As filed with the Securities and Exchange Commission on April 15, 1998
Registration No. 333-01173
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
POST-EFFECTIVE AMENDMENT NO. 2 to
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
(Exact name of Registrant)
COLORADO 63 84-0467907
(State of Incorporation) (Primary Standard (I.R.S. Employer
Industrial Classification Identification No.)
Code Number)
8515 East Orchard Road
Englewood, Colorado 80111
(800) 537-2033
(Address, including zip code, and telephone number,
including area code, or registrant's principal
executive officer)
William T. McCallum
President and Chief Executive Officer
Great-West Life & Annuity Insurance Company
8515 East Orchard Road
Englewood, Colorado 80111
(Name and Address of Agent for Service)
Copy to:
James F. Jorden, Esq.
Jorden Burt Boros Cicchetti Berenson & Johnson LLP
1025 Thomas Jefferson Street, N.W., Suite 400 East
Washington, D.C. 20007-0805
Approximate Date of Proposed Public Offering: Upon the effective date of this
Registration Statement.
It is proposed that this Registration Statement will become effective on May 1,
1998.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following: X
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering:
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement for the same offering:
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box:
Cross Reference Sheet
Showing Location in Prospectus
and Statement of Additional Information
As Required by Form S-1
FORM S-1 PROSPECTUS
CAPTION ITEM
<TABLE>
1. Forepart of Registration Statement
<S> <C> <C> <C> <C> <C> <C>
and Outside Front Cover Page Cover Page
2. Inside Front and Outside Cover Page; Table of
Back Cover Pages Contents
3. Summary Information, Risk Factors Key Features of the
and Ratio of Earnings Annuity; Great-West
to Fixed Charges Life & Annuity
Insurance Company
4. Use of Proceeds Not Applicable
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Distribution of the Contracts
9. Description of Securities The Guarantee Period
Fund; The Market Value
Adjustment
10. Interest of Named Experts Legal Matters; Experts
and Counsel
11. Information with Respect Great-West Life &
to the Registrant Annuity Insurance
Company and The Series
Account; Selected
Financial Data; Legal
Proceedings; Financial
Statements
12. Disclosure of Commission, Not Applicable
Position on Indemnification
for Securities Act Liabilities
</TABLE>
THE SCHWAB VARIABLE ANNUITY(TM)
A FLEXIBLE PREMIUM DEFERRED FIXED AND VARIABLE ANNUITY
Distributed by
CHARLES SCHWAB & CO., INC.
---------------------------------------------
Issued by
GREAT-WEST LIFE & ANNUITY
INSURANCE COMPANY
This prospectus describes interests under a flexible premium deferred annuity
contract, The Schwab Variable Annuity (the "Contract"). The Contract is issued
either on a group basis or as individual contracts by Great-West Life & Annuity
Insurance Company (the "Company"). Participation in a group contract will be
accounted for by the issuance of a certificate showing an interest under the
group contract. The certificate and the individual contract are hereafter both
referred to as the "Contract."
Your investment in the Contract may be allocated among twenty-five Investment
Divisions of the Variable Annuity-1 Series Account ("Series Account") and the
available Guarantee Periods under the Guarantee Period Fund. The Investment
Divisions invest in various underlying funds (open-end investment companies)
offered by fund families such as Federated, INVESCO, Janus, Lexington, Berger,
Alger, Schwab Funds, Stein Roe, Strong, Montgomery, American Century, SAFECO,
Van Eck and Van Kampen. You also have the option of allocating some or all of
your investment in the Contract to the Guarantee Period Fund which allows you to
select one or more Guarantee Periods, each of which offers you a specified
interest rate for a specified period. There may be a market value adjustment on
the amounts withdrawn from the Guarantee Period Fund. The Guarantee Period Fund
may not be available in all states.
The minimum initial investment is $5,000 ($2,000 if an IRA) or $1,000 if made
under an Automatic Contribution Plan ("ACP"). The minimum subsequent
Contribution is $500 (or $100 per month if made under an ACP).
There are no sales charges, redemption, surrender or withdrawal charges. The
Contract provides a Free Look Period of 10 days (30 days for replacement
policies) from your receipt of the Contract (or longer, if required by state
law), during which time you may cancel your investment in the Contract. During
the Free Look Period, all Contributions allocated to an Investment Division will
be allocated first to the Schwab Money Market Investment Division and will
remain there until the next Transaction Date following the end of the Free Look
Period. Contributions to the Guarantee Period Fund will be allocated immediately
into the specified Guarantee Period(s).
Your Variable Account Value will increase or decrease based on the investment
performance of the options you select. You bear the entire investment risk under
the Contract prior to the annuity commencement date for all amounts in your
Variable Sub-Accounts. While there is a guaranteed death benefit, there is no
guaranteed or minimum Variable Account Value on amounts allocated to Investment
Divisions. Therefore, the Annuity Account Value you receive could be less than
the total amount of your Contributions.
Amounts allocated to the Guarantee Period Fund may be subject to a Market Value
Adjustment which could result in receipt of less than your Contributions if you
surrender, Transfer, make a partial withdrawal, apply amounts to purchase an
annuity or take a distribution upon the death of the Owner or Annuitant before a
Guarantee Period Maturity Date. Whether such a result actually occurs depends on
the timing of the transaction, the amount of the Market Value Adjustment and the
interest rate credited. The interest rate in subsequent Guarantee Periods may be
more or less than the rate of a previous Guarantee Period.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. NO PERSON IS AUTHORIZED BY THE COMPANY TO GIVE INFORMATION OR
TO MAKE ANY REPRESENTATION, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN
CONNECTION WITH THE OFFERS CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE. PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE.
Prospectus Dated May 1, 1998
The Contracts are not deposits of, or guaranteed or endorsed by any bank, nor
are the Contracts federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency. The
Contracts involve certain investment risks, including possible loss of
principal.
To Place Orders and for Account Information: Contact the Schwab Annuity Service
Center at 800-838-0650 or P.O. Box 7666, San Francisco, California 94120-7666.
About This Prospectus: This Prospectus concisely presents important information
you should have before investing in the Contract. Please read it carefully and
retain it for future reference. You can find more detailed information
pertaining to the Contract in the Statement of Additional Information dated ,
1998 (as may be amended from time to time), and filed with the Securities and
Exchange Commission. The Statement of Additional Information is incorporated by
reference into this Prospectus, and may be obtained without charge by contacting
the Schwab Annuity Service Center at 800-838-0650 or P.O. Box 7666, San
Francisco, California 94120-7666.
To learn more about this product, you may obtain the Statement of Additional
Information which has been filed with the Securities and Exchange Commission
(SEC) along with other related materials on the SEC's Internet Web site
(http://www.sec.gov).
<PAGE>
TABLE OF CONTENTS
<TABLE>
Page
<S> <C> <C> <C> <C> <C> <C>
DEFINITIONS.................................................................................iv
KEY FEATURES OF THE ANNUITY................................................................. 1
VARIABLE ANNUITY FEE TABLE...................................................................
CONDENSED FINANCIAL INFORMATION..............................................................
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
AND THE SERIES ACCOUNT ...........................................................7
THE ELIGIBLE FUNDS...........................................................................8
THE GUARANTEE PERIOD FUND...................................................................12
THE MARKET VALUE ADJUSTMENT.................................................................15
APPLICATION AND CONTRIBUTIONS.............................................................. 16
ANNUITY ACCOUNT VALUE ......................................................................17
TRANSFERS...................................................................................18
CASH WITHDRAWALS............................................................................21
TELEPHONE TRANSACTIONS......................................................................22
DEATH BENEFIT...............................................................................22
CHARGES AND DEDUCTIONS......................................................................25
PAYMENT OPTIONS.............................................................................27
FEDERAL TAX MATTERS ........................................................................31
ASSIGNMENTS OR PLEDGES......................................................................36
PERFORMANCE DATA ...........................................................................36
DISTRIBUTION OF THE CONTRACTS...............................................................37
SELECTED FINANCIAL DATA.....................................................................38
VOTING RIGHTS.............................................................................. 48
RIGHTS RESERVED BY THE COMPANY..............................................................49
LEGAL PROCEEDINGS ..........................................................................49
LEGAL MATTERS...............................................................................49
EXPERTS ....................................................................................50
AVAILABLE INFORMATION.......................................................................50
APPENDIX A..................................................................................50
APPENDIX B..................................................................................50
FINANCIAL STATEMENTS.......................................................................F-1
</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, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED ON.
- --------------------------------------------------------------------------
The Contract is not available in all states.
<PAGE>
--------------------------------------------------------------------------
DEFINITIONS
--------------------------------------------------------------------------
Accumulation Period - The period between the Effective Date and the Payment
Commencement Date.
Annuitant - The person named in the application upon whose life the payment of
an annuity is based and who will receive annuity payments. If a Contingent
Annuitant is named, then the Annuitant will be considered the Primary Annuitant.
While the Annuitant is living and at least 30 days prior to the annuity
commencement date, the Owner may, by Request, change the Annuitant.
Annuity Account - An account established by the Company in the name of the Owner
that reflects all account activity under this Contract.
Annuity Account Value - The sum of the Variable and Fixed Sub-Accounts credited
to the Owner under the Annuity Account; less Transfers, partial withdrawals,
amounts applied to an annuity option, periodic withdrawals, charges deducted
under the Contract and, less Premium Tax, if any.
Annuity Payment Period - The period beginning on the annuity commencement date
and continuing until all annuity payments have been made under the Contract.
Annuity Unit - An accounting measure used to determine the dollar value of any
variable annuity payment after the first annuity payment is made.
Automatic Contribution Plan ("ACP") - A plan which allows for automatic periodic
Contributions. The Contribution amount will be withdrawn from a designated
pre-authorized account and automatically credited to the Annuity Account.
Beneficiary - The person(s) designated by the Owner, in the application, or as
subsequently changed by the Owner by Request, to receive any death benefit which
may become payable under the terms of the Contract. If the surviving spouse of
an Owner is the surviving Joint Owner, the surviving spouse will become the
Beneficiary upon such Owner's death and may elect to take the death benefit, if
any, or elect to continue the Contract in force.
Company - Great-West Life & Annuity Insurance Company, the issuer of this
annuity, located at 8515 East Orchard Road, Englewood, Colorado 80111.
Contingent Annuitant - The person named in the application, unless later changed
by the Owner by Request while the Annuitant is alive and before annuity payments
have commenced, who becomes the Annuitant when the Primary Annuitant dies. No
new Contingent Annuitant may be designated after the death of the Primary
Annuitant.
Contributions - Purchase amounts received under the Contract and allocated to
the Fixed or Variable Sub-Account(s) prior to any Premium Tax or other
deductions.
Effective Date - The date on which the first Contribution is credited to the
Annuity Account.
Eligible Fund - A registered management investment company, or portfolio
thereof, in which the assets of the Series Account may be invested.
Fixed Sub-Accounts - The subdivision(s) of the Owner's Annuity Account
reflecting the value of Contributions made to a fixed interest investment option
available under the Contract and any Fixed Sub-Account Riders.
Guarantee Period - One of the periods of time available in the Guarantee Period
Fund during which the Company will credit a stated rate of interest. The Company
may stop offering any term at any time for new Contributions. Amounts allocated
to one or more Guaranteed Periods may be subject to a Market Value Adjustment.
Guarantee Period Fund - A Fixed Sub-Account in which amounts allocated will be
credited a stated rate of interest for the applicable Guarantee Period(s).
Guarantee Period Maturity Date - The last day of any Guarantee Period.
Guaranteed Interest Rate - The minimum interest rate applicable to each Fixed
Sub-Account equal to an annual effective rate in effect at the time the
Contribution is made and as reflected in written confirmation of the
Contribution. This is the minimum rate allowed by law and is subject to change
in accordance with changes in applicable law.
Individual Retirement Annuity (IRA) - An annuity contract used in a retirement
savings program that is intended to satisfy the requirements of Section 408 of
the Internal Revenue Code of 1986, as amended.
Investment Division - A division of the Series Account containing the shares of
an Eligible Fund. There is an Investment Division for each Eligible Fund.
Market Value Adjustment - An adjustment which may be made to amounts paid out
before the Guarantee Period Maturity Date due to surrenders, partial
withdrawals, Transfers, amounts applied to the periodic withdrawal option or to
purchase an annuity, and distributions resulting from death of the Owner or
Annuitant, as applicable. The Market Value Adjustment may increase or decrease
the amount payable on one of the above-described distributions. A negative
adjustment may result in an effective interest rate lower than the applicable
Guaranteed Interest Rate and the value of the Contribution(s) allocated to the
Guarantee Period being less than the Contribution(s) made. The Market Value
Adjustment is detailed on page 15.
Non-Qualified Annuity Contract - An annuity contract which is not intended to be
part of a qualified retirement plan and is not intended to satisfy the
requirements of Section 408 of the Internal Revenue Code of 1986, as amended.
Owner (Joint Owner) or You - The person(s), while the Annuitant is living, named
in the Contract Data Page who is entitled to exercise all rights and privileges
under the Contract. Joint Owners must be husband and wife as of the date the
Contract is issued. The Annuitant will be the Owner unless otherwise indicated
in the application. If a Contract is purchased as an IRA, the Owner and the
Annuitant must be the same individual and no Joint Owner may be named. Any
reference to Owner in the singular tense shall include the plural, and vice
versa, as applicable.
Payment Commencement Date - The date on which annuity payments or periodic
withdrawals commence under a payment option. The Payment Commencement Date must
be at least one year after the Effective Date of the Contract. If a Payment
Commencement Date is not shown on the Contract Data Page, annuity payments will
commence on the first day of the month of the Annuitant's 91st birthday. The
Payment Commencement Date may be changed by the Owner within 60 days prior to
commencement of annuity payments or it may be changed by the Beneficiary upon
the death of the Owner. If this is an IRA, payments which satisfy the minimum
distribution requirements of the Internal Revenue Code of 1986, as amended, must
begin no later than the Owner's attainment of age 70 1/2.
Premium Tax - The amount of tax, if any, charged by a state or other
governmental authority.
Request - Any written, telephoned, or computerized instruction in a form
satisfactory to the Company and received at the Schwab Annuity Service Center
(or other annuity service center subsequently named) from the Owner or the
Owner's designee (as specified in a form acceptable to the Company) or the
Beneficiary (as applicable) as required by any provision of the Contract or as
required by the Company. All Requests are subject to any action taken or payment
made by the Company before it was processed.
Schwab Annuity Service Center - P.O. Box 7666, San Francisco, California
94120-7666, telephone 800-838-0650.
Series Account - The segregated account established by the Company under
Colorado law and registered as a unit investment trust under the Investment
Company Act of 1940, as amended.
Simplified Employee Pension - An individual retirement annuity (IRA) which may
accept contributions from one or more employers under a retirement savings
program intended to satisfy the requirements of Section 408(k) of the Internal
Revenue Code of 1986, as amended.
