUAL FUND AND STOCK BROKERAGE SERVICES, IN
CLASS 36 (U.S. CLS. 101 AND 102) RUSS HERMAN, EXAMINING ATTORNEY
</TABLE>
4
<PAGE> 1
EXHIBIT 1.A.(8)(b)(ii)
PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND II,
FIDELITY DISTRIBUTORS CORPORATION
and
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
THIS AGREEMENT, made and entered into as of the 14th day of June, 1999
by and among WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO, (hereinafter the
"Company"), an Ohio corporation, on its own behalf and on behalf of each
segregated asset account of the Company set forth on Schedule A hereto as may
be amended from time to time (each such account hereinafter referred to as the
"Account"), and the VARIABLE INSURANCE PRODUCTS FUND II, an unincorporated
business trust organized under the laws of the Commonwealth of Massachusetts
(hereinafter the "Fund") and FIDELITY DISTRIBUTORS CORPORATION (hereinafter the
"Underwriter"), a Massachusetts corporation.
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as the investment vehicle for
separate accounts established for variable life insurance policies and variable
annuity contracts (collectively, the "Variable Insurance Products") to be
offered by insurance companies which have entered into participation agreements
with the Fund and the Underwriter (hereinafter "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each representing the interest in a particular managed
portfolio of securities and other assets, any one or more of which may be made
available under this Agreement, as may be amended from time to time by mutual
agreement of the parties hereto (each such series hereinafter referred to as a
"Portfolio"); and
WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission, dated September 17, 1986 (File No. 812-6422), granting
Participating Insurance Companies and variable annuity and variable life
insurance separate accounts exemptions from the provisions of sections 9(a),
13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended,
(hereinafter the "1940 Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by variable annuity
1
<PAGE> 2
and variable life insurance separate accounts of both affiliated and
unaffiliated life insurance companies (hereinafter the "Shared Funding
Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, Fidelity Management & Research Company (the "Adviser") is
duly registered as an investment adviser under the federal Investment Advisers
Act of 1940 and any applicable state securities law; and
WHEREAS, the Company has registered or will register certain variable
life insurance and variable annuity contracts under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, to set aside
and invest assets attributable to the aforesaid variable annuity contracts; and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended, (hereinafter the "1934 Act"), and is a member in good
standing of the National Association of Securities Dealers, Inc. (hereinafter
"NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid variable life and variable
annuity contracts and the Underwriter is authorized to sell such shares to unit
investment trusts such as each Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the
Company, the Fund and the Underwriter agree as follows:
ARTICLE I. Sale of Fund Shares
1.1. The Underwriter agrees to sell to the Company those shares of
the Fund which each Account orders, executing such orders on a daily basis at
the net asset value next computed after receipt by the Fund or its designee of
the order for the shares of the Fund. For purposes of this Section 1.1, the
Company shall be the designee of the Fund for receipt of such orders from each
Account and receipt by such designee shall constitute receipt by the Fund;
provided that the Fund receives notice of such order by 9:30 a.m. Boston time
on the next following Business Day. "Business Day" shall mean any day on which
the New York Stock Exchange is open for trading
2
<PAGE> 3
and on which the Fund calculates its net asset value pursuant to the rules of
the Securities and Exchange Commission.
1.2. The Fund agrees to make its shares available indefinitely for
purchase at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates its net asset value
pursuant to rules of the Securities and Exchange Commission and the Fund shall
use reasonable efforts to calculate such net asset value on each day which the
New York Stock Exchange is open for trading. Notwithstanding the foregoing,
the Board of Trustees of the Fund (hereinafter the "Board") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the offering of
shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Board
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, necessary in the best interests of the shareholders
of such Portfolio.
1.3. The Fund and the Underwriter agree that shares of the Fund will
be sold only to Participating Insurance Companies and their separate accounts.
No shares of any Portfolio will be sold to the general public.
1.4. The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles I, III, V, VII and Section 2.5 of Article II
of this Agreement is in effect to govern such sales.
1.5. The Fund agrees to redeem for cash, on the Company's request,
any full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.5, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives notice of such
request for redemption on the next following Business Day.
1.6. The Company agrees that purchases and redemptions of Portfolio
shares offered by the then current prospectus of the Fund shall be made in
accordance with the provisions of such prospectus. The Company agrees that all
net amounts available under the variable annuity contracts with the form
number(s) which are listed on Schedule A attached hereto and incorporated
herein by this reference, as such Schedule A may be amended from time to time
hereafter by mutual written agreement of all the parties hereto, (the
"Contracts") shall be invested in the Fund, in such other Funds advised by the
Adviser as may be mutually agreed to in writing by the parties hereto, or in
the Company's general account, provided that such amounts may also be invested
in an investment company other than the Fund if (a) such other investment
company, or series thereof, has investment objectives or policies that are
substantially different from the investment objectives and policies of all the
Portfolios of the Fund; or (b) the Company gives the Fund and the Underwriter
45 days written notice of its intention to make such other investment company
available as a funding vehicle for the Contracts; or (c) such other investment
company was available as a funding vehicle for the Contracts prior to the date
of this
3
<PAGE> 4
Agreement and the Company so informs the Fund and Underwriter prior to their
signing this Agreement (a list of such funds appearing on Schedule C to this
Agreement); or (d) the Fund or Underwriter consents to the use of such other
investment company.
1.7. The Company shall pay for Fund shares on the next Business Day
after an order to purchase Fund shares is made in accordance with the
provisions of Section 1.1 hereof. Payment shall be in federal funds
transmitted by wire. For purpose of Section 2.10 and 2.11, upon receipt by the
Fund of the federal funds so wired, such funds shall cease to be the
responsibility of the Company and shall become the responsibility of the Fund.
1.8. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Fund's shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio. The
Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.10. The Fund shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated (normally by 6:30
p.m. Boston time) and shall use its best efforts to make such net asset value
per share available by 7 p.m. Boston time.
ARTICLE II. Representations and Warranties
2.1. The Company represents and warrants that the Contracts are or
will be registered under the 1933 Act; that the Contracts will be issued and
sold in compliance in all material respects with all applicable Federal and
State laws and that the sale of the Contracts shall comply in all material
respects with state insurance suitability requirements. The Company further
represents and warrants that it is an insurance company duly organized and in
good standing under applicable law and that it has legally and validly
established each Account prior to any issuance or sale thereof as a segregated
asset account under Section 1701.54 of the Ohio Revised Code and has registered
or, prior to any issuance or sale of the Contracts, will register each Account
as a unit investment trust in accordance with the provisions of the 1940 Act to
serve as a segregated investment account for the Contracts.
2.2. The Fund represents and warrants that Fund shares sold pursuant
to this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the State of Ohio and all
applicable federal and state securities laws
4
<PAGE> 5
and that the Fund is and shall remain registered under the 1940 Act. The Fund
shall amend the Registration Statement for its shares under the 1933 Act and
the 1940 Act from time to time as required in order to effect the continuous
offering of its shares. The Fund shall register and qualify the shares for
sale in accordance with the laws of the various states only if and to the
extent deemed advisable by the Fund or the Underwriter.
2.3. The Fund represents that it is currently qualified as a
Regulated Investment Company under Subchapter M of the Internal Revenue Code of
1986, as amended, (the "Code") and that it will make every effort to maintain
such qualification (under Subchapter M or any successor or similar provision)
and that it will notify the Company immediately upon having a reasonable basis
for believing that it has ceased to so qualify or that it might not so qualify
in the future.
2.4. The Company represents that the Contracts are currently treated
as endowment or annuity insurance contracts, under applicable provisions of the
Code and that it will make every effort to maintain such treatment and that it
will notify the Fund and the Underwriter immediately upon having a reasonable
basis for believing that the Contracts have ceased to be so treated or that
they might not be so treated in the future.
2.5. (a) With respect to Initial Class shares, the Fund currently
does not intend to make any payments to finance distribution expenses pursuant
to Rule 12b-1 under the 1940 Act or otherwise, although it may make such
payments in the future. The Fund has adopted a "no fee" or "defensive" Rule
12b-1 Plan under which it makes no payments for distribution expenses. To the
extent that it decides to finance distribution expenses pursuant to Rule 12b-1,
the Fund undertakes to have a board of trustees, a majority of whom are not
interested persons of the Fund, formulate and approve any plan under Rule 12b-1
to finance distribution expenses.
(b) With respect to Service Class shares, the Fund has adopted
a Rule 12b-1 Plan under which it makes payments to finance distribution
expenses. The Fund represents and warrants that it has a board of trustees, a
majority of whom are not interested persons of the Fund, which has formulated
and approved the Fund's Rule 12b-1 Plan to finance distribution expenses of the
Fund and that any changes to the Fund's Rule 12b-1 Plan will be approved by a
similarly constituted board of trustees.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
State of Ohio and the Fund and the Underwriter represent that their respective
operations are and shall at all times remain in material compliance with the
laws of the State of Ohio to the extent required to perform this Agreement.
2.7. The Underwriter represents and warrants that it is a member in
good standing of the NASD and is registered as a broker-dealer with the SEC.
The Underwriter further represents that it will sell and distribute the Fund
shares in accordance with the laws of the State
5
<PAGE> 6
of Ohio and all applicable state and federal securities laws, including without
limitation the 1933 Act, the 1934 Act, and the 1940 Act.
2.8. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.9. The Underwriter represents and warrants that the Adviser is and
shall remain duly registered in all material respects under all applicable
federal and state securities laws and that the Adviser shall perform its
obligations for the Fund in compliance in all material respects with the laws
of the State of Ohio and any applicable state and federal securities laws.
2.10. The Fund and Underwriter represent and warrant that all of
their directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.11. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities
dealing with the money and/or securities of the Fund are covered by a blanket
fidelity bond or similar coverage for the benefit of the Fund, and that said
bond is issued by a reputable bonding company, includes coverage for larceny
and embezzlement, and is in an amount not less than $5 million. The Company
agrees to make all reasonable efforts to see that this bond or another bond
containing these provisions is always in effect, and agrees to notify the Fund
and the Underwriter in the event that such coverage no longer applies.
ARTICLE III. Prospectuses and Proxy Statements; Voting
3.1. The Underwriter shall provide the Company with as many printed
copies of the Fund's current prospectus and Statement of Additional Information
as the Company may reasonably request. If requested by the Company in lieu
thereof, the Fund shall provide camera-ready film containing the Fund's
prospectus and Statement of Additional Information, and such other assistance
as is reasonably necessary in order for the Company once each year (or more
frequently if the prospectus and/or Statement of Additional Information for the
Fund is amended during the year) to have the prospectus for the Contracts and
the Fund's prospectus printed together in one document, and to have the
Statement of Additional Information for the Fund and the Statement of
Additional Information for the Contracts printed together in one document.
Alternatively, the Company may print the Fund's prospectus and/or its Statement
of Additional Information in combination with other fund companies'
prospectuses and statements of additional information. Except as provided in
the following three sentences, all expenses of printing and distributing Fund
prospectuses and Statements of Additional Information shall be the expense of
6
<PAGE> 7
the Company. For prospectuses and Statements of Additional Information
provided by the Company to its existing owners of Contracts in order to update
disclosure annually as required by the 1933 Act and/or the 1940 Act, the cost
of printing shall be borne by the Fund. If the Company chooses to receive
camera- ready film in lieu of receiving printed copies of the Fund's
prospectus, the Fund will reimburse the Company in an amount equal to the
product of A and B where A is the number of such prospectuses distributed to
owners of the Contracts, and B is the Fund's per unit cost of typesetting and
printing the Fund's prospectus. The same procedures shall be followed with
respect to the Fund's Statement of Additional Information.
The Company agrees to provide the Fund or its designee with such
information as may be reasonably requested by the Fund to assure that the
Fund's expenses do not include the cost of printing any prospectuses or
Statements of Additional Information other than those actually distributed to
existing owners of the Contracts.
3.2. The Fund's prospectus shall state that the Statement of
Additional Information for the Fund is available from the Underwriter or the
Company (or in the Fund's discretion, the Prospectus shall state that such
Statement is available from the Fund).
3.3. The Fund, at its expense, shall provide the Company with copies
of its proxy statements, reports to shareholders, and other communications
(except for prospectuses and Statements of Additional Information, which are
covered in Section 3.1) to shareholders in such quantity as the Company shall
reasonably require for distributing to Contract owners.
3.4. If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with instructions received
from Contract owners; and
(iii) vote Fund shares for which no instructions have been received
in a particular separate account in the same proportion as Fund
shares of such portfolio for which instructions have been
received in that separate account,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass- through voting privileges
for variable contract owners. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law. Participating Insurance Companies shall be responsible for
assuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set
forth on Schedule B attached hereto and incorporated herein by this reference,
which standards will also be provided to the other Participating Insurance
Companies.
3.5. The Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders, and in particular the Fund will either
provide for annual meetings or comply with Section 16(c) of the 1940 Act
(although the Fund is not one of the trusts described in Section 16(c) of that
Act) as well as with Sections 16(a) and, if and when applicable, 16(b).
Further, the
7
<PAGE> 8
Fund will act in accordance with the Securities and Exchange Commission's
interpretation of the requirements of Section 16(a) with respect to periodic
elections of trustees and with whatever rules the Commission may promulgate
with respect thereto.
ARTICLE IV. Sales Material and Information
4.1. The Company shall furnish, or shall cause to be furnished, to
the Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or its investment adviser or the Underwriter is
named, at least fifteen Business Days prior to its use. No such material shall
be used if the Fund or its designee reasonably objects to such use within
fifteen Business Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or
its designee or by the Underwriter, except with the permission of the Fund or
the Underwriter or the designee of either.
4.3. The Fund, Underwriter, or its designee shall furnish, or shall
cause to be furnished, to the Company or its designee, each piece of sales
literature or other promotional material in which the Company and/or its
separate account(s), is named at least fifteen Business Days prior to its use.
No such material shall be used if the Company or its designee reasonably
objects to such use within fifteen Business Days after receipt of such
material.
4.4. The Fund and the Underwriter shall not give any information or
make any representations on behalf of the Company or concerning the Company,
each Account, or the Contracts other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public
domain or approved by the Company for distribution to Contract owners, or in
sales literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy
of all registration statements, prospectuses, Statements of Additional
Information, reports, proxy statements, sales literature and other promotional
materials, applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to the Fund or its shares,
contemporaneously with the filing of such document with the Securities and
Exchange Commission or other regulatory authorities.
8
<PAGE> 9
4.6. The Company will provide to the Fund at least one complete copy
of all registration statements, prospectuses, Statements of Additional
Information, reports, solicitations for voting instructions, sales literature
and other promotional materials, applications for exemptions, requests for no
action letters, and all amendments to any of the above, that relate to the
Contracts or each Account, contemporaneously with the filing of such document
with the SEC or other regulatory authorities.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational
or training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, Statements of Additional Information, shareholder reports, and
proxy materials.
ARTICLE V. Fees and Expenses
5.1. The Fund and Underwriter shall pay no fee or other compensation
to the Company under this agreement, except that if the Fund or any Portfolio
adopts and implements a plan pursuant to Rule 12b-1 to finance distribution
expenses, then the Underwriter may make payments to the Company or to the
underwriter for the Contracts if and in amounts agreed to by the Underwriter in
writing and such payments will be made out of existing fees otherwise payable
to the Underwriter, past profits of the Underwriter or other resources
available to the Underwriter. No such payments shall be made directly by the
Fund.
5.2. All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund. The Fund shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale. The Fund shall bear
the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any federal or state law,
and all taxes on the issuance or transfer of the Fund's shares.
5.3. The Company shall bear the expenses of distributing the Fund's
prospectus, proxy materials and reports to owners of Contracts issued by the
Company.
9
<PAGE> 10
ARTICLE VI. Diversification
6.1. The Fund will at all times invest money from the Contracts in
such a manner as to ensure that the Contracts will be treated as variable
contracts under the Code and the regulations issued thereunder. Without
limiting the scope of the foregoing, the Fund will at all times comply with
Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the
diversification requirements for variable annuity, endowment, or life insurance
contracts and any amendments or other modifications to such Section or
Regulations. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps (a) to notify Company of such breach and (b) to
adequately diversify the Fund so as to achieve compliance within the grace
period afforded by Regulation 1.817-5.
ARTICLE VII. Potential Conflicts
7.1. The Board will monitor the Fund for the existence of any
material irreconcilable conflict between the interests of the contract owners
of all separate accounts investing in the Fund. An irreconcilable material
conflict may arise for a variety of reasons, including: (a) an action by any
state insurance regulatory authority; (b) a change in applicable federal or
state insurance, tax, or securities laws or regulations, or a public ruling,
private letter ruling, no-action or interpretative letter, or any similar
action by insurance, tax, or securities regulatory authorities; (c) an
administrative or judicial decision in any relevant proceeding; (d) the manner
in which the investments of any Portfolio are being managed; (e) a difference
in voting instructions given by variable annuity contract and variable life
insurance contract owners; or (f) a decision by an insurer to disregard the
voting instructions of contract owners. The Board shall promptly inform the
Company if it determines that an irreconcilable material conflict exists and
the implications thereof.
7.2. The Company will report any potential or existing conflicts of
which it is aware to the Board. The Company will assist the Board in carrying
out its responsibilities under the Shared Funding Exemptive Order, by providing
the Board with all information reasonably necessary for the Board to consider
any issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3. If it is determined by a majority of the Board, or a majority of
its disinterested trustees, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a
vote of all affected Contract owners and, as appropriate, segregating the
assets of any appropriate group (i.e., annuity contract owners, life insurance
contract owners, or
10
<PAGE> 11
variable contract owners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected contract owners
the option of making such a change; and (2), establishing a new registered
management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a
decision by the Company to disregard contract owner voting instructions and
that decision represents a minority position or would preclude a majority vote,
the Company may be required, at the Fund's election, to withdraw the affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account; provided, however that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the Board.
Any such withdrawal and termination must take place within six (6) months after
the Fund gives written notice that this provision is being implemented, and
until the end of that six month period the Underwriter and Fund shall continue
to accept and implement orders by the Company for the purchase (and redemption)
of shares of the Fund.
7.5. If a material irreconcilable conflict arises because a
particular state insurance regulator's decision applicable to the Company
conflicts with the majority of other state regulators, then the Company will
withdraw the affected Account's investment in the Fund and terminate this
Agreement with respect to such Account within six months after the Board
informs the Company in writing that it has determined that such decision has
created an irreconcilable material conflict; provided, however, that such
withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
disinterested members of the Board. Until the end of the foregoing six month
period, the Underwriter and Fund shall continue to accept and implement orders
by the Company for the purchase (and redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but
in no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination, provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.7. If and to the extent that Rule 6e-2 and Rule 6e- 3(T) are
amended, or Rule 6e-3 is adopted, to provide exemptive relief from any
provision of the Act or the rules promulgated thereunder with respect to mixed
or shared funding (as defined in the Shared Funding Exemptive
11
<PAGE> 12
Order) on terms and conditions materially different from those contained in the
Shared Funding Exemptive Order, then (a) the Fund and/or the Participating
Insurance Companies, as appropriate, shall take such steps as may be necessary
to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted,
to the extent such rules are applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2,
7.3, 7.4, and 7.5 of this Agreement shall continue in effect only to the extent
that terms and conditions substantially identical to such Sections are
contained in such Rule(s) as so amended or adopted.
ARTICLE VIII. Indemnification
8.1. Indemnification By The Company
8.1(a). The Company agrees to indemnify and hold harmless the Fund
and each trustee of the Board and officers and each person, if any, who
controls the Fund within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.1)
against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Company) or litigation
(including legal and other expenses), to which the Indemnified Parties may
become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements are related to the sale or acquisition of the
Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in the
Registration Statement or prospectus for the Contracts or contained in
the Contracts or sales literature for the Contracts (or any amendment
or supplement to any of the foregoing), or arise out of or are based
upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, provided that this agreement to indemnify
shall not apply as to any Indemnified Party if such statement or
omission or such alleged statement or omission was made in reliance
upon and in conformity with information furnished to the Company by or
on behalf of the Fund for use in the Registration Statement or
prospectus for the Contracts or in the Contracts or sales literature
(or any amendment or supplement) or otherwise for use in connection
with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature of the Fund not
supplied by the Company, or persons under its control) or wrongful
conduct of the Company or persons under its control, with respect to
the sale or distribution of the Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration Statement,
prospectus, or sales literature of the
12
<PAGE> 13
Fund or any amendment thereof or supplement thereto or the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading if such a statement or omission was made in reliance upon
information furnished to the Fund by or on behalf of the Company; or
(iv) arise as a result of any failure by the Company to provide
the services and furnish the materials under the terms of this
Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement
or arise out of or result from any other material breach of this
Agreement by the Company;
as limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against an Indemnified Party as such
may arise from such Indemnified Party's willful misfeasance, bad
faith, or gross negligence in the performance of such Indemnified
Party's duties or by reason of such Indemnified Party's reckless
disregard of obligations or duties under this Agreement or to the
Fund, whichever is applicable.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the Company in
writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall have
been served upon such Indemnified Party (or after such Indemnified
Party shall have received notice of such service on any designated
agent), but failure to notify the Company of any such claim shall not
relieve the Company from any liability which it may have to the
Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action
is brought against the Indemnified Parties, the Company shall be
entitled to participate, at its own expense, in the defense of such
action. The Company also shall be entitled to assume the defense
thereof, with counsel satisfactory to the party named in the action.
After notice from the Company to such party of the Company's election
to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and the
Company will not be liable to such party under this Agreement for any
legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than
reasonable costs of investigation.
13
<PAGE> 14
8.1(d). The Indemnified Parties will promptly notify the Company
of the commencement of any litigation or proceedings against them in
connection with the issuance or sale of the Fund Shares or the
Contracts or the operation of the Fund.
8.2. Indemnification by the Underwriter
8.2(a). The Underwriter agrees to indemnify and hold harmless the
Company and each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may
become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements are related to the sale or acquisition of the
Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
Registration Statement or prospectus or sales literature of the
Fund (or any amendment or supplement to any of the foregoing),
or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not
apply as to any Indemnified Party if such statement or omission
or such alleged statement or omission was made in reliance upon
and in conformity with information furnished to the Underwriter
or Fund by or on behalf of the Company for use in the
Registration Statement or prospectus for the Fund or in sales
literature (or any amendment or supplement) or otherwise for use
in connection with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature for the
Contracts not supplied by the Underwriter or persons under its
control) or wrongful conduct of the Fund, Adviser or Underwriter
or persons under their control, with respect to the sale or
distribution of the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue statement of
a material fact contained in a Registration Statement,
prospectus, or sales literature covering the Contracts, or any
amendment thereof or supplement thereto, or the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statement or statements
therein not misleading, if such statement or omission was made
in reliance upon information furnished to the Company by or on
behalf of the Fund; or
14
<PAGE> 15
(iv) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in good
faith or otherwise, to comply with the diversification
requirements specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Underwriter;
as limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith,
or gross negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to each Company or the Account, whichever is
applicable.
8.2(c). The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Underwriter in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Underwriter
of any such claim shall not relieve the Underwriter from any liability which it
may have to the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Underwriter to such party
of the Underwriter's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by
it, and the Underwriter will not be liable to such party under this Agreement
for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable
costs of investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.
8.3. Indemnification By the Fund
15
<PAGE> 16
8.3(a). The Fund agrees to indemnify and hold harmless the Company,
and each of its directors and officers and each person, if any, who controls
the Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.3) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Fund) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any
statute, regulation, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements result from the gross negligence, bad faith or willful misconduct
of the Board or any member thereof, are related to the operations of the Fund
and:
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure to comply with the
diversification requirements specified in Article VI of this
Agreement);or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against an Indemnified Party as such may arise
from such Indemnified Party's willful misfeasance, bad faith, or gross
negligence in the performance of such Indemnified Party's duties or by reason
of such Indemnified Party's reckless disregard of obligations and duties under
this Agreement or to the Company, the Fund, the Underwriter or each Account,
whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Fund will be entitled to participate, at
its own expense, in the defense thereof. The Fund also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Fund to such party of the Fund's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Fund will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the
defense thereof other than reasonable costs of investigation.
16
<PAGE> 17
8.3(d). The Company and the Underwriter agree promptly to notify the
Fund of the commencement of any litigation or proceedings against it or any of
its respective officers or directors in connection with this Agreement, the
issuance or sale of the Contracts, with respect to the operation of either
Account, or the sale or acquisition of shares of the Fund.
ARTICLE IX. Applicable Law
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
Securities and Exchange Commission may grant (including, but not limited to,
the Shared Funding Exemptive Order) and the terms hereof shall be interpreted
and construed in accordance therewith.