Surrender Value - The Annuity Account Value with a Market Value Adjustment, if
applicable, on the effective date of the surrender, less Premium Tax, if any.
Transaction Date - The date on which any Contribution or Request from the Owner
will be processed by the Company at the Schwab Annuity Service Center.
Contributions and Requests received after 4:00 p.m. EST/EDT will be deemed to
have been received on the next business day. Requests will be processed and the
Variable Account Value will be determined on each day that the New York Stock
Exchange is open for trading.
Transfer - The moving of money from and among the Investment Division(s) and the
Guaranteed Period Fund.
Variable Account Value - The sum of the values of the Variable Sub-Accounts
credited to the Owner under the Annuity Account.
Variable Sub-Accounts - The sub-division(s) of the Owner's Annuity Account
containing the value credited to the Owner under the Annuity Account from an
Investment Division.
We, our, us, or GWL&A: Great-West Life & Annuity Insurance Company.
<PAGE>
----------------------------------------------------------------------------
KEY FEATURES OF THE ANNUITY
----------------------------------------------------------------------------
The Contract currently allows you to invest in your choice of twenty-five
different Investment Divisions offered by fourteen different mutual fund
investment advisers. You can also invest in the Guarantee Period Fund. Your
Annuity Account Value allocated to an Investment Division will vary with the
investment performance of the Investment Division you select. You bear the
entire investment risk for all amounts invested in the Investment Division(s).
Your Annuity Account Value could be less than the total amount of your
Contributions.
Who should invest. The Contract is designed for investors who are seeking
long-term tax deferred asset accumulation with a wide range of investment
options. The Contract can be used for retirement or other long-term investment
purposes. The deferral of income taxes is particularly attractive to investors
in high federal and state tax brackets who have already fully taken advantage of
their ability to make IRA contributions or "pre-tax" contributions to their
employer sponsored retirement or savings plans.
A Wide Range of Variable Investment Choices. The Contract gives you an
opportunity to select among twenty-five different Investment Divisions. Each
Investment Division invests in shares of an Eligible Fund. The Eligible Funds
cover a wide range of investment objectives as follows: <TABLE>
<S> <C> <C> <C> <C> <C> <C>
Investment Objective Eligible Funds
Aggressive Growth SteinRoe Special Venture Fund
Janus Aspen Aggressive Growth Portfolio
Alger American Small Capitalization Portfolio
American Century VP Capital Appreciation
Berger IPT-Small Company Growth Fund
Strong Discovery Fund II
International Aggressive Growth Montgomery Variable Series: International
Small Cap Fund
Lexington Emerging Markets Fund
Growth Montgomery Variable Series: Growth Fund
Schwab MarketTrack Growth Portfolio II
Janus Aspen Growth Portfolio
Alger American Growth Portfolio
International Growth Janus Aspen Worldwide Growth Portfolio
American Century VP International
Index Schwab S&P 500 Portfolio
Growth & Income SAFECO RST Equity Portfolio
Federated American Leaders Fund II
Real Estate Van Kampen American Capital Life Investment Trust-
Morgan Stanley Real Estate Securities Portfolio
Equity Income Federated Utility Fund II
INVESCO VIF-Industrial Income Portfolio
Balanced/Asset Allocation INVESCO VIF-Total Return Portfolio
Hard Assets Van Eck Worldwide Hard Assets Fund
High Yield Bond INVESCO VIF-High Yield Portfolio
Government Bond Federated Fund for U.S. Government Securities II
Money Market Schwab Money Market Portfolio
</TABLE>
The distinct investment objectives and policies for each Eligible Fund are more
fully described in their individual fund prospectuses which are available from
the Schwab Annuity Service Center, P.O. Box 7666, San Francisco, California
94120-7666, or via telephone at 1-800-838-0650.
The Guarantee Period Fund. The Contract also gives you an opportunity to
allocate your Contributions and to transfer your Annuity Account Value to the
Guarantee Period Fund. However, the Guarantee Period Fund may not be available
in all states or jurisdictions where the Contract is sold. Please consult wiht
your representative or call the Schwab Annuity Service Center for more
information. This Fixed Sub-Account option is comprised of Guarantee Periods,
each of which has its own stated rate of interest and its own maturity date. The
stated rate of interest for the Guarantee Period will depend on the date the
Guarantee Period is established and the duration of the Guarantee Period you
select from among those available. The rates declared are subject to a minimum
(Guaranteed Interest Rate), but the Company may declare higher rates (the stated
rate of interest). The Guaranteed Interest Rate will be disclosed in the written
confirmation. The stated rate of interest will not be less than the Guaranteed
Interest Rate and will also be disclosed in the written confirmation. Amounts
withdrawn or transferred from a Guarantee Period prior to the Guarantee Period
Maturity Date may be subject to a Market Value Adjustment. (See "Market Value
Adjustment," page 15.)
How to Invest. You must complete a Contract application form in order to invest
in the Contract and you must pay by check or instruct us to transfer funds from
your Schwab account. The minimum initial investment is $5,000 (or $2,000 if in
an IRA). Subsequent investments must be at least $500. The minimum initial
investment may be reduced to $1,000 should the Owner agree to make additional
$100 per month minimum recurring deposits through an ACP.
Free Look Period. The Contract provides for a Free Look Period which allows you
to cancel your investment generally within 10 days (30 days for replacement
policies) of your receipt of the Contract. You can cancel the Contract during
the Free Look Period by delivering or mailing the Contract to the Schwab Annuity
Service Center. The cancellation is not effective unless we receive a notice
which is postmarked before the end of the Free Look Period. If the Contract is
returned, the Contract will be void from the start and the greater of: (a)
Contributions received less surrenders, withdrawals and distributions, or (b)
the Annuity Account Value less surrenders, withdrawals and distributions, will
be refunded. These procedures may vary where required by state law. (See
"Application and Contributions," page 16.)
Allocation of the Initial Investment. Any initial Contribution allocated to an
Investment Division (other than certain 1035 exchanges - see "Application and
Contributions," page 16) will be allocated to the Schwab Money Market Portfolio
until the next Transaction Date following the end of the Free Look Period. At
that time, the Variable Account Value will be allocated to the Investment
Divisions in accordance with your instructions. (See "Annuity Account Value,"
page 17.) Your initial investment in the Guarantee Period Fund will be
immediately allocated to the Guarantee Period(s) specified in the application.
Charges and Deductions Under the Contract. The Contract is a "no load" variable
annuity and, as such, imposes no sales charges, redemption or withdrawal
charges.
There is a Mortality and Expense Risk Charge at an effective annual rate of
0.85% of the value of the net assets in the Variable Account. A Contract
Maintenance Charge of $25 will be deducted annually from your Annuity Account
Value for policies with less than $50,000 in assets. There will be a transfer
fee of $10 for each Transfer in excess of twelve Transfers per calendar year.
(See "Charges and Deductions," page 25.)
Depending on your state of residence, we may deduct a charge for Premium Tax
from purchase payments or amounts withdrawn or at the Payment Commencement Date.
(See "Charges and Deductions," page 25.)
The Market Value Adjustment may increase or decrease the value of a Guarantee
Period if the Guarantee Period is broken prior to the Guarantee Period Maturity
Date. A negative adjustment may result in an effective interest rate lower than
the stated rate of interest for the Guarantee Period and the Guaranteed Interest
Rate and the value of the Guarantee Period being less than Contribution(s). (See
"Market Value Adjustment," page 15).
Switching Investments. You may switch Contributions among the Investment
Divisions or Guarantee Period Fund as often as you like with no immediate tax
consequences. You may make a Transfer Request to the Schwab Annuity Service
Center. A transfer fee may apply. (See "Charges and Deductions," page 25.)
Amounts Transferred out of a Guarantee Period prior to the Guarantee Period
Maturity Date may be subject to a Market Value Adjustment. (See "Market Value
Adjustment," page 15.)
Full and Partial Withdrawals. You may withdraw all or part of your Annuity
Account Value before the earlier of the annuity commencement date you selected
or the Annuitant's or Owner's death. Withdrawals may be taxable and if made
prior to age 59 1/2 may be subject to a 10% penalty tax. Withdrawals of amounts
allocated to a Guarantee Period prior to the Guarantee Period Maturity Date may
be subject to Market Value Adjustment. (See "Market Value Adjustment," page 15.)
The minimum partial withdrawal prior to the Market Value Adjustment is $500.
There is no limit on the number of withdrawals made. The Company may delay
payment of withdrawals from your Variable Sub-Accounts by up to 7 days and may
delay withdrawals from the Guarantee Period Fund by up to 6 months. (See "Cash
Withdrawals," page 21.)
Annuity Options. Beginning on the first day of the month immediately following
the annuity commencement date you select, you may elect to receive annuity
payments on a fixed or variable basis. (The default date is the first day of the
month that the Annuitant attains age 91.) A wide range of annuity options are
available to provide flexibility in choosing an annuity payment schedule that
meets your particular needs. These annuity options include alternatives designed
to provide payments for life (for either a single or joint life), with or
without a guaranteed minimum number of payments. (See "Payment Options," page
27.)
Death Benefit. The amount of the death benefit, if payable before annuity
payments commence, will be the greater of (a) the Annuity Account Value with a
Market Value Adjustment, if applicable, as of the date a Request for payment is
received, less Premium Tax, if any; or (b) the sum of Contributions paid, less
partial withdrawals and Periodic Withdrawals, less charges deducted under the
Contract, if any, less Premium Tax, if any. (See "Death Benefit," page 22.)
Customer Service. Schwab's professional representatives are available toll-free
to assist you. If you have any questions about your Contract, please telephone
the Schwab Annuity Service Center (800-838-0650) or write to the Schwab Annuity
Service Center at P.O. Box 7666, San Francisco, California 94120-7666. All
inquiries should include the Contract number and the Owner's name. As a Contract
Owner you will receive periodic statements confirming any transactions relating
to your Contract, as well as a quarterly statement and an annual report.
<PAGE>
VARIABLE ANNUITY FEE TABLE
The purpose of this table and the examples that follow is to assist you
in understanding the various costs and expenses that you will bear directly or
indirectly when investing in the Contract. The table and examples reflect
expenses related to the Investment Divisions as well as of the Eligible Funds.
The table assumes that the entire Annuity Account Value is allocated to one or
more Investment Divisions. The information set forth should be considered
together with the narrative provided under the heading "Charges and Deductions,"
page 25 of this Prospectus, and with the Funds' prospectuses. In addition to the
expenses listed below, Premium Tax may be applicable.
Contract Owner Transaction Expenses1
Sales Load None
Surrender Fee None
Transfer Fee (First 12 Per Year)2 None
Annual Contract Maintenance Charge3 $25.00
Investment Division Annual Expenses1
(as a percentage of average Variable
Account assets)
Mortality and Expense Risk Charge 0.85%
Administrative Expense Charge 0.00%
Other Fees and Expenses of the Variable Account 0.00%
-----
Total Investment Division Annual Expenses 0.85%
- --------
1 The Contract Owner Transaction Expenses apply to each Contract,
regardless of how the Annuity Account Value is allocated. The Investment
Division Annual Expenses do not apply to the Guarantee Period Fund.
2 There is a $10 fee for each transfer in excess of twelve in any calendar
year.
3 The Contract Maintenance Charge is currently waived for Contracts with an
Annuity Account Value of at least $50,000. If your Annuity Account Value falls
below $50,000 due to a withdrawal, the Contract Maintenance Charge will be
reinstated until such time as your Annuity Account Value is equal to or greater
than $50,000. This charge may also be waived for Contracts issued under certain
sponsored arrangements.
<PAGE>
Eligible Fund Annual Expenses (1)
(as a percentage of Eligible Fund net assets, after expenses reimbursements)
<TABLE>
Total
Management Other 12b-1 Eligible
Fund
Fees Expenses Fees Expenses
Portfolio
<S> <C> <C> <C> <C>
Alger American Growth Portfolio .75% .04% 0% .79%
Alger American Small
Capitalization Portfolio .85% .04% 0% .89%
American Century VP
Capital Appreciation 1.00% 0% 0% 1.00%
American Century VP
International 1.50% 0% 0% 1.50%
Berger IPT-Small
Company Growth Fund .0% 1.15% 0% 1.15%
Federated American
Leaders Fund II .66% .19% 0% .85%
Federated Fund for U.S. Government Securities II .15% .65% 0% .80%
Federated Utility Fund II .48% .37% 0% .85%
INVESCO VIF-High Yield Portfolio .60% .23% 0% .83%
INVESCO VIF-Industrial Income Portfolio .75% .16% 0% .91%
INVESCO VIF-Total Return Portfolio .75% .17% 0% .92%
Janus Aspen Aggressive
Growth Portfolio .73% .03% 0% .76%
Janus Aspen Growth Portfolio .65% .05% 0% .70%
Janus Aspen Worldwide
Growth Portfolio .66% .08% 0% .74%
Lexington Emerging Markets Fund .85% .99% 0% 1.84%
Montgomery Variable Series: Growth Fund2 0% .34% 0% .34%
Montgomery Variable Series:
International Small Cap Fund2 0% 0% 0% 0%
SAFECO RST Equity Portfolio .73% .02% 0% .75%
Schwab MarketTrack Growth Portfolio II .0% .75% 0% .75%
Schwab Money Market Portfolio .25% .25% 0% .50%
Schwab S&P 500 Portfolio . 0% .28% 0% .28%
SteinRoe Special Venture Fund .50% .23% 0% .73%
Strong Discovery Fund II 1.00% .18% 0% 1.18%
Van Eck Worldwide Hard Assets Fund3 1.00% .17% 0% 1.17%
Van Kampen American Capital Life
Investment Trust-Morgan Stanley Real
Estate Securities Portfolio 1.00% .07% 0%1.07%
- ---------------------------------
</TABLE>
(1) The figures given above (other than for the Montgomery Variable Series:
Growth Fund, Montgomery Variable Series: International Small Cap Fund - see note
2, below) reflect the amounts deducted after expense offset arrangements, if
any, from the Eligible Funds during1997. From time to time, an Eligible Fund's
investment adviser, in its sole discretion, may waive all or part of its fees
and/or voluntarily assume certain expenses. For a more complete description of
the Eligible Funds' fees and expenses, see the Eligible Funds' prospectuses. As
of the date of this Prospectus, certain fees are being waived or expenses are
being assumed, in each case on a voluntary basis. Without such waivers or
reimbursements, the total Eligible Fund annual expenses that would have been
incurred for the last completed fiscal year would be: 5.81% for Berger IPT-Small
Company Growth Fund; .94% for Federated American Leaders Fund II; 1.25% for
Federated Fund for U.S. Government Securities II; 1.12% for Federated Utility
Fund II; .94% for INVESCO VIF-High Yield Portfolio; .97% for INVESCO
VIF-Industrial Income Portfolio; 1.10% for INVESCO VIF-Total Return Portfolio;
.78% for Janus Aspen Aggressive Growth Portfolio; .78% for Janus Aspen Growth
Portfolio; .81% for Janus Aspen Worldwide Growth Portfolio; 1.91% for Lexington
Emerging Markets Fund; and .71% for Schwab Money Market Portfolio; .93% for
Schwab S&P 500 Portfolio and 1.99% for Schwab MarketTrack Growth Portfolio II.