ARTICLE X. Termination
10.1. This Agreement shall continue in full force and effect until the
first to occur of:
(a) termination by any party for any reason by sixty (60) days advance
written notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio based upon the Company's
determination that shares of such Portfolio are not reasonably
available to meet the requirements of the Contracts; or
(c) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event any of the
Portfolio's shares are not registered, issued or sold in
accordance with applicable state and/or federal law or such law
precludes the use of such shares as the underlying investment
media of the Contracts issued or to be issued by the Company; or
(d) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event that such
Portfolio ceases to qualify as a Regulated Investment Company
under Subchapter M of the Code or under any successor or similar
provision, or if the Company reasonably believes that the Fund may
fail to so qualify; or
17
<PAGE> 18
(e) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Portfolio in the event that such
Portfolio fails to meet the diversification requirements specified
in Article VI hereof; or
(f) termination by either the Fund or the Underwriter by written
notice to the Company, if either one or both of the Fund or the
Underwriter respectively, shall determine, in their sole judgment
exercised in good faith, that the Company and/or its affiliated
companies has suffered a material adverse change in its business,
operations, financial condition or prospects since the date of
this Agreement or is the subject of material adverse publicity; or
(g) termination by the Company by written notice to the Fund and the
Underwriter, if the Company shall determine, in its sole judgment
exercised in good faith, that either the Fund or the Underwriter
or an affiliate of either has suffered a material adverse change
in its business, operations, financial condition or prospects
since the date of this Agreement or is the subject of material
adverse publicity; or
(h) termination by the Fund or the Underwriter by written notice to
the Company, if the Company gives the Fund and the Underwriter the
written notice specified in Section 1.6(b) hereof and at the time
such notice was given there was no notice of termination
outstanding under any other provision of this Agreement; provided,
however any termination under this Section 10.1(h) shall be
effective forty five (45) days after the notice specified in
Section 1.6(b) was given.
10.2. Effect of Termination. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to reallocate investments in the Fund, redeem
investments in the Fund and/or invest in the Fund upon the making of additional
purchase payments under the Existing Contracts. The parties agree that this
Section 10.2 shall not apply to any terminations under Article VII and the
effect of such Article VII terminations shall be governed by Article VII of
this Agreement.
10.3 The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract Owner initiated
or approved transactions, or (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act.
Upon request, the Company will promptly furnish to the Fund and the Underwriter
the opinion of counsel for the Company (which counsel shall be reasonably
satisfactory to the Fund and the Underwriter) to the effect that any redemption
pursuant to clause (ii) above is a Legally Required Redemption. Furthermore,
except in cases where permitted under the terms of the Contracts, the Company
shall not prevent Contract Owners from allocating payments to a Portfolio that
was otherwise
18
<PAGE> 19
available under the Contracts without first giving the Fund or the Underwriter
90 days notice of its intention to do so.
ARTICLE XI. Notices
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
If to the Company:
Western Reserve Life Assurance Co. of Ohio
4333 Edgewood Road, NE
Cedar Rapids, IA 52499
Attention: Individual Division, Law Department
If to the Underwriter:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
ARTICLE XII. Miscellaneous
12.1 All persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Board, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and
addresses of the owners of the Contracts and all information reasonably
identified as confidential in writing by any other party hereto and, except as
permitted by this Agreement, shall not disclose, disseminate or utilize such
names and addresses and other confidential information until such time as it
may come into the public domain without the express written consent of the
affected party.
12.3 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
19
<PAGE> 20
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the insurance operations
of the Company are being conducted in a manner consistent with the California
Insurance Regulations and any other applicable law or regulations.
12.7 The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to
under state and federal laws.
12.8. This Agreement or any of the rights and obligations hereunder
may not be assigned by any party without the prior written consent of all
parties hereto; provided, however, that the Underwriter may assign this
Agreement or any rights or obligations hereunder to any affiliate of or company
under common control with the Underwriter, if such assignee is duly licensed
and registered to perform the obligations of the Underwriter under this
Agreement. The Company shall promptly notify the Fund and the Underwriter of
any change in control of the Company.
12.9. The Company shall furnish, or shall cause to be furnished, to
the Fund or its designee copies of the following reports:
(a) the Company's annual statement (prepared under statutory
accounting principles) and annual report (prepared under
generally accepted accounting principles ("GAAP"), if any), as
soon as practical and in any event within 90 days after the
end of each fiscal year;
(b) the Company's quarterly statements (statutory) (and GAAP, if
any), as soon as practical and in any event within 45 days
after the end of each quarterly period:
(c) any financial statement, proxy statement, notice or report of
the Company sent to stockholders and/or policyholders, as soon
as practical after the delivery thereof to stockholders;
20
<PAGE> 21
(d) any registration statement (without exhibits) and financial
reports of the Company filed with the Securities and Exchange
Commission or any state insurance regulator, as soon as
practical after the filing thereof;
(e) any other report submitted to the Company by independent
accountants in connection with any annual, interim or special
audit made by them of the books of the Company, as soon as
practical after the receipt thereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed in its name and on its behalf by its duly authorized
representative.
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
By: s/ John R. Kenney
-----------------
Name: John R. Kenney
Title: President
VARIABLE INSURANCE PRODUCTS FUND II
By: s/ Robert C. Pozen
------------------
Robert C. Pozen
Senior Vice President
FIDELITY DISTRIBUTORS CORPORATION
By: s/ Kevin J. Kelly
-----------------
Kevin J. Kelly
Vice President
21
<PAGE> 22
Schedule A
Separate Accounts and Associated Contracts
<TABLE>
<CAPTION>
Name of Separate Account and Policy Form Numbers of Contracts
Date Established by Board of Directors Funded By Separate Account
- -------------------------------------- --------------------------
<S> <C>
WRL Series Life Corporate Account WL694 136 82 598
December 8, 1997
</TABLE>
22
<PAGE> 23
SCHEDULE B
PROXY VOTING PROCEDURE
The following is a list of procedures and corresponding responsibilities for
the handling of proxies relating to the Fund by the Underwriter, the Fund and
the Company. The defined terms herein shall have the meanings assigned in the
Participation Agreement except that the term "Company" shall also include the
department or third party assigned by the Insurance Company to perform the
steps delineated below.
1. The number of proxy proposals is given to the Company by the Underwriter as
early as possible before the date set by the Fund for the shareholder
meeting to facilitate the establishment of tabulation procedures. At this
time the Underwriter will inform the Company of the Record, Mailing and
Meeting dates. This will be done verbally approximately two months before
meeting.
2. Promptly after the Record Date, the Company will perform a "tape run", or
other activity, which will generate the names, addresses and number of
units which are attributed to each contractowner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in Step #2. The Company will use its best efforts to call in the
number of Customers to Fidelity, as soon as possible, but no later than two
weeks after the Record Date.
3. The Fund's Annual Report no longer needs to be sent to each Customer by the
Company either before or together with the Customers' receipt of a proxy
statement. Underwriter will provide the last Annual Report to the Company
pursuant to the terms of Section 3.3 of the Agreement to which this
Schedule relates.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card") is
provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Legal Department
of the Underwriter or its affiliate ("Fidelity Legal") must approve the
Card before it is printed. Allow approximately 2-4 business days for
printing information on the Cards. Information commonly found on the Cards
includes:
a. name (legal name as found on account registration)
b. address
c. Fund or account number
d. coding to state number of units
e. individual Card number for use in tracking and verification of
votes (already on Cards as printed by the Fund)
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
23
<PAGE> 24
5. During this time, Fidelity Legal will develop, produce, and the Fund will
pay for the Notice of Proxy and the Proxy Statement (one document). Printed
and folded notices and statements will be sent to Company for insertion
into envelopes (envelopes and return envelopes are provided and paid for by
the Insurance Company). Contents of envelope sent to Customers by Company
will include:
a. Voting Instruction Card(s)
b. One proxy notice and statement (one document)
c. return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as quickly
as possible and that their vote is important. One copy will be
supplied by the Fund.)
e. cover letter - optional, supplied by Company and reviewed and
approved in advance by Fidelity Legal.
6. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to Fidelity Legal.
7. Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the Company
as the shareowner. (A 5-week period is recommended.) Solicitation
time is calculated as calendar days from (but not including) the
meeting, counting backwards.
8. Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An
often used procedure is to sort Cards on arrival by proposal into vote
categories of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by Fidelity in the past.
9. Signatures on Card checked against legal name on account registration which
was printed on the Card.
Note: For Example, If the account registration is under "Bertram C. Jones,
Trustee," then that is the exact legal name to be printed on the Card and
is the signature needed on the Card.
24
<PAGE> 25
10. If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter, a new
Card and return envelope. The mutilated or illegible Card is disregarded
and considered to be not received for purposes of vote tabulation. Any
Cards that have "kicked out" (e.g. mutilated, illegible) of the procedure
are "hand verified," i.e., examined as to why they did not complete the
system. Any questions on those Cards are usually remedied individually.
11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
12. The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of shares.) Fidelity Legal
must review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to Fidelity
Legal on the morning of the meeting not later than 10:00 a.m. Boston time.
Fidelity Legal may request an earlier deadline if required to calculate the
vote in time for the meeting.
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
Fidelity Legal will provide a standard form for each Certification.
15. The Company will be required to box and archive the Cards received from the
Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, Fidelity Legal
will be permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
25
<PAGE> 26
SCHEDULE C
Other investment companies currently available under variable annuities or
variable life insurance issued by the Company:
Federated Insurance Series
Prime Money Fund II
BT Insurance Funds Trust
EAFE Equity Index Fund
Equity 500 Index Fund
Small Cap Index Fund
26
<PAGE> 27
SUB-LICENSE AGREEMENT
Agreement effective as of this 14th of June, 1999, by and between Fidelity
Distributors Corporation (hereinafter called "Fidelity"), a corporation
organized and existing under the laws of the Commonwealth of Massachusetts,
with a principal place of business at 82 Devonshire Street, Boston,
Massachusetts, and Western Reserve Life Assurance Co. of Ohio (hereinafter
called "Company"), a company organized and existing under the laws of the State
of Ohio, with a principal place of business at 570 Carillon Parkway, St.
Petersburg, Florida.
WHEREAS, FMR Corp., a Massachusetts corporation, the parent company of
Fidelity, is the owner of the trademark and the tradename "FIDELITY
INVESTMENTS" and is the owner of a trademark in a pyramid design (hereinafter,
collectively the "Fidelity Trademarks"), a copy of each of which is attached
hereto as Exhibit "A"; and
WHEREAS, FMR Corp. has granted a license to Fidelity (the "Master License
Agreement") to sub-license the Fidelity Trademarks to third parties for their
use in connection with Promotional Materials as hereinafter defined; and
WHEREAS, Company is desirous of using the Fidelity Trademarks in connection
with distribution of "sales literature and other promotional material" with
information, including the Fidelity Trademarks, printed in said material (such
material hereinafter called the Promotional Material). For the purpose of this
Agreement, "sales literature and other promotional material" shall have the
same meaning as in the certain Participation Agreement dated as of the 14th day
of June, 1999, among Fidelity, Company and Variable Insurance Products Fund II
(hereinafter "Participation Agreement"); and
WHEREAS, Fidelity is desirous of having the Fidelity Trademarks used in
connection with the Promotional Material.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy whereof is hereby
acknowledged, and of the mutual promises hereinafter set forth, the parties
hereby agree as follows:
1. Fidelity hereby grants to Company a non-exclusive, non- transferable
license to use the Fidelity Trademarks in connection with the promotional
distribution of the Promotional Material and Company accepts said license,
subject to the terms and conditions set forth herein.
2. Company acknowledges that FMR Corp. is the owner of all right, title
and interest in the Fidelity Trademarks and agrees that it will do nothing
inconsistent with the ownership of the Fidelity Trademarks by FMR Corp., and
that it will not, now or hereinafter, contest any registration or application
for registration of the Fidelity Trademarks by FMR Corp., nor will it, now or
hereafter, aid anyone in contesting any registration or application for
registration of the Fidelity Trademarks by FMR Corp.
1
<PAGE> 28
3. Company agrees to use the Fidelity Trademarks only in the form and
manner approved by Fidelity and not to use any other trademark, service mark or
registered trademark in combination with any of the Fidelity Trademarks without
approval by Fidelity.
4. Company agrees that it will place all necessary and proper notices and
legends in order to protect the interests of FMR Corp. and Fidelity therein
pertaining to the Fidelity Trademarks on the Promotional Material including,
but not limited to, symbols indicating trademarks, service marks and registered
trademarks. Company will place such symbols and legends on the Promotional
Material as requested by Fidelity or FMR Corp. upon receipt of notice of same
from Fidelity or FMR Corp.
5. Company agrees that the nature and quality of all of the Promotional
Material distributed by Company bearing the Fidelity Trademarks shall conform
to standards set by, and be under the control of, Fidelity.
6. Company agrees to cooperate with Fidelity in facilitating Fidelity's
control of the use of the Fidelity Trademarks and of the quality of the
Promotional Material to permit reasonable inspection of samples of same by
Fidelity and to supply Fidelity with reasonable quantities of samples of the
Promotional Material upon request.
7. Company shall comply with all applicable laws and regulations and
obtain any and all licenses or other necessary permits pertaining to the
distribution of said Promotional Material.
8. Company agrees to notify Fidelity of any unauthorized use of the
Fidelity Trademarks by others promptly as it comes to the attention of Company.
Fidelity or FMR Corp. shall have the sole right and discretion to commence
actions or other proceedings for infringement, unfair competition or the like
involving the Fidelity Trademarks and Company shall cooperate in any such
proceedings if so requested by Fidelity or FMR Corp.
9. This agreement shall continue in force until terminated by Fidelity.
This agreement shall automatically terminate upon termination of the Master
License Agreement. In addition, Fidelity shall have the right to terminate
this agreement at any time upon notice to Company, with or without cause. Upon
any such termination, Company agrees to cease immediately all use of the
Fidelity Trademarks and shall destroy, at Company's expense, any and all
materials in its possession bearing the Fidelity Trademarks, and agrees that
all rights in the Fidelity Trademarks and in the goodwill connected therewith
shall remain the property of FMR Corp. Unless so terminated by Fidelity, or
extended by written agreement of the parties, this agreement shall expire on
the termination of that certain Participation Agreement.
10. Company shall indemnify Fidelity and FMR Corp. and hold each of them
harmless from and against any loss, damage, liability, cost or expense of any
nature whatsoever, including without limitation, reasonable attorneys' fees and
all court costs, arising out of use of the Fidelity Trademarks by Company.
2
<PAGE> 29
11. In consideration for the promotion and advertising of Fidelity as a
result of the distribution by Company of the Promotional Material, Company
shall not pay any monies as a royalty to Fidelity for this license.
12. This agreement is not intended in any manner to modify the terms and
conditions of the Participation Agreement. In the event of any conflict
between the terms and conditions herein and thereof, the terms and conditions
of the Participation Agreement shall control.
13. This agreement shall be interpreted according to the laws of the
Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties hereunto set their hands and seals, and
hereby execute this agreement, as of the date first above written.
FIDELITY DISTRIBUTORS CORPORATION
By:
---------------------
Name:
---------------------
Title:
---------------------
WESTERN RESERVE LIFE ASSURANCE
CO. OF OHIO
By:
---------------------
Name: John R. Kenney
Title: President
3
<PAGE> 30
EXHIBIT A
<TABLE>
<S> <C>
Int. Cl.: 36
Prior U.S. Cls.: 101 and 102
Reg. No. 1,481,040
United States Patent and Trademark Office Registered Mar. 15, 1988
- ---------------------------------------------------------------------
</TABLE>
SERVICE MARK
PRINCIPAL REGISTER
FIDELITY
INVESTMENTS
<TABLE>
<S> <C>
FMR CORP. (MASSACHUSETTS FIRST USE 2-22-1984; IN
CORPORATION) COMMERCE 2-22-1984.
82 DEVONSHIRE STREET
BOSTON, MA 02109, ASSIGNEE OF NO CLAIM IS MADE TO THE
FIDELITY DISTRIBUTORS EXCLUSIVE RIGHT TO USE
CORPORATION (MASSACHUSETTS "INVESTMENTS", APART FROM THE
CORPORATION) BOSTON, MA 02109 MARK AS SHOWN.
FOR: MUTUAL FUND AND STOCK SER. NO. 641,707, FILED 1-28-
BROKERAGE SERVICES, IN CLASS 1987
36 (U.S. CLS. 101 AND 102)
RUSS HERMAN, EXAMINING
ATTORNEY
</TABLE>
4
<PAGE> 1
EXHIBIT 1.A.(8)(b)(iii)
PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND III,
FIDELITY DISTRIBUTORS CORPORATION
and
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
THIS AGREEMENT, made and entered into as of the 14th day of June,
1999 by and among WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO, (hereinafter the
"Company"), an Ohio corporation, on its own behalf and on behalf of each
segregated asset account of the Company set forth on Schedule A hereto as may be
amended from time to time (each such account hereinafter referred to as the
"Account"), and the VARIABLE INSURANCE PRODUCTS FUND III, an unincorporated
business trust organized under the laws of the Commonwealth of Massachusetts
(hereinafter the "Fund") and FIDELITY DISTRIBUTORS CORPORATION (hereinafter the
"Underwriter"), a Massachusetts corporation.
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as the investment vehicle for
separate accounts established for variable life insurance policies and variable
annuity contracts (collectively, the "Variable Insurance Products") to be
offered by insurance companies which have entered into participation agreements
with the Fund and the Underwriter (hereinafter "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into
several series of shares, each representing the interest in a particular managed
portfolio of securities and other assets, any one or more of which may be made
available under this Agreement, as may be amended from time to time by mutual
agreement of the parties hereto (each such series hereinafter referred to as a
"Portfolio"); and
WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission, dated September 17, 1986 (File No. 812-6422), granting
Participating Insurance Companies and variable annuity and variable life
insurance separate accounts exemptions from the provisions of sections 9(a),
13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended,
(hereinafter the "1940 Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by variable annuity
1
<PAGE> 2
and variable life insurance separate accounts of both affiliated and
unaffiliated life insurance companies (hereinafter the "Shared Funding Exemptive
Order"); and
WHEREAS, the Fund is registered as an open-end management
investment company under the 1940 Act and its shares are registered under the
Securities Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, Fidelity Management & Research Company (the "Adviser") is
duly registered as an investment adviser under the federal Investment Advisers
Act of 1940 and any applicable state securities law; and
WHEREAS, the Company has registered or will register certain
variable life insurance and variable annuity contracts under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing
segregated asset account, established by resolution of the Board of Directors of
the Company, on the date shown for such Account on Schedule A hereto, to set
aside and invest assets attributable to the aforesaid variable annuity
contracts; and
WHEREAS, the Company has registered or will register each Account
as a unit investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended, (hereinafter the "1934 Act"), and is a member in good standing
of the National Association of Securities Dealers, Inc. (hereinafter "NASD");
and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid variable life and variable
annuity contracts and the Underwriter is authorized to sell such shares to unit
investment trusts such as each Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the
Company, the Fund and the Underwriter agree as follows:
ARTICLE I. Sale of Fund Shares
1.1. The Underwriter agrees to sell to the Company those shares of
the Fund which each Account orders, executing such orders on a daily basis at
the net asset value next computed after receipt by the Fund or its designee of
the order for the shares of the Fund. For purposes of this Section 1.1, the
Company shall be the designee of the Fund for receipt of such orders from each
Account and receipt by such designee shall constitute receipt by the Fund;
provided that the Fund receives notice of such order by 9:30 a.m. Boston time on
the next following Business Day. "Business Day" shall mean any day on which the
New York Stock Exchange is open for trading
2
<PAGE> 3
and on which the Fund calculates its net asset value pursuant to the rules of
the Securities and Exchange Commission.
1.2. The Fund agrees to make its shares available indefinitely for
purchase at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates its net asset value pursuant
to rules of the Securities and Exchange Commission and the Fund shall use
reasonable efforts to calculate such net asset value on each day which the New
York Stock Exchange is open for trading. Notwithstanding the foregoing, the
Board of Trustees of the Fund (hereinafter the "Board") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the offering of
shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Board
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, necessary in the best interests of the shareholders
of such Portfolio.
1.3. The Fund and the Underwriter agree that shares of the Fund
will be sold only to Participating Insurance Companies and their separate
accounts. No shares of any Portfolio will be sold to the general public.
1.4. The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles I, III, V, VII and Section 2.5 of Article II
of this Agreement is in effect to govern such sales.
1.5. The Fund agrees to redeem for cash, on the Company's request,
any full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.5, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives notice of such
request for redemption on the next following Business Day.
1.6. The Company agrees that purchases and redemptions of
Portfolio shares offered by the then current prospectus of the Fund shall be
made in accordance with the provisions of such prospectus. The Company agrees
that all net amounts available under the variable annuity contracts with the
form number(s) which are listed on Schedule A attached hereto and incorporated
herein by this reference, as such Schedule A may be amended from time to time
hereafter by mutual written agreement of all the parties hereto, (the
"Contracts") shall be invested in the Fund, in such other Funds advised by the
Adviser as may be mutually agreed to in writing by the parties hereto, or in the
Company's general account, provided that such amounts may also be invested in an
investment company other than the Fund if (a) such other investment company, or
series thereof, has investment objectives or policies that are substantially
different from the investment objectives and policies of all the Portfolios of
the Fund; or (b) the Company gives the Fund and the Underwriter 45 days written
notice of its intention to make such other investment company available as a
funding vehicle for the Contracts; or (c) such other investment company was
available as a funding vehicle for the Contracts prior to the date of this
3
<PAGE> 4
Agreement and the Company so informs the Fund and Underwriter prior to their
signing this Agreement (a list of such funds appearing on Schedule C to this
Agreement); or (d) the Fund or Underwriter consents to the use of such other
investment company.
1.7. The Company shall pay for Fund shares on the next Business
Day after an order to purchase Fund shares is made in accordance with the
provisions of Section 1.1 hereof. Payment shall be in federal funds transmitted
by wire. For purpose of Section 2.10 and 2.11, upon receipt by the Fund of the
federal funds so wired, such funds shall cease to be the responsibility of the
Company and shall become the responsibility of the Fund.
1.8. Issuance and transfer of the Fund's shares will be by book
entry only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Fund's shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio. The
Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.10. The Fund shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated (normally by 6:30
p.m. Boston time) and shall use its best efforts to make such net asset value
per share available by 7 p.m. Boston time.
ARTICLE II. Representations and Warranties
2.1. The Company represents and warrants that the Contracts are or
will be registered under the 1933 Act; that the Contracts will be issued and
sold in compliance in all material respects with all applicable Federal and
State laws and that the sale of the Contracts shall comply in all material
respects with state insurance suitability requirements. The Company further
represents and warrants that it is an insurance company duly organized and in
good standing under applicable law and that it has legally and validly
established each Account prior to any issuance or sale thereof as a segregated
asset account under Section 1701.54 of the Ohio Revised Code and has registered
or, prior to any issuance or sale of the Contracts, will register each Account
as a unit investment trust in accordance with the provisions of the 1940 Act to
serve as a segregated investment account for the Contracts.
2.2. The Fund represents and warrants that Fund shares sold
pursuant to this Agreement shall be registered under the 1933 Act, duly
authorized for issuance and sold in compliance with the laws of the State of
Ohio and all applicable federal and state securities laws
4
<PAGE> 5
and that the Fund is and shall remain registered under the 1940 Act. The Fund
shall amend the Registration Statement for its shares under the 1933 Act and the
1940 Act from time to time as required in order to effect the continuous
offering of its shares. The Fund shall register and qualify the shares for sale
in accordance with the laws of the various states only if and to the extent
deemed advisable by the Fund or the Underwriter.
2.3. The Fund represents that it is currently qualified as a
Regulated Investment Company under Subchapter M of the Internal Revenue Code of
1986, as amended, (the "Code") and that it will make every effort to maintain
such qualification (under Subchapter M or any successor or similar provision)
and that it will notify the Company immediately upon having a reasonable basis
for believing that it has ceased to so qualify or that it might not so qualify
in the future.
2.4. The Company represents that the Contracts are currently
treated as endowment or annuity insurance contracts, under applicable provisions
of the Code and that it will make every effort to maintain such treatment and
that it will notify the Fund and the Underwriter immediately upon having a
reasonable basis for believing that the Contracts have ceased to be so treated
or that they might not be so treated in the future.
2.5. (a) With respect to Initial Class shares, the Fund currently
does not intend to make any payments to finance distribution expenses pursuant
to Rule 12b-1 under the 1940 Act or otherwise, although it may make such
payments in the future. The Fund has adopted a "no fee" or "defensive" Rule
12b-1 Plan under which it makes no payments for distribution expenses. To the
extent that it decides to finance distribution expenses pursuant to Rule 12b-1,
the Fund undertakes to have a board of trustees, a majority of whom are not
interested persons of the Fund, formulate and approve any plan under Rule 12b-1
to finance distribution expenses.
(b) With respect to Service Class shares, the Fund has
adopted a Rule 12b-1 Plan under which it makes payments to finance distribution
expenses. The Fund represents and warrants that it has a board of trustees, a
majority of whom are not interested persons of the Fund, which has formulated
and approved the Fund's Rule 12b-1 Plan to finance distribution expenses of the
Fund and that any changes to the Fund's Rule 12b-1 Plan will be approved by a
similarly constituted board of trustees.
2.6. The Fund makes no representation as to whether any aspect of
its operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
State of Ohio and the Fund and the Underwriter represent that their respective
operations are and shall at all times remain in material compliance with the
laws of the State of Ohio to the extent required to perform this Agreement.
2.7. The Underwriter represents and warrants that it is a member
in good standing of the NASD and is registered as a broker-dealer with the SEC.
The Underwriter further represents that it will sell and distribute the Fund
shares in accordance with the laws of the State
5
<PAGE> 6
of Ohio and all applicable state and federal securities laws, including without
limitation the 1933 Act, the 1934 Act, and the 1940 Act.
2.8. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.9. The Underwriter represents and warrants that the Adviser is
and shall remain duly registered in all material respects under all applicable
federal and state securities laws and that the Adviser shall perform its
obligations for the Fund in compliance in all material respects with the laws of
the State of Ohio and any applicable state and federal securities laws.
2.10. The Fund and Underwriter represent and warrant that all of
their directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.11. The Company represents and warrants that all of its
directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
covered by a blanket fidelity bond or similar coverage for the benefit of the
Fund, and that said bond is issued by a reputable bonding company, includes
coverage for larceny and embezzlement, and is in an amount not less than $5
million. The Company agrees to make all reasonable efforts to see that this bond
or another bond containing these provisions is always in effect, and agrees to
notify the Fund and the Underwriter in the event that such coverage no longer
applies.
ARTICLE III. Prospectuses and Proxy Statements; Voting
3.1. The Underwriter shall provide the Company with as many
printed copies of the Fund's current prospectus and Statement of Additional
Information as the Company may reasonably request. If requested by the Company
in lieu thereof, the Fund shall provide camera-ready film containing the Fund's
prospectus and Statement of Additional Information, and such other assistance as
is reasonably necessary in order for the Company once each year (or more
frequently if the prospectus and/or Statement of Additional Information for the
Fund is amended during the year) to have the prospectus for the Contracts and
the Fund's prospectus printed together in one document, and to have the
Statement of Additional Information for the Fund and the Statement of Additional
Information for the Contracts printed together in one document. Alternatively,
the Company may print the Fund's prospectus and/or its Statement of Additional
Information in combination with other fund companies' prospectuses and
statements of additional information. Except as provided in the following three
sentences, all expenses of printing and distributing Fund prospectuses and
Statements of Additional Information shall be the expense of
6
<PAGE> 7
the Company. For prospectuses and Statements of Additional Information provided
by the Company to its existing owners of Contracts in order to update disclosure
annually as required by the 1933 Act and/or the 1940 Act, the cost of printing
shall be borne by the Fund. If the Company chooses to receive camera-ready film
in lieu of receiving printed copies of the Fund's prospectus, the Fund will
reimburse the Company in an amount equal to the product of A and B where A is
the number of such prospectuses distributed to owners of the Contracts, and B is
the Fund's per unit cost of typesetting and printing the Fund's prospectus. The
same procedures shall be followed with respect to the Fund's Statement of
Additional Information.
The Company agrees to provide the Fund or its designee with such
information as may be reasonably requested by the Fund to assure that the Fund's
expenses do not include the cost of printing any prospectuses or Statements of
Additional Information other than those actually distributed to existing owners
of the Contracts.
3.2. The Fund's prospectus shall state that the Statement of
Additional Information for the Fund is available from the Underwriter or the
Company (or in the Fund's discretion, the Prospectus shall state that such
Statement is available from the Fund).
3.3. The Fund, at its expense, shall provide the Company with
copies of its proxy statements, reports to shareholders, and other
communications (except for prospectuses and Statements of Additional
Information, which are covered in Section 3.1) to shareholders in such quantity
as the Company shall reasonably require for distributing to Contract owners.
3.4. If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with instructions
received from Contract owners; and
(iii) vote Fund shares for which no instructions have been
received in a particular separate account in the same
proportion as Fund shares of such portfolio for which
instructions have been received in that separate account,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund shares
held in any segregated asset account in its own right, to the extent permitted
by law. Participating Insurance Companies shall be responsible for assuring that
each of their separate accounts participating in the Fund calculates voting
privileges in a manner consistent with the standards set forth on Schedule B
attached hereto and incorporated herein by this reference, which standards will
also be provided to the other Participating Insurance Companies.
3.5. The Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders, and in particular the Fund will either provide
for annual meetings or comply with Section 16(c) of the 1940 Act (although the
Fund is not one of the trusts described in Section 16(c) of that Act) as well as
with Sections 16(a) and, if and when applicable, 16(b). Further, the
7
<PAGE> 8
Fund will act in accordance with the Securities and Exchange Commission's
interpretation of the requirements of Section 16(a) with respect to periodic
elections of trustees and with whatever rules the Commission may promulgate with
respect thereto.
ARTICLE IV. Sales Material and Information
4.1. The Company shall furnish, or shall cause to be furnished, to
the Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or its investment adviser or the Underwriter is
named, at least fifteen Business Days prior to its use. No such material shall
be used if the Fund or its designee reasonably objects to such use within
fifteen Business Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee or by the Underwriter, except with the permission of the Fund or the
Underwriter or the designee of either.
4.3. The Fund, Underwriter, or its designee shall furnish, or
shall cause to be furnished, to the Company or its designee, each piece of sales
literature or other promotional material in which the Company and/or its
separate account(s), is named at least fifteen Business Days prior to its use.
No such material shall be used if the Company or its designee reasonably objects
to such use within fifteen Business Days after receipt of such material.
4.4. The Fund and the Underwriter shall not give any information
or make any representations on behalf of the Company or concerning the Company,
each Account, or the Contracts other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete
copy of all registration statements, prospectuses, Statements of Additional
Information, reports, proxy statements, sales literature and other promotional
materials, applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to the Fund or its shares,
contemporaneously with the filing of such document with the Securities and
Exchange Commission or other regulatory authorities.
8
<PAGE> 9
4.6. The Company will provide to the Fund at least one complete
copy of all registration statements, prospectuses, Statements of Additional
Information, reports, solicitations for voting instructions, sales literature
and other promotional materials, applications for exemptions, requests for no
action letters, and all amendments to any of the above, that relate to the
Contracts or each Account, contemporaneously with the filing of such document
with the SEC or other regulatory authorities.
4.7. For purposes of this Article IV, the phrase "sales literature
or other promotional material" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, Statements of Additional Information, shareholder reports, and
proxy materials.
ARTICLE V. Fees and Expenses
5.1. The Fund and Underwriter shall pay no fee or other
compensation to the Company under this agreement, except that if the Fund or any
Portfolio adopts and implements a plan pursuant to Rule 12b-1 to finance
distribution expenses, then the Underwriter may make payments to the Company or
to the underwriter for the Contracts if and in amounts agreed to by the
Underwriter in writing and such payments will be made out of existing fees
otherwise payable to the Underwriter, past profits of the Underwriter or other
resources available to the Underwriter. No such payments shall be made directly
by the Fund.
5.2. All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund. The Fund shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale. The Fund shall bear
the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any federal or state law,
and all taxes on the issuance or transfer of the Fund's shares.
5.3. The Company shall bear the expenses of distributing the
Fund's prospectus, proxy materials and reports to owners of Contracts issued by
the Company.
9
<PAGE> 10
ARTICLE VI. Diversification
6.1. The Fund will at all times invest money from the Contracts in
such a manner as to ensure that the Contracts will be treated as variable
contracts under the Code and the regulations issued thereunder. Without limiting
the scope of the foregoing, the Fund will at all times comply with Section
817(h) of the Code and Treasury Regulation 1.817-5, relating to the
diversification requirements for variable annuity, endowment, or life insurance
contracts and any amendments or other modifications to such Section or
Regulations. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps (a) to notify Company of such breach and (b) to
adequately diversify the Fund so as to achieve compliance within the grace
period afforded by Regulation 1.817-5.
ARTICLE VII. Potential Conflicts
7.1. The Board will monitor the Fund for the existence of any
material irreconcilable conflict between the interests of the contract owners of
all separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by an insurer to disregard the voting
instructions of contract owners. The Board shall promptly inform the Company if
it determines that an irreconcilable material conflict exists and the
implications thereof.
7.2. The Company will report any potential or existing conflicts
of which it is aware to the Board. The Company will assist the Board in carrying
out its responsibilities under the Shared Funding Exemptive Order, by providing
the Board with all information reasonably necessary for the Board to consider
any issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3. If it is determined by a majority of the Board, or a majority
of its disinterested trustees, that a material irreconcilable conflict exists,
the Company and other Participating Insurance Companies shall, at their expense
and to the extent reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., annuity contract owners, life insurance contract
owners, or
10
<PAGE> 11
variable contract owners of one or more Participating Insurance Companies) that
votes in favor of such segregation, or offering to the affected contract owners
the option of making such a change; and (2), establishing a new registered
management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a
decision by the Company to disregard contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote, the
Company may be required, at the Fund's election, to withdraw the affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account; provided, however that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested members of the Board. Any such
withdrawal and termination must take place within six (6) months after the Fund
gives written notice that this provision is being implemented, and until the end
of that six month period the Underwriter and Fund shall continue to accept and
implement orders by the Company for the purchase (and redemption) of shares of
the Fund.
7.5. If a material irreconcilable conflict arises because a
particular state insurance regulator's decision applicable to the Company
conflicts with the majority of other state regulators, then the Company will
withdraw the affected Account's investment in the Fund and terminate this
Agreement with respect to such Account within six months after the Board informs
the Company in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board. Until the end of the foregoing six month period, the Underwriter
and Fund shall continue to accept and implement orders by the Company for the
purchase (and redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination, provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are
amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision
of the Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive
11
<PAGE> 12
Order) on terms and conditions materially different from those contained in the
Shared Funding Exemptive Order, then (a) the Fund and/or the Participating
Insurance Companies, as appropriate, shall take such steps as may be necessary
to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to
the extent such rules are applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3,
7.4, and 7.5 of this Agreement shall continue in effect only to the extent that
terms and conditions substantially identical to such Sections are contained in
such Rule(s) as so amended or adopted.
ARTICLE VIII. Indemnification
8.1. Indemnification By The Company
8.1(a). The Company agrees to indemnify and hold harmless the Fund
and each trustee of the Board and officers and each person, if any, who controls
the Fund within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.1) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Company) or litigation (including legal and other
expenses), to which the Indemnified Parties may become subject under any
statute, regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements
are related to the sale or acquisition of the Fund's shares or the Contracts
and:
(i) arise out of or are based upon any untrue
statements or alleged untrue statements of any material
fact contained in the Registration Statement or prospectus
for the Contracts or contained in the Contracts or sales
literature for the Contracts (or any amendment or
supplement to any of the foregoing), or arise out of or
are based upon the omission or the alleged omission to
state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify
shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or
omission was made in reliance upon and in conformity with
information furnished to the Company by or on behalf of
the Fund for use in the Registration Statement or
prospectus for the Contracts or in the Contracts or sales
literature (or any amendment or supplement) or otherwise
for use in connection with the sale of the Contracts or
Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the Registration Statement, prospectus or sales
literature of the Fund not supplied by the Company, or persons
under its control) or wrongful conduct of the Company or persons
under its control, with respect to the sale or distribution of the
Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration
Statement, prospectus, or sales literature of the
12
<PAGE> 13
Fund or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading if such a statement or omission was made in
reliance upon information furnished to the Fund by or on behalf of
the Company; or
(iv) arise as a result of any failure by the Company to
provide the services and furnish the materials under the terms of
this Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material breach
of this Agreement by the Company;
as limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(b). The Company shall not be liable under this
indemnification provision with respect to any losses, claims,
damages, liabilities or litigation incurred or assessed against an
Indemnified Party as such may arise from such Indemnified Party's
willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of
such Indemnified Party's reckless disregard of obligations or
duties under this Agreement or to the Fund, whichever is
applicable.
8.1(c). The Company shall not be liable under this
indemnification provision with respect to any claim made against
an Indemnified Party unless such Indemnified Party shall have
notified the Company in writing within a reasonable time after the
summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified
Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify
the Company of any such claim shall not relieve the Company from
any liability which it may have to the Indemnified Party against
whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought
against the Indemnified Parties, the Company shall be entitled to
participate, at its own expense, in the defense of such action.
The Company also shall be entitled to assume the defense thereof,
with counsel satisfactory to the party named in the action. After
notice from the Company to such party of the Company's election to
assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and
the Company will not be liable to such party under this Agreement
for any legal or other expenses subsequently incurred by such
party independently in connection with the defense thereof other
than reasonable costs of investigation.
13
<PAGE> 14
8.1(d). The Indemnified Parties will promptly notify the
Company of the commencement of any litigation or proceedings
against them in connection with the issuance or sale of the Fund
Shares or the Contracts or the operation of the Fund.
8.2. Indemnification by the Underwriter
8.2(a). The Underwriter agrees to indemnify and hold harmless the
Company and each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute, regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements are related to the sale or acquisition of the Fund's
shares or the Contracts and:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the Registration Statement or prospectus or sales literature
of the Fund (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission
or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in
conformity with information furnished to the Underwriter or
Fund by or on behalf of the Company for use in the
Registration Statement or prospectus for the Fund or in
sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the
Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature for
the Contracts not supplied by the Underwriter or persons
under its control) or wrongful conduct of the Fund, Adviser
or Underwriter or persons under their control, with respect
to the sale or distribution of the Contracts or Fund shares;
or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration
Statement, prospectus, or sales literature covering the
Contracts, or any amendment thereof or supplement thereto,
or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statement or statements therein not misleading, if
such statement or omission was made in reliance upon
information furnished to the Company by or on behalf of the
Fund; or
14
<PAGE> 15
(iv) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure, whether unintentional or in
good faith or otherwise, to comply with the diversification
requirements specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in
this Agreement or arise out of or result from any other
material breach of this Agreement by the Underwriter;
as limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to each Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Underwriter in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action. After notice from the Underwriter to such party
of the Underwriter's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by it,
and the Underwriter will not be liable to such party under this Agreement for
any legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of
the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of the Contracts
or the operation of each Account.
8.3. Indemnification By the Fund
15
<PAGE> 16
8.3(a). The Fund agrees to indemnify and hold harmless the
Company, and each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.3)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Fund) or litigation (including
legal and other expenses) to which the Indemnified Parties may become subject
under any statute, regulation, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or expenses (or actions in respect thereof)
or settlements result from the gross negligence, bad faith or willful misconduct
of the Board or any member thereof, are related to the operations of the Fund
and:
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure to comply with the
diversification requirements specified in Article VI of this
Agreement);or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Company, the Fund, the Underwriter or each Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Fund will be entitled to participate, at
its own expense, in the defense thereof. The Fund also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Fund to such party of the Fund's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Fund will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
16
<PAGE> 17
8.3(d). The Company and the Underwriter agree promptly to notify
the Fund of the commencement of any litigation or proceedings against it or any
of its respective officers or directors in connection with this Agreement, the
issuance or sale of the Contracts, with respect to the operation of either
Account, or the sale or acquisition of shares of the Fund.
ARTICLE IX. Applicable Law
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the
1933, 1934 and 1940 acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
Securities and Exchange Commission may grant (including, but not limited to, the
Shared Funding Exemptive Order) and the terms hereof shall be interpreted and
construed in accordance therewith.
ARTICLE X. Termination
10.1. This Agreement shall continue in full force and effect until
the first to occur of:
(a) termination by any party for any reason by sixty (60) days
advance written notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund and
the Underwriter with respect to any Portfolio based upon the
Company's determination that shares of such Portfolio are
not reasonably available to meet the requirements of the
Contracts; or
(c) termination by the Company by written notice to the Fund and
the Underwriter with respect to any Portfolio in the event
any of the Portfolio's shares are not registered, issued or
sold in accordance with applicable state and/or federal law
or such law precludes the use of such shares as the
underlying investment media of the Contracts issued or to be
issued by the Company; or
(d) termination by the Company by written notice to the Fund and
the Underwriter with respect to any Portfolio in the event
that such Portfolio ceases to qualify as a Regulated
Investment Company under Subchapter M of the Code or under
any successor or similar provision, or if the Company
reasonably believes that the Fund may fail to so qualify; or
17
<PAGE> 18
(e) termination by the Company by written notice to the Fund and
the Underwriter with respect to any Portfolio in the event
that such Portfolio fails to meet the diversification
requirements specified in Article VI hereof; or
(f) termination by either the Fund or the Underwriter by written
notice to the Company, if either one or both of the Fund or
the Underwriter respectively, shall determine, in their sole
judgment exercised in good faith, that the Company and/or
its affiliated companies has suffered a material adverse
change in its business, operations, financial condition or
prospects since the date of this Agreement or is the subject
of material adverse publicity; or
(g) termination by the Company by written notice to the Fund and
the Underwriter, if the Company shall determine, in its sole
judgment exercised in good faith, that either the Fund or
the Underwriter or an affiliate of either has suffered a
material adverse change in its business, operations,
financial condition or prospects since the date of this
Agreement or is the subject of material adverse publicity;
or
(h) termination by the Fund or the Underwriter by written notice
to the Company, if the Company gives the Fund and the
Underwriter the written notice specified in Section 1.6(b)
hereof and at the time such notice was given there was no
notice of termination outstanding under any other provision
of this Agreement; provided, however any termination under
this Section 10.1(h) shall be effective forty five (45) days
after the notice specified in Section 1.6(b) was given.
10.2. Effect of Termination. Notwithstanding any termination of
this Agreement, the Fund and the Underwriter shall at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to reallocate investments in the Fund, redeem
investments in the Fund and/or invest in the Fund upon the making of additional
purchase payments under the Existing Contracts. The parties agree that this
Section 10.2 shall not apply to any terminations under Article VII and the
effect of such Article VII terminations shall be governed by Article VII of this
Agreement.
10.3 The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract Owner initiated or
approved transactions, or (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act. Upon
request, the Company will promptly furnish to the Fund and the Underwriter the
opinion of counsel for the Company (which counsel shall be reasonably
satisfactory to the Fund and the Underwriter) to the effect that any redemption
pursuant to clause (ii) above is a Legally Required Redemption. Furthermore,
except in cases where permitted under the terms of the Contracts, the Company
shall not prevent Contract Owners from allocating payments to a Portfolio that
was otherwise
18
<PAGE> 19
available under the Contracts without first giving the Fund or the Underwriter
90 days notice of its intention to do so.
ARTICLE XI. Notices
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
If to the Company:
Western Reserve Life Assurance Co. of Ohio
4333 Edgewood Road, NE
Cedar Rapids, IA 52499
Attention: Individual Division, Law Department
If to the Underwriter:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
ARTICLE XII. Miscellaneous
12.1 All persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Board, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3 The captions in this Agreement are included for convenience
of reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
19
<PAGE> 20
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
12.6 Each party hereto shall cooperate with each other party and
all appropriate governmental authorities (including without limitation the SEC,
the NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the insurance operations
of the Company are being conducted in a manner consistent with the California
Insurance Regulations and any other applicable law or regulations.
12.7 The rights, remedies and obligations contained in this
Agreement are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
12.8. This Agreement or any of the rights and obligations
hereunder may not be assigned by any party without the prior written consent of
all parties hereto; provided, however, that the Underwriter may assign this
Agreement or any rights or obligations hereunder to any affiliate of or company
under common control with the Underwriter, if such assignee is duly licensed and
registered to perform the obligations of the Underwriter under this Agreement.
The Company shall promptly notify the Fund and the Underwriter of any change in
control of the Company.
12.9. The Company shall furnish, or shall cause to be furnished,
to the Fund or its designee copies of the following reports:
(a) the Company's annual statement (prepared under statutory
accounting principles) and annual report (prepared under
generally accepted accounting principles ("GAAP"), if any),
as soon as practical and in any event within 90 days after
the end of each fiscal year;
(b) the Company's quarterly statements (statutory) (and GAAP, if
any), as soon as practical and in any event within 45 days
after the end of each quarterly period:
(c) any financial statement, proxy statement, notice or report
of the Company sent to stockholders and/or policyholders, as
soon as practical after the delivery thereof to
stockholders;
20
<PAGE> 21
(d) any registration statement (without exhibits) and financial
reports of the Company filed with the Securities and
Exchange Commission or any state insurance regulator, as
soon as practical after the filing thereof;
(e) any other report submitted to the Company by independent
accountants in connection with any annual, interim or
special audit made by them of the books of the Company, as
soon as practical after the receipt thereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative.
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
By: s/ John R. Kenney
-------------------------
Name: John R. Kenney
Title: President
VARIABLE INSURANCE PRODUCTS FUND III
By: s/ Robert C. Pozen
-------------------------
Robert C. Pozen
Senior Vice President
FIDELITY DISTRIBUTORS CORPORATION
By: s/ Kevin J. Kelly
-------------------------
Kevin J. Kelly
Vice President
21
<PAGE> 22
Schedule A
Separate Accounts and Associated Contracts
<TABLE>
<CAPTION>
Name of Separate Account and Policy Form Numbers of Contracts
Date Established by Board of Directors Funded By Separate Account
- -------------------------------------- --------------------------
<S> <C>
WRL Series Life Corporate Account WL694 136 82 598
December 8, 1997
</TABLE>
22
<PAGE> 23
SCHEDULE B
PROXY VOTING PROCEDURE
The following is a list of procedures and corresponding responsibilities for the
handling of proxies relating to the Fund by the Underwriter, the Fund and the
Company. The defined terms herein shall have the meanings assigned in the
Participation Agreement except that the term "Company" shall also include the
department or third party assigned by the Insurance Company to perform the steps
delineated below.
1. The number of proxy proposals is given to the Company by the Underwriter as
early as possible before the date set by the Fund for the shareholder
meeting to facilitate the establishment of tabulation procedures. At this
time the Underwriter will inform the Company of the Record, Mailing and
Meeting dates. This will be done verbally approximately two months before
meeting.
2. Promptly after the Record Date, the Company will perform a "tape run", or
other activity, which will generate the names, addresses and number of
units which are attributed to each contractowner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in Step #2. The Company will use its best efforts to call in the
number of Customers to Fidelity, as soon as possible, but no later than two
weeks after the Record Date.
3. The Fund's Annual Report no longer needs to be sent to each Customer by the
Company either before or together with the Customers' receipt of a proxy
statement. Underwriter will provide the last Annual Report to the Company
pursuant to the terms of Section 3.3 of the Agreement to which this
Schedule relates.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card") is
provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Legal Department
of the Underwriter or its affiliate ("Fidelity Legal") must approve the
Card before it is printed. Allow approximately 2-4 business days for
printing information on the Cards. Information commonly found on the Cards
includes:
a. name (legal name as found on account registration)
b. address
c. Fund or account number
d. coding to state number of units
e. individual Card number for use in tracking and verification of
votes (already on Cards as printed by the Fund)
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
23
<PAGE> 24
5. During this time, Fidelity Legal will develop, produce, and the Fund will
pay for the Notice of Proxy and the Proxy Statement (one document). Printed
and folded notices and statements will be sent to Company for insertion
into envelopes (envelopes and return envelopes are provided and paid for by
the Insurance Company). Contents of envelope sent to Customers by Company
will include:
a. Voting Instruction Card(s)
b. One proxy notice and statement (one document)
c. return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as quickly
as possible and that their vote is important. One copy will be
supplied by the Fund.)
e. cover letter - optional, supplied by Company and reviewed and
approved in advance by Fidelity Legal.
6. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews and
approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to Fidelity Legal.
7. Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the Company
as the shareowner. (A 5-week period is recommended.) Solicitation time
is calculated as calendar days from (but not including) the meeting,
counting backwards.
8. Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An often
used procedure is to sort Cards on arrival by proposal into vote categories
of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by Fidelity in the past.
9. Signatures on Card checked against legal name on account registration which
was printed on the Card.
Note: For Example, If the account registration is under "Bertram C. Jones,
Trustee," then that is the exact legal name to be printed on the Card and
is the signature needed on the Card.
24
<PAGE> 25
10. If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter, a new
Card and return envelope. The mutilated or illegible Card is disregarded
and considered to be not received for purposes of vote tabulation. Any
Cards that have "kicked out" (e.g. mutilated, illegible) of the procedure
are "hand verified," i.e., examined as to why they did not complete the
system. Any questions on those Cards are usually remedied individually.
11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
12. The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations stated
in terms of a percentage and the number of shares.) Fidelity Legal must
review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to Fidelity
Legal on the morning of the meeting not later than 10:00 a.m. Boston time.
Fidelity Legal may request an earlier deadline if required to calculate the
vote in time for the meeting.
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
Fidelity Legal will provide a standard form for each Certification.
15. The Company will be required to box and archive the Cards received from the
Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, Fidelity Legal
will be permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
25
<PAGE> 26
SCHEDULE C
Other investment companies currently available under variable annuities or
variable life insurance issued by the Company:
Federated Insurance Series
Prime Money Fund II
BT Insurance Funds Trust
EAFE Equity Index Fund
Equity 500 Index Fund
Small Cap Index Fund
26
<PAGE> 27
SUB-LICENSE AGREEMENT
Agreement effective as of this 14th of June, 1999, by and between Fidelity
Distributors Corporation (hereinafter called "Fidelity"), a corporation
organized and existing under the laws of the Commonwealth of Massachusetts, with
a principal place of business at 82 Devonshire Street, Boston, Massachusetts,
and Western Reserve Life Assurance Co. of Ohio (hereinafter called "Company"), a
company organized and existing under the laws of the State of Ohio, with a
principal place of business at 570 Carillon Parkway, St. Petersburg, Florida.