See the Eligible Funds' prospectuses for a discussion of fee waiver and expense
reimbursements. 2 For the Montgomery Variable Series: Growth Fund and Montgomery
Variable Series: International Small-Cap Fund, the fund manager has agreed to
reduce management fees, if necessary, to keep total annual operating expenses to
1.25% and 1.50%, respectively. The fund manager may also voluntarily further
reduce management fees and other expenses to increase the return to the Funds'
investors and voluntarily elected to do so in 1997. Without such reimbursements,
the total Eligible Fund expenses that would have been incurred for the last
completed fiscal year would be: 1.97% for the Montgomery Variable Series: Growth
Fund and 3.50% for the Montgomery Variable Series: International Small-Cap Fund.
3 Other Expenses are net of soft dollar credits. Without such credits, Other
Expenses would have been .18% and Total Eligible Fund Expenses would have been
1.18%
<PAGE>
Examples(1)
If you retain, annuitize, or surrender the Contract at the end of the applicable
time period, you would pay the following fees and expenses on a $1,000
investment, assuming a 5% annual return on assets: <TABLE>
<S> <C> <C> <C>
Investment Divisions 1 Year 3 Years 5 Years Ten Years
Alger American Growth Portfolio $ 8.30 $27.11 $49.42 $123.72
Alger American Small
Capitalization Portfolio $ 9.35 $30.50 $55.54 $138.69
American Century VP Capital Appreciation $10.50 $34.21 $62.24 $154.99
American Century VP International $15.75 $50.93 $92.21 $226.87
Berger IPT-Small Company Growth Fund $12.08 $39.25 $71.31 $176.93
Federated American Leaders Fund II $ 8.93 $29.14 $53.10 $132.72
Federated Fund for U.S. Government Securities II $ 8.40 $27.45 $50.04 $125.22
Federated Utility Fund II $ 8.93 $29.14 $53.10 $132.72
INVESCO VIF-High Yield Portfolio $ 8.72 $28.47 $51.88 $129.72
INVESCO VIF-Industrial Income Portfolio $ 9.56 $31.17 $56.76 $141.67
INVESCO VIF-Total Return Portfolio $ 9.66 $31.51 $57.37 $143.15
Janus Aspen Aggressive
Growth Portfolio $ 7.98 $26.09 $47.58 $119.19
Janus Aspen Growth Portfolio $ 7.35 $24.05 $43.89 $110.11
Janus Aspen Worldwide
Growth Portfolio $ 7.77 $25.41 $46.35 $116.17
Lexington Emerging Markets Fund $19.32 $62.16 $112.17 $273.73
Montgomery Variable Series: Growth Fund $ 3.57 $11.75 $21.51 $54.44
Montgomery Variable Series:
International Small-Cap Fund $ 0.00 $0.00 $0.00 $0.00
SAFECO RST Equity Portfolio $ 7.88 $25.75 $46.97 $117.68
Schwab MarketTrack Growth Portfolio II $ 7.88 $25.75 $46.97 $117.68
Schwab Money Market Portfolio $ 5.25 $17.23 $31.51 $79.43
Schwab S&P 500 Portfolio $ 2.94 $ 9.68 $17.74 $44.97
SteinRoe Special Venture Fund $ 7.67 $25.07 $45.74 $114.66
Strong Discovery Fund II $12.39 $40.26 $73.11 $181.28
Van Eck Worldwide Hard Assets Fund $12.39 $40.26 $73.11 $181.28
Van Kampen American Capital Life
Investment Trust-Morgan Stanley Real
Estate Securities Portfolio $11.24 $36.57 $66.48 $165.27
</TABLE>
THESE EXAMPLES SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES PAID MAY BE GREATER OR LESS THAN THOSE SHOWN, SUBJECT
TO THE GUARANTEES IN THE CONTRACT.
These examples assume that no premium taxes have been assessed (although premium
taxes may be applicable - see "Premium Tax," page 26).
(1) The Eligible Fund Annual Expenses and these examples are based on data
provided by the Eligible Funds. The Company has no reason to doubt the accuracy
or completeness of that data, but the Company has not verified the Eligible
Funds' figures. In preparing the Eligible Fund Expense table and the Examples
above, the Company has relied on the figures provided by the Eligible Funds.
<PAGE>
47
Condensed Financial Information
Selected Data for Accumulation Units
Outstanding Through Each Period
For the Years Ended December 31,
Investment Division 1997 1996
- ------------------- ---- ----
Alger American Growth $10.24
Value at beginning of period $12.76 $10.00
Value at end of period $10.24
Number of accumulation units 417,162.09
outstanding at end of period 1,166.64
Alger American Small-Cap $10.09
Value at beginning of period $11.14 $10.00
Value at end of period $10.09
Number of accumulation units 337,576.93
outstanding at end of period 4,080.46
American Century VP Capital $ 9.61
Appreciation $ 9.22 $10.00
Value at beginning of period $ 9.61
Value at end of period 82,255.58
Number of accumulation units 30,139.13
outstanding at end of period
American Century VP International $10.49
Value at beginning of period $12.35 $10.00
Value at end of period $10.49
Number of accumulation units 298,156.62
outstanding at end of period 13,399.99
Berger Small Company Growth $10.00
Federated American Leaders Fund $13.75
IIValue at beginning of period
Value at end of period 124,653.31
Number of accumulation units
outstanding at end of period
Federated American Leaders Fund II
Value at beginning of period $10.42
Value at end of period $13.67 $10.00
Number of accumulation units $10.42
outstanding at end of period 1,426,437.13
65,888.88
Federated Utility Fund II
Value at beginning of period $10.00
Value at end of period $12.45
Number of accumulation units
outstanding at end of period 168,289.28
Federated Fund for U.S.
Government Securities II $ 9.97
Value at beginning of period $10.71 $10.00
Value at end of period $ 9.97
Number of accumulation units 815,966.27
outstanding at end of period 9,330.15
INVESCO VIF - High Yield $10.39
Value at beginning of period $12.09 $10.00
Value at end of period $10.39
Number of accumulation units 1,360,680.67
outstanding at end of period 52,043.52
INVESCO VIF - Industrial Income $10.44
Value at beginning of period $13.27 $10.00
Value at end of period $10.44
Number of accumulation units 1,271,028.35
outstanding at end of period 68,873.87
<PAGE>
INVESCO VIF - Total Return $10.27
Value at beginning of period $12.52 $10.00
Value at end of period $10.27
Number of accumulation units 996,949.40
outstanding at end of period 3,927.31
Janus Aspen Aggressive Growth $ 9.89
Value at beginning of period $11.05 $10.00
Value at end of period $ 9.89
Number of accumulation units 331,141.90
outstanding at end of period 6,698.73
Janus Aspen Growth $10.26
Value at beginning of period $12.49 $10.00
Value at end of period $10.26
Number of accumulation units 1,335,813.25
outstanding at end of period 93,598.79
Janus Aspen Worldwide Growth $10.42
Value at beginning of period $12.62 $10.00
Value at end of period $10.42
Number of accumulation units 2,208,663.79
outstanding at end of period 51,892.38
Lexington Emerging Markets $10.26
Value at beginning of period $ 9.00 $10.00
Value at end of period $10.26
Number of accumulation units 309,521.91
outstanding at end of period 18,281.42
Montgomery Variable Series:
International Small-Cap $10.51
Value at beginning of period $ 9.89 $10.00
Value at end of period $10.51
Number of accumulation units 208,496.59
outstanding at end of period 3,230.28
Montgomery Variable Series:
Growth $10.35
Value at beginning of period $13.20 $10.00
Value at end of period $10.35
Number of accumulation units 643,624.38
outstanding at end of period 11,226.77
SAFECO RST Equity
Value at beginning of period $10.00
Value at end of period $11.83
Number of accumulation units
outstanding at end of period 357,176.26
Schwab
Asset Director - HighMarketTrack $10.35
Growth $12.79 $10.00
Value at beginning of period $10.35
Value at end of period 284,530.36
Number of accumulation units 16,525.39
outstanding at end of period
Schwab Money Market $10.07
Value at beginning of period $10.49 $10.00
Value at end of period $10.07
Number of accumulation units 4,114,002.58
outstanding at end of period 297,045.95
Schwab S&P 500 $10.52
Value at beginning of period $13.81 $10.00
Value at end of period $10.52
Number of accumulation units 2,115,859.53
outstanding at end of period 62,674.08
SteinRoe $10.27
$10.98 $10.00
Capital AppreciationSpecial Venture $10.27
Value at beginning of period 952,879.99
Value at end of period 70,715.11
Number of accumulation units
outstanding at end of period
Strong Discovery Fund II $10.44
Value at beginning of period $11.53 $10.00
Value at end of period $10.44
Number of accumulation units 211,488.12
outstanding at end of period 24,613.07
Van Eck Worldwide Hard Assets $10.31
Value at beginning of period $10.04 $10.00
Value at end of period $10.31
Number of accumulation units 132,622.35
outstanding at end of period 2,220.85
Van Kampen American Capital
LIT-Morgan Stanley Real Estate
Securities Portfolio $10.00
Value at beginning of period $10.56
Value at end of period
Number of accumulation units 176,075.27
outstanding at end of period
<PAGE>
----------------------------------------------------------------------------
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
AND THE SERIES ACCOUNT
----------------------------------------------------------------------------
Great-West Life & Annuity Insurance Company ("GWL&A")
The Company is a stock life insurance company originally organized under
the laws of the state of Kansas as the National Interment Association. Its name
was changed to Ranger National Life Insurance Company in 1963 and to
Insuramerica Corporation prior to changing to its current name in 1982. In
September of 1990, GWL&A redomesticated and is now organized under the laws of
the state of Colorado.
GWL&A is authorized to engage in the sale of life insurance, accident
and health insurance and annuities. It is qualified to do business in the
District of Columbia, Puerto Rico and 49 states in the United States.
GWL&A is a wholly-owned subsidiary of The Great-West Life Assurance Company
("Great-West Life"). Great-West Life is a subsidiary of Great-West Lifeco Inc.,
a holding company. Great-West Lifeco Inc. is in turn a subsidiary of Power
Financial Corporation, a financial services company. Power Corporation of
Canada, a holding and management company, has voting control of Power Financial
Corporation. Mr. Paul Desmarais, through a group of private holding companies,
which he controls, has voting control of Power Corporation of Canada.
The Series Account
The Variable Annuity-1 Series Account ("Series Account") was established
by the Company as a separate account under the laws of the State of Colorado on
July 24, 1995. The Series Account is registered with the Securities and Exchange
Commission ("Commission") under the Investment Company Act of 1940, as amended
("1940 Act"), as a unit investment trust. The Series Account meets the
definition of a "separate account" under the federal securities laws. However,
such registration does not involve supervision of the management of the Series
Account or the Company by the Commission.
The Company does not guarantee the investment performance of the Series
Account. The portion of the Annuity Account Value attributable to the Series
Account and the amount of variable annuity payments depend on the investment
performance of the Eligible Funds. Thus, the Contract Owner bears the full
investment risk for all Contributions allocated to the Series Account.
The Series Account is administered and accounted for as part of the
general business of the Company; but the income, capital gains, or capital
losses of each Investment Division are credited to or charged against the assets
held in that Investment Division in accordance with the terms of the Contract,
without regard to other income, capital gains or capital losses of any other
Investment Division or arising out of any other business the Company may
conduct. Under Colorado law, the assets of the Series Account are not chargeable
with liabilities arising out of any other business the Company may conduct.
Nevertheless, all obligations arising under the Contracts are generally
corporate obligations of the Company.
The Series Account currently has twenty-five Investment Divisions
available for allocation of Contributions. If, in the future, the Company
determines that marketing needs and investment conditions warrant, it may
establish additional Investment Divisions which will be made available to Owners
to the extent and on a basis to be determined by the Company, (See "Addition,
Deletion, or Substitution," page 12). Each Investment Division invests in shares
of an Eligible Fund, each having a specific investment objective.
----------------------------------------------------------------------------
THE ELIGIBLE FUNDS
----------------------------------------------------------------------------
The Eligible Funds described below are offered exclusively for use as
funding vehicles for insurance products and, consequently, are not publicly
available mutual funds. Each Eligible Fund has separate investment objectives
and policies. As a result, each Eligible Fund operates as a separate investment
portfolio and the investment performance of one Eligible Fund has no effect on
the investment performance of any other Eligible Fund. See the Eligible Funds'
prospectuses for more information.
The Alger American Fund
Alger American Small Capitalization Portfolio: Seeks long-term capital
appreciation by investing at least 65% of its total assets, except
during temporary defensive periods, in equity securities of companies
that, at the time of purchase, have total market capitalization within
the range of companies included in the Russell 2000 Growth Index
("Russell Index") or the S&P SmallCap 600 Index ("S&P Index"), updated
quarterly. Both indexes are broad indexes of small capitalization
stocks. As of December 31, 1997, the range of market capitalization of
the companies in the Russell Index was $20 million to $2.97 billion; the
range of market capitalization of the companies in the S&P Index at that
date was $21 million to $2.934 billion. The combined range as of that
date was $20 million to $2.97 billion. The Portfolio may invest up to
35% of its total assets in equity securities of companies that, at the
time of purchase, have total market capitalization outside this combined
range, and in excess of that amount (up to 100% of its assets) during
temporary defensive periods.
Alger American Growth Portfolio: Seeks long-term capital appreciation by
investment of at least 65% of its total assets, except during temporary
defensive periods, in equity securities of companies that, at the time
of purchase of the securities, have total market capitalization of $1
billion or greater. The Portfolio may invest up to 35% of its total
assets in equity securities of companies that, at the time of purchase,
have total market capitalization of less than $1 billion.
American Century Variable Portfolios, Inc.
American Century VP Capital Appreciation: Seeks capital growth by
investing in common stocks (including securities convertible into common
stocks and other equity equivalents) and other securities that meet
certain fundamental and technical standards of selection and have, in
the opinion of the investment manager, better-than-average potential for
appreciation. The Portfolio's investment manager intends to stay fully
invested in such securities, regardless of the movement of stock prices
generally.
American Century VP International: Seeks capital growth by investing
primarily in securities of foreign companies that meet certain
fundamental and technical standards of selection and have, in the
opinion of the investment manager, potential for appreciation. The
Portfolio will invest primarily in common stocks (defined to include
depository receipts for common stock and other equity equivalents) of
such companies. Investment in securities for foreign issues typically
involves a greater degree of risk than an investment in domestic
securities.
Berger Institutional Products Trust
Berger IPT-Small Company Growth Fund: Seeks capital appreciation by
investing primarily in equity securities (including common and preferred
stocks, convertible debt securities and other securities having equity
features) of small growth companies with market capitalization of less
than $1 billion at the time of initial purchase.