WHEREAS, FMR Corp., a Massachusetts corporation, the parent company of
Fidelity, is the owner of the trademark and the tradename "FIDELITY INVESTMENTS"
and is the owner of a trademark in a pyramid design (hereinafter, collectively
the "Fidelity Trademarks"), a copy of each of which is attached hereto as
Exhibit "A"; and
WHEREAS, FMR Corp. has granted a license to Fidelity (the "Master License
Agreement") to sub-license the Fidelity Trademarks to third parties for their
use in connection with Promotional Materials as hereinafter defined; and
WHEREAS, Company is desirous of using the Fidelity Trademarks in connection
with distribution of "sales literature and other promotional material" with
information, including the Fidelity Trademarks, printed in said material (such
material hereinafter called the Promotional Material). For the purpose of this
Agreement, "sales literature and other promotional material" shall have the same
meaning as in the certain Participation Agreement dated as of the 14th day of
June, 1999, among Fidelity, Company and Variable Insurance Products Fund III
(hereinafter "Participation Agreement"); and
WHEREAS, Fidelity is desirous of having the Fidelity Trademarks used in
connection with the Promotional Material.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy whereof is hereby acknowledged,
and of the mutual promises hereinafter set forth, the parties hereby agree as
follows:
1. Fidelity hereby grants to Company a non-exclusive, non-transferable
license to use the Fidelity Trademarks in connection with the promotional
distribution of the Promotional Material and Company accepts said license,
subject to the terms and conditions set forth herein.
2. Company acknowledges that FMR Corp. is the owner of all right, title and
interest in the Fidelity Trademarks and agrees that it will do nothing
inconsistent with the ownership of the Fidelity Trademarks by FMR Corp., and
that it will not, now or hereinafter, contest any registration or application
for registration of the Fidelity Trademarks by FMR Corp., nor will it, now or
hereafter, aid anyone in contesting any registration or application for
registration of the Fidelity Trademarks by FMR Corp.
1
<PAGE> 28
3. Company agrees to use the Fidelity Trademarks only in the form and
manner approved by Fidelity and not to use any other trademark, service mark or
registered trademark in combination with any of the Fidelity Trademarks without
approval by Fidelity.
4. Company agrees that it will place all necessary and proper notices and
legends in order to protect the interests of FMR Corp. and Fidelity therein
pertaining to the Fidelity Trademarks on the Promotional Material including, but
not limited to, symbols indicating trademarks, service marks and registered
trademarks. Company will place such symbols and legends on the Promotional
Material as requested by Fidelity or FMR Corp. upon receipt of notice of same
from Fidelity or FMR Corp.
5. Company agrees that the nature and quality of all of the Promotional
Material distributed by Company bearing the Fidelity Trademarks shall conform to
standards set by, and be under the control of, Fidelity.
6. Company agrees to cooperate with Fidelity in facilitating Fidelity's
control of the use of the Fidelity Trademarks and of the quality of the
Promotional Material to permit reasonable inspection of samples of same by
Fidelity and to supply Fidelity with reasonable quantities of samples of the
Promotional Material upon request.
7. Company shall comply with all applicable laws and regulations and obtain
any and all licenses or other necessary permits pertaining to the distribution
of said Promotional Material.
8. Company agrees to notify Fidelity of any unauthorized use of the
Fidelity Trademarks by others promptly as it comes to the attention of Company.
Fidelity or FMR Corp. shall have the sole right and discretion to commence
actions or other proceedings for infringement, unfair competition or the like
involving the Fidelity Trademarks and Company shall cooperate in any such
proceedings if so requested by Fidelity or FMR Corp.
9. This agreement shall continue in force until terminated by Fidelity.
This agreement shall automatically terminate upon termination of the Master
License Agreement. In addition, Fidelity shall have the right to terminate this
agreement at any time upon notice to Company, with or without cause. Upon any
such termination, Company agrees to cease immediately all use of the Fidelity
Trademarks and shall destroy, at Company's expense, any and all materials in its
possession bearing the Fidelity Trademarks, and agrees that all rights in the
Fidelity Trademarks and in the goodwill connected therewith shall remain the
property of FMR Corp. Unless so terminated by Fidelity, or extended by written
agreement of the parties, this agreement shall expire on the termination of that
certain Participation Agreement.
10. Company shall indemnify Fidelity and FMR Corp. and hold each of them
harmless from and against any loss, damage, liability, cost or expense of any
nature whatsoever, including without limitation, reasonable attorneys' fees and
all court costs, arising out of use of the Fidelity Trademarks by Company.
2
<PAGE> 29
11. In consideration for the promotion and advertising of Fidelity as a
result of the distribution by Company of the Promotional Material, Company shall
not pay any monies as a royalty to Fidelity for this license.
12. This agreement is not intended in any manner to modify the terms and
conditions of the Participation Agreement. In the event of any conflict between
the terms and conditions herein and thereof, the terms and conditions of the
Participation Agreement shall control.
13. This agreement shall be interpreted according to the laws of the
Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties hereunto set their hands and seals, and
hereby execute this agreement, as of the date first above written.
FIDELITY DISTRIBUTORS CORPORATION
By: _____________________
Name: _____________________
Title: _____________________
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
By: _____________________
Name: John R. Kenney
Title: President
3
<PAGE> 30
EXHIBIT A
<TABLE>
<S> <C>
Int. Cl.: 36
Prior U.S. Cls.: 101 and 102
Reg. No. 1,481,040
United States Patent and Trademark Office Registered Mar. 15, 1988
-------------------------------------------------------------------------------
</TABLE>
SERVICE MARK
PRINCIPAL REGISTER
FIDELITY
INVESTMENTS
<TABLE>
<S> <C>
FMR CORP. (MASSACHUSETTS CORPORATION) FIRST USE 2-22-1984; IN COMMERCE 2-22-1984.
82 DEVONSHIRE STREET
BOSTON, MA 02109, ASSIGNEE OF NO CLAIM IS MADE TO THE EXCLUSIVE RIGHT TO
FIDELITY DISTRIBUTORS CORPORATION USE "INVESTMENTS", APART FROM THE MARK AS SHOWN.
(MASSACHUSETTS CORPORATION) BOSTON, MA
02109 SER. NO. 641,707, FILED 1-28-1987
FOR: MUTUAL FUND AND STOCK BROKERAGE RUSS HERMAN, EXAMINING ATTORNEY
SERVICES, IN CLASS 36 (U.S. CLS. 101
AND 102)
</TABLE>
4
<PAGE> 1
EXHIBIT 1.A.(8)(c)
PARTICIPATION AGREEMENT
AMONG
WESTERN RESERVE LIFE ASSURANCE COMPANY,
PIMCO VARIABLE INSURANCE TRUST,
AND
PIMCO FUNDS DISTRIBUTORS LLC
THIS AGREEMENT, dated as of the 15th day of July, 1999 by and among
Western Reserve Life Assurance Company, (the "Company"), an Ohio life insurance
company, on its own behalf and on behalf of each segregated asset account of
the Company set forth on Schedule A hereto as may be amended from time to time
(each account hereinafter referred to as the "Account"), PIMCO Variable
Insurance Trust (the "Fund"), a Delaware business trust, and PIMCO Funds
Distributors LLC (the "Underwriter"), a Delaware limited liability company.
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as the investment vehicle for
separate accounts established for variable life insurance and variable annuity
contracts (the "Variable Insurance Products") to be offered by insurance
companies which have entered into participation agreements with the Fund and
Underwriter ("Participating Insurance Companies");
WHEREAS, the shares of beneficial interest of the Fund are divided
into several series of shares, each designated a "Portfolio" and representing
the interest in a particular managed portfolio of securities and other assets;
WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission (the "SEC") granting Participating Insurance Companies and
variable annuity and variable life insurance separate accounts exemptions from
the provisions of sections 9(a), 13(a), 15(a), and 15(b) of the Investment
Company Act of 1940, as amended, (the "1940 Act") and Rules 6e-2(b)(15) and
6e-3(T)(b)(15) thereunder, if and to the extent necessary to permit shares of
the Fund to be sold to and held by variable annuity and variable life insurance
separate accounts of both affiliated and unaffiliated life insurance companies
(the "Mixed and Shared Funding Exemptive Order");
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and shares of the Portfolios are registered under
the Securities Act of 1933, as amended (the "1933 Act");
WHEREAS, Pacific Investment Management Company (the "Adviser"), which
serves as investment adviser to the Fund, is duly registered as an investment
adviser under the federal Investment Advisers Act of 1940, as amended;
WHEREAS, the Company has issued or will issue certain variable life
insurance and/or variable annuity contracts supported wholly or partially by
the Account (the "Contracts"), and said Contracts are listed in Schedule A
hereto, as it may be amended from time to time by mutual written agreement;
<PAGE> 2
WHEREAS, the Account is duly established and maintained as a
segregated asset account, duly established by the Company, on the date shown
for such Account on Schedule A hereto, to set aside and invest assets
attributable to the aforesaid Contracts;
WHEREAS, the Underwriter, which serves as distributor to the Fund, is
registered as a broker dealer with the SEC under the Securities Exchange Act of
1934, as amended (the "1934 Act"), and is a member in good standing of the
National Association of Securities Dealers, Inc. (the "NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios listed in
Schedule A hereto, as it may be amended from time to time by mutual written
agreement (the "Designated Portfolios") on behalf of the Account to fund the
aforesaid Contracts, and the Underwriter is authorized to sell such shares to
the Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the
Company, the Fund and the Underwriter agree as follows:
ARTICLE I. Sale of Fund Shares
1.1. The Fund has granted to the Underwriter exclusive
authority to distribute the Fund's shares, and has agreed to instruct, and has
so instructed, the Underwriter to make available to the Company for purchase on
behalf of the Account Fund shares of those Designated Portfolios selected by
the Underwriter. Pursuant to such authority and instructions, and subject to
Article X hereof, the Underwriter agrees to make available to the Company for
purchase on behalf of the Account, shares of those Designated Portfolios listed
on Schedule A to this Agreement, such purchases to be effected at net asset
value in accordance with Section 1.3 of this Agreement. Notwithstanding the
foregoing, (i) Fund series (other than those listed on Schedule A) in existence
now or that may be established in the future will be made available to the
Company only as the Underwriter may so provide, and (ii) the Board of Trustees
of the Fund (the "Board") may suspend or terminate the offering of Fund shares
of any Designated Portfolio or class thereof, if such action is required by law
or by regulatory authorities having jurisdiction or if, in the sole discretion
of the Board acting in good faith and in light of its fiduciary duties under
federal and any applicable state laws, suspension or termination is necessary
in the best interests of the shareholders of such Designated Portfolio.
1.2. The Fund shall redeem, at the Company's request, any
full or fractional Designated Portfolio shares held by the Company on behalf of
the Account, such redemptions to be effected at net asset value in accordance
with Section 1.3 of this Agreement. Notwithstanding the foregoing, (i) the
Company shall not redeem Fund shares attributable to Contract owners except in
the circumstances permitted in Section 10.3 of this Agreement, and (ii) the
Fund may delay redemption of Fund shares of any Designated Portfolio to the
extent permitted by the 1940 Act, and any rules, regulations or orders
thereunder.
1.3. Purchase and Redemption Procedures
(a) The Fund hereby appoints the Company as an
agent of the Fund for the limited purpose of receiving purchase and
redemption requests on behalf of the Account (but not with respect to
any Fund shares that may be held in the general account of the
Company) for shares of those Designated Portfolios made available
hereunder, based on allocations of amounts to the Account or
subaccounts thereof under the Contracts and other transactions
relating to the
- 2-
<PAGE> 3
Contracts or the Account. Receipt of any such request (or relevant
transactional information therefor) on any day the New York Stock
Exchange is open for trading and on which the Fund calculates its net
asset value pursuant to the rules of the SEC (a "Business Day") by the
Company as such limited agent of the Fund prior to the time that the
Fund ordinarily calculates its net asset value as described from time
to time in the Fund Prospectus (which as of the date of execution of
this Agreement is 4:00 p.m. Eastern Time) shall constitute receipt by
the Fund on that same Business Day, provided that the Fund receives
notice of such request by 9:30 a.m. Eastern Time on the next following
Business Day.
(b) The Company shall pay for shares of each
Designated Portfolio on the same day that it notifies the Fund of a
purchase request for such shares. Payment for Designated Portfolio
shares shall be made in federal funds transmitted to the Fund by wire
to be received by the Fund by 4:00 p.m. Eastern Time on the day the
Fund is notified of the purchase request for Designated Portfolio
shares (unless the Fund determines and so advises the Company that
sufficient proceeds are available from redemption of shares of other
Designated Portfolios effected pursuant to redemption requests
tendered by the Company on behalf of the Account). If federal funds
are not received on time, such funds will be invested, and Designated
Portfolio shares purchased thereby will be issued, as soon as
practicable and the Company shall promptly, upon the Fund's request,
reimburse the Fund for any charges, costs, fees, interest or other
expenses incurred by the Fund in connection with any advances to, or
borrowing or overdrafts by, the Fund, or any similar expenses incurred
by the Fund, as a result of portfolio transactions effected by the
Fund based upon such purchase request. Upon receipt of federal funds
so wired, such funds shall cease to be the responsibility of the
Company and shall become the responsibility of the Fund.
(c) Payment for Designated Portfolio shares
redeemed by the Account or the Company shall be made in federal funds
transmitted by wire to the Company or any other designated person on
the next Business Day after the Fund is properly notified of the
redemption order of such shares (unless redemption proceeds are to be
applied to the purchase of shares of other Designated Portfolios in
accordance with Section 1.3(b) of this Agreement), except that the
Fund reserves the right to redeem Designated Portfolio shares in
assets other than cash and to delay payment of redemption proceeds to
the extent permitted under Section 22(e) of the 1940 Act and any Rules
thereunder, and in accordance with the procedures and policies of the
Fund as described in the then current prospectus. The Fund shall not
bear any responsibility whatsoever for the proper disbursement or
crediting of redemption proceeds by the Company; the Company alone
shall be responsible for such action.
(d) Any purchase or redemption request for
Designated Portfolio shares held or to be held in the Company's
general account shall be effected at the net asset value per share
next determined after the Fund's receipt of such request, provided
that, in the case of a purchase request, payment for Fund shares so
requested is received by the Fund in federal funds prior to close of
business for determination of such value, as defined from time to time
in the Fund Prospectus.
1.4. The Fund shall use its best efforts to make the net
asset value per share for each Designated Portfolio available to the Company by
6:30 p.m. Eastern Time each Business Day, and in any event, as soon as
reasonably practicable after the net asset value per share for such Designated
Portfolio is calculated, and shall calculate such net asset value in accordance
with the Fund's Prospectus. Neither the Fund, any Designated Portfolio, the
Underwriter, nor any of their affiliates shall be liable for any
- 3 -
<PAGE> 4
information provided to the Company pursuant to this Agreement which
information is based on incorrect information supplied by the Company or any
other Participating Insurance Company to the Fund or the Underwriter.
1.5. The Fund shall furnish same day notice (by wire or
telephone followed by written confirmation) to the Company or as soon as
reasonably practicable of any income dividends or capital gain distributions
payable on any Designated Portfolio shares. The Company, on its behalf and on
behalf of the Account, hereby elects to receive all such dividends and
distributions as are payable on any Designated Portfolio shares in the form of
additional shares of that Designated Portfolio. The Company reserves the
right, on its behalf and on behalf of the Account, to revoke this election and
to receive all such dividends and capital gain distributions in cash. The Fund
shall notify the Company promptly of the number of Designated Portfolio shares
so issued as payment of such dividends and distributions.
1.6. Issuance and transfer of Fund shares shall be by book
entry only. Stock certificates will not be issued to the Company or the
Account. Purchase and redemption orders for Fund shares shall be recorded in
an appropriate ledger for the Account or the appropriate subaccount of the
Account.
1.7. (a) The parties hereto acknowledge that the
arrangement contemplated by this Agreement is not exclusive; the Fund's shares
may be sold to other insurance companies (subject to Section 1.8 hereof) and
the cash value of the Contracts may be invested in other investment companies,
provided, however, that until this Agreement is terminated pursuant to Article
X, the Company shall promote the Designated Portfolios on the same basis as
other funding vehicles available under the Contracts. Funding vehicles other
than those listed on Schedule A to this Agreement may be available for the
investment of the cash value of the Contracts, provided, however, (i) any such
vehicle or series thereof, has investment objectives or policies that are
substantially different from the investment objectives and policies of the
Designated Portfolios available hereunder; (ii) the Company gives the Fund and
the Underwriter 45 days written notice of its intention to make such other
investment vehicle available as a funding vehicle for the Contracts; and (iii)
unless such other investment company was available as a Funding vehicle for the
Contracts prior to the date of this Agreement and the Company has so informed
the Fund and the Underwriter prior to their signing this Agreement, the Fund or
Underwriter consents in writing to the use of such other vehicle, such consent
not to be unreasonably withheld.
(b) The Company shall not, without prior notice
to the Underwriter (unless otherwise required by applicable law), take any
action to operate the Account as a management investment company under the 1940
Act.
(c) The Company shall not, without prior notice
to the Underwriter (unless otherwise required by applicable law), induce
Contract owners to change or modify the Fund or change the Fund's distributor
or investment adviser.
(d) The Company shall not, without prior notice
to the Fund, induce Contract owners to vote on any matter submitted for
consideration by the shareholders of the Fund in a manner other than as
recommended by the Board of Trustees of the Fund.
- 4 -
<PAGE> 5
1.8. The Underwriter and the Fund shall sell Fund shares
only to Participating Insurance Companies and their separate accounts and to
persons or plans ("Qualified Persons") that communicate to the Underwriter and
the Fund that they qualify to purchase shares of the Fund under Section 817(h)
of the Internal Revenue Code of 1986, as amended (the "Code") and the
regulations thereunder without impairing the ability of the Account to consider
the portfolio investments of the Fund as constituting investments of the
Account for the purpose of satisfying the diversification requirements of
Section 817(h). The Underwriter and the Fund shall not sell Fund shares to any
insurance company or separate account unless an agreement complying with
Article VI of this Agreement is in effect to govern such sales, to the extent
required. The Company hereby represents and warrants that it and the Account
are Qualified Persons. The Fund reserves the right to cease offering shares of
any Designated Portfolio in the discretion of the Fund.
ARTICLE II. Representations and Warranties
2.1. The Company represents and warrants that the Contracts
(a) are, or prior to issuance will be, registered under the 1933 Act, or (b)
are not registered because they are properly exempt from registration under the
1933 Act or will be offered exclusively in transactions that are properly
exempt from registration under the 1933 Act. The Company further represents
and warrants that the Contracts will be issued and sold in compliance in all
material respects with all applicable federal securities and state securities
and insurance laws and that the sale of the Contracts shall comply in all
material respects with state insurance suitability requirements. The Company
further represents and warrants that it is an insurance company duly organized
and in good standing under applicable law, that it has legally and validly
established the Account prior to any issuance or sale thereof as a segregated
asset account under Ohio insurance laws, and that it (a) has registered or,
prior to any issuance or sale of the Contracts, will register the Account as a
unit investment trust in accordance with the provisions of the 1940 Act to
serve as a segregated investment account for the Contracts, or alternatively
(b) has not registered the Account in proper reliance upon an exclusion from
registration under the 1940 Act. The Company shall register and qualify the
Contracts or interests therein as securities in accordance with the laws of the
various states only if and to the extent deemed advisable by the Company.
2.2. The Fund represents and warrants that Fund shares
sold pursuant to this Agreement shall be registered under the 1933 Act, duly
authorized for issuance and sold in compliance with applicable state and
federal securities laws and that the Fund is and shall remain registered under
the 1940 Act. The Fund shall amend the registration statement for its shares
under the 1933 Act and the 1940 Act from time to time as required in order to
effect the continuous offering of its shares. The Fund shall register and
qualify the shares for sale in accordance with the laws of the various states
only if and to the extent deemed advisable by the Fund or the Underwriter.
2.3. The Fund may make payments to finance distribution
expenses pursuant to Rule 12b-1 under the 1940 Act. Prior to financing
distribution expenses pursuant to Rule 12b-1, the Fund will have the Board, a
majority of whom are not interested persons of the Fund, formulate and approve
a plan pursuant to Rule 12b-1 under the 1940 Act to finance distribution
expenses.
2.4. The Fund makes no representations as to whether any
aspect of its operations, including, but not limited to, investment policies,
fees and expenses, complies with the insurance and other applicable laws of the
various states.
- 5 -
<PAGE> 6
2.5. The Fund represents that it is lawfully organized and
validly existing under the laws of the State of Delaware and that it does and
will comply in all material respects with the 1940 Act.
2.6. The Underwriter represents and warrants that it is a
member in good standing of the NASD and is registered as a broker-dealer with
the SEC. The Underwriter further represents that it will sell and distribute
the Fund shares in accordance with any applicable state and federal securities
laws.
2.7. The Fund and the Underwriter represent and warrant
that all of their trustees/directors, officers, employees, investment advisers,
and other individuals or entities dealing with the money and/or securities of
the Fund are and shall continue to be at all times covered by a blanket
fidelity bond or similar coverage for the benefit of the Fund in an amount not
less than the minimum coverage as required currently by Rule 17g-1 of the 1940
Act or related provisions as may be promulgated from time to time. The
aforesaid bond shall include coverage for larceny and embezzlement and shall be
issued by a reputable bonding company.
2.8. The Company represents and warrants that all of its
directors, officers, employees, and other individuals/entities employed or
controlled by the Company dealing with the money and/or securities of the
Account are covered by a blanket fidelity bond or similar coverage for the
benefit of the Account, in an amount not less than $5 million. The aforesaid
bond includes coverage for larceny and embezzlement and is issued by a
reputable bonding company. The Company agrees to hold for the benefit of the
Fund and to pay to the Fund any amounts lost from larceny, embezzlement or
other events covered by the aforesaid bond to the extent such amounts properly
belong to the Fund pursuant to the terms of this Agreement. The Company agrees
to make all reasonable efforts to see that this bond or another bond containing
these provisions is always in effect, and agrees to notify the Fund and the
Underwriter in the event that such coverage no longer applies.
ARTICLE III. Prospectuses and Proxy Statements; Voting
3.1. The Underwriter shall provide the Company with as many
copies of the Fund's current prospectus (describing only the Designated
Portfolios listed on Schedule A) or, to the extent permitted, the Fund's
profiles as the Company may reasonably request. The Company shall bear the
expense of printing copies of the current prospectus and profiles for the
Contracts that will be distributed to existing Contract owners, and the Company
shall bear the expense of printing copies of the Fund's prospectus and profiles
that are used in connection with offering the Contracts issued by the Company.
If requested by the Company in lieu thereof, the Fund shall provide such
documentation (including a final copy of the new prospectus on diskette at the
Fund's expense) and other assistance as is reasonably necessary in order for
the Company once each year (or more frequently if the prospectus for the Fund
is amended) to have the prospectus for the Contracts and the Fund's prospectus
or profile printed together in one document (the payment of such printing costs
to be governed by the provisions of Section 5.3 of this Agreement).
3.2. The Fund's prospectus shall state that the current
Statement of Additional Information ("SAI") for the Fund is available, and the
Underwriter (or the Fund), at its expense, shall provide a reasonable number of
copies of such SAI free of charge to the Company for itself and for any owner
of a Contract who requests such SAI.
3.3. The Fund shall provide the Company with information
regarding the Fund's expenses, which information may include a table of fees
and related narrative disclosure for use in any
- 6 -
<PAGE> 7
prospectus or other descriptive document relating to a Contract. The Company
agrees that it will use such information in the form provided. The Company
shall provide prior written notice of any proposed modification of such
information, which notice will describe in detail the manner in which the
Company proposes to modify the information, and agrees that it may not modify
such information in any way without the prior consent of the Fund.
3.4. The Fund, at its expense, shall provide the Company
with copies of its proxy material, reports to shareholders, and other
communications to shareholders in such quantity as the Company shall reasonably
require for distributing to Contract owners.
3.5. The Company shall:
(i) solicit voting instructions from Contract
owners;
(ii) vote the Fund shares in accordance with
instructions received from Contract owners;
and
(iii) vote Fund shares for which no instructions
have been received in the same proportion as
Fund shares of such portfolio for which
instructions have been received,
so long as and to the extent that the SEC continues to interpret the 1940 Act
to require pass-through voting privileges for variable contract owners or to
the extent otherwise required by law. The Company will vote Fund shares held
in any segregated asset account in the same proportion as Fund shares of such
portfolio for which voting instructions have been received from Contract
owners, to the extent permitted by law.