Federated Insurance Series
Federated American Leaders Fund II: Seeks to achieve long-term growth of
capital as a primary objective and seeks to provide income as a
secondary objective through investment of at least 65 % of its total
assets (under normal circumstances) in common stocks of "blue chip"
companies.
Federated Fund for U.S. Government Securities II: Seeks to provide
current income through investment of at least 65% of its total assets in
securities which are primary or direct obligations of the U.S.
government or its agencies or instrumentalities or which are guaranteed
as to principal and interest by the U.S. government, its agencies, or
instrumentalities and in certain collateralized mortgage obligations,
and repurchase agreements.
Federated Utility Fund II: Seeks to provide high current income and
moderate capital appreciation by investing in a professionally-managed,
diversified portfolio of utility company equity and debt securities.
INVESCO Variable Investment Funds, Inc.
INVESCO VIF-Industrial Income Portfolio: Seeks the best possible current
income while following sound investment practices. Capital growth
potential is an additional consideration in the selection of portfolio
securities. The Portfolio normally invests at least 65% of its total
assets in dividend-paying common stocks. Up to 10% of the Portfolio's
total assets may be invested in equity securities that do not pay
regular dividends. The remaining assets are invested in other
income-producing securities such as corporate bonds. The Portfolio also
has the flexibility to invest in other types of securities.
INVESCO VIF-Total Return Portfolio: Seeks a high total return on
investment through capital appreciation and current income. The Total
Return Portfolio seeks to achieve its investment objective by investing
in a combination of equity securities (consisting of common stocks and,
to a lesser degree, securities convertible into common stock) and fixed
income securities.
INVESCO VIF-High Yield Portfolio: Seeks a high level of current income
by investing substantially all of its assets in lower rated bonds and
other debt securities and in preferred stock. These bonds and other
securities are sometimes referred to as "junk bonds." The High Yield
Portfolio pursues its investment objective through investment in a
variety of long-term, intermediate-term, and short-term bonds. Potential
capital appreciation is a factor in the selection of investments, but is
secondary to the Portfolio's primary objective.
Janus Aspen Series
Janus Aspen Aggressive Growth Portfolio: Seeks long-term growth of
capital in a manner consistent with the preservation of capital. The
Portfolio normally invests at least 50% of its equity assets in
securities issued by medium-sized companies. Medium-sized companies are
those whose market capitalizations fall within the range of companies in
the S&P MidCap 400 Index (the "MidCap Index"). Companies whose
capitalization falls outside this range after the Portfolio's initial
purchase continue to be considered medium-sized companies for the
purpose of this policy. As of December 31, 1997, the MidCap Index
included companies with capitalizations between approximately $213
million to $13.7 billion. The range of the MidCap Index is expected to
change on a regular basis. Subject to the above policy, the Portfolio
may also invest in smaller or larger issuers.
Janus Aspen Growth Portfolio: Seeks long-term growth of capital in a
manner consistent with the preservation of capital. The Portfolio
pursues its objective by investing in common stocks of companies of any
size. This Portfolio generally invests in larger, more established
issuers.
Janus Aspen Worldwide Growth Portfolio: Seeks long-term growth of
capital in a manner consistent with the preservation of capital. The
Portfolio pursues its objective primarily through investments in common
stocks of foreign and domestic issuers. The Portfolio has the
flexibility to invest on a worldwide basis in companies and
organizations of any size, regardless of country of organization or
place of principal business activity. The Portfolio normally invests in
issuers from at least five different countries, including the United
States; however, it may at times invest in fewer than five countries or
even a single country.
Lexington Emerging Markets Fund, Inc.
Lexington Emerging Markets Fund: Seeks long term growth of capital
primarily through investment in equity securities of companies domiciled
in, or doing business in emerging countries and emerging markets. For
purposes of its investment objective, the Fund considers emerging
country equity securities to be any country whose economy and market the
World Bank or United Nations considers to be emerging or developing. The
Fund may also invest in equity securities and equivalents traded in any
market of companies that derive 50% or more of their total revenue from
either goods or services produced in such emerging countries or markets
or sales made in such countries.
Montgomery Variable Series
Montgomery Growth Fund: Seeks capital appreciation by investing, under
normal conditions, at least 65% of its total assets in the equity
securities of domestic corporations. Although such companies may be of
any size and industry, the Fund targets companies having total market
capitalizations of $1 billion or more. The Fund seeks growth at a
reasonable value, identifying companies with sound fundamental value and
the potential for substantial growth.
Montgomery International Small Cap Fund: Seeks capital appreciation by
investing at least 65% of its total assets (under normal conditions) in
equity securities of companies outside the United States having total
market capitalizations of less than $1 billion, sound fundamental values
and potential for long-term growth at a reasonable price. The Fund
generally invests the remaining 35% of its total assets in a similar
manner but may invest those assets in companies having market
capitalizations of $1 billion or more, or in debt securities, including
up to 5% of its total assets in debt securities rated below investment
grade.
SAFECO Resource Series Trust
SAFECO RST Equity Portfolio: Seeks long-term growth of capital and
reasonable current income. The Portfolio ordinarily invests principally
in common stocks or securities convertible into common stocks of larger,
established companies that are proven performers. In selecting stocks
for the portfolio, the fund manager looks for companies that have
demonstrated consistent earnings growth as well as attractive dividend
income. This fund may be a good choice if you are seeking attractive
total returns but are uncomfortable with a more aggressive fund.
Schwab Annuity Portfolios
Schwab Money Market Portfolio: Seeks maximum current income consistent
with liquidity and stability of capital. It seeks to achieve its
objective by investing in short-term money market instruments. This
Portfolio is neither insured nor guaranteed by the United States
Government and there can be no assurance that it will be able to
maintain a stable net asset value of $1.00 per share.
Schwab MarketTrack Growth Portfolio II: Seeks to provide high capital
growth with less volatility than an all stock portfolio. The MarketTrack
Growth Portfolio seeks to meet its investment objective by investing in
a mix of stocks, bonds, and cash equivalents either directly or through
investment in other mutual funds.
Schwab S&P 500 Portfolio: Seeks to track the price and dividend
performance (total return) of common stocks of U.S. companies, as
represented in the Standard & Poor's Composite Index of 500 stocks (the
"Index"). The S&P 500 Fund invests primarily in the common stocks of
companies composing the Index.
SteinRoe Variable Investment Trust
SteinRoe Special Venture Fund: Seeks capital growth by investing
primarily in common stocks, convertible securities, and other securities
selected for prospective capital growth.
Strong Discovery Fund II, Inc.
Strong Discovery Fund II: Seeks capital growth. The Fund's investment
adviser seeks to identify emerging investment trends and attractive
growth opportunities. The Fund normally emphasizes equity investments,
although it has the flexibility to invest in debt obligations and
short-term fixed-income securities.
Van Eck Worldwide Insurance Trust
Van Eck Worldwide Hard Assets Fund: Seeks long-term capital appreciation
by investing in hard asset securities; i.e., commodities or securities
of firms involved to a significant extent (directly or indirectly)
primarily in the following areas: precious metals, ferrous and
non-ferrous metals, energy, forest products, real estate, and other
non-agricultural commodities. The Fund seeks opportunities in all the
global stock, bond, and commodity markets, including domestic markets.
Income is a secondary consideration.
Van Kampen American Capital Life Investment Trust
Van Kampen American Capital LIT-Morgan Stanley Real Estate Securities
Portfolio: Seeks long-term growth of capital. Current income is a
secondary consideration. The Portfolio seeks to achieve its objectives
by investing principally in securities of companies operating in the
real estate industry ("Real Estate Securities"). Under normal market
conditions, at least 65% of the Portfolio's total assets will be
invested in Real Estate Securities, primarily equity securities of real
estate investment trusts.
The two Alger American Funds are advised by Fred Alger Management, Inc.
of New York, New York. The two American Century Variable Portfolios, Inc., are
advised by American Century Investment Management, Inc. of Kansas City,
Missouri, advisers to the American Century family of mutual funds. The Berger
IPT-Small Company Growth Fund is advised by Berger Associates of Denver,
Colorado. The three Federated Insurance Series Portfolios are advised by
Federated Advisers of Pittsburgh, Pennsylvania. The three INVESCO Variable
Investment Funds, Inc., Portfolios are advised by INVESCO Funds Group, Inc., of
Denver, Colorado. INVESCO Trust Company is the sub-adviser for the INVESCO
VIF-Industrial Income Portfolio. The three Janus Aspen Series Portfolios are
advised by Janus Capital Corporation of Denver, Colorado. The Lexington Emerging
Markets Fund is advised by Lexington Management Corporation of Saddle Brook, New
Jersey. The two Montgomery Variable Series Funds are advised by Montgomery Asset
Management, LLC of San Francisco, California. The SAFECO RST Equity Portfolio is
advised by SAFECO Asset Management Company of Seattle, Washington. The three
Schwab Annuity Portfolios are advised by Charles Schwab Investment Management,
Inc., of San Francisco, California. The SteinRoe Special Venture Fund is advised
by Stein Roe & Farnham Incorporated of Chicago, Illinois. Strong Discovery Fund
II is advised by Strong Capital Management, Inc. of Milwaukee, Wisconsin. The
Van Eck Worldwide Hard Assets Fund is advised by Van Eck Associates Corporation
of New York, New York. The Van Kampen American Capital LIT-Morgan Stanley Real
Estate Securities Portfolio is advised by Van Kampen American Capital Asset
Management, Inc.
***
Meeting investment objectives depends on various factors, including, but
not limited to, how well the Eligible Fund managers anticipate changing economic
and market conditions. THERE IS NO ASSURANCE THAT ANY OF THESE ELIGIBLE FUNDS
WILL ACHIEVE THEIR STATED OBJECTIVES.
The Contracts are not deposits of, or guaranteed or endorsed by, any
bank, nor are the Contracts federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency. The
Contracts involve certain investment risks, including possible loss of
principal.
Each Eligible Fund is registered with the Commission as an open-end
management investment company or portfolio thereof. The Commission does not
supervise the management or the investment practices and policies of any of the
Eligible Funds.
Since some of the Eligible Funds are available to registered separate
accounts of other insurance companies offering variable annuity and variable
life products, there is a possibility that a material conflict may arise between
the interests of the Series Account and one or more other separate accounts
investing in the Eligible Funds. In the event of a material conflict, the
affected insurance companies are required to take any necessary steps to resolve
the matter, including stopping their separate accounts from investing in the
Eligible Funds. See the Eligible Funds' prospectuses for more details.
Additional information concerning the investment objectives and policies
of all of the Eligible Funds and the investment advisory services and
administrative services and charges can be found in the current prospectuses for
the Eligible Funds, which can be obtained by calling the Schwab Annuity Service
Center at 800-838-0650, or by writing to Schwab Annuity Service Center, P.O. Box
7666, San Francisco, California 94120-7666. The Eligible Funds' prospectuses
should be read carefully before any decision is made concerning the allocation
of Contributions to, or Transfers among, the Investment Divisions.
Addition, Deletion, or Substitution
The Company does not control the Eligible Funds and cannot guarantee
that any of the Eligible Funds will always be available for allocation of
Contributions or Transfers. The Company retains the right to make changes in the
Series Account and in its investments. Currently, Schwab must approve certain
changes.
GWL&A and Schwab reserve the right to eliminate the shares of any
Eligible Fund held by an Investment Division and to substitute shares of another
Eligible Fund or of another investment company, for the shares of any Eligible
Fund, if the shares of the Eligible Fund are no longer available for investment
or if, First GWL&A and Schwab, in their discretion, determine to discontinue any
Eligible Fund. To the extent required by the 1940 Act, a substitution of shares
attributable to the Owner's interest in an Investment Division will not be made
without prior notice to the Owners and the prior approval of the Commission.
Nothing contained herein shall prevent the Series Account from purchasing other
securities for other series or classes of variable annuity policies, or from
effecting an exchange between series or classes of variable policies on the
basis of Requests made by you.
New Investment Divisions may be established when, in our discretion,
marketing, tax, investment or other conditions so warrant. Any new Investment
Divisions will be made available to Owners on a basis to be determined by us.
Each additional Investment Division will purchase shares in a Eligible Fund or
in another mutual fund or investment vehicle. We may also eliminate one or more
Investment Divisions if, in our sole discretion, marketing, tax, investment or
other conditions so warrant. In the event any Investment Division is eliminated,
we will notify the Owners and request a re-allocation of the amounts invested in
the eliminated Investment Division.
In the event of any such substitution or change, we may make such
changes to your Contract as may be necessary or appropriate to reflect such
substitution or change. Furthermore, if deemed to be in the best interests of
persons having voting rights under the Contracts, the Series Account may be
operated as a management company under the 1940 Act or any other form permitted
by law, may be de-registered under such Act in the event such registration is no
longer required, or may be combined with one or more other separate accounts.
Such changes will be made in compliance with applicable law.
---------------------------------------------------------------------------
THE GUARANTEE PERIOD FUND
----------------------------------------------------------------------------
Guarantee Period Fund
Amounts allocated to the Guarantee Period Fund under the Contract will
be deposited to, and accounted for, in a non-unitized market value separate
account established by the Company under Section 10-7-401, et seq. of the
Colorado Insurance Code and, accordingly, are not part of the Series Account. A
non-unitized separate account is a separate account in which the Owner does not
participate in the performance of the assets through unit values. Therefore,
Owners allocating Contributions do not receive a unit ownership of assets
accounted for in this separate account. The assets accrue solely to the benefit
of the Company and any gain or loss in the separate account is borne entirely by
the Company. For amounts allocated to the Guarantee Period Fund, Owners will
receive the Contract guarantees made by the Company.
Contributions allocated to or amounts transferred to the Guarantee
Period Fund will establish a new Guarantee Period of a duration selected by the
Owner from those currently being offered by the Company. Every Guarantee Period
offered by the Company will have a duration of at least one year. Contributions
allocated to the Guarantee Period Fund will be credited on the Transaction Date.
Each Guarantee Period will have its own stated rate of interest and
Guarantee Period Maturity Date. The stated rate of interest applicable to a
Guarantee Period will depend on the date the Guarantee Period is established and
the duration chosen by the Owner.
As of the date of this Prospectus, Guarantee Periods with annual
durations of 1 to 10 years are offered only in those states where the Guarantee
Period Fund is available. The Guarantee Periods may be changed in the future;
however, any such modification will not have an impact on any Guarantee Period
then in effect.
The value of amounts in each Guarantee Period is the Owner's
Contributions, less Premium Tax, if any, in that Guarantee Period, plus interest
earned, less amounts distributed, withdrawn (in whole or in part), Transferred
or applied to an annuity option, periodic withdrawals, and charges deducted
under the Contract. If a Guarantee Period is broken, a Market Value Adjustment
may be assessed. Any such amount withdrawn or Transferred from a Guarantee
Period will be paid in accordance with the MVA formula (See "Market Value
Adjustment," page 15.)
Investments
The Company intends to invest in assets which, in the aggregate, have
characteristics, especially cash flow patterns, reasonably related to the
characteristics of its liabilities. Various techniques will be used to achieve
the objective of close aggregate matching of assets and liabilities. The Company
will primarily invest in investment-grade fixed income securities including:
Securities issued by the U.S. Government or its agencies or
instrumentalities, which issues may or may not be guaranteed by the
U.S. Government.
Debt securities which have an investment grade, at the time of
purchase, within the four highest grades assigned by Moody's Investment
Services, Inc. (Aaa, Aa, A or Baa), Standard & Poor's Corporation (AAA,
AA, A or BBB) or any other nationally recognized rating service.
Other debt instruments, including, but not limited to, issues of
banks or bank holding companies and of corporations, which obligations,
although not rated by Moody's, Standard & Poor's, or other nationally
recognized rating firms, are deemed by the Company's management to have
an investment quality comparable to securities which may be purchased as
stated above.
Commercial paper, cash or cash equivalents, and other short-term
investments having a maturity of less than one year which are considered
by the Company's management to have investment quality comparable to
securities which may be purchased as stated above.
In addition, the Company may invest in futures and options. Financial
futures and related options thereon and options on securities are purchased
solely for non-speculative hedging purposes. The Company may sell a futures
contract or purchase a put option on futures or securities to protect the value
of securities held in or to be sold for the general account or the non-unitized
separate account in the event the securities prices are anticipated to decline.
Similarly, if securities prices are expected to rise, the Company may purchase a
futures contract or a call option thereon against anticipated positive cash flow
or may purchase options on securities.
WHILE THE FOREGOING GENERALLY DESCRIBES THE INVESTMENT STRATEGY FOR THE
GUARANTEE PERIOD FUND, THE COMPANY IS NOT OBLIGATED TO INVEST THE ASSETS
ATTRIBUTABLE TO THE GUARANTEE PERIOD FUND ACCORDING TO ANY PARTICULAR STRATEGY,
EXCEPT AS MAY BE REQUIRED BY COLORADO AND OTHER STATE INSURANCE LAWS, NOR WILL
THE STATED RATE OF INTEREST THAT THE COMPANY ESTABLISHES NECESSARILY RELATE TO
THE PERFORMANCE OF THE NON-UNITIZED MARKET VALUE SEPARATE ACCOUNT.
Subsequent Guarantee Periods
Prior to the date annuity payments commence, you may invest the value of
amounts held in a maturing Guarantee Period in any Guarantee Period that we
offer at that time. On the quarterly statement issued prior to the end of any
Guarantee Period, we will notify you of the upcoming maturity of a Guarantee
Period. THE GUARANTEE PERIOD AVAILABLE FOR NEW CONTRIBUTIONS MAY BE CHANGED AT
ANY TIME, INCLUDING BETWEEN THE DATE OF NOTIFICATION OF A MATURING GUARANTEE
PERIOD AND THE DATE A SUBSEQUENT GUARANTEE PERIOD BEGINS. Information regarding
the current Guarantee Periods then available and their stated rate of interest
may be obtained by calling the Schwab Annuity Service Center at:
1-800-838-0650.
If the Company receives no direction from the Contract Owner by the
Guarantee Period Maturity Date, the Company will automatically allocate the
amount from the maturing Guarantee Period to a Guarantee Period equal in
duration to the one just ended. If at that time, the duration previously chosen
is no longer available, the amount will be allocated to the next shortest
available Guarantee Period duration. If none of the above is available, the
value of matured Guarantee Periods will be allocated to the Schwab Money Market
Investment Division. In any event, a Guarantee Period will not renew for a term
equal in duration to the one just ended if the Guarantee Period will mature
after the Payment Commencement Date. No Guarantee Period may mature later than
six months after a Payment Commencement Date. For example, if a 3-year Guarantee
Period matures and the Payment Commencement Date begins 1 3/4 years from the
Guarantee Period Maturity Date, the matured value will be transferred to a
2-year Guarantee Period.
Breaking A Guarantee Period
Any Transfer, withdrawal or the selection of an annuity option prior to
the Guarantee Period Maturity Date will be known as breaking a Guarantee Period.
When a Request to break a Guarantee Period is received, the Guarantee Period
that is closest to the Guarantee Period Maturity Date will be broken first. If a
Guarantee Period is broken, a Market Value Adjustment may be assessed. The
Market Value Adjustment may increase or decrease the value of the amount
Transferred or withdrawn from the Guarantee Period Fund. The Market Value
Adjustment may reduce the value of amounts held in a Guarantee Period below the
amount of your Contribution(s) allocated to that Guarantee Period. (See "Market
Value Adjustment" below.)
Interest Rates
Declared rates are effective annual rates of interest. The rate is
guaranteed throughout the Guarantee Period. FOR GUARANTEE PERIODS NOT YET IN
EFFECT, GWL&A MAY DECLARE INTEREST RATES DIFFERENT THAN THOSE CURRENTLY IN
EFFECT. When a subsequent Guarantee Period begins, the rate applied will not be
less than the rate then applicable to new Contracts of the same type with the
same Guarantee Period.
The stated rate of interest must be at least equal to the Guaranteed
Interest Rate. The Company may declare higher rates. The Guaranteed Interest
Rate is based on the applicable state standard non-forfeiture law. Please see
Appendix A for the standard non-forfeiture law rate applicable to the state in
which the Contract was issued.
The determination of the stated rate of interest is influenced by, but
does not necessarily correspond to, interest rates available on fixed income
investments which the Company may acquire using funds deposited into the
Guarantee Period Fund. In addition, the Company will consider other items in
determining the stated rate of interest including regulatory and tax
requirements, sales commissions and administrative expenses borne by the
Company, general economic trends, and competitive factors.
Market Value Adjustment
Distributions from the amounts allocated to a Guarantee Period due to a
full surrender or partial withdrawal, Transfer, application of amounts to the
periodic withdrawal option or to purchase an annuity, or distributions resulting
from the death of the Owner or Annuitant prior to a Guarantee Period Maturity
Date will be subject to a Market Value Adjustment ("MVA"). An MVA may increase
or decrease the amount payable on one of the above described distributions.
Amount available for a full surrender, partial withdrawal or Transfer = amount
Requested + MVA. The MVA is calculated by multiplying the amount Requested by
the Market Value Adjustment Factor ("MVAF").
The MVA reflects the relationship as of the time of its calculation
between (a) the U.S. Treasury Strip ask side yield as published in the Wall
Street Journal on the last business day of the week prior to the date the stated
rate of interest was established for the Guarantee Period; and (b) the U.S.
Treasury Strip ask side yield as published in the Wall Street Journal on the
last business day of the week prior to the week the Guarantee Period is broken.
There would be a downward adjustment if Treasury rates at the time the Guarantee
Period is broken, exceed Treasury rates when the Guarantee Period was created.
There would be an upward adjustment if Treasury rates at the time the Guarantee
Period is broken, are lower than when the Guarantee Period was created. The MVA
factor is the same for all Contracts.
<PAGE>
1. The formula used to determine the MVA is:
MVA = (amount applied) X (MVAF)
The Market Value Adjustment Factor (MVAF) is:
MVAF = {[(1 + i)/(1 + j +.10%)] N/12} - 1
where:
a) i is the U.S. Treasury Strip ask side yield as published in
the Wall Street Journal on the last business day of the week
prior to the date the stated rate of interest was established for
the Guarantee Period. The term of i is measured in years and
equals the term of the Guarantee Period;
b) j is the U.S. Treasury Strip ask side yield as published in
the Wall Street Journal on the last business day of the week
prior to the week the Guarantee Period is broken. The term of j
equals the remaining term to maturity of the Guarantee Period,
rounded up to the higher number of years; and
c) N is the number of complete months remaining until maturity.
If i + j differ by less than .10%, the MVA will equal 0. If N is less
than 6, the MVA will
equal 0.
2. The Market Value Adjustment will apply to any Guarantee Period six or more
months prior to the Guarantee Period Maturity Date in each of the following
situations:
a) Transfer to another Guarantee Period or to an Investment
Division offered under this Contract; or
b) Surrenders, partial withdrawals, annuitization or Periodic
Withdrawals; or
c) A single sum payment upon death of the Owner or Annuitant.
3. The Market Value Adjustment will not apply to any Guarantee Period having
fewer than six months prior to the Guarantee Period Maturity Date in each of the
following situations:
a) Transfer to an Investment Division offered under this
Contract; or
b) Surrenders, partial withdrawals, annuitization or Periodic
Withdrawals.
c) A single sum payment upon death of the Owner or Annuitant.
See Appendix B for Illustrations of the MVA.
<PAGE>
----------------------------------------------------------------------------
APPLICATION AND CONTRIBUTIONS
----------------------------------------------------------------------------
Contributions
All Contributions may be paid at the Schwab Annuity Service Center by a
check payable to GWL&A or by transfer to GWL&A of available funds from your
Schwab account.
The initial Contribution for the Contract must be at least $5,000 (or
$2,000 if for an IRA). Subsequent Contributions must be at least $500. This
minimum initial investment may be reduced to $1,000, but only if you participate
in an Automatic Contribution Plan and contribute at least $100 per month through
a recurring deposit. A confirmation will be issued to you upon the acceptance of
each Contribution.
Your Contract will be issued and your Contribution generally will be
accepted and credited within two business days after receipt of an acceptable
application and receipt of the initial Contribution at the Schwab Annuity
Service Center. All Contributions should be paid to the Schwab Annuity Service
Center by check (payable to GWL&A) or by instructing Schwab to transfer to GWL&A
available funds from your account with Schwab. Acceptance is subject to there
being sufficient information in a form acceptable to us and we reserve the right
to reject any application or Contribution.
The Schwab Annuity Service Center will process your application and
Contributions. If your application is complete and your initial Contribution is
being transferred from funds available in your Schwab account, then the
Contribution will generally be credited within two business days following
receipt of the application. If your application is incomplete, the Schwab
Annuity Service Center will either complete the application from information
Schwab has on file, or contact you for the additional information. No transfer
of funds will be made from your Schwab account until your application is
complete. The funds will be credited as Contributions to the Contract when they
are transferred.
If your Contribution is by check, and the application is complete,
Schwab will use its best efforts to credit the Contribution on the day of
receipt, but in all such cases it will be credited to your Contract within two
business days of receipt. If your application is incomplete, the Schwab Annuity
Service Center will complete the application from information Schwab has on file
or contact you by telephone to obtain the required information. If your
application remains incomplete for five business days, we will return to you
both the check and the application unless you consent to our retaining the
initial Contribution and crediting it as soon as the requirements are fulfilled.
A Contract may be returned within ten days after receipt, or longer
where required by law ("Free Look Period"). During the Free Look Period, all
contributions will be processed as follows:
(1) Amounts to be allocated to one or more of the then available
Guarantee Periods will be allocated as directed, effective upon
the Transaction Date.
(2) Amounts the Owner has directed to be allocated to one or more of
the Investment Divisions will first be allocated to the Schwab
Money Market Investment Division until the next Transaction Date
following the end of the Free Look Period. On that date, the
Variable Account Value held in the Schwab Money Market Investment
Division will be allocated to the Investment Divisions selected
by the Owner.
(3) During the Free Look Period, you may change the allocation
percentages among the Investment Divisions and/or your selection
of Investment Divisions to which Contributions will be allocated
after the Free Look Period.
(4) If the Contract is returned, the contract will be void from the
start and the greater of: (a) Contributions received less
surrenders, withdrawals and distributions or (b) the Annuity
Account Value less surrenders, withdrawals and distributions,
will be refunded. Exercising the return privilege requires the
return of the Contract to the Company or to the Schwab Annuity
Service Center.
Amounts the Owner has contributed from a 1035 exchange of the variable
annuity issued by Transamerica Occidental Life Insurance Company and First
Transamerica Occidental Life Insurance Company distributed by Charles Schwab &
Co., Inc. (previously referred to as the Schwab Investment Advantage Annuity
Contract) will be immediately allocated to the Investment Divisions selected by
the Owner. If the Contract is returned, it will be void from the start and the
greater of: (a) Contributions received less surrenders, withdrawals and
distributions, or (b) the Annuity Account Value less surrenders, withdrawals and
distributions, will be refunded.
Additional Contributions may be made at any time prior to the Payment
Commencement Date, as long as the Annuitant is living. Additional Contributions
must be at least $500 or $100 per month if under an ACP. Additional
contributions will be credited within two days following receipt.
Total Contributions may exceed $1,000,000 with our prior approval.
The Company reserves the right to modify the limitations set forth in
this section.
----------------------------------------------------------------------------
ANNUITY ACCOUNT VALUE
----------------------------------------------------------------------------
Before the date annuity payments commence, your Annuity Account Value is
the sum of each Variable and Fixed Sub-Account established under your Contract.
Before the annuity commencement date, the Variable Account Value is the
total dollar amount of all Accumulation Units under each of your Variable
Sub-Accounts. Initially, the value of each Accumulation Unit was set at $10.00.
Each Variable Sub-Account's value prior to the Payment Commencement Date is
equal to: (a) net Contributions allocated to the corresponding Investment
Division; plus or minus (b) any increase or decrease in the value of the assets
of the Variable Sub-Account due to investment results; less (c) the daily
Mortality and Expense Risk Charge; less (d) reductions for the Contract
Maintenance Charge deducted on the last business day of each Contract Year; less
(e) any applicable Transfer Fees; and less (f) any withdrawals or Transfers from
the Variable Sub-Account.
A Valuation Period is the period between successive Valuation Dates. It
begins at the close of the New York Stock Exchange (generally 4:00 p.m. ET) on
each Valuation Date and ends at the close of the New York Stock Exchange on the
next succeeding Valuation Date. A Valuation Date is each day that the New York
Stock Exchange is open for regular business. The value of an Investment
Division's assets is determined at the end of each Valuation Date. To determine
the value of an asset on a day that is not a Valuation Date, the value of that
asset as of the end of the previous Valuation Date will be used.
The Variable Account Value is expected to change from Valuation Period
to Valuation Period, reflecting the investment experience of the selected
Investment Division(s) as well as the deductions for charges.
Contributions which you allocate to an Investment Division are used to
purchase Variable Accumulation Units in the Investment Division(s) you select.
The number of Accumulation Units to be credited will be determined by dividing
the portion of each Contribution allocated to the Investment Division by the
value of an Accumulation Unit determined at the end of the Valuation Period
during which the Contribution was received. In the case of the initial
Contribution, Accumulation Units for that payment will be credited to the
Variable Account Value (and, except for certain 1035 exchanges), held in the
Schwab Money Market Investment Division until the end of the Free Look Period
(see "Application and Contributions," page 16). In the case of any subsequent
Contribution, Accumulation Units for that payment will be credited at the end of
the Valuation Period during which we receive the Contribution. The value of an
Accumulation Unit for each Investment Division for a Valuation Period is
established at the end of each Valuation Period and is calculated by multiplying
the value of that unit at the end of the prior Valuation Period by the
Investment Division's Net Investment Factor for the Valuation Period.