3.6. Participating Insurance Companies shall be
responsible for assuring that each of their separate accounts participating in
a Designated Portfolio calculates voting privileges as required by the Shared
Funding Exemptive Order and consistent with any reasonable standards that the
Fund may adopt and provide in writing.
ARTICLE IV. Sales Material and Information
4.1. The Company shall furnish, or shall cause to be
furnished, to the Fund or its designee, each piece of sales literature or other
promotional material that the Company develops and in which the Fund (or a
Designated Portfolio thereof) or the Adviser or the Underwriter is named. No
such material shall be used until approved by the Fund or its designee, and the
Fund will use its best efforts for it or its designee to review such sales
literature or promotional material within ten Business Days after receipt of
such material. The Fund or its designee reserves the right to reasonably
object to the continued use of any such sales literature or other promotional
material in which the Fund (or a Designated Portfolio thereof) or the Adviser
or the Underwriter is named, and no such material shall be used if the Fund or
its designee so object.
4.2. The Company shall not give any information or make
any representations or statements on behalf of the Fund or concerning the Fund
or the Adviser or the Underwriter in connection with the sale of the Contracts
other than the information or representations contained in the registration
statement or prospectus or SAI for the Fund shares, as such registration
statement and prospectus or SAI may be amended or supplemented from time to
time, or in reports or proxy statements for the Fund, or in
- 7 -
<PAGE> 8
sales literature or other promotional material approved by the Fund or its
designee or by the Underwriter, except with the permission of the Fund or the
Underwriter or the designee of either.
4.3. The Fund and the Underwriter, or their designee,
shall furnish, or cause to be furnished, to the Company, each piece of sales
literature or other promotional material that it develops and in which the
Company, and/or its Account, is named. No such material shall be used until
approved by the Company, and the Company will use its best efforts to review
such sales literature or promotional material within ten Business Days after
receipt of such material. The Company reserves the right to reasonably object
to the continued use of any such sales literature or other promotional material
in which the Company and/or its Account is named, and no such material shall be
used if the Company so objects.
4.4. The Fund and the Underwriter shall not give any
information or make any representations on behalf of the Company or concerning
the Company, the Account, or the Contracts other than the information or
representations contained in a registration statement, prospectus (which shall
include an offering memorandum, if any, if the Contracts issued by the Company
or interests therein are not registered under the 1933 Act), or SAI for the
Contracts, as such registration statement, prospectus, or SAI may be amended or
supplemented from time to time, or in published reports for the Account which
are in the public domain or approved by the Company for distribution to
Contract owners, or in sales literature or other promotional material approved
by the Company or its designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one
complete copy of all registration statements, prospectuses, SAIs, reports,
proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, promptly after the
filing of such document(s) with the SEC or other regulatory authorities.
4.6. The Company will provide to the Fund at least one
complete copy of all registration statements, prospectuses (which shall include
an offering memorandum, if any, if the Contracts issued by the Company or
interests therein are not registered under the 1933 Act), SAIs, reports,
solicitations for voting instructions, sales literature and other promotional
materials, applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to the Contracts or the Account,
promptly after the filing of such document(s) with the SEC or other regulatory
authorities. The Company shall provide to the Fund and the Underwriter any
complaints received from the Contract owners pertaining to the Fund or the
Designated Portfolio.
4.7. The Fund will provide the Company with as much notice
as is reasonably practicable of any proxy solicitation for any Designated
Portfolio, and of any material change in the Fund's registration statement,
particularly any change resulting in a change to the registration statement or
prospectus for any Account. The Fund will work with the Company so as to
enable the Company to solicit proxies from Contract owners, or to make changes
to its prospectus or registration statement, in an orderly manner. The Fund
will make reasonable efforts to attempt to have changes affecting Contract
prospectuses become effective simultaneously with the annual updates for such
prospectuses.
4.8. For purposes of this Article IV, the phrase "sales
literature and other promotional materials" includes, but is not limited to,
any of the following that refer to the Fund or any affiliate of the Fund:
advertisements (such as material published, or designed for use in, a
newspaper, magazine, or other periodical, radio, television, telephone or tape
recording, videotape display, signs or billboards, motion pictures, or other
public media), sales literature (i.e., any written communication
- 8 -
<PAGE> 9
distributed or made generally available to customers or the public, including
brochures, circulars, reports, market letters, form letters, seminar texts,
reprints or excerpts of any other advertisement, sales literature, or published
article), educational or training materials or other communications distributed
or made generally available to some or all agents or employees, and
registration statements, prospectuses, SAIs, shareholder reports, proxy
materials, and any other communications distributed or made generally available
with regard to the Fund.
ARTICLE V. Fees and Expenses
5.1. The Fund and the Underwriter shall pay no fee or
other compensation to the Company under this Agreement, except that if the Fund
or any Portfolio adopts and implements a plan pursuant to Rule 12b-1 to finance
distribution expenses, then the Fund or Underwriter may make payments to the
Company or to the underwriter for the Contracts if and in amounts agreed to by
the Underwriter in writing, and such payments will be made out of existing fees
otherwise payable to the Underwriter, past profits of the Underwriter, or other
resources available to the Underwriter. Currently, no such payments are
contemplated.
5.2. All expenses incident to performance by the Fund
under this Agreement shall be paid by the Fund. The Fund shall see to it that
all its shares are registered and authorized for issuance in accordance with
applicable federal law and, if and to the extent deemed advisable by the Fund,
in accordance with applicable state laws prior to their sale. The Fund shall
bear the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any federal or state law,
and all taxes on the issuance or transfer of the Fund's shares.
5.3. The Fund shall contribute a maximum of $5,000
annually in aggregate towards the expenses of printing and distributing the
Fund's prospectus to owners of Contracts issued by the Company and of
distributing the Fund's proxy materials and reports to such Contract owners,
with any additional expenses to be borne by the Company.
ARTICLE VI. Diversification and Qualification
6.1. The Fund will invest its assets in such a manner as
to ensure that the Contracts will be treated as annuity or life insurance
contracts, whichever is appropriate, under the Code and the regulations issued
thereunder (or any successor provisions). Without limiting the scope of the
foregoing, each Designated Portfolio has complied and will continue to comply
with Section 817(h) of the Code and Treasury Regulation Section 1.817-5, and
any Treasury interpretations thereof, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts, and
any amendments or other modifications or successor provisions to such Section
or Regulations. In the event of a breach of this Article VI by the Fund, it
will take all reasonable steps (a) to notify the Company of such breach and (b)
to adequately diversify the Fund so as to achieve compliance within the grace
period afforded by Regulation 1.817-5.
6.2. The Fund represents that it is or will be qualified
as a Regulated Investment Company under Subchapter M of the Code, and that it
will make every effort to maintain such qualification (under Subchapter M or
any successor or similar provisions) and that it will notify the
- 9 -
<PAGE> 10
Company immediately upon having a reasonable basis for believing that it has
ceased to so qualify or that it might not so qualify in the future.
6.3. The Company represents that the Contracts are
currently, and at the time of issuance shall be, treated as life insurance or
annuity insurance contracts, under applicable provisions of the Code, and that
it will make every effort to maintain such treatment, and that it will notify
the Fund and the Underwriter immediately upon having a reasonable basis for
believing the Contracts have ceased to be so treated or that they might not be
so treated in the future. The Company agrees that any prospectus offering a
contract that is a "modified endowment contract" as that term is defined in
Section 7702A of the Code (or any successor or similar provision), shall
identify such contract as a modified endowment contract.
ARTICLE VII. Potential Conflicts
The following provisions shall apply only upon issuance of the Mixed and Shared
Funding Order and the sale of shares of the Fund to variable life insurance
separate accounts, and then only to the extent required under the 1940 Act.
7.1. The Board will monitor the Fund for the existence of
any material irreconcilable conflict between the interests of the Contract
owners of all separate accounts investing in the Fund. An irreconcilable
material conflict may arise for a variety of reasons, including: (a) an action
by any state insurance regulatory authority; (b) a change in applicable federal
or state insurance, tax, or securities laws or regulations, or a public ruling,
private letter ruling, no-action or interpretative letter, or any similar
action by insurance, tax, or securities regulatory authorities; (c) an
administrative or judicial decision in any relevant proceeding; (d) the manner
in which the investments of any Portfolio are being managed; (e) a difference
in voting instructions given by variable annuity contract and variable life
insurance contract owners; or (f) a decision by an insurer to disregard the
voting instructions of contract owners. The Board shall promptly inform the
Company if it determines that an irreconcilable material conflict exists and
the implications thereof.
7.2. The Company will report any potential or existing
conflicts of which it is aware to the Board. The Company will assist the Board
in carrying out its responsibilities under the Mixed and Shared Funding
Exemptive Order, by providing the Board with all information reasonably
necessary for the Board to consider any issues raised. This includes, but is
not limited to, an obligation by the Company to inform the Board whenever
Contract owner voting instructions are disregarded.
7.3. If it is determined by a majority of the Board, or a
majority of its disinterested members, that a material irreconcilable conflict
exists, the Company and other Participating Insurance Companies shall, at their
expense and to the extent reasonably practicable (as determined by a majority
of the disinterested Board members), take whatever steps are necessary to
remedy or eliminate the irreconcilable material conflict, up to and including:
(1) withdrawing the assets allocable to some or all of the separate accounts
from the Fund or any Portfolio and reinvesting such assets in a different
investment medium, including (but not limited to) another Portfolio of the
Fund, or submitting the question whether such segregation should be implemented
to a vote of all affected contract owners and, as appropriate, segregating the
assets of any appropriate group (i.e., annuity contract owners, life insurance
contract owners, or variable contract owners of one or more Participating
Insurance Companies) that votes in favor of such segregation, or offering to
the affected contract owners the option of making such a change; and (2)
establishing a new registered management investment company or managed separate
account.
- 10 -
<PAGE> 11
7.4. If a material irreconcilable conflict arises because
of a decision by the Company to disregard Contract owner voting instructions
and that decision represents a minority position or would preclude a majority
vote, the Company may be required, at the Fund's election, to withdraw the
Account's investment in the Fund and terminate this Agreement with respect to
each Account; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the Board.
Any such withdrawal and termination must take place within six (6) months after
the Fund gives written notice that this provision is being implemented, and
until the end of that six month period the Fund shall continue to accept and
implement orders by the Company for the purchase (and redemption) of shares of
the Fund.
7.5. If a material irreconcilable conflict arises because
a particular state insurance regulator's decision applicable to the Company
conflicts with the majority of other state regulators, then the Company will
withdraw the affected Account's investment in the Fund and terminate this
Agreement with respect to such Account within six months after the Board
informs the Company in writing that it has determined that such decision has
created an irreconcilable material conflict; provided, however, that such
withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
disinterested members of the Board. Until the end of the foregoing six month
period, the Fund shall continue to accept and implement orders by the Company
for the purchase (and redemption) of shares of the Fund.
7.6. For purposes of Section 7.3 through 7.6 of this
Agreement, a majority of the disinterested members of the Board shall determine
whether any proposed action adequately remedies any irreconcilable material
conflict, but in no event will the Fund be required to establish a new funding
medium for the Contracts. The Company shall not be required by Section 7.3 to
establish a new funding medium for the Contract if an offer to do so has been
declined by vote of a majority of Contract owners materially adversely affected
by the irreconcilable material conflict. In the event that the Board
determines that any proposed action does not adequately remedy any
irreconcilable material conflict, then the Company will withdraw the Account's
investment in the Fund and terminate this Agreement within six (6) months after
the Board informs the Company in writing of the foregoing determination;
provided, however, that such withdrawal and termination shall be limited to the
extent required by any such material irreconcilable conflict as determined by a
majority of the disinterested members of the Board.
7.7. If and to the extent the Mixed and Shared Funding
Exemption Order or any amendment thereto contains terms and conditions
different from Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3, 7.4, and 7.5 of this
Agreement, then the Fund and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with the Mixed
and Shared Funding Exemptive Order, and Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3,
7.4 and 7.5 of this Agreement shall continue in effect only to the extent that
terms and conditions substantially identical to such Sections are contained in
the Mixed and Shared Funding Exemptive Order or any amendment thereto. If and
to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is
adopted, to provide exemptive relief from any provision of the 1940 Act or the
rules promulgated thereunder with respect to mixed or shared funding (as
defined in the Mixed and Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Mixed and Shared
Funding Exemptive Order, then (a) the Fund and/or the Participating Insurance
Companies, as appropriate, shall take such steps as may be necessary to comply
with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the
extent such rules are applicable; and (b) Sections 3.5, 3.6, 7.1., 7.2, 7.3,
7.4, and 7.5 of this Agreement shall continue in effect only to the
- 11 -
<PAGE> 12
extent that terms and conditions substantially identical to such Sections are
contained in such Rule(s) as so amended or adopted.
ARTICLE VIII. Indemnification
8.1. Indemnification By the Company
8.1(a). The Company agrees to indemnify and hold
harmless the Fund and the Underwriter and each of its trustees/directors and
officers, and each person, if any, who controls the Fund or Underwriter within
the meaning of Section 15 of the 1933 Act or who is under common control with
the Underwriter (collectively, the "Indemnified Parties" for purposes of this
Section 8.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the Company)
or litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute or regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of the Fund's shares or the Contracts, and:
(i) arise out of or are based upon any untrue
statement or alleged untrue statements of any
material fact contained in the registration
statement, prospectus (which shall include a written
description of a Contract that is not registered
under the 1933 Act), or SAI for the Contracts or
contained in the Contracts or sales literature for
the Contracts (or any amendment or supplement to any
of the foregoing), or arise out of or are based upon
the omission or the alleged omission to state therein
a material fact required to be stated therein or
necessary to make the statements therein not
misleading, provided that this agreement to indemnify
shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or
omission was made in reliance upon and in conformity
with information furnished to the Company by or on
behalf of the Fund for use in the registration
statement, prospectus or SAI for the Contracts or in
the Contracts or sales literature (or any amendment
or supplement) or otherwise for use in connection
with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or
representations contained in the registration
statement, prospectus, SAI, or sales literature of
the Fund not supplied by the Company or persons under
its control) or wrongful conduct of the Company or
its agents or persons under the Company's
authorization or control, with respect to the sale or
distribution of the Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged
untrue statement of a material fact contained in a
registration statement, prospectus, SAI, or sales
literature of the Fund or any amendment thereof or
supplement thereto or the omission or alleged
omission to state therein a material fact required to
be stated therein or necessary to make the statements
therein not misleading if such a statement or
omission was made in reliance upon information
furnished to the Fund by or on behalf of the Company;
or
- 12 -
<PAGE> 13
(iv) arise as a result of any material failure by
the Company to provide the services and furnish the
materials under the terms of this Agreement
(including a failure, whether unintentional or in
good faith or otherwise, to comply with the
qualification requirements specified in Article VI of
this Agreement); or
(v) arise out of or result from any material
breach of any representation and/or warranty made by
the Company in this Agreement or arise out of or
result from any other material breach of this
Agreement by the Company; or
(vi) as limited by and in accordance with the
provisions of Sections 8.1(b) and 8.1(c) hereof.
8.1(b). The Company shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith,
or gross negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of its obligations or
duties under this Agreement.
8.1(c). The Company shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Company in writing
within a reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Company of
any such claim shall not relieve the Company from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any such action is
brought against an Indemnified Party, the Company shall be entitled to
participate, at its own expense, in the defense of such action. The Company
also shall be entitled to assume the defense thereof, with counsel satisfactory
to the party named in the action. After notice from the Company to such party
of the Company's election to assume the defense thereof, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
the Company will not be liable to such party under this Agreement for any legal
or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation.
8.1(d). The Indemnified Parties will promptly notify
the Company of the commencement of any litigation or proceedings against them
in connection with the issuance or sale of the Fund shares or the Contracts or
the operation of the Fund.
8.2. Indemnification by the Underwriter
8.2(a). The Underwriter agrees to indemnify and hold
harmless the Company and each of its directors and officers and each person, if
any, who controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may
become subject under any statute or regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements:
- 13 -
<PAGE> 14
(i) arise out of or are based upon any untrue
statement or alleged untrue statement of any material
fact contained in the registration statement or
prospectus or SAI or sales literature of the Fund (or
any amendment or supplement to any of the foregoing),
or arise out of or are based upon the omission or the
alleged omission to state therein a material fact
required to be stated therein or necessary to make
the statements therein not misleading, provided that
this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or
such alleged statement or omission was made in
reliance upon and in conformity with information
furnished to the Underwriter or Fund by or on behalf
of the Company for use in the registration statement,
prospectus or SAI for the Fund or in sales literature
(or any amendment or supplement) or otherwise for use
in connection with the sale of the Contracts or Fund
shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or
representations contained in the registration
statement, prospectus, SAI or sales literature for
the Contracts not supplied by the Underwriter or
persons under its control) or wrongful conduct of the
Fund or Underwriter or persons under their control,
with respect to the sale or distribution of the
Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged
untrue statement of a material fact contained in a
registration statement, prospectus, SAI or sales
literature covering the Contracts, or any amendment
thereof or supplement thereto, or the omission or
alleged omission to state therein a material fact
required to be stated therein or necessary to make
the statement or statements therein not misleading,
if such statement or omission was made in reliance
upon information furnished to the Company by or on
behalf of the Fund or the Underwriter; or
(iv) arise as a result of any failure by the Fund
or the Underwriter to provide the services and
furnish the materials under the terms of this
Agreement (including a failure of the Fund, whether
unintentional or in good faith or otherwise, to
comply with the diversification and other
qualification requirements specified in Article VI of
this Agreement); or
(v) arise out of or result from any material
breach of any representation and/or warranty made by
the Underwriter in this Agreement or arise out of or
result from any other material breach of this
Agreement by the Underwriter;
as limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under
this indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith,
or gross negligence in the performance or such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to the Company or the Account, whichever is applicable.
- 14 -
<PAGE> 15
8.2(c). The Underwriter shall not be liable under
this indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified the
Underwriter in writing within a reasonable time after the summons or other
first legal process giving information of the nature of the claim shall have
been served upon such Indemnified Party (or after such Indemnified Party shall
have received notice of such service on any designated agent), but failure to
notify the Underwriter of any such claim shall not relieve the Underwriter from
any liability which it may have to the Indemnified Party against whom such
action is brought otherwise than on account of this indemnification provision.
In case any such action is brought against the Indemnified Party, the
Underwriter will be entitled to participate, at its own expense, in the defense
thereof. The Underwriter also shall be entitled to assume the defense thereof,
with counsel satisfactory to the party named in the action. After notice from
the Underwriter to such party of the Underwriter's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Underwriter will not be liable to
such party under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the defense thereof
other than reasonable costs of investigation.
The Company agrees promptly to notify the Underwriter
of the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of the Contracts
or the operation of the Account.
8.3. Indemnification By the Fund
8.3(a). The Fund agrees to indemnify and hold
harmless the Company and each of its directors and officers and each person, if
any, who controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.3)
against any and all losses, claims, expenses, damages, liabilities (including
amounts paid in settlement with the written consent of the Fund) or litigation
(including legal and other expenses) to which the Indemnified Parties may be
required to pay or may become subject under any statute or regulation, at
common law or otherwise, insofar as such losses, claims, expenses, damages,
liabilities or expenses (or actions in respect thereof) or settlements, are
related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund
to provide the services and furnish the materials
under the terms of this Agreement (including a
failure, whether unintentional or in good faith or
otherwise, to comply with the diversification and
other qualification requirements specified in Article
VI of this Agreement); or
(ii) arise out of or result from any material
breach of any representation and/or warranty made by
the Fund in this Agreement or arise out of or result
from any other material breach of this Agreement by
the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith,
or gross negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to the Company, the Fund, the Underwriter or the
Account, whichever is applicable.
- 15 -
<PAGE> 16
8.3(c). The Fund shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Fund in writing
within a reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Fund will be entitled to participate, at
its own expense, in the defense thereof. The Fund also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Fund to such party of the Fund's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Fund will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the
defense thereof other than reasonable costs of investigation.
8.3(d). The Company and the Underwriter agree
promptly to notify the Fund of the commencement of any litigation or proceeding
against it or any of its respective officers or directors in connection with
the Agreement, the issuance or sale of the Contracts, the operation of the
Account, or the sale or acquisition of shares of the Fund.
ARTICLE IX. Applicable Law
9.1. This Agreement shall be construed and the provisions
hereof interpreted under and in accordance with the laws of the State of
California.
9.2. This Agreement shall be subject to the provisions of
the 1933, 1934 and 1940 Acts, and the rules and regulations and rulings
thereunder, including such exemptions from those statutes, rules and
regulations as the SEC may grant (including, but not limited to, any Mixed and
Shared Funding Exemptive Order) and the terms hereof shall be interpreted and
construed in accordance therewith. If, in the future, the Mixed and Shared
Funding Exemptive Order should no longer be necessary under applicable law,
then Article VII shall no longer apply.
ARTICLE X. Termination
10.1. This Agreement shall continue in full force and
effect until the first to occur of:
(a) termination by any party, for any reason with respect
to some or all Designated Portfolios, by three (3)
months advance written notice delivered to the other
parties; or
(b) termination by the Company by written notice to the
Fund and the Underwriter based upon the Company's
determination that shares of the Fund are not
reasonably available to meet the requirements of the
Contracts; or
(c) termination by the Company by written notice to the
Fund and the Underwriter in the event any of the
Designated Portfolio's shares are not registered,
issued or sold in accordance with applicable state
and/or federal law or such law precludes the use of
such shares as the underlying investment media of the
Contracts issued or to be issued by the Company; or
- 16 -
<PAGE> 17
(d) termination by the Fund or Underwriter in the event
that formal administrative proceedings are instituted
against the Company by the NASD, the SEC, the
Insurance Commissioner or like official of any state
or any other regulatory body regarding the Company's
duties under this Agreement or related to the sale of
the Contracts, the operation of any Account, or the
purchase of the Fund's shares; provided, however,
that the Fund or Underwriter determines in its sole
judgment exercised in good faith, that any such
administrative proceedings will have a material
adverse effect upon the ability of the Company to
perform its obligations under this Agreement; or
(e) termination by the Company in the event that formal
administrative proceedings are instituted against the
Fund or Underwriter by the NASD, the SEC, or any
state securities or insurance department or any other
regulatory body; provided, however, that the Company
determines in its sole judgment exercised in good
faith, that any such administrative proceedings will
have a material adverse effect upon the ability of
the Fund or Underwriter to perform its obligations
under this Agreement; or
(f) termination by the Company by written notice to the
Fund and the Underwriter with respect to any
Designated Portfolio in the event that such Portfolio
ceases to qualify as a Regulated Investment Company
under Subchapter M or fails to comply with the
Section 817(h) diversification requirements specified
in Article VI hereof, or if the Company reasonably
believes that such Portfolio may fail to so qualify
or comply; or
(g) termination by the Fund or Underwriter by written
notice to the Company in the event that the Contracts
fail to meet the qualifications specified in Article
VI hereof; or
(h) termination by either the Fund or the Underwriter by
written notice to the Company, if either one or both
of the Fund or the Underwriter respectively, shall
determine, in their sole judgment exercised in good
faith, that the Company has suffered a material
adverse change in its business, operations, financial
condition, or prospects since the date of this
Agreement or is the subject of material adverse
publicity; or
(i) termination by the Company by written notice to the
Fund and the Underwriter, if the Company shall
determine, in its sole judgment exercised in good
faith, that the Fund, Adviser, or the Underwriter has
suffered a material adverse change in its business,
operations, financial condition or prospects since
the date of this Agreement or is the subject of
material adverse publicity; or
(j) termination by the Fund or the Underwriter by written
notice to the Company, if the Company gives the Fund
and the Underwriter the written notice specified in
Section 1.7(a)(ii) hereof and at the time such notice
was given there was no notice of termination
outstanding under any other provision of this
Agreement; provided, however, any termination under
this Section 10.1(j) shall be effective forty-five
days after the notice specified in Section 1.7(a)(ii)
was given; or
- 17 -
<PAGE> 18
(k) termination by the Company upon any substitution of
the shares of another investment company or series
thereof for shares of a Designated Portfolio of the
Fund in accordance with the terms of the Contracts,
provided that the Company has given at least 45 days
prior written notice to the Fund and Underwriter of
the date of substitution; or
(l) termination by any party in the event that the Fund's
Board of Trustees determines that a material
irreconcilable conflict exists as provided in Article
VII.
10.2. Notwithstanding any termination of this Agreement,
the Fund and the Underwriter shall, at the option of the Company, continue to
make available additional shares of the Fund pursuant to the terms and
conditions of this Agreement, for all Contracts in effect on the effective date
of termination of this Agreement (hereinafter referred to as "Existing
Contracts"), unless the Underwriter requests that the Company seek an order
pursuant to Section 26(b) of the 1940 Act to permit the substitution of other
securities for the shares of the Designated Portfolios. The Underwriter agrees
to split the cost of seeking such an order, and the Company agrees that it
shall reasonably cooperate with the Underwriter and seek such an order upon
request. Specifically, the owners of the Existing Contracts may be permitted
to reallocate investments in the Fund, redeem investments in the Fund and/or
invest in the Fund upon the making of additional purchase payments under the
Existing Contracts (subject to any such election by the Underwriter). The
parties agree that this Section 10.2 shall not apply to any terminations under
Article VII and the effect of such Article VII terminations shall be governed
by Article VII of this Agreement. The parties further agree that this Section
10.2 shall not apply to any terminations under Section 10.1(g) of this
Agreement.