Unlike a brokerage account, amounts held under a Contract are not
covered by the Securities Investor Protection Corporation ("SIPC") .
----------------------------------------------------------------------------
TRANSFERS
----------------------------------------------------------------------------
In General
Prior to the Payment Commencement Date you may Transfer all or part of
your Annuity Account Value among and between the Investment Divisions and the
available Guarantee Periods by telephone or by sending a Request to the Schwab
Annuity Service Center or by calling the voice response unit @ 1-800-838-0650
(KeyTalk). The Request must specify the amounts being Transferred, the
Investment Division(s) and/or Guarantee Period(s) from which the Transfer is to
be made, and the Investment Division(s) and/or Guarantee Period(s) that will
receive the Transfer.
Currently, there is no limit on the number of Transfers you can make
among the Investment Divisions during any calendar year. There is no charge for
the first twelve Transfers each calendar year, but there will be a charge of $10
for each additional Transfer in each calendar year. We reserve the right to
limit the number of Transfers you make. The charge will be deducted from the
amount transferred. All Transfers made on a single Transaction Date will be
aggregated to count as only one Transfer toward the twelve free Transfers;
however, if a one time rebalancing Transfer also occurs on the Transaction Date,
it will be counted as a separate and additional Transfer.
Transfers involving the Guarantee Period Fund (including Transfers to or
from the Investment Division(s)) are not limited during any calendar year. These
Guarantee Period Fund Transfers are counted against your twelve free Transfers
as discussed above. The $10 charge will apply to each Transfer made in excess of
the first twelve Transfers each calendar year.
A Transfer generally will be effective on the date the Request for
Transfer is received by the Schwab Annuity Service Center if received before
4:00 p.m. Eastern Time. Under current law, there will not be any tax liability
to you if you make a Transfer.
Transfers involving the Investment Divisions will result in the purchase
and/or cancellation of Accumulation Units having a total value equal to the
dollar amount being Transferred to or from a particular Investment Division. The
purchase and/or cancellation of such units generally shall be made using the
Variable Account Value as of the end of the Valuation Date on which the Transfer
is effective.
When a Transfer is made from amounts in a Guarantee Period before the
Guarantee Period Maturity Date, the amount Transferred may be subject to a
Market Value Adjustment. (See "Market Value Adjustment," page 15.) A Request for
Transfer from amounts in a Guarantee Period made prior to the Guarantee Period
Maturity Date for Transfers on the Guarantee Period Maturity Date will not be
counted for the purpose of determining any Transfer Fee on Transfers in excess
of the twelve Transfers per year if these Transfers are to take place on the
Guarantee Period Maturity Date.
Possible Restrictions
We reserve the right without prior notice to modify, restrict, suspend
or eliminate the Transfer privileges (including telephone Transfers) at any
time. For example, restrictions may be necessary to protect Owners from adverse
impacts on portfolio management of large and/or numerous Transfers by market
timers or others. We have determined that the movement of significant amounts
from one Investment Division to another may prevent the underlying Eligible Fund
from taking advantage of investment opportunities because the Eligible Fund must
maintain a significant cash position in order to handle redemptions. Such
movement may also cause a substantial increase in Eligible Fund transaction
costs which must be indirectly borne by Owners. Therefore, we reserve the right
to require that all Transfer Requests be made by the Owner and not by an Owner's
designee and to require that each Transfer Request be made by a separate
communication to us. We also reserve the right to request that each Transfer
Request be submitted in writing and be manually signed by the Owner; facsimile
Transfer Requests may not be allowed. Transfers among the Investment Divisions
may also be subject to such terms and conditions as may be imposed by the
Eligible Funds.
Custom Transfer: Dollar Cost Averaging (Automatic Transfers)
The Owner may Request to automatically Transfer at regular intervals,
predetermined amounts from one Investment Division selected from among those
being allowed under this option (which may be modified by the Company from time
to time) to any of the other Investment Divisions. The intervals between
Transfers may be monthly, quarterly, semi-annually or annually. The Transfer
will be initiated on the Transaction Date one frequency period following the
date of the Request. Transfers will continue on that same day each interval
unless terminated by you or for other reasons as set forth in the Contract. If
there are insufficient funds in the applicable Variable Sub-Account on the date
of Transfer, no Transfer will be made; however, Dollar Cost Averaging will
resume once there are sufficient funds in the applicable Variable Sub-Account.
Dollar Cost Averaging will terminate automatically upon the annuity commencement
date. Amounts transferred through Dollar Cost Averaging are not counted against
the twelve free Transfers allowed in a calendar year.
Automatic Transfers must meet the following conditions:
1. The minimum amount that can be Transferred out of the selected
Investment Division is $100 per month.
2. The Owner must specify dollar amount to be Transferred, designate the
Investment Division(s) to which the Transfer will be made and the percent to be
allocated to such Investment Division(s). The Accumulation Unit values will be
determined on the Transfer Date.
Dollar Cost Averaging may be used to purchase Accumulation Units of the
Investment Divisions over a period of time. The Owner, by Request, may cease
Dollar Cost Averaging at any time. Participation in Dollar Cost Averaging does
not, however, assure a greater profit, nor will it prevent or necessarily
alleviate losses in a declining market. The Company reserves the right to
modify, suspend or terminate Dollar Cost Averaging at any time.
Custom Transfer: Rebalancer Option
The Owner may Request to automatically Transfer among the Investment
Divisions on a periodic basis by electing the Rebalancer Option. This option
automatically reallocates the Variable Account Value to maintain a particular
allocation among Investment Divisions selected by the Owner. The amount
allocated to each Investment Division will increase or decrease at different
rates depending on the investment experience of the Investment Division.
The Owner may Request that the rebalancing occur one time only, in which
case the Transfer will take place on the Transaction Date of the Request. This
Transfer will count as one Transfer towards the twelve free Transfers allowed in
a calendar year. (See "Transfer Fee," page 26.)
Rebalancing may also be set up on a quarterly, semiannual or annual
basis, in which case the first Transfer will be initiated on the Transaction
Date one frequency period following the date of the Request. On the Transaction
Date for the specified Request, assets will be automatically reallocated to the
selected Investment Divisions. Rebalancing will continue on the same Transaction
Date for subsequent periods. In order to participate in the Rebalancer Option,
the entire Variable Account Value must be included. Transfers set up with these
frequencies will not count against the twelve free Transfers allowed in a
calendar year.
The Owner must specify the percentage of Variable Account Value to be
allocated to each Investment Division and the frequency of rebalancing. The
Owner, by Request, may modify the allocations or cease the Rebalancer Option at
any time. The Rebalancer Option will terminate automatically upon the Payment
Commencement Date. Participation in the Rebalancer Option and Dollar Cost
Averaging at the same time is not allowed. Participation in the Rebalancer
Option does not assure a greater profit, nor will it prevent or necessarily
alleviate losses in a declining market. The Company reserves the right to
modify, suspend, or terminate the Rebalancer Option at any time.
----------------------------------------------------------------------------
CASH WITHDRAWALS
----------------------------------------------------------------------------
Withdrawals
You (the Owner) may withdraw from the Contract all or part of your
Annuity Account Value at any time during the life of the Annuitant and prior to
the date annuity payments commence by Request at the Schwab Annuity Service
Center subject to the rules below. Federal or state laws, rules or regulations
may apply. The amount payable to you if you surrender your Contract is your
Annuity Account Value, with a Market Value Adjustment, if applicable, on the
effective date of the surrender, and less any applicable Premium Tax. No
withdrawals may be made after the date annuity payments commence.
A Request for a partial withdrawal will result in a reduction in your
Annuity Account Value equal to the sum of the dollar amount withdrawn. A Market
Value Adjustment may apply. (See "Market Value Adjustment," page 15.) The
partial withdrawal proceeds may be greater or less than the amount requested,
depending on the effect of the Market Value Adjustment.
The minimum partial withdrawal before application of the MVA is $500.
Partial withdrawals are unlimited; however, you must specify the Investment
Division(s) or Guarantee Period(s) from which the withdrawal is to be made.
After any partial withdrawal, if the remaining Annuity Account Value is less
than $2,000, then a full surrender may be required.
The following terms apply:
(a) No partial withdrawals are permitted after the date annuity
payments commence.
(b) A partial withdrawal will be effective upon the Transaction Date.
(c) A partial withdrawal from amounts in a Guarantee Period may be
subject to the Market Value Adjustment provisions, the Guarantee
Period Fund provisions of the Contract, and the terms of the attached
Guarantee Period Fund Rider(s), if any.
You may Request partial withdrawals from your Annuity Account Value and
direct the Company to remit such withdrawn amounts directly to your designated
Investment Manager or Financial Advisor (collectively "Consultant"). Any such
withdrawal Requests must meet the minimum withdrawal requirements and company
with all terms and conditions applicable to partial withdrawals, as described
above. If your Annuity Account Value exceeds your "investment in the Contract,"
then you may b subject to income tax on withdrawals made from your Annuity
Account even though payments are made by the Company directly to your
Consultant. In addition, the Code may require us to withhold federal income
taxes from withdrawals and report such withdrawals to the IRS. If you Request
partial withdrawals to pay Consultant fees, your Annuity Account Value will be
reduced by the sum of the fees paid to the Consultant and the related
withholding, although you may elect, in writing, to have the Company not
withhold federal income tax from withdrawals, unless withholding is mandatory
for your Contract. If you are younger than 59 1/2, the taxable portion of any
withdrawals made to pay Consultant fees will also generally be considered early
withdrawals under the Code subjecting you to a 10% additional tax on the taxable
portion of such withdrawals. You should consult a competent tax advisor prior to
authorizing the withdrawal of any amounts from your Annuity Account to pay
Consultant fees.
Withdrawals made for any purpose may be taxable (this includes Periodic
Withdrawals, discussed below). Moreover, the Internal Revenue Code (the "Code")
provides that a 10% penalty tax may be imposed on the taxable portions of
certain early withdrawals. The Code generally requires us to withhold federal
income tax from withdrawals. However, generally you will be entitled to elect,
in writing, not to have tax withholding apply unless withholding is mandatory
for your Contract. Withholding applies to the portion of the withdrawal which is
included in your income and subject to federal income tax. The tax withholding
rate is 10% of the taxable amount of the withdrawal. Withholding applies only if
the taxable amount of the withdrawal is at least $200. Some states also require
withholding for state income taxes. (See "Federal Tax Matters," page 31.)
Withdrawal Requests must be in writing to ensure that your instructions
regarding withholding are followed. If an adequate election is not made, the
Request will be denied and no withdrawal or partial withdrawal will be
processed.
After a withdrawal of all of your total Annuity Account Value, or at any
time that your Annuity Account Value is zero, all your rights under the Contract
will terminate.
Since IRAs are offered by this Prospectus, reference should be made to
the applicable provisions of the Code for any additional limitations or
restrictions on cash withdrawals.
- ----------------------------------------------------------------------------
TELEPHONE TRANSACTIONS
- ----------------------------------------------------------------------------
We will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine and if we follow such procedures we will
not be liable for any losses due to unauthorized or fraudulent instructions.
However, we may be liable for such losses if we do not follow those reasonable
procedures. The procedures we will follow for telephone transactions may include
requiring some form of personal identification prior to acting on instructions
received by telephone, providing written confirmation of the transaction, and/or
tape recording the instructions given by telephone.
We reserve the right to suspend telephone transaction privileges at any
time, for some or all Contracts, and for any reason. Withdrawals are not
permitted by telephone.
<PAGE>
- ----------------------------------------------------------------------------
DEATH BENEFIT
- ----------------------------------------------------------------------------
Payment of Death Benefit
Before the date annuity payments commence, the death benefit, if any,
will be equal to the greater of: (a) the Annuity Account Value with an MVA, if
applicable, as of the date the Request for payment is received, less Premium
Tax, if any, or (b) the sum of Contributions paid, less partial withdrawals
and/or Periodic Withdrawals, less Premium Tax, if any. The death benefit will
become payable following the Company's receipt of a Request from the
Beneficiary. When an Owner or the Annuitant dies before the annuity commencement
date and a death benefit is payable to a Beneficiary, the death benefit proceeds
will remain invested in accordance with the allocation instructions given by the
Owner(s) until new allocation instructions are Requested by the Beneficiary or
until the death benefit is actually paid to the Beneficiary. The death benefit
will be determined as of the date payments commence; however, on the date a
payment option is processed, amounts in the Variable Sub-Account will be
Transferred to the Money Market Investment Division unless the Beneficiary
otherwise elects by Request. Subject to the distribution rules set forth below,
payment of the death benefit may be Requested to be made as follows:
A. Proceeds from the Variable Sub-Account(s)
1. payment in a single sum; or
2. payment under any of the variable annuity options provided
under this Contract.
B. Proceeds from the Guarantee Period(s)
1. payment in a single sum with respect to which a Market
Value Adjustment may apply; or
2. payment under any of the annuity options provided under
this Contract with respect to which a Market Value
Adjustment may apply; or
3. payment on the Guarantee Period Maturity Date so that a
Market Value Adjustment will not apply.
In any event, no payment of benefits provided under the Contract will be
allowed that does not satisfy the requirements of Section 72(s) of the Code and
any other applicable federal or state laws, rules or regulations.
Distribution Rules
1. Death of Annuitant
Upon the death of the Annuitant while the Owner is living, and before
the annuity commencement date, the Company will pay the death benefit to the
Beneficiary unless there is a Contingent Annuitant.
If a Contingent Annuitant was named by the Owner(s) prior to the
Annuitant's death, and the Annuitant dies before the annuity commencement date
while the Owner and Contingent Annuitant are living, no death benefit will be
payable by reason of the Annuitant's death and the Contingent Annuitant will
become the Annuitant.
If the Annuitant dies after the date annuity payments commence and
before the entire interest has been distributed, any benefit payable must be
distributed to the Beneficiary in accordance with and at least as rapidly as
under the payment option applicable to the Annuitant on the Annuitant's date of
death.
If a corporation or other non-individual is an Owner, or if the deceased
Annuitant is an Owner, the death of the Annuitant will be treated as the death
of an Owner and the Contract will be subject to the "Death of Owner" provisions
described below.
2. Death of Owner
If the Owner is not the Annuitant:
(1) If there is a Joint Owner who is the surviving spouse of the
deceased Owner, the Joint Owner will become the Owner and Beneficiary
and may elect to take the death benefit or elect to continue the
Contract in force.
(2) In all other cases, the Company will pay the death benefit to the
Beneficiary even if a Joint Owner (who was not the Owner's spouse on the
date of the Owner's death), the Annuitant and/or the Contingent
Annuitant are alive at the time of the Owner's death, unless the sole
Beneficiary is the deceased Owner's surviving spouse and the Beneficiary
elects to become the Owner and Annuitant and to continue the Contract in
force.
If the Owner is not the Annuitant, and the Owner dies after annuity
payments commence and before the entire interest has been distributed while the
Annuitant is living, any benefit payable will continue to be distributed to the
Annuitant at least as rapidly as under the payment option applicable on the
Owner's death. All rights granted the Owner under the Contract will pass to any
surviving Joint Owner and, if none, to the Annuitant.
If the Owner is the Annuitant (Owner/Annuitant):
(1) If there is a Joint Owner who is the surviving spouse of the
deceased Owner and a Contingent Annuitant, the Joint Owner will become
the Owner and the Beneficiary, the Contingent Annuitant will become the
Annuitant, and the Contract will continue in force.
(2) If there is a Joint Owner who is the surviving spouse of the
deceased Owner but no Contingent Annuitant, the Joint Owner will become
the Owner, Annuitant and Beneficiary and may elect to take the death
benefit or continue the Contract in force.
(3) In all other cases, the Company will pay the death benefit to the
Beneficiary, even if a Joint Owner (who was not the Owner's spouse on
the date of the Owner's death), Annuitant and/or Contingent Annuitant
are alive at the time of the Owner's death, unless the sole Beneficiary
is the deceased Owner's surviving spouse and the Beneficiary Requests to
become the Owner and Annuitant and to continue the Contract in force.
Any death benefit payable to the Beneficiary upon an Owner's death will
be distributed as follows:
(1) If the Owner's surviving spouse is the person entitled to receive
benefits upon the Owner's death, the surviving spouse will be treated as
the Owner and will be allowed to take the death benefit or continue the
Contract in force; or
(2) If the Beneficiary is a non-spouse individual, she/he may elect, not
later than one year after the Owner's date of death, to receive the
death benefit in either a single sum or payment under any of the
variable or fixed annuity options available under the Contract, provided
that (a) such annuity is distributed in substantially equal installments
over the life or life expectancy of the Beneficiary or over a period not
extending beyond the life expectancy of the Beneficiary; and (b) such
distributions begin not later than one year after the Owner's date of
death. If no election is received by the Company from a non-spouse
Beneficiary such that substantially equal installments have begun not
later than one year after the Owner's date of death, then the entire
amount must be distributed within five years of the Owner's date of
death. The death benefit will be determined as of the date the payments
commence; or
(3) If a corporation or other non-individual entity is entitled to
receive benefits upon the Owner's death, the death benefit must be
completely distributed within five years of the Owner's date of death.
Beneficiary
You may select one or more Beneficiaries. If more than one Beneficiary
is selected, unless you indicate otherwise, they will share equally in any death
benefit payable. You may change the Beneficiary any time before the Annuitant's
death.
You may, while the Annuitant is living, change the Beneficiary by
Request. A change of Beneficiary will take effect as of the date the Request is
processed by the Schwab Annuity Service Center, unless a certain date is
specified by the Owner. If the Owner dies before the Request was processed, the
change will take effect as of the date the Request was made, unless the Company
has already made a payment or otherwise taken action on a designation or change
before receipt or processing of such Request. A beneficiary designated
irrevocably may not be changed without the written consent of that Beneficiary,
except as allowed by law.
The interest of any Beneficiary who dies before the Owner or the
Annuitant will terminate at the death of the Beneficiary. The interest of any
Beneficiary who dies at the time of, or within 30 days after, the death of an
Owner or the Annuitant will also terminate if no benefits have been paid to such
Beneficiary, unless the Owner otherwise indicates by Request. The benefits will
then be paid as though the Beneficiary had died before the deceased Owner or
Annuitant. If no Beneficiary survives the Owner or Annuitant, as applicable, the
Company will pay the death benefit proceeds to the Owner's estate.
If the surviving spouse of an Owner is the surviving Joint Owner, the
surviving spouse will become the Beneficiary upon such Owner's death and may
elect to take the death benefit or may elect to continue the Contract in force.
If there is no surviving Joint Owner, and no named Beneficiary is alive at the
time at the time of an Owner's death, any benefits payable will be paid to the
Owner's estate.
Contingent Annuitant
While the Annuitant is living, the Owner(s) may, by Request, designate
or change a Contingent Annuitant from time to time. A change of Contingent
Annuitant will take effect as of the date the Request is processed at the Schwab
Annuity Service Center, unless a certain date is specified by the Owner(s).
- ----------------------------------------------------------------------------
CHARGES AND DEDUCTIONS
- ----------------------------------------------------------------------------
No deductions are made from Contributions except for any applicable
Premium Tax. Therefore, the full amount of the Contributions (less any
applicable Premium Tax) are invested in the Contract.
As more fully described below, charges under the Contract are assessed
only as deductions for Premium Tax, if applicable, for certain Transfers, as a
Contract Maintenance Charge, and as charges against the assets in the Owner's
Variable Sub-Account(s) for our assumption of mortality and expense risks. In
addition, a Market Value Adjustment may apply to withdrawals and surrenders,
Transfers, amounts applied to purchase an annuity, and distributions resulting
from death of the Owner or Annuitant if the amounts held in a Guarantee Period
are paid out prior to the Guarantee Period Maturity Date.
Mortality and Expense Risk Charge
We deduct a Mortality and Expense Risk Charge from your Variable
Sub-Account(s) at the end of each Valuation Period to compensate us for bearing
certain mortality and expense risks under the Contract. This is a daily charge
equal to an effective annual rate of 0.85% of the value of the net assets in
your Variable Sub-Account(s). The approximate portion of this charge
attributable to mortality risks is 0.68%; the approximate portion of this charge
estimated to be attributable to expense risk is 0.17% of the value of the net
assets in your Variable Sub-Account(s). We guarantee that this charge will never
increase beyond 0.85%.
The Mortality and Expense Risk Charge is reflected in the unit values
for each of your Variable Sub-Accounts. Thus, this charge will continue to be
applicable should you choose a variable annuity payment option or the periodic
withdrawal option.
Annuity Account Values and annuity payments are not affected by changes
in actual mortality experience incurred by us. The mortality risks assumed by us
arise from our contractual obligations to make annuity payments determined in
accordance with the annuity tables and other provisions contained in the
Contract. Thus you are assured that neither the Annuitant's longevity nor an
unanticipated improvement in general life expectancy will adversely affect the
annuity payments under the Contract.
We bear substantial risk in connection with the death benefit before the
annuity commencement date, since we will pay a death benefit equal to the
greater of: (1) the Annuity Account Value with a Market Value Adjustment, if
applicable, as of the later of the date of death or the date the Request for
payment is received, less Premium Tax, if any; or, (2) the sum of the
Contributions paid, less partial withdrawals and/or Periodic Withdrawals, less
any charges under Contract less Premium Tax, if any (i.e., we bear the risk of
unfavorable experience in your Variable Sub-Accounts).
The expense risk assumed is the risk that our actual expenses in
administering the Contracts and the Series Account will be greater than
anticipated, or exceed the amount recovered through the Contract Maintenance
Charge plus the amount, if any, recovered through Transfer Fees.
If the Mortality and Expense Risk Charge is insufficient to cover actual
costs and risks assumed, the loss will fall on us. Conversely, if this charge is
more than sufficient, any excess will be profit to us. Currently, we expect a
profit from this charge. Our expenses for distributing the Contracts will be
borne by our general assets, including any profits from this charge.
Contract Maintenance Charge
We currently deduct a $25 annual Contract Maintenance Charge from the
Annuity Account Value only on each Contract anniversary date. This charge
partially covers our costs for administering the Contracts and the Series
Account. Once you have selected a payment option, this charge will cease to
apply other than for the Periodic Withdrawal Option. The Contract Maintenance
Charge is deducted from your Annuity Account Value allocated to the Schwab Money
Market Investment Division. If you do not have sufficient Annuity Account Value
allocated to the Schwab Money Market Investment Division to cover the Contract
Maintenance Charge, then the charge or any portion thereof will be deducted on a
pro rata basis from all your Variable Sub-Accounts with current value. If the
entire Annuity Account is held in the Guarantee Period Fund or there are not
enough funds in any Variable Sub-Account to pay the entire charge, then the
Contract Maintenance Charge will be deducted on a pro rata basis from amounts
held in all Guarantee Periods. There is no MVA on amounts deducted from a
Guarantee Period for the Contract Maintenance Charge. The Contract Maintenance
Charge is currently waived for Contracts with an Annuity Account Value of at
least $50,000. If your Annuity Account Value falls below $50,000 due to a
withdrawal, the Contract Maintenance Charge will be reinstated until such time
as your Annuity Account Value is equal to or greater than $50,000. This charge
may also be waived for Contracts issued under certain sponsored arrangements. We
do not expect a profit from amounts received from the Contract Maintenance
Charge.
Premium Tax
We may be required to pay state premium taxes or retaliatory taxes
currently ranging from 0% to 3.5% in connection with Contributions or values
under the Contracts. Depending upon applicable state law, we will deduct charges
for the premium taxes we incur with respect to a particular Contract from the
Contributions, from amounts withdrawn, or from amounts applied on the Payment
Commencement Date. In some states, charges for both direct premium taxes and
retaliatory premium taxes may be imposed at the same or different times with
respect to the same Contribution, depending on applicable state law.
Transfer Fee
There will be a $10 charge for each Transfer in excess of twelve
Transfers in any calendar year. We do not expect a profit from the Transfer fee
for excess Transfers.
Other Taxes
Under present laws, we will incur state or local taxes (in addition to
the Premium Tax described above) in several states. No charges are currently
made for taxes other than Premium Tax. However, we reserve the right to deduct
charges in the future for federal, state, and local taxes or the economic burden
resulting from the application of any tax laws that we determine to be
attributable to the Contracts.
Expenses of the Eligible Funds
The value of the assets in the Investment Divisions reflect the value of
Eligible Fund shares and therefore the fees and expenses paid by each Eligible
Fund. A complete description of the fees, expenses, and deductions from the
Eligible Funds are found in the Eligible Funds' prospectuses. (See "The Eligible
Funds," page 8.) Current prospectuses for the Funds can be obtained by calling
the Schwab Annuity Service Center at 800-838-0650, or by writing to the Schwab
Annuity Service Center, P.O. Box 7666, San Francisco, California 94120-7666.
- ----------------------------------------------------------------------------
PAYMENT OPTIONS
- ----------------------------------------------------------------------------
Periodic Withdrawal Option
The Owner may Request that all or part of the Annuity Account Value be
applied to a Periodic Withdrawal Option. The amount applied to a Periodic
Withdrawal is the Annuity Account Value with an MVA, if applicable, less Premium
Tax, if any.
In Requesting Periodic Withdrawals, the Owner must elect:
- The withdrawal frequency of either 12-, 6-, 3-, or 1-month
intervals;
- A withdrawal amount; a minimum of $100 is required;
- The calendar day of the month on which withdrawals will be made;
- One withdrawal option; and
- The allocation of withdrawals from the Owner's Variable and/or
Fixed Sub-Account(s) as follows:
1) Prorate the amount to be paid across all Variable and Fixed
Sub-Accounts in proportion to the assets in each sub-
account; or
2) Select the Variable and/or Fixed Sub-Account(s) from which
withdrawals will be made. Once the Variable and/or Fixed
Sub-Accounts have been depleted, the Company will
automatically prorate the remaining withdrawals against
all remaining available Variable and/or Fixed Sub-Accounts
unless the Owner Requests the selection of another
Variable and/or Fixed Sub-Account.
The Owner may elect to change the withdrawal option and/or the frequency
once each calendar year.
While Periodic Withdrawals are being received:
1. the Owner may continue to exercise all contractual rights that
are available prior to electing an annuity option, except that no
Contributions may be made;
2. for Periodic Withdrawals from Guarantee Periods six or more
months prior to its Guarantee Period Maturity Date, a Market
Value Adjustment, if applicable, will be assessed;
3. the Owner may keep the same investment options as were in force
before periodic withdrawals began;
4. charges and fees under the Contract continue to apply; and 5.
maturing Guarantee Periods renew into the shortest Guarantee Period then
available.
Periodic Withdrawals will cease on the earlier of the date:
1. the amount elected to be paid under the option selected has been
reduced to zero;
2. the Annuity Account Value is zero;
3. the Owner Requests that withdrawals stop; or
4. an Owner or the Annuitant dies.
The Owner must elect one of the following five (5) withdrawal options:
1. Income for a Specified Period for at least thirty-six (36) months The
Owner elects the duration over which withdrawals will be made. The
amount paid will vary based on the duration; or
2. Income of a Specified Amount for at least thirty-six (36) months The
Owner elects the dollar amount of the withdrawals. Based on the amount
elected, the duration may vary; or
3. Interest Only - The withdrawals will be based on the amount of
interest credited to the Guarantee Period Fund between each withdrawal.
Available only if 100% of the account value is invested in the Guarantee
Period Fund; or
4. Minimum Distribution - If this is an IRA contract, the Owner may
Request minimum distributions as specified under Code Section 401(a)(9);
or
5. Any Other Form for a period of at least thirty-six (36) months - Any
other form of Periodic Withdrawal which is acceptable to the Company.
If Periodic Withdrawals cease, the Owner may resume making
Contributions. The Owner may elect to restart a Periodic Withdrawal program;
however, the Company may limit the number of times the Owner may restart a
Periodic Withdrawal program.
Periodic withdrawals made for any purpose may be taxable, subject to
withholding and subject to the 10% penalty tax. IRAs are subject to complex
rules with respect to restrictions on and taxation of distributions, including
the applicability of penalty taxes. A competent tax adviser should be consulted
before a Periodic Withdrawal Option is requested. (See "Federal Tax Matters,"
page 31.)
You may Request a Periodic Withdrawal to remit fees paid to your
Investment Manager or Financial Advisor; however, any such Periodic Withdrawal
Requests must meet the requirements and comply with all terms and conditions
applicable to Periodic Withdrawals, as described above. As well, there may be
income tax consequences to any Periodic Withdrawal made for this purpose. (See
"Cash Withdrawals," page .)
Annuity Date
The date annuity payments commence may be chosen when the Contract is
purchased or at a later date. This date must be at least one year after the
initial Contribution. In the absence of an earlier election, the annuity date is
the first day of the month of the Annuitant's 91st birthday.
If an option has not been elected within 30 days of the annuity
commencement date, the Annuity Account Value held in the Fixed Sub-Account(s)
will be applied under Annuity Payment Option 3, discussed below, to provide
payments for life with a guaranteed period of 20 years. The Annuity Account
Value held in the Variable Sub-Account(s) will be applied under Variable Annuity
Payment Option 1, discussed below, to provide payments for life with a
guaranteed period of 20 years.
Under section 401(a)(9) of the Code, a Contract which is purchased and
used in connection with an Individual Retirement Account or with certain other
plans qualifying for special federal income tax treatment is subject to complex
"minimum distribution" requirements, which require that distributions under such
a plan must begin by a specific date, and also that the entire interest of the
plan participant must be distributed within certain specified periods under
formulas that specify minimum annual distributions. The application of the
minimum distribution requirements to each person will vary according to the
person's age and other circumstances. A prospective purchaser may wish to
consult a competent tax adviser regarding the application of the minimum
distribution requirements. (See "Federal Tax Matters," page 31.)