10.3. The Company shall not redeem Fund shares attributable
to the Contracts (as opposed to Fund shares attributable to the Company's
assets held in the Account) except (i) as necessary to implement Contract owner
initiated or approved transactions, (ii) as required by state and/or federal
laws or regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption"), (iii) upon 45
days prior written notice to the Fund and Underwriter, as permitted by an order
of the SEC pursuant to Section 26(b) of the 1940 Act, but only if a
substitution of other securities for the shares of the Designated Portfolios is
consistent with the terms of the Contracts, or (iv) as permitted under the
terms of the Contract. Upon request, the Company will promptly furnish to the
Fund and the Underwriter reasonable assurance that any redemption pursuant to
clause (ii) above is a Legally Required Redemption. Furthermore, except in
cases where permitted under the terms of the Contacts, the Company shall not
prevent Contract owners from allocating payments to a Portfolio that was
otherwise available under the Contracts without first giving the Fund or the
Underwriter 45 days notice of its intention to do so.
10.4. Notwithstanding any termination of this Agreement,
each party's obligation under Article VIII to indemnify the other parties shall
survive.
- 18 -
<PAGE> 19
ARTICLE XI. Notices
Any notice shall be sufficiently given when sent by
registered or certified mail to the other party at the address of such party
set forth below or at such other address as such party may from time to time
specify in writing to the other party.
<TABLE>
<S> <C>
If to the Fund: PIMCO Variable Insurance Trust
840 Newport Center Drive, Suite 300
Newport Beach, CA 92660
If to the Company: Western Reserve Life Assurance Co. of Ohio
c/o PFL Life Insurance Company
4333 Edgewood Road N.E.
Cedar Rapids, Iowa 52499-001
Attn: Financial Markets Division Counsel
If to Underwriter: PIMCO Funds Distributors LLC
2187 Atlantic Street
Stamford, CT 06902
</TABLE>
ARTICLE XII. Miscellaneous
12.1. All persons dealing with the Fund must look solely to
the property of the Fund, and in the case of a series company, the respective
Designated Portfolios listed on Schedule A hereto as though each such
Designated Portfolio had separately contracted with the Company and the
Underwriter for the enforcement of any claims against the Fund. The parties
agree that neither the Board, officers, agents or shareholders of the Fund
assume any personal liability or responsibility for obligations entered into by
or on behalf of the Fund.
12.2. Subject to the requirements of legal process and
regulatory authority, each party hereto shall treat as confidential the names
and addresses of the owners of the Contracts and all information reasonably
identified as confidential in writing by any other party hereto and, except as
permitted by this Agreement, shall not disclose, disseminate or utilize such
names and addresses and other confidential information without the express
written consent of the affected party until such time as such information has
come into the public domain.
12.3. The captions in this Agreement are included for
convenience of reference only and in no way define or delineate any of the
provisions hereof or otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in two
or more counterparts, each of which taken together shall constitute one and the
same instrument.
12.5. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
the Agreement shall not be affected thereby.
12.6. Each party hereto shall cooperate with each other
party and all appropriate governmental authorities (including without
limitation the SEC, the NASD, and state insurance regulators) and shall permit
such authorities reasonable access to its books and records in connection
- 19 -
<PAGE> 20
with any investigation or inquiry relating to this Agreement or the
transactions contemplated hereby. Notwithstanding the generality of the
foregoing, each party hereto further agrees to furnish the Ohio Insurance
Commissioner with any information or reports in connection with services
provided under this Agreement which such Commissioner may request in order to
ascertain whether the variable annuity operations of the Company are being
conducted in a manner consistent with the Ohiovariable annuity laws and
regulations and any other applicable law or regulations.
12.7. The rights, remedies and obligations contained in
this Agreement are cumulative and are in addition to any and all rights,
remedies, and obligations, at law or in equity, which the parties hereto are
entitled to under state and federal laws.
12.8. This Agreement or any of the rights and obligations
hereunder may not be assigned by any party without the prior written consent of
all parties hereto.
12.9. The Company shall furnish, or shall cause to be
furnished, to the Fund or its designee copies of the following reports:
(a) the Company's annual statement (prepared under
statutory accounting principles) and annual report
(prepared under generally accepted accounting
principles) filed with any state or federal
regulatory body or otherwise made available to the
public, as soon as practicable and in any event
within 90 days after the end of each fiscal year; and
(b) any registration statement (without exhibits) and
financial reports of the Company filed with the
Securities and Exchange Commission or any state
insurance regulatory, as soon as practicable after
the filing thereof.
- 20 -
<PAGE> 21
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
<TABLE>
<S> <C>
WESTERN RESERVE LIFE ASSURANCE COMPANY:
By its authorized officer
By: s/ John R. Kenney
------------------------------------------
Name:
------------------------------------------
Title:
------------------------------------------
Date:
------------------------------------------
PIMCO VARIABLE INSURANCE TRUST
By its authorized officer
By: s/ Jeffrey M. Sargent
------------------------------------------
Name: Jeffery M. Sargent
Title: Senior Vice President
Date:
------------------------------------------
PIMCO FUNDS DISTRIBUTORS LLC
By its authorized officer
By: s/ Newton B. Schott, Jr.
------------------------------------------
Name: Newton B. Schott, Jr.
Title: Executive Vice President
Date:
------------------------------------------
</TABLE>
8194921.doc 12/31/97
- 21 -
<PAGE> 22
Schedule A
PIMCO VARIABLE INSURANCE TRUST PORTFOLIOS:
1. Total Return Bond Portfolio
2. StocksPLUS Growth and Income Portfolio
3. Short-Term Bond Portfolio
4. Mid-Cap Growth Portfolio
5. Small-Cap Value Portfolio
Dated _________________
<TABLE>
- ----------------------------------------------------------------------------------------------
<S> <C>
Name of Separate Account and Date Contracts Funded by Separate Account:
Established by Board of Directors:
- ----------------------------------------------------------------------------------------------
WRL Series Life Corporate Account Advantage IV Variable Universal Life Policy
December 8, 1997; (1940 Act Registrant) (COLI) ; Policy Form No. WL694 136-82-598 (1933
Act Registered)
- ----------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 1.A.(8)(d)
PARTICIPATION AGREEMENT
AMONG
T. ROWE PRICE EQUITY SERIES, INC.,
T. ROWE PRICE INTERNATIONAL SERIES, INC.,
T. ROWE PRICE INVESTMENT SERVICES, INC.,
AND
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
THIS AGREEMENT, made and entered into as of this 15th day of July, 1999,
by and among Western Reserve Life Assurance Co. of Ohio (hereinafter, the
"Company"), an Ohio insurance company, on its own behalf and on behalf of each
segregated asset account of the Company set forth on Schedule A hereto as may
be amended from time to time (each account hereinafter referred to as the
"Account"), and the undersigned funds, each, a corporation organized under the
laws of Maryland (each hereinafter referred to as the "Fund") and T. Rowe Price
Investment Services, Inc. (hereinafter the "Underwriter"), a Maryland
corporation.
WHEREAS, the Fund engages in business as an open-end management investment
company and is or will be available to act as the investment vehicle for
separate accounts established for variable life insurance and variable annuity
contracts (the "Variable Insurance Products") to be offered by insurance
companies which have entered into participation agreements with the Fund and
Underwriter (hereinafter "Participating Insurance Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each designated a "Portfolio" and representing the interest
in a particular managed portfolio of securities and other assets; and
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission ("SEC") granting Participating Insurance Companies and variable
annuity and variable life insurance separate accounts exemptions from the
provisions of sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company
Act of 1940, as amended, (hereinafter the "1940 Act") and Rules 6e- 2(b)(15)
and 6e-3(T) (b)(15) thereunder, to the extent necessary to permit shares of the
Fund to be sold to and held by variable annuity and variable life insurance
separate accounts of both affiliated and unaffiliated life insurance companies
(hereinafter the "Shared Funding Exemptive Order"); and
<PAGE> 2
2
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and shares of the Portfolios are registered under
the Securities Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, T. Rowe Price Associates, Inc. and Rowe Price- Fleming
International, Inc. (each hereinafter referred to as the "Adviser") are each
duly registered as an investment adviser under the Investment Advisers Act of
1940, as amended, and any applicable state securities laws; and
WHEREAS, the Company has issued or will issue certain variable life
insurance or variable annuity contracts (including any certificates thereunder)
supported wholly or partially by the Account (the "Contracts"), and said
Contracts are listed in Schedule A hereto, as it may be amended from time to
time by mutual written agreement; and
WHEREAS, the Account is duly established and maintained as a segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, to set aside
and invest assets attributable to the aforesaid Contracts; and
WHEREAS, the Company has registered or will register the Account as a unit
investment trust under the 1940 Act or will not register the Account in proper
reliance upon an exclusion from registration under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the SEC
under the Securities Exchange Act of 1934, as amended (hereinafter the "1934
Act"), and is a member in good standing of the National Association of
Securities Dealers, Inc. (hereinafter "NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios listed in
Schedule A hereto, as it may be amended from time to time by mutual written
agreement (the "Designated Portfolios") on behalf of the Account to fund the
aforesaid Contracts, and the Underwriter is authorized to sell such shares to
unit investment trusts such as the Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Underwriter agree as follows:
ARTICLE I. Sale of Fund Shares
1.1 The Underwriter agrees to sell to the Company those shares of the
Designated Portfolios which the Account orders, executing such orders on a
daily basis at the net asset value next computed after receipt by the Fund or
its designee of the order for the shares of the Designated Portfolios.
<PAGE> 3
3
1.2 The Fund agrees to make shares of the Designated Portfolios available
for purchase at the applicable net asset value per share by the Company and the
Account on those days on which the Fund calculates its net asset value pursuant
to rules of the SEC, and the Fund shall use its best efforts to calculate such
net asset value on each day which the New York Stock Exchange is open for
trading. Notwithstanding the foregoing, the Board of Directors of the Fund
(hereinafter the "Board") may refuse to sell shares of any Designated Portfolio
to any person, or suspend or terminate the offering of shares of any Designated
Portfolio if such action is required by law or by regulatory authorities having
jurisdiction, or is, in the sole discretion of the Board acting in good faith
and in light of their fiduciary duties under federal and any applicable state
laws, necessary in the best interests of the shareholders of such Designated
Portfolio.
1.3 The Fund and the Underwriter agree that shares of the Fund will be
sold only to Participating Insurance Companies and their separate accounts. No
shares of any Designated Portfolios will be sold to the general public. The
Fund and the Underwriter will not sell Fund shares to any insurance company or
separate account unless an agreement containing provisions substantially the
same as Articles I, III and VII of this Agreement is in effect to govern such
sales.
1.4 The Fund agrees to redeem, on the Company's request, any full or
fractional shares of the Designated Portfolios held by the Company, executing
such requests on a daily basis at the net asset value next computed after
receipt by the Fund or its designee of the request for redemption, except that
the Fund reserves the right to suspend the right of redemption or postpone the
date of payment or satisfaction upon redemption consistent with Section 22(e)
of the 1940 Act and any sales thereunder, and in accordance with the procedures
and policies of the Fund as described in the then current prospectus.
1.5 For purposes of Sections 1.1 and 1.4, the Company shall be the
designee of the Fund for receipt of purchase and redemption orders from the
Account, and receipt by such designee shall constitute receipt by the Fund;
provided that the Company receives the order by 4:00 p.m. Baltimore time and
the Fund receives notice of such order by 9:30 a.m. Baltimore time on the next
following Business Day. "Business Day" shall mean any day on which the New
York Stock Exchange is open for trading and on which the Fund calculates its
net asset value pursuant to the rules of the SEC.
1.6 The Company agrees to purchase and redeem the shares of each
Designated Portfolio offered by the then current prospectus of the Fund and in
accordance with the provisions of such prospectus.
1.7 The Company shall pay for Fund shares one Business Day after receipt
of an order to purchase Fund shares is made in accordance with the provisions
of Section 1.5 hereof. Payment shall be in federal funds transmitted by wire
by 3:00 p.m. Baltimore time. If payment in Federal Funds for any purchase is
not received or is received by the Fund after 3:00 p.m. Baltimore time on such
Business Day, the Company shall promptly, upon the Fund's request, reimburse
the Fund for any charges, costs, fees, interest or other expenses incurred by
the Fund in connection with any advances to, or borrowings or overdrafts by,
the Fund, or any similar
<PAGE> 4
4
expenses incurred by the Fund, as a result of portfolio transactions effected
by the Fund based upon such purchase request. For purposes of Section 2.8 and
2.9 hereof, upon receipt by the Fund of the federal funds so wired, such funds
shall cease to be the responsibility of the Company and shall become the
responsibility of the Fund.
1.8 Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9 The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Designated Portfolios' shares. The
Company hereby elects to receive all such income, dividends, and capital gain
distributions as are payable on Designated Portfolio shares in additional
shares of that Portfolio. The Company reserves the right to revoke this
election and to receive all such income dividends and capital gain
distributions in cash. The Fund shall notify the Company of the number of
shares so issued as payment of such dividends and distributions.
1.10 The Fund shall make the net asset value per share for each Designated
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated (normally by 6:30
p.m. Baltimore time) and shall use its best efforts to make such net asset
value per share available by 7 p.m. Baltimore time. If the net asset value is
materially incorrect through no fault of the Company, the Company on behalf of
each Account, shall be entitled to an adjustment to the number of shares
purchased or redeemed to reflect the correct net asset value in accordance with
Fund procedures. Any material error in the net asset value shall be reported
to the Company promptly upon discovery. Any administrative or other costs or
losses incurred for correcting underlying Contract owner accounts shall be at
the Company's expense.
1.11 The Parties hereto acknowledge that the arrangement contemplated by
this Agreement is not exclusive; the Fund's shares may be sold to other
insurance companies (subject to Section 1.3 and Article VI hereof) and the cash
value of the Contracts may be invested in other investment companies.
ARTICLE II. Representations and Warranties
2.1 The Company represents and warrants that the Contracts are or will be
registered under the 1933 Act or that the Contracts are not registered because
they are properly exempt from registration under the 1933 Act or will be
offered exclusively in transactions that are properly exempt from registration
under the 1933 Act. The Company further represents and warrants that the
Contracts will be issued and sold in compliance in all material respects with
all applicable federal and state laws and that the sale of the Contracts shall
comply in all material respects with state insurance suitability requirements.
The Company further represents and warrants that it is an insurance company
duly organized and in good standing under applicable law and that it has
legally and validly established the Account prior to any issuance or sale
<PAGE> 5
5
thereof as a segregated asset account under the Ohio insurance laws and has
registered or, prior to any issuance or sale of the Contracts, will register
the Account as a unit investment trust in accordance with the provisions of the
1940 Act to serve as a segregated investment account for the Contracts or that
it has not registered the Account in proper reliance upon an exclusion from
registration under the 1940 Act.
2.2 The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the state of Ohio and all
applicable federal and state securities laws and that the Fund is and shall
remain registered under the 1940 Act. The Fund shall amend the Registration
Statement for its shares under the 1933 Act and the 1940 Act from time to time
as required in order to effect the continuous offering of its shares. The Fund
shall register and qualify the shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by the Fund or
the Underwriter.
2.3 The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, although it
may make such payments in the future. To the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1, the Fund will undertake to have
the Board, a majority of whom are not interested persons of the Fund, formulate
and approve any plan pursuant to Rule 12b-1 under the 1940 Act to finance
distribution expenses.
2.4 The Fund makes no representations as to whether any aspect of its
operations, including but not limited to, investment policies, fees and
expenses, complies with the insurance and other applicable laws of the various
states, except that the Fund represents that the Fund's investment policies,
fees and expenses are and shall at all times remain in compliance with the laws
of the state of Ohio to the extent required to perform this Agreement.
2.5 The Fund represents that it is lawfully organized and validly
existing under the laws of the State of Maryland and that it does and will
comply in all material respects with the 1940 Act.
2.6 The Underwriter represents and warrants that it is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter further represents that it will sell and distribute the Fund shares
in accordance with the laws of the State of Ohio and any applicable state and
federal securities laws.
2.7 The Underwriter represents and warrants that the Adviser is and shall
remain duly registered under all applicable federal and state securities laws
and that the Adviser shall perform its obligations for the Fund in compliance
in all material respects with the laws of the State of Ohio and any applicable
state and federal securities laws.
2.8 The Fund and the Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other individuals or
entities dealing with the money and/or securities of the Fund are and shall
continue to be at all times covered by a blanket
<PAGE> 6
6
fidelity bond or similar coverage for the benefit of the Fund in an amount not
less than the minimum coverage as required currently by Rule 17g-1 of the 1940
Act or related provisions as may be promulgated from time to time. The
aforesaid bond shall include coverage for larceny and embezzlement and shall be
issued by a reputable bonding company.
2.9 The Company represents and warrants that all of its directors,
officers, employees, and other individuals/entities employed or controlled by
the Company dealing with the money and/or securities of the Fund are covered by
a blanket fidelity bond or similar coverage in an amount not less than $5
million. The aforesaid bond includes coverage for larceny and embezzlement and
is issued by a reputable bonding company. The Company agrees that any amounts
received under such bond in connection with claims that arise from the
arrangements described in this Agreement will be held by the Company for the
benefit of the Fund. The Company agrees to make all reasonable efforts to see
that this bond or another bond containing these provisions is always in effect,
and agrees to notify the Fund and the Underwriter in the event that such
coverage no longer applies. The Company agrees to exercise its best efforts to
ensure that other individuals/entities not employed or controlled by the
Company and dealing with the money and/or securities of the Fund maintain a
similar bond or coverage in a reasonable amount.
ARTICLE III. Prospectuses, Statements of Additional Information, and Proxy
Statements; Voting
3.1 (a) The Underwriter, at least annually, shall provide the Company
with as many copies of the current prospectus for the Designated Portfolios as
listed on Schedule A, as the Company may reasonably request for distribution to
existing Contract owners whose Contracts are funded by such Designated
Portfolios. The Underwriter shall provide the Company, at the Company's
expense, with as many copies of the current prospectus for the Designated
Portfolios as the Company may reasonably request for distribution to
prospective purchasers of Contracts. If requested by the Company in lieu
thereof, the Fund shall provide such documentation (including a "camera ready"
copy of the new prospectus as set in type or, at the request of the Company, as
a diskette in either pdf format, or the form sent to the financial printer) and
other assistance as is reasonably necessary in order for the parties hereto
once each year (or more frequently if the prospectuses for the Designated
Portfolios are supplemented or amended) to have the prospectus for the
Contracts and the prospectuses for the Designated Portfolios printed together
in one document. With respect to any prospectuses and shareholder reports of
the Designated Portfolios that are printed in combination with any one or more
Contract prospectuses or shareholder reports (the "Booklet"), the costs of
printing Booklets for distribution to existing Contract owners shall be
prorated to and reimbursed by the Underwriter based on (a) the ratio of the
number of pages of the prospectuses and shareholder reports for the Designated
Portfolios included in the Booklet to the number of pages in the Booklet as a
whole; and (b) the ratio of the number of Contract owners with Contract value
allocated to the Designated Portfolios to the total number of Contract owners;
provided, however, that the Company shall bear all printing expenses of such
combined documents where used for distribution to prospective purchasers or to
owners of existing Contracts not funded by the Designated Portfolios; and
provided further, that the Underwriter's reimbursement obligation for
<PAGE> 7
7
printing expenses under this subparagraph (a) shall not exceed $5,000 per year.
The Underwriter may request a statement from the Company showing how the
printing expenses were prorated and the number of Contract owners with Contract
value allocated to the Designated Portfolios.
(b) The prospectuses for the Designated Portfolios shall state that the
current Statements of Additional Information (the "SAI") for the Designated
Portfolios are available from the Company. The Underwriter, at its expense,
shall print and provide as many copies of the SAI as the Company may reasonably
request for distribution to existing Contract owners whose Contract are funded
by such Designated Portfolios. The Underwriter, at the Company's expense,
shall print and provide such SAI to the Company (or a master of such SAI
suitable for duplication by the Company) for distribution to a prospective
purchaser who requests such SAI or to an owner of a Contract not funded by the
Designated Portfolios. The Company shall send an SAI to any such Contract owner
within 3 business days of the receipt of a request.
(c) The Underwriter will use its best efforts to provide such
documentation to the Company in a timely manner to enable the Company to print
such documents for distribution to Contract owners and meet applicable
regulatory deadlines in accordance with the Company's reasonable time
requirements, but for a May 1st prospectus or statement of additional
information, no later than the twentieth calendar day of April for pdf files,
and no later than the third business day prior to the last day of April for a
printed copy or camera-ready version thereof.
3.2 The Fund, at its expense, shall provide the Company with copies of
its proxy material, reports to shareholders, and other communications to
shareholders in such quantity as the Company shall reasonably require for
distribution to Contract owners in the Fund. The Underwriter (at the Company's
expense) shall provide the Company with copies of the Fund's annual and
semi-annual reports in such quantity as the Company shall reasonably request
for use in connection with offering the Contracts issued by the Company to
prospective Contract owners. If requested by the Company in lieu thereof, the
Underwriter shall provide such documentation (which may include a final copy of
the Fund's annual and semi-annual reports as set in type or on diskette) and
other assistance as is reasonably necessary in order for the Company (at the
Company's expense) to print such shareholder communications for distribution to
Contract owners. The Company shall send a copy of the Fund's annual or
semi-annual report within 3 business days of the receipt of a request by a
Contract owner.
3.3 The Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote the Fund shares in accordance with instructions received
from Contract owners; and
(iii) vote Fund shares for which no instructions have been received
in the same proportion as Fund shares of such Designated
Portfolio for which instructions have been received,
<PAGE> 8
8
so long as and to the extent that the SEC continues to interpret the 1940 Act
to require pass-through voting privileges for variable contract owners or to
the extent otherwise required by law. The Company reserves the right to vote
Fund shares held in any segregated asset account in its own right, to the
extent permitted by law.
3.4 Participating Insurance Companies shall be responsible for assuring
that each of their separate accounts participating in a Designated Portfolio
calculates voting privileges as required by the Shared Funding Exemptive Order
and consistent with any reasonable standards that the Fund may adopt.
3.5 The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund
is not one of the trusts described in Section 16(c) of that Act) as well as
with Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will
act in accordance with the SEC's interpretation of the requirements of Section
16(a) with respect to periodic elections of directors or trustees and with
whatever rules the SEC may promulgate with respect thereto.
ARTICLE IV. Sales Material and Information
4.1 The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material that the Company develops or uses and in which the Fund (or a
Portfolio thereof) or the Adviser or the Underwriter is named, at least ten
calendar days prior to its use. No such material shall be used if the Fund or
its designee reasonably object to such use within ten calendar days after
receipt of such material. The Fund or its designee reserves the right to
reasonably object to the continued use of such material, and no such material
shall be used if the Fund or its designee so object.
4.2 The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus or SAI
for the Fund shares, as such registration statement and prospectus or SAI may
be amended or supplemented from time to time, or in reports or proxy statements
for the Fund, or in sales literature or other promotional material approved by
the Fund or its designee or by the Underwriter, except with the permission of
the Fund or the Underwriter or the designee of either.
4.3 The Fund, Underwriter, or its designee shall furnish, or shall cause
to be furnished, to the Company, each piece of sales literature or other
promotional material in which the Company, and/or its Account, is named at
least ten calendar days prior to its use. No such material shall be used if the
Company reasonably objects to such use within ten calendar days after receipt
of such material. The Company reserves the right to reasonably object to the
continued use of such material and no such material shall be used if the
Company so objects.
<PAGE> 9
9
4.4. The Fund and the Underwriter shall not give any information or make
any representations on behalf of the Company or concerning the Company, the
Account, or the Contracts other than the information or representations
contained in a registration statement, prospectus, or SAI for the Contracts, as
such registration statement, prospectus or SAI may be amended or supplemented
from time to time, or in published reports for the Account which are in the
public domain or approved by the Company for distribution to Contract owners,
or in sales literature or other promotional material approved by the Company or
its designee, except with the permission of the Company.
4.5 The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, SAIs, reports, proxy statements,
sales literature and other promotional materials, applications for exemptions,
requests for no-action letters, and all amendments to any of the above, that
relate to the Fund or its shares, within a reasonable time after the filing of
such document(s) with the SEC or other regulatory authorities.
4.6 The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, SAIs, reports, solicitations for
voting instructions, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Contracts or the Account, within a
reasonable time after the filing of such document(s) with the SEC or other
regulatory authorities.
4.7 For purposes of this Article IV, the phrase "sales literature and
other promotional materials" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, reports,
market letters, form letters, seminar texts, reprints or excerpts of any other
advertisement, sales literature, or published article), educational or training
materials or other communications distributed or made generally available to
some or all agents or employees, and registration statements, prospectuses,
SAIs, shareholder reports, proxy materials, and any other communications
distributed or made generally available with regard to the Funds.
ARTICLE V. Fees and Expenses
5.1 The Fund and the Underwriter shall pay no fee or other compensation
to the Company under this Agreement, except that if the Fund or any Portfolio
adopts and implements a plan pursuant to Rule 12b-1 to finance distribution
expenses, then the Underwriter may make payments to the Company or to the
underwriter for the Contracts if and in amounts agreed to by the Underwriter in
writing, and such payments will be made out of existing fees otherwise payable
to the Underwriter, past profits of the Underwriter, or other resources
available to the Underwriter. No such payments shall be made directly by the
Fund. Currently, no such payments are contemplated.
<PAGE> 10
10
5.2 All expenses incident to performance by the Fund under this Agreement
shall be paid by the Fund, except as otherwise provided herein. The Fund shall
see to it that all its shares are registered and authorized for issuance in
accordance with applicable federal law and, if and to the extent deemed
advisable by the Fund, in accordance with applicable state laws prior to their
sale. The Fund shall bear the expenses for the cost of registration and
qualification of the Fund's shares, preparation and filing of the Fund's
prospectus and registration statement, proxy materials and reports, setting the
prospectus in type, setting in type and printing the proxy materials and
reports to shareholders (including the costs of printing a prospectus that
constitutes an annual report), the preparation of all statements and notices
required by any federal or state law, and all taxes on the issuance or transfer
of the Fund's shares.
5.3 The Company shall bear the expenses of distributing the Fund's
prospectus, proxy materials, and reports to Contract owners and prospective
Contract owners.
ARTICLE VI. Diversification and Qualification
6.1 The Fund will invest the assets of each Designated Portfolio in such
a manner as to ensure that the Contracts will be treated as annuity, endowment,
or life insurance contracts, whichever is appropriate, under the Internal
Revenue Code of 1986, as amended (the "Code") and the regulations issued
thereunder (or any successor provisions). Without limiting the scope of the
foregoing, each Designated Portfolio of the Fund will comply with Section
817(h) of Code and Treasury Regulation Section 1.817-5, and any Treasury
interpretations thereof, relating to the diversification requirements for
variable annuity, endowment, or life insurance contracts, and any amendments or
other modifications or successor provisions to such Section or Regulations. In
the event of a breach of this Article VI by the Fund, it will take all
reasonable steps (a) to notify the Company of such breach and (b) to adequately
diversify the Fund so as to achieve compliance within the grace period afforded
by Regulation 817.5.
6.2 The Fund represents that each Designated Portfolio is or will be
qualified as a Regulated Investment Company under Subchapter M of the Code, and
that it will make every effort to maintain such qualification (under Subchapter
M or any successor or similar provisions) and that it will notify the Company
immediately upon having a reasonable basis for believing that it has ceased to
so qualify or that it might not so qualify in the future.
6.3 The Company represents that the Contracts are currently, and at the
time of issuance shall be, treated as life insurance, endowment contracts, or
annuity insurance contracts, under applicable provisions of the Code, and that
it will make every effort to maintain such treatment, and that it will notify
the Fund and the Underwriter immediately upon having a reasonable basis for
believing the Contracts have ceased to be so treated or that they might not be
so treated in the future. The Company agrees that any prospectus offering a
contract that is a "modified endowment contract" as that term is defined in
Section 7702A of the Code (or any successor or similar provision), shall
identify such contract as a modified endowment contract.
<PAGE> 11
11
ARTICLE VII. Potential Conflicts.
7.1 The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by an insurer to disregard the voting
instructions of contract owners. The Board shall promptly inform the Company
if it determines that an irreconcilable material conflict exists and the
implications thereof.
7.2. The Company will report any potential or existing conflicts of which
it is aware to the Board. The Company will assist the Board in carrying out
its responsibilities under the Shared Funding Exemptive Order, by providing the
Board with all information reasonably necessary for the Board to consider any
issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever Contract owner voting instructions are
disregarded.
7.3 If it is determined by a majority of the Board, or a majority of its
disinterested members, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested Board members), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a
vote of all affected contract owners and, as appropriate, segregating the
assets of any appropriate group (i.e., annuity contract owners, life insurance
contract owners, or variable contract owners of one or more Participating
Insurance Companies) that votes in favor of such segregation, or offering to
the affected contract owners the option of making such a change; and (2),
establishing a new registered management investment company or managed separate
account.
7.4 If a material irreconcilable conflict arises because of a decision by
the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such
Account provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the Board.
Any such withdrawal and termination must take place within six (6) months after
the Fund gives written notice that this provision is being
<PAGE> 12
12
implemented, and until the end of that six month period the Fund shall continue
to accept and implement orders by the Company for the purchase (and redemption)
of shares of the Fund.
7.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company
in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested
members of the Board. Until the end of the foregoing six month period, the
Fund shall continue to accept and implement orders by the company for the
purchase (and redemption) of shares of the Fund.
7.6 For purposes of Section 7.3 through 7.6 of this Agreement, a majority
of the disinterested members of the Board shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no
event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contract if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination; provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.7 If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or Rule
6e-3 is adopted, to provide exemptive relief from any provision of the 1940 Act
or the rules promulgated thereunder with respect to mixed or shared funding (as
defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive
Order, then (a) the Fund and/or the Participating Insurance Companies, as
appropriate, shall take such steps as may be necessary to comply with Rules
6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such
rules are applicable; and (b) Sections 3.4, 3.5, 3.6, 7.1, 7.2, 7.3, 7.4, and
7.5 of this Agreement shall continue in effect only to the extent that terms
and conditions substantially identical to such Sections are contained in such
Rule(s) as so amended or adopted.
ARTICLE VIII. Indemnification
8.1 Indemnification By the Company
<PAGE> 13
13
8.1(a). The Company agrees to indemnify and hold harmless the Fund
and the Underwriter and each of their officers and directors and each person,
if any, who controls the Fund or the Underwriter within the meaning of Section
15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of
this Section 8.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the Company)
or litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute or regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the
Registration Statement, prospectus (which shall include an
offering memorandum, if any), or statement of additional
information ("SAI") for the Contracts or contained in the
Contracts or sales literature or other promotional material for
the Contracts (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements
therein not misleading, provided that this agreement to
indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was
made in reliance upon and in conformity with information
furnished to the Company by or on behalf of the Fund for use in
the Registration Statement, prospectus or SAI for the Contracts
or in the Contracts or sales literature or other promotional
material (or any amendment or supplement) or otherwise for use
in connection with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature or other
promotional material of the Fund not supplied by the Company or
persons under its control) or wrongful conduct of the Company
or persons under its authorization or control, with respect to
the sale or distribution of the Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a Registration Statement,
prospectus, SAI, or sales literature or other promotional
material of the Fund or any amendment thereof or supplement
thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statements therein not misleading if such a statement
or omission was made in reliance upon information furnished to
the Fund by or on behalf of the Company; or
(iv) arise as a result of any material failure by the Company to
provide the services and furnish the materials under the terms
of this Agreement
<PAGE> 14
14
(including a failure, whether unintentional or in good faith or
otherwise, to comply with the qualification requirements
specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company,
as limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation to which an Indemnified Party would otherwise be subject by reason
of such Indemnified Party's willful misfeasance, bad faith, or gross negligence
in the performance of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of its obligations or duties under this
Agreement.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Company of
any such claim shall not relieve the Company from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any such action is
brought against an Indemnified Party, the Company shall be entitled to
participate, at its own expense, in the defense of such action. The Company
also shall be entitled to assume the defense thereof, with counsel satisfactory
to the party named in the action and to settle the claim at its own expense;
provided, however, that no such settlement shall, without the Indemnified
Parties' written consent, include any factual stipulation referring to the
Indemnified Parties or their conduct. After notice from the Company to such
party of the Company's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by
it, and the Company will not be liable to such party under this Agreement for
any legal or other expenses subsequently incurred by such party independently
in connection with the defense thereof other than reasonable costs of
investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of
the commencement of any litigation or proceedings against them in connection
with the issuance or sale of the Fund Shares or the Contracts or the operation
of the Fund.
8.2 Indemnification by the Underwriter
8.2(a). The Underwriter agrees to indemnify and hold harmless the
Company and each of it directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts
paid
<PAGE> 15
15
in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may
become subject under any statute or regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements are related to the sale or acquisition of the
Fund's shares or the Contracts; and
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the Registration Statement or prospectus or SAI or sales
literature or other promotional material of the Fund (or
any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein
not misleading, provided that this agreement to indemnify
shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or
omission was made in reliance upon and in conformity with
information furnished to the Underwriter or Fund by or on
behalf of the Company for use in the Registration
Statement or prospectus for the Fund or in sales
literature or other promotional material (or any amendment
or supplement) or otherwise for use in connection with the
sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the Registration Statement, prospectus or
sales literature or other promotional material for the
Contracts not supplied by the Underwriter or persons under
its control) or wrongful conduct of the Fund or
Underwriter or persons under their control, with respect
to the sale or distribution of the Contracts or Fund
shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration
Statement, prospectus, SAI, or sales literature or other
promotional material of the Contracts, or any amendment
thereof or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statement or
statements therein not misleading, if such statement or
omission was made in reliance upon information furnished
to the Company by or on behalf of the Fund; or
(iv) arise as a result of any material failure by the Fund to
provide the services and furnish the materials under the
terms of this Agreement (including a failure, whether
unintentional or in good faith or otherwise, to comply
with the diversification and other
<PAGE> 16
16
qualification requirements specified in Article VI of this
Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in
this Agreement or arise out of or result from any other
material breach of this Agreement by the Underwriter;
as limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith,
or gross negligence in the performance or such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to the Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Underwriter in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Underwriter
of any such claim shall not relieve the Underwriter from any liability which it
may have to the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any such action is
brought against the Indemnified Party, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action and to settle the claim at its own expense;
provided, however, that no such settlement shall, without the Indemnified
Parties' written consent, include any factual stipulation referring to the
Indemnified Parties or their conduct. After notice from the Underwriter to
such party of the Underwriter's election to assume the defense thereof, the
Indemnified Party shall bear the fees and expenses of any additional counsel
retained by it, and the Underwriter will not be liable to such party under this
Agreement for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable
costs of investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of the Account.
8.3 Indemnification By the Fund
8.3(a). The Fund agrees to indemnify and hold harmless the Company
and each of its directors and officers and each person, if any, who controls
the Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of
<PAGE> 17
17
this Section 8.3) against any and all losses, claims, expenses, damages,
liabilities (including amounts paid in settlement with the written consent of
the Fund) or litigation (including legal and other expenses) to which the
Indemnified Parties may be required to pay or may become subject under any
statute or regulation, at common law or otherwise, insofar as such losses,
claims, expenses, damages, liabilities or expenses (or actions in respect
thereof) or settlements, are related to the operations of the Fund and:
(i) arise as a result of any material failure by the Fund to
provide the services and furnish the materials under the
terms of this Agreement (including a failure, whether
unintentional or in good faith or otherwise, to comply with
the diversification and other qualification requirements
specified in Article VI of this Agreement); or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation to which an Indemnified Party would otherwise be subject by reason
of such Indemnified Party's willful misfeasance, bad faith, or gross negligence
in the performance of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations and duties under this
Agreement or to the Company, the Fund, the Underwriter or the Account,
whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Fund will be entitled to participate, at
its own expense, in the defense thereof. The Fund also shall be entitled to
assume the expense thereof, with counsel satisfactory to the party named in the
action and to settle the claim at its own expense; provided, however, that no
such settlement shall, without the Indemnified Parties' written consent,
include any factual stipulation referring to the Indemnified Parties or their
conduct. After notice from the Fund to such party of the Fund's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Fund will not be
liable to such party under this Agreement for any legal or other
<PAGE> 18
18
expenses subsequently incurred by such party independently in connection with
the defense thereof other than reasonable costs of investigation.
8.3(d). The Company and the Underwriter agree promptly to notify the
Fund of the commencement of any litigation or proceeding against it or any of
its respective officers or directors in connection with the Agreement, the
issuance or sale of the Contracts, the operation of the Account, or the sale or
acquisition of shares of the Fund.
ARTICLE IX. Applicable Law
9.1 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Maryland.
9.2 This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the SEC may grant
(including, but not limited to, any Shared Funding Exemptive Order) and the
terms hereof shall be interpreted and construed in accordance therewith.
ARTICLE X. Termination
10.1 This Agreement shall continue in full force and effect until the
first to occur of:
(a) termination by any party, for any reason with respect to some or
all Designated Portfolios, by six (6) months' advance written
notice delivered to the other parties; or
(b) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Designated Portfolio based upon
the Company's determination that shares of the Fund are not
reasonably available to meet the requirements of the Contracts;
provided that such termination shall apply only to the
Designated Portfolio not reasonably available; or
(c) termination by the Company by written notice to the Fund and the
Underwriter in the event any of the Designated Portfolio's
shares are not registered, issued or sold in accordance with
applicable state and/or federal law or such law precludes the
use of such shares as the underlying investment media of the
Contracts issued or to be issued by the Company; or
(d) termination by the Fund or Underwriter in the event that formal
administrative proceedings are instituted against the Company by
the NASD, the SEC, the Insurance Commissioner or like official
of any state
<PAGE> 19
19
or any other regulatory body regarding the Company's duties
under this Agreement or related to the sale of the Contracts,
the operation of any Account, or the purchase of the Fund
shares; provided, however, that the Fund or Underwriter
determines in its sole judgment exercised in good faith, that
any such administrative proceedings will have a material adverse
effect upon the ability of the Company to perform its
obligations under this Agreement; or
(e) termination by the Company in the event that formal
administrative proceedings are instituted against the Fund or
Underwriter by the NASD, the SEC, or any state securities or
insurance department or any other regulatory body; provided,
however, that the Company determines in its sole judgment
exercised in good faith, that any such administrative
proceedings will have a material adverse effect upon the ability
of the Fund or Underwriter to perform its obligations under this
Agreement; or
(f) termination by the Company by written notice to the Fund and the
Underwriter with respect to any Designated Portfolio in the
event that such Designated Portfolio ceases to qualify as a
Regulated Investment Company under Subchapter M or fails to
comply with the Section 817(h) diversification requirements
specified in Article VI hereof, or if the Company reasonably
believes that such Designated Portfolio may fail to so qualify
or comply; or
(g) termination by the Fund or Underwriter by written notice to the
Company in the event that the Contracts fail to meet the
qualifications specified in Section 6.3 hereof; or if the Fund
or Underwriter reasonably believes that such Contracts may fail
to so qualify; or
(h) termination by either the Fund or the Underwriter by written
notice to the Company, if (i) either one or both of the Fund or
the Underwriter respectively, shall determine, in their sole
judgment reasonably exercised in good faith, that the Company
has suffered a material adverse change in its business or
financial condition, is the subject of material adverse
publicity and such material adverse change or material adverse
publicity will have a material adverse impact upon the business
and operations of either the Fund or the Underwriter, (ii) the
Fund or the Underwriter shall notify the Company in writing of
such determination and its intent to terminate this Agreement,
and (iii) after considering the actions taken by the Company and
any other changes in circumstances since the giving of such
notice, such determination of the Fund or the Underwriter shall
continue to apply on the thirtieth (30th) day following the
giving of such notice, which thirtieth (30th) day shall be the
effective date of termination; or
<PAGE> 20
20
(i) termination by the Company by written notice to the Fund and the
Underwriter, (i) if the Company shall determine, in its sole
judgment reasonably exercised in good faith, that either the
Fund or the Underwriter has suffered a material adverse change
in its business or financial condition, or is the subject of
material adverse publicity and such material adverse change or
material adverse publicity will have a material adverse impact
upon the business and operations of either the Company, (ii) the
Company shall notify the Fund and the Underwriter in writing of
such determination and its intent to terminate this Agreement,
and (iii) after considering the actions taken by the Fund and/or
the Underwriter and any other changes in circumstances since the
giving of such notice, such determination of the Company shall
continue to apply on the thirtieth (30th) day following the
giving of such notice, which thirtieth (30th) day shall be the
effective date of termination.
10.2 Effect of Termination. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall, at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, the owners of the Existing Contracts may be
permitted to reallocate investments in the Fund, redeem investments in the Fund
and/or invest in the Fund upon the making of additional purchase payments under
the Existing Contracts. The parties agree that this Section 10.2 shall not
apply to any termination under Article VII and the effect of such Article VII
termination shall be governed by Article VII of this Agreement. The parties
further agree that this Section 10.2 shall not apply to any termination under
Section 10.1(g) of this Agreement.
10.3 The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract owner initiated
or approved transactions, (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption"), or (iii) pursuant
to the terms of a substitution order issued by the SEC pursuant to Section
26(b) of the 1940 Act. Upon request, the Company will promptly furnish to the
Fund and the Underwriter the opinion of counsel for the Company (which counsel
shall be reasonably satisfactory to the Fund and the Underwriter) to the effect
that any redemption pursuant to clause (ii) above is a Legally Required
Redemption. Furthermore, except in cases where permitted under the terms of the
Contracts, the Company shall not prevent Contract owners from allocating
payments to a Portfolio that was otherwise available under the Contracts
without first giving the Fund or the Underwriter 90 days notice of its
intention to do so.
10.4 Notwithstanding any termination of this Agreement, each party's
obligation under Article VIII to indemnify the other parties shall survive.
ARTICLE XI. Notices
<PAGE> 21
21
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
T. Rowe Price Associates, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Attention: Henry H. Hopkins, Esq.
If to the Company:
Western Reserve Life Assurance Co. of Ohio
c/o PFL Life Insurance Company
4333 Edgewood Road, N.E.
Cedar Rapids, IA 52499
Attn: Financial Markets Division Counsel
If to Underwriter:
T. Rowe Price Investment Services
100 East Pratt Street
Baltimore, Maryland 21202
Attention: Henry H. Hopkins, Esq.
ARTICLE XII. Miscellaneous
12.1 All references herein to the Fund are to each of the undersigned
Funds as if this agreement were between such individual Fund and the
Underwriter and the Company. All references herein to the Adviser relate
solely to the Adviser of such individual Fund, as appropriate. All persons
dealing with a Fund must look solely to the property of such Fund, and in the
case of a series company, the respective Designated Portfolio listed on
Schedule A hereto as though such Designated Portfolio had separately contracted
with the Company and the Underwriter for the enforcement of any claims against
the Fund. The parties agree that neither the Board, officers, agents or
shareholders assume any personal liability or responsibility for obligations
entered into by or on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and
addresses of the owners of the Contracts and all information reasonably
identified as confidential in writing by any other party hereto and, except as
permitted by this Agreement, shall not disclose, disseminate or utilize such
names and
<PAGE> 22
22
addresses and other confidential information without the express written
consent of the affected party until such time as such information may come into
the public domain.
12.3 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the SEC, the
NASD, and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the Ohio Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the variable annuity
operations of the Company are being conducted in a manner consistent with Ohio
variable annuity laws and regulations and any other applicable law or
regulations.
12.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies, and
obligations, at law or in equity, which the parties hereto are entitled to
under state and federal laws.
12.8 This Agreement or any of the rights and obligations hereunder may not
be assigned by any party without the prior written consent of all parties
hereto.
12.9 The Company shall furnish or cause to be furnished, to the Fund or
its designee copies of the following reports:
(a) the Company's annual statement (prepared under statutory accounting
principles) and annual report (prepared under generally accepted
accounting principles ("GAAP"), if any), as soon as practical and in
any event within 90 days after the end of each fiscal year.
(b) the Company's quarterly statements (statutory) (and GAAP, if any), as
soon as practical and in any event within 45 days after the end of
each quarterly period.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
<PAGE> 23
23
COMPANY: WESTERN RESERVE LIFE ASSURANCE CO.OF OHIO
By its authorized officer
By: s/ John R. Kenney
--------------------------------------
Title: CHAIRMAN, CEO AND PRESIDENT
-----------------------------------
Date: JULY 22, 1999
------------------------------------
FUNDS: T. ROWE PRICE EQUITY SERIES, INC.
By its authorized officer
By: s/
--------------------------------------
Title: Vice President
-----------------------------------
Date: July 15, 1999
------------------------------------
T. ROWE PRICE INTERNATIONAL SERIES, INC.
By its authorized officer
By: s/
--------------------------------------
Title: Vice President
-----------------------------------
Date: July 15, 1999
------------------------------------
UNDERWRITER: T. ROWE PRICE INVESTMENT SERVICES, INC.
By its authorized officer
By: s/
--------------------------------------
Title: Vice President
-----------------------------------
Date: July 15, 1999
------------------------------------
<PAGE> 24
SCHEDULE A
<TABLE>
<CAPTION>
Name of Separate Account and Contracts Funded by
Date Established by Board of Directors Separate Account Designated Portfolios
- -------------------------------------- ---------------- ---------------------
<S> <C> <C>
WRL Series Life Corporate Account Advantage IV T. Rowe Price Equity Series, Inc.
Established December 8, 1997 Variable Universal ---------------------------------
Life (COLI) - T. Rowe Price Mid-Cap Growth Portfolio
Policy No. - T. Rowe Price New America Growth Portfolio
WL694 136 82 598 - T. Rowe Price Equity Income Portfolio
T. Rowe Price International Series, Inc.
----------------------------------------
- T. Rowe Price International Stock
Portfolio
</TABLE>
<PAGE> 1
EXHIBIT 1.A.(8)(e)
JANUS ASPEN SERIES
FUND PARTICIPATION AGREEMENT
THIS AGREEMENT is made this 22 day of July, 1999, between JANUS ASPEN
SERIES, an open-end management investment company organized as a Delaware
business trust (the "Trust"), and WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO, a
life insurance company organized under the laws of the State of Ohio (the
"Company"), on its own behalf and on behalf of each segregated asset account of
the Company set forth on Schedule A, as may be amended from time to time (the
"Accounts").
W I T N E S S E T H:
WHEREAS, the Trust has registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and has registered the offer
and sale of its Institutional Shares ("shares") under the Securities Act of
1933, as amended (the "1933 Act"); and
WHEREAS, the Trust desires to act as an investment vehicle for separate
accounts established for variable life insurance policies and variable annuity
contracts to be offered by insurance companies that have entered into
participation agreements with the Trust (the "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Trust is divided into several
series of shares, each series representing an interest in a particular managed
portfolio of securities and other assets (the "Portfolios"); and
WHEREAS, the Trust has received an order from the Securities and Exchange
Commission ("SEC") granting Participating Insurance Companies and their
separate accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a)
and 15(b) of the 1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder,
to the extent necessary to permit shares of the Trust to be sold to and held by
variable annuity and variable life insurance separate accounts of both
affiliated and unaffiliated life insurance companies and certain qualified
pension and retirement plans (the "Exemptive Order"); and
WHEREAS, the Company has registered or will register (unless registration
is not required under applicable law) certain variable life insurance policies
and/or variable annuity contracts under the 1933 Act (the "Contracts"); and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act or alternatively, has properly relied
on the exclusion from registration in 3(c)(11), 3(c)(1) or 3(c)(7) of the 1940
Act; and
-1-
<PAGE> 2
WHEREAS, the Company desires to utilize shares of one or more Portfolios
as an investment vehicle of the Accounts;
NOW, THEREFORE, in consideration of their mutual promises, the parties
agree as follows:
ARTICLE I
Sale of Trust Shares
1.1 The Trust shall make shares of its Portfolios available to the
Accounts at the net asset value next computed after receipt of such purchase
order by the Trust (or its agent), as established in accordance with the
provisions of the then current prospectus of the Trust. Shares of a particular
Portfolio of the Trust shall be ordered in such quantities and at such times as
determined by the Company to be necessary to meet the requirements of the
Contracts. The Trustees of the Trust (the "Trustees") may refuse to sell shares
of any Portfolio to any person, or suspend or terminate the offering of shares
of any Portfolio if such action is required by law or by regulatory authorities
having jurisdiction or is, in the sole discretion of the Trustees acting in
good faith and in light of their fiduciary duties under federal and any
applicable state laws, necessary in the best interests of the shareholders of
such Portfolio.
1.2 The Trust will redeem any full or fractional shares of any Portfolio
when requested by the Company on behalf of an Account at the net asset value
next computed after receipt by the Trust (or its agent) of the request for
redemption, as established in accordance with the provisions of the then
current prospectus of the Trust. The Trust shall make payment for such shares
in the manner established from time to time by the Trust, but in no event shall
payment be delayed for a greater period than is permitted by the 1940 Act.
1.3 For the purposes of Sections 1.1 and 1.2, the Trust hereby appoints
the Company as its agent for the limited purpose of receiving and accepting
purchase and redemption orders resulting from investment in and payments under
the Contracts. Receipt by the Company shall constitute receipt by the Trust
provided that i) such orders are received by the Company in good order prior to
the time the net asset value of each Portfolio is priced in accordance with its
prospectus and ii) the Trust receives notice of such orders by 10:00 a.m. New
York time on the next following Business Day. "Business Day" shall mean any
day on which the New York Stock Exchange is open for trading and on which the
Trust calculates its net asset value pursuant to the rules of the SEC.
1.4 Purchase orders that are transmitted to the Trust in accordance with
Section 1.3 shall be paid for no later than 12:00 noon New York time on the
same Business Day that the Trust receives notice of the order. Payments shall
be made in federal funds transmitted by wire.
-2-
<PAGE> 3
1.5 Issuance and transfer of the Trust's shares will be by book entry
only. Stock certificates will not be issued to the Company or the Account.
Shares ordered from the Trust will be recorded in the appropriate title for
each Account or the appropriate subaccount of each Account.
1.6 The Trust shall furnish same day notice (by wire or telephone
followed by written confirmation) to the Company of any income dividends or
capital gain distributions payable on the Trust's shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on a Portfolio's shares in additional shares of that Portfolio. The
Company reserves the right to revoke this election and to receive all such
dividends and capital gain distributions in cash. The Trust shall notify the
Company of the number of shares so issued as payment of such dividends and
distributions.
1.7 The Trust shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated and shall use its best efforts to
make such net asset value per share available by 6 p.m. New York time.
1.8 The Trust agrees that its shares will be sold only to Participating
Insurance Companies and their separate accounts and to certain qualified
pension and retirement plans to the extent permitted by the Exemptive Order. No
shares of any Portfolio will be sold directly to the general public. The
Company agrees that Trust shares will be used only for the purposes of funding
the Contracts and Accounts listed in Schedule A, as amended from time to time.
1.9 The Trust agrees that all Participating Insurance Companies shall
have the obligations and responsibilities regarding pass-through voting and
conflicts of interest corresponding to those contained in Section 2.8 and
Article IV of this Agreement.
ARTICLE II
Obligations of the Parties
2.1 The Trust shall prepare and be responsible for filing with the SEC
and any state regulators requiring such filing all shareholder reports,
notices, proxy materials (or similar materials such as voting instruction
solicitation materials), prospectuses and statements of additional information
of the Trust. The Trust shall bear the costs of registration and qualification
of its shares, preparation and filing of the documents listed in this Section
2.1 and all taxes to which an issuer is subject on the issuance and transfer of
its shares.
2.2 At the option of the Company, the Trust shall either (a) provide the
Company (at the Company's expense) with as many copies of the Trust's current
prospectus, annual report, semi-annual report and other shareholder
communications, including any amendments
-3-
<PAGE> 4
or supplements to any of the foregoing, as the Company shall reasonably
request; or (b) provide the Company with a camera ready copy of such documents
in a form suitable for printing. The Trust shall provide the Company with a
copy of its statement of additional information in a form suitable for
duplication by the Company. The Trust (at its expense) shall provide the
Company with copies of any Trust-sponsored proxy materials in such quantity as
the Company shall reasonably require for distribution to Contract owners. The
Trust shall provide the materials described in this Section 2.2 promptly after
receipt of SEC comments (if any) and shall use best efforts to provide such
materials within a reasonable time prior to required printing and distribution
of such materials.
2.3 (a) The Company shall bear the costs of printing and distributing
the Trust's prospectus, statement of additional information, shareholder
reports and other shareholder communications to owners of and applicants for
policies for which the Trust is serving or is to serve as an investment
vehicle. The Company shall bear the costs of distributing proxy materials (or
similar materials such as voting solicitation instructions) to Contract owners.
The Company assumes sole responsibility for ensuring that such materials are
delivered to Contract owners in accordance with applicable federal and state
securities laws.
(b) If the Company elects to include any materials provided by the
Trust, specifically prospectuses, SAIs, shareholder reports and proxy
materials, on its web site or in any other computer or electronic format, the
Company assumes sole responsibility for maintaining such materials in the form
provided by the Trust and for promptly replacing such materials with all
updates provided by the Trust.
2.4 The Company agrees and acknowledges that the Trust's adviser, Janus
Capital Corporation ("Janus Capital"), is the sole owner of the name and mark
"Janus" and that all use of any designation comprised in whole or part of Janus
(a "Janus Mark") under this Agreement shall inure to the benefit of Janus
Capital. Except as provided in Section 2.5, the Company shall not use any
Janus Mark on its own behalf or on behalf of the Accounts or Contracts in any
registration statement, advertisement, sales literature or other materials
relating to the Accounts or Contracts without the prior written consent of
Janus Capital. Upon termination of this Agreement for any reason, the Company
shall cease all use of any Janus Mark(s) as soon as reasonably practicable.
2.5 (a) The Company shall furnish, or cause to be furnished, to the
Trust or its designee, a copy of each Contract prospectus or statement of
additional information in which the Trust or its investment adviser is named
prior to the filing of such document with the SEC. The Company shall furnish,
or shall cause to be furnished, to the Trust or its designee, each piece of
sales literature or other promotional material in which the Trust or its
investment adviser is named, at least fifteen Business Days prior to its use.
No such material shall be used if the Trust or its designee reasonably objects
to such use within fifteen Business Days after receipt of such material.
-4-
<PAGE> 5
(b) The Trust shall furnish, or shall cause to be furnished, to the
Company or its designee, each piece of sales literature or other promotional
material in which the Company or its investment adviser is named, at least
fifteen Business Days prior to its use. No such material shall be used if the
Company or its designee reasonably objects to such use within fifteen Business
Days after receipt of such material.
2.6 The Company shall not give any information or make any
representations or statements on behalf of the Trust or concerning the Trust or
its investment adviser in connection with the sale of the Contracts other than
information or representations contained in and accurately derived from the
registration statement or prospectus for the Trust shares (as such registration
statement and prospectus may be amended or supplemented from time to time),
reports of the Trust, Trust-sponsored proxy statements, or in sales literature
or other promotional material approved by the Trust or its designee, except as
required by legal process or regulatory authorities or with the written
permission of the Trust or its designee.
2.7 The Trust shall not give any information or make any representations
or statements on behalf of the Company or concerning the Company, the Accounts
or the Contracts other than information or representations contained in and
accurately derived from the registration statement or prospectus for the
Contracts (as such registration statement and prospectus may be amended or
supplemented from time to time), or in materials approved by the Company for
distribution including sales literature or other promotional materials, except
as required by legal process or regulatory authorities or with the written
permission of the Company.
2.8 So long as, and to the extent that the Securities and Exchange
Commission interprets the 1940 Act to require pass- through voting privileges
for variable policyowners, the Company will provide pass-through voting
privileges to owners of policies whose cash values are invested, through the
Accounts, in shares of the Trust. The Trust shall require all Participating
Insurance Companies to calculate voting privileges in the same manner and the
Company shall be responsible for assuring that the Accounts calculate voting
privileges in the manner established by the Trust. With respect to each
Account, the Company will vote shares of the Trust held by the Account and for
which no timely voting instructions from policyowners are received as well as
shares it owns that are held by that Account, in the same proportion as those
shares for which voting instructions are received. The Company and its agents
will in no way recommend or oppose or interfere with the solicitation of
proxies for Trust shares held by Contract owners without the prior written
consent of the Trust, which consent may be withheld in the Trust's sole
discretion.
2.9 The Company shall notify the Trust of any applicable state insurance
laws that restrict the Portfolios' investments or otherwise affect the
operation of the Trust and shall notify the Trust of any changes in such laws.
-5-
<PAGE> 6
ARTICLE III
Representations and Warranties
3.1 The Company represents and warrants that it is an insurance company
duly organized and in good standing under the laws of the State of Ohio and
that it has legally and validly established each Account as a segregated asset
account under such law on the date set forth in Schedule A.
3.2 The Company represents and warrants that each Account has been registered
or, prior to any issuance or sale of the Contracts, will be registered as a
unit investment trust in accordance with the provisions of the 1940 Act or
alternatively, has not registered an Account in proper reliance upon the
exclusion from registration in 3(c)(11), 3(c)(1) or 3(c)(7) of the 1940 Act.
For its unregistered Accounts which are exempt from registration under the 1940
Act in reliance upon Section 3(c)(1) or Section 3(c)(7) thereof, the Company
represents and agrees that:
(a) AFSG Securities Corporation is the principal underwriter for each
such unregistered Account and its subaccounts and is a registered
broker-dealer under the Securities and Exchange Act of 1934 (the
"1934 Act"),
(b) the shares of the Portfolios of the Trust are and will continue to be
the only investment securities held by the corresponding Account
subaccounts; and
(c) with regard to each Portfolio, the Company, on behalf of the
corresponding Account subaccount will:
i. vote such shares held by it in the same proportion as the vote
of all other holders of such shares; and
ii. refrain from substituting shares of another security for such
shares unless the SEC has approved such substitution in the
manner provided in Section 26 of the 1940 Act.
3.3 The Company represents and warrants that the Contracts or interests
in the Accounts (1) are or, prior to issuance, will be registered as securities
under the 1933 Act or, alternatively (2) are not registered because they are
properly exempt from registration under the 1933 Act or will be offered
exclusively in transactions that are properly exempt from registration under
the 1933 Act. The Company further represents and warrants that the Contracts
will be issued and sold in compliance in all material respects with all
applicable federal and state laws; and the sale of the Contracts shall comply
in all material respects with state insurance suitability requirements.
-6-
<PAGE> 7
3.4 Each party represents and warrants to the other that it will use best
efforts to ensure that any of its trading systems implicated under this
Agreement prior to, during and after the calendar year 2000 will recognize
accurate century data, and user interfaces and operation environments will
comply with Year 2000 application standards. Notwithstanding any other
provision of this Agreement, no party shall be liable for any indirect, special
or consequential losses even if the party has notice of the possibility of such
loss.
3.5 The Trust represents and warrants that it is duly organized and
validly existing under the laws of the State of Delaware.
3.6 The Trust represents and warrants that the Trust shares offered and
sold pursuant to this Agreement will be registered under the 1933 Act and the
Trust shall be registered under the 1940 Act prior to any issuance or sale of
such shares. The Trust shall amend its registration statement under the 1933
Act and the 1940 Act from time to time as required in order to effect the
continuous offering of its shares. The Trust shall register and qualify its
shares for sale in accordance with the laws of the various states only if and
to the extent deemed advisable by the Trust.
3.7 The Trust represents and warrants that the investments of each
Portfolio will comply with the diversification requirements set forth in
Section 817(h) of the Internal Revenue Code of 1986, as amended, and the rules
and regulations thereunder.
3.8 The Trust represents that it intends to qualify as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended, (the "Code") and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
3.9 The Trust's Institutional Shares currently do not intend to make any
payments to finance distribution expenses pursuant to Rule 12b-1 under the 1940
Act or otherwise, although they may make such payments in the future. To the
extent that the Trust decides to finance distribution expenses for the
Institutional Shares pursuant to Rule 12b-1, the Trust undertakes to have a
board of trustees, a majority of whom are not interested persons of the Trust,
formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.
3.10 The Trust represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities
dealing with the money and/or securities of the Trust are and shall continue to
be at all times covered by a blanket fidelity bond or similar coverage for the
benefit of the Trust in an amount not less than the minimal coverage as
required currently by Rule 17g-(1) of the 1940 Act or related provisions as may
be promulgated from time to time. The aforesaid Bond shall include coverage
for larceny and embezzlement and shall be issued by a reputable bonding
company.
-7-
<PAGE> 8
ARTICLE IV
Potential Conflicts
4.1 The parties acknowledge that the Trust's shares may be made available
for investment to other Participating Insurance Companies. In such event, the
Trustees will monitor the Trust for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
Participating Insurance Companies. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by an insurer to disregard the voting
instructions of contract owners. The Trustees shall promptly inform the
Company if they determine that an irreconcilable material conflict exists and
the implications thereof.
4.2 The Company agrees to promptly report any potential or existing
conflicts of which it is aware to the Trustees. The Company will assist the
Trustees in carrying out their responsibilities under the Exemptive Order by
providing the Trustees with all information reasonably necessary for the
Trustees to consider any issues raised including, but not limited to,
information as to a decision by the Company to disregard Contract owner voting
instructions.
4.3 If it is determined by a majority of the Trustees, or a majority of
its disinterested Trustees, that a material irreconcilable conflict exists that
affects the interests of Contract owners, the Company shall, in cooperation
with other Participating Insurance Companies whose contract owners are also
affected, at its expense and to the extent reasonably practicable (as
determined by the Trustees) take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, which steps could include: (a)
withdrawing the assets allocable to some or all of the Accounts from the Trust
or any Portfolio and reinvesting such assets in a different investment medium,
including (but not limited to) another Portfolio of the Trust, or submitting
the question of whether or not such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
Contract owners the option of making such a change; and (b) establishing a new
registered management investment company or managed separate account.
4.4 If a material irreconcilable conflict arises because of a decision by
the Company to disregard Contract owner voting instructions and that decision
represents a minority position
-8-
<PAGE> 9
or would preclude a majority vote, the Company may be required, at the Trust's
election, to withdraw the affected Account's investment in the Trust and
terminate this Agreement with respect to such Account; provided, however that
such withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
disinterested Trustees. Any such withdrawal and termination must take place
within six (6) months after the Trust gives written notice that this provision
is being implemented. Until the end of such six (6) month period, the Trust
shall continue to accept and implement orders by the Company for the purchase
and redemption of shares of the Trust.
4.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Trust and terminate this Agreement with
respect to such Account within six (6) months after the Trustees inform the
Company in writing that it has determined that such decision has created an
irreconcilable material conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested
Trustees. Until the end of such six (6) month period, the Trust shall continue
to accept and implement orders by the Company for the purchase and redemption
of shares of the Trust.
4.6 For purposes of Sections 4.3 through 4.6 of this Agreement, a
majority of the disinterested Trustees shall determine whether any proposed
action adequately remedies any irreconcilable material conflict, but in no
event will the Company be required to establish a new funding medium for the
Contracts if an offer to do so has been declined by vote of a majority of
Contract owners materially adversely affected by the irreconcilable material
conflict. In the event that the Trustees determine that any proposed action
does not adequately remedy any irreconcilable material conflict, then the
Company will withdraw the Account's investment in the Trust and terminate this
Agreement within six (6) months after the Trustees inform the Company in
writing of the foregoing determination; provided, however, that such withdrawal
and termination shall be limited to the extent required by any such material
irreconcilable conflict as determined by a majority of the disinterested
Trustees.
4.7 The Company shall at least annually submit to the Trustees such
reports, materials or data as the Trustees may reasonably request so that the
Trustees may fully carry out the duties imposed upon them by the Exemptive
Order, and said reports, materials and data shall be submitted more frequently
if deemed appropriate by the Trustees.
4.8 If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Exemptive Order) on terms and conditions materially
different from those contained in the Exemptive Order, then the Trust and/or
the Participating Insurance Companies, as appropriate, shall take
-9-
<PAGE> 10
such steps as may be necessary to comply with Rules 6e-2 and 6e- 3(T), as
amended, and Rule 6e-3, as adopted, to the extent such rules are applicable.
ARTICLE V
Indemnification
5.1 Indemnification By the Company. The Company agrees to indemnify and
hold harmless the Trust and each of its Trustees, officers, employees and
agents and each person, if any, who controls the Trust within the meaning of
Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for
purposes of this Article V) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Company) or expenses (including the reasonable costs of investigating or
defending any alleged loss, claim, damage, liability or expense and reasonable
legal counsel fees incurred in connection therewith) (collectively, "Losses"),
to which the Indemnified Parties may become subject under any statute or
regulation, or at common law or otherwise, insofar as such Losses are related
to the sale or acquisition of the Trust's shares or the Contracts and:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in a registration
statement or prospectus for the Contracts or in the Contracts themselves
or in sales literature generated or approved by the Company on behalf of
the Contracts or Accounts (or any amendment or supplement to any of the
foregoing) (collectively, "Company Documents" for the purposes of this
Article V), or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that
this indemnity shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was made in
reliance upon and was accurately derived from written information
furnished to the Company by or on behalf of the Trust for use in Company
Documents or otherwise for use in connection with the sale of the
Contracts or Trust shares; or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately derived
from Trust Documents as defined in Section 5.2(a)) or wrongful conduct of
the Company or persons under its control, with respect to the sale or
acquisition of the Contracts or Trust shares; or
(c) arise out of or result from any untrue statement or alleged
untrue statement of a material fact contained in Trust Documents as
defined in Section 5.2(a) or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading if such statement or
-10-
<PAGE> 11
omission was made in reliance upon and accurately derived from written
information furnished to the Trust by or on behalf of the Company; or
(d) arise out of or result from any failure by the Company to
provide the services or furnish the materials required under the terms of
this Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement by
the Company.
5.2 Indemnification By the Trust. The Trust agrees to indemnify and hold
harmless the Company and each of its directors, officers, employees and agents
and each person, if any, who controls the Company within the meaning of Section
15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of
this Article V) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the Trust) or
expenses (including the reasonable costs of investigating or defending any
alleged loss, claim, damage, liability or expense and reasonable legal counsel
fees incurred in connection therewith) (collectively, "Losses"), to which the
Indemnified Parties may become subject under any statute or regulation, or at
common law or otherwise, insofar as such Losses:
(a) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the registration
statement or prospectus for the Trust (or any amendment or supplement
thereto), (collectively, "Trust Documents" for the purposes of this
Article V), or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided that
this indemnity shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was made in
reliance upon and was accurately derived from written information
furnished to the Trust by or on behalf of the Company for use in Trust
Documents or otherwise for use in connection with the sale of the
Contracts or Trust shares; or
(b) arise out of or result from statements or representations (other
than statements or representations contained in and accurately derived
from Company Documents) or wrongful conduct of the Trust or persons under
its control, with respect to the sale or acquisition of the Contracts or
Trust shares; or
(c) arise out of or result from any untrue statement or alleged
untrue statement of a material fact contained in Company Documents or the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading if such statement or omission was made in reliance upon and
accurately derived from written information furnished to the Company by or
on behalf of the Trust; or
-11-
<PAGE> 12
(d) arise out of or result from any failure by the Trust to provide
the services or furnish the materials required under the terms of this
Agreement; or
(e) arise out of or result from any material breach of any
representation and/or warranty made by the Trust in this Agreement or
arise out of or result from any other material breach of this Agreement by
the Trust.
5.3 Neither the Company nor the Trust shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any Losses incurred or assessed against an Indemnified Party that arise from
such Indemnified Party's willful misfeasance, bad faith or negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.
5.4 Neither the Company nor the Trust shall be liable under the
indemnification provisions of Sections 5.1 or 5.2, as applicable, with respect
to any claim made against an Indemnified Party unless such Indemnified Party
shall have notified the other party in writing within a reasonable time after
the summons, or other first written notification, giving information of the
nature of the claim shall have been served upon or otherwise received by such
Indemnified Party (or after such Indemnified Party shall have received notice
of service upon or other notification to any designated agent), but failure to
notify the party against whom indemnification is sought of any such claim shall
not relieve that party from any liability which it may have to the Indemnified
Party in the absence of Sections 5.1 and 5.2.
5.5 In case any such action is brought against the Indemnified Parties,
the indemnifying party shall be entitled to participate, at its own expense, in
the defense of such action. The indemnifying party also shall be entitled to
assume the defense thereof, with counsel reasonably satisfactory to the party
named in the action. After notice from the indemnifying party to the
Indemnified Party of an election to assume such defense, the Indemnified Party
shall bear the fees and expenses of any additional counsel retained by it, and
the indemnifying party will not be liable to the Indemnified Party under this
Agreement for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable
costs of investigation.
ARTICLE VI
Termination
6.1 (a) This Agreement may be terminated by either party for any reason
by ninety (90) days advance written notice delivered to the other party.
(b) This Agreement may be terminated by the Company immediately upon
written notice to the Trust with respect to any Portfolio:
-12-
<PAGE> 13
(i) based upon the Company's determination that shares of
such Portfolio are not reasonably available to meet the requirements of the
Contracts; or
(ii) in the event any of the Portfolio's shares are not
registered, issued or sold in accordance with applicable state and/or federal
law or such law precludes the use of such shares as the underlying investment
media of the Contracts issued or to be issued by the Company; or
(iii) in the event that such Portfolio ceases to qualify as
a Regulated Investment Company under Subchapter M of the Code or under any
successor or similar provision, or if the Company reasonably believes that the
Trust may fail to so qualify; or
(iv) in the event that such Portfolio fails to meet the
diversification requirements specified in this Agreement.
6.2 Notwithstanding any termination of this Agreement, the Trust shall,
at the option of the Company, continue to make available additional shares of
the Trust (or any Portfolio) pursuant to the terms and conditions of this
Agreement for all Contracts in effect on the effective date of termination of
this Agreement, provided that the Company continues to pay the costs set forth
in Section 2.3.
6.3 The provisions of Article V shall survive the termination of this
Agreement, and the provisions of Article IV and Section 2.8 shall survive the
termination of this Agreement as long as shares of the Trust are held on behalf
of Contract owners in accordance with Section 6.2.
ARTICLE VII
Notices
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Trust:
Janus Aspen Series
100 Fillmore Street
Denver, Colorado 80206
Attention: General Counsel
-13-
<PAGE> 14
If to the Company:
Western Reserve Life Assurance Co. of Ohio
C/o PFL Life Insurance Company
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499
Attn: Financial Markets Division Counsel
ARTICLE VIII
Miscellaneous
8.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
8.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
8.3 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
8.4 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of State of Colorado.
8.5 The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising, directly or indirectly, under this Agreement,
of any and every nature whatsoever, shall be satisfied solely out of the assets
of the Trust and that no Trustee, officer, agent or holder of shares of
beneficial interest of the Trust shall be personally liable for any such
liabilities.
8.6 Each party shall cooperate with each other party and all appropriate
governmental authorities (including without limitation the Securities and
Exchange Commission, the National Association of Securities Dealers, Inc., and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with any investigation or inquiry
relating to this Agreement or the transactions contemplated hereby.
8.7 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
-14-
<PAGE> 15
8.8 The parties to this Agreement acknowledge and agree that this
Agreement shall not be exclusive in any respect.
8.9 Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the prior written approval of the other party.
8.10 No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by both
parties.
IN WITNESS WHEREOF, the parties have caused their duly authorized officers
to execute this Participation Agreement as of the date and year first above
written.
JANUS ASPEN SERIES
By: s/ Bonnie Howe
------------------------------------
Name: Bonnie M. Howe
----------------------------------
Title: Assistant Vice President
---------------------------------
WESTERN RESERVE LIFE ASSURANCE CO.
OF OHIO
BY: S/ JOHN R. KENNEY
------------------------------------
NAME: CHAIRMAN, CEO AND PRESIDENT
----------------------------------
TITLE: JOHN R. KENNEY
----------------------------------
-15-
<PAGE> 16
SCHEDULE A
SEPARATE ACCOUNTS AND ASSOCIATED CONTRACTS
<TABLE>
<CAPTION>
NAME OF SEPARATE ACCOUNT AND CONTRACTS FUNDED
DATE ESTABLISHED BY BOARD OF DIRECTORS BY SEPARATE ACCOUNT
- -------------------------------------- -------------------
<S> <C>
WRL VARIABLE LIFE ACCOUNT A VARIABLE UNIVERSAL LIFE
JUNE 28, 1999 FORM NO. APUL0600 699
WRL SERIES LIFE CORPORATE ACCOUNT VARIABLE UNIVERSAL LIFE COLI
DECEMBER 8, 1997 FORM NO. WL694 136 82 598
</TABLE>
-16-
<PAGE> 1
Exhibit 5
Letterhead of Western Reserve Life Assurance Co. of Ohio
September 10, 1999
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, Florida 33770
RE: WRL Series Life Corporate Account (File No. 333-57681)
Gentlemen:
This opinion is furnished in connection with the registration by Western Reserve
Life Assurance Co. of Ohio of flexible premium variable life insurance policies
("Policies") under the Securities Act of 1933. The prospectus included in the
Registration Statement on Form S-6 describes the Policies. I am familiar with
the Registration Statement and Exhibits thereof.
In my opinion, the illustrations of life insurance benefits, cash values and net
cash values included in the section entitled "Illustrations of Cash Value, Net
Cash Value and Life Insurance Benefits" of the prospectus, based on the
assumptions stated in the illustrations, are consistent with the provisions of
the respective forms of the Policies.
I hereby consent to use of this opinion as an exhibit to post-effective
amendment no. 3 to the Registration Statement and to the reference to my name
under the heading "Experts" in the prospectus.
Very truly yours,
/s/ Kenneth Turnquist
Kenneth Turnquist, FSA
<PAGE> 1
EXHIBIT 7
CONSENT OF INDEPENDENT AUDITORS
WE CONSENT TO THE REFERENCE TO OUR FIRM UNDER THE CAPTION "EXPERTS" AND TO THE
USE OF OUR REPORT DATED FEBRUARY 19, 1999 WITH RESPECT TO THE STATUTORY-BASIS
FINANCIAL STATEMENTS AND SCHEDULES OF WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
INCLUDED IN POST-EFFECTIVE AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT (FORM
S-6 NO. 333-57681) AND RELATED PROSPECTUS OF WRL SERIES LIFE CORPORATE ACCOUNT.
/S/ ERNST & YOUNG LLP
DES MOINES, IOWA
SEPTEMBER 22, 1999