Annuity Options
An annuity option may be selected by the Owner when the Contract is
purchased, or at a later date. This selection may be changed, by Request, at any
time up to 30 days before the annuity date. In the absence of an election,
payments will automatically commence on the annuity date as described above. The
amount to be applied is the Annuity Account Value on the annuity date. The
minimum amount that may be withdrawn from the Annuity Account Value to purchase
an annuity payment option is $2,000 with an MVA, if applicable. If the amount is
less than $2,000, the Company may pay the amount in a single sum subject to the
Contract provisions applicable to a partial withdrawal. Payments may be elected
to be received monthly, quarterly, semi-annually or annually. Payments to be
made under the annuity payment option selected must be at least $50. The Company
reserves the right to make payments using the most frequent payment interval
which produces a payment of not less than $50. The maximum amount that may be
applied under any payment option is $1,000,000, unless prior approval is
obtained from the Company.
A single sum payment may be elected. If it is, then the amount to be
paid is the Surrender Value. If the Owner elects a variable annuity with funds
from the Owner's Variable Sub-Accounts, then the amount to be applied is the
Annuity Account Value held in the Variable Sub-Account(s), as of the annuity
commencement date, less any applicable Premium Tax. If the Owner elects a fixed
annuity with funds from the Fixed Sub-Accounts, then the amount to be applied is
the Annuity Account Value held in the Fixed Sub-Account(s), as of the annuity
commencement date with an MVA, if applicable, less any applicable Premium Tax.
Fixed Annuity Payment Options
Option 1: Income of Specified Amount
The amount applied under this option may be paid in equal annual,
semiannual, quarterly or monthly installments of the dollar amount elected for
not more than 240 months. Upon death of the Annuitant, the Beneficiary will
begin to receive the remaining payments at the same interval that was elected by
the Owner.
Option 2: Income for a Specified Period
Payments are paid annually, semiannually, quarterly or monthly, as
elected, for a selected number of years not to exceed 240 months. Upon death of
the Annuitant, the Beneficiary will begin to receive the remaining payments at
the same interval that was elected by the Owner.
Option 3: Fixed Life Annuity with Guaranteed Period
This option provides for monthly payments during a designated period and
thereafter throughout the lifetime of the Annuitant. The designated period may
be 5, 10, 15 or 20 years. Upon death of the Annuitant, for each remaining
designated period, the amounts payable under this payment option will be paid to
the Beneficiary.
Option 4: Fixed Life Annuity
This annuity is payable monthly during the lifetime of the Annuitant,
terminating with the last payment due prior to the death of the Annuitant. Since
no minimum number of payments is guaranteed, this option may offer the maximum
level of monthly payments of the annuity options. It is possible that only one
payment may be made if the Annuitant died before the date on which the second
payment was due. Upon the death of the Annuitant, all payments cease and no
amounts are payable to the Beneficiary.
Option 5: Any Other Form
This option allows an Owner the ability to choose any other form of
annuity which is acceptable to the Company.
Variable Annuity Payment Options
Option 1: Variable Life Annuity with Guarantee Period
This option provides for payments during a designated period and
thereafter throughout the life time of the Annuitant. The designated period may
be 5, 10, 15 or 20 years. Upon death of the Annuitant, for each remaining
designated period, the amounts payable under this payment option will be paid to
the Beneficiary.
Option 2: Variable Life Annuity
This annuity is payable during the lifetime of the Annuitant. The
annuity terminates with the last payment due prior to the death of the
Annuitant. Since no minimum number of payments is guaranteed, this option may
offer the maximum level of monthly payments of the annuity options. It is
possible that only one payment may be made if the Annuitant died before the date
on which the second payment was due. Upon the death of the Annuitant, all
payments cease and no amounts are payable to the Beneficiary.
Variable annuity payment options are subject to the following
provisions:
<PAGE>
Amount of First Payment
The first payment under a variable annuity payment option will be based
on the value of the amounts held in each Variable Sub-Account on the 5th
Valuation Date preceding the annuity commencement date. It will be determined by
applying the appropriate rate to the amount applied under the payment option.
Annuity Units
The number of Annuity Units paid to the Annuitant for each Variable
Sub-Account is determined by dividing the amount of the first monthly payment by
its Accumulation Unit Value on the 5th Valuation Date preceding the date the
first payment is due. The number of Annuity Units used to calculate each payment
for a Variable Sub-Account remains fixed during the Annuity Payment Period.
Amount of Payments after the First
Payments after the first will vary depending upon the investment
experience of the Investment Divisions. The subsequent amount paid from each
sub-account is determined by multiplying (a) by (b) where (a) is the number of
sub-account Annuity Units to be paid and (b) is the sub-account Annuity Unit
value on the 5th Valuation Date preceding the date the annuity payment is due.
The total amount of each variable annuity payment will be the sum of the
variable annuity payments for each Variable Sub-Account. The Company guarantees
that the dollar amount of each payment after the first will not be affected by
variations in expenses or mortality experience.
Transfers After the Annuity Commencement Date
Once annuity payments have begun, no Transfers may be made from a fixed
annuity payment option to a variable annuity payment option, or vice versa;
however, for variable annuity payment options, Transfers may be made among
Investment Divisions. Transfers after the annuity commencement date will be made
by converting the number of Annuity Units being Transferred to the number of
Accumulation Units of the Variable Sub-Account to which the Transfer is made.
The result will be that the next annuity payment, if it were made at that time,
would be the same amount that it would have been without the Transfer.
Thereafter, annuity payments will reflect changes in the value of the new
Annuity Units.
***
For annuity options involving life income, the actual age and/or sex of
the Annuitant will affect the amount of each payment. We reserve the right to
ask for satisfactory proof of the Annuitant's age. We may delay annuity payments
until satisfactory proof is received. Since payments to older Annuitants are
expected to be fewer in number, the amount of each annuity payment under a
selected annuity form will be greater for older Annuitants than for younger
Annuitants.
If the age of the Annuitant has been misstated, the payments established
will be made on the basis of the correct age. If payments were too large because
of misstatement, the difference with interest may be deducted by the Company
from the next payment or payments. If payments were too small, the difference
with interest may be added by the Company to the next payment. This interest is
at an annual effective rate which will not be less than the Guaranteed Interest
Rate.
The Payment Commencement Date and annuity options available for IRAs may
also be controlled by endorsements, the plan documents, or applicable law.
Once payments start under the annuity form selected by the Owner: (a) no
changes can be made in the annuity form, (b) no additional Contributions will be
accepted under the Contract, and (c) no further withdrawals, other than
withdrawals made to provide annuity benefits, will be allowed.
***
A portion or the entire amount of the annuity payments may be taxable as
ordinary income. If, at the time the annuity payments begin, we have not
received a proper written election not to have federal income taxes withheld, we
must by law withhold such taxes from the taxable portion of such annuity
payments and remit that amount to the federal government (an election not to
have taxes withheld is not permitted for certain Qualified Contracts). State
income tax withholding may also apply. (See "Federal Tax-Matters," below.)
- ----------------------------------------------------------------------------
FEDERAL TAX MATTERS
- ----------------------------------------------------------------------------
Introduction
The following discussion is a general description of federal income tax
considerations relating to the Contracts and is not intended as tax advice.
Further, this discussion is based on the assumption that the Contract qualifies
as an annuity contract for federal income tax purposes. This discussion is not
intended to address the tax consequences resulting from all of the situations in
which a person may be entitled to or may receive a distribution under the
Contract. Any person concerned about these tax implications should consult a
competent tax adviser before initiating any transaction. This discussion is
based upon our understanding of the present federal income tax laws as they are
currently interpreted by the Internal Revenue Service. No representation is made
as to the likelihood of the continuation of the present federal income tax laws
or of the current interpretation by the Internal Revenue Service. Moreover, no
attempt has been made to consider any applicable state or other tax laws.
The Contract may be purchased on a non-tax qualified basis
("Non-Qualified Contract") or purchased and used in connection with IRAs. The
ultimate effect of federal income taxes on the amounts held under a Contract, on
annuity payments, and on the economic benefit to you, the Annuitant, or the
Beneficiary may depend on the type of Contract, and on the tax status of the
individual concerned. In addition, certain requirements must be satisfied in
purchasing an IRA and receiving distributions from an IRA in order to continue
receiving favorable tax treatment. Therefore, purchasers of IRAs should seek
competent legal and tax advice regarding the suitability of the Contract for
their situation, the applicable requirements, and the tax treatment of the
rights and benefits of the Contract. The following discussion assumes that an
IRA is purchased with proceeds from and/or Contributions that qualify for the
intended special federal income tax treatment.
Tax Status
The Company is taxed as a life insurance company under Part I of
Subchapter L of the Code.
Taxation of Annuities
In General
Section 72 of the Code governs taxation of annuities in general. An
Owner who is a natural person generally is not taxed on increases (if any) in
the value of an Annuity Account Value until distribution occurs by withdrawing
all or part of the Annuity Account Value (e.g., withdrawals or annuity payments
under the annuity form elected). However, under certain circumstances, the Owner
may be subject to taxation currently. In addition, an assignment, pledge, or
agreement to assign or pledge any portion of the Annuity Account Value generally
will be treated as a distribution. The taxable portion of a distribution (in the
form of a single sum payment or an annuity) is taxable as ordinary income. An
IRA Contract may not be assigned as collateral.
The Owner of an annuity contract who is not a natural person (e.g. a
corporation) generally must include in income any increase in the excess of the
Annuity Account Value over the "investment in the contract" (discussed below)
during each taxable year. The rule does not apply where the non-natural person
is the nominal owner of a Contract and the beneficial owner is a natural person.
The rule also does not apply in the following circumstances: (1) where the
annuity Contract is acquired by the estate of a decedent, (2) where the Contract
is held under an IRA, (3) where the Contract is a qualified funding asset for a
structured settlement, and (4) where the Contract is purchased on behalf of an
employee upon termination of a qualified plan. A prospective Owner that is not a
natural person may wish to discuss these matters with a competent tax adviser.
The following discussion generally applies to a Contract owned by a
natural person.
Withdrawals
In the case of a withdrawal under an IRA, including withdrawals under
the Periodic Withdrawal Option, a ratable portion of the amount received may be
non-taxable. The amount of the non-taxable portion is generally determined by
the ratio of the "investment in the contract" to the individual's total accrued
benefit under the retirement plan. The "investment in the contract" generally
equals the amount of any nondeductible Contributions paid by or on behalf of any
individual. Special tax rules may be available for certain distributions from an
IRA.
With respect to Non-Qualified Contracts, partial withdrawals, including
Periodic Withdrawals, are generally treated as taxable income to the extent that
the Annuity Account Value immediately before the withdrawal exceeds the
"investment in the contract" at that time. If a partial withdrawal is made from
a Guarantee Period which is subject to a Market Value Adjustment, then the
Annuity Account Value immediately before the withdrawal will not be altered to
take into account the Market Value Adjustment. As a result, for purposes of
determining the taxable portion of the partial withdrawal, the Annuity Account
Value will not reflect the amount, if any, deducted from or added to the
Guarantee Period due to the Market Value Adjustment. Full surrenders are treated
as taxable income to the extent that the amount received exceeds the "investment
in the contract." The taxable portion of any annuity payment is taxed at
ordinary income tax rates.
Annuity Payments
Although the tax consequences may vary depending on the annuity form
elected under the Contract, in general, only the portion of the annuity payment
that represents the amount by which the Annuity Account Value exceeds the
"investment in the contract" will be taxed; after the investment in the contract
is recovered, the full amount of any additional annuity payments is taxable. For
fixed annuity payments, in general there is no tax on the portion of each
payment which represents the same ratio that the "investment in the contract"
bears to the total expected value of the annuity payments for the term of the
payments; however, the remainder of each annuity payment is taxable. Once the
investment in the Contract has been fully recovered, the full amount of any
additional annuity payments is taxable. If the annuity payments cease as a
result of an Annuitant's death before full recovery of the "investment in the
contract," you should consult a competent tax adviser regarding the
deductibility of the unrecovered amount.
Penalty Tax
In the case of a distribution pursuant to a Non-Qualified Contract,
there may be imposed a federal income tax penalty equal to 10% of the amount
treated as taxable income. In general, however, there is no penalty tax on
distributions: (1) made on or after the date on which the recipient of payments
under the Contract attains age 59 1/2; (2) made as a result of death or
disability of the recipient of payments under the Contract; or (3) received in
substantially equal periodic payments (at least annually) for the life or life
expectancy of the Owner or the joint lives or life expectancies of the Owner and
a "designated beneficiary." Other exemptions or tax penalties may apply to
distributions from a Non-Qualified Contract or certain distributions pursuant to
an IRA. For more details regarding these exemptions or penalties consult a
competent tax adviser.
Taxation of Death Benefit Proceeds
Amounts may be distributed from the Contract because of the death of an
Owner or the Annuitant. Generally such amounts are includible in the income of
the recipient as follows: (1) if distributed in a lump sum, they are taxed in
the same manner as a full surrender, as described above, or (2) if distributed
under an annuity form, they are taxed in the same manner as annuity payments, as
described above.
Distribution-at-Death Rules
In order to be treated as an annuity contract, the terms of the Contract
must provide the following two distribution rules: (A) if any Contract Owner
dies on or after the date annuity payments commence, and before the entire
interest in the Contract has been distributed, the remainder of his interest
will not be distributed under a slower distribution schedule than that provided
for in the method in effect on the Contract Owner's death; and (B) if any
Contract Owner dies before the date annuity payments commence, his entire
interest must generally be distributed within five years after the date of death
provided that if such interest is payable to a designated Beneficiary, then such
interest may be made over the life of that designated Beneficiary or over a
period not extending beyond the life expectancy of that Beneficiary, so long as
payments commence within one year after the Contract Owner's death. If the sole
designated Beneficiary is the spouse of the Contract Owner, the Contract may be
continued in the name of the spouse as Contract Owner. The designated
Beneficiary is the natural person designated by the terms of the Contract or by
the Contract Owner as the individual to whom ownership of the contract passes by
reason of the Contract Owner's death. If the Contract Owner is not an
individual, then for purposes of the distribution at death rules, the Primary
Annuitant is considered the Contract Owner. In addition, when the Contract Owner
is not an individual, a change in the Primary Annuitant is treated as the death
of the Contract Owner. Distributions made to a Beneficiary upon the Owner's
death from an IRA must be made pursuant to the rules in Section 401(a)(9) of the
Code.
Transfers, Assignments, or Exchanges
A Transfer of ownership of a Contract, the designation of an Annuitant,
Payee or other Beneficiary who is not also the Owner, or the exchange of a
Contract may result in adverse tax consequences to the Owner that are not
discussed herein. An Owner contemplating any such designation, transfer,
assignment, or exchange of a Contract should contact a competent tax adviser
with respect to the potential tax effects of such a transaction.
Multiple Contracts
All deferred, non-qualified annuity contracts that are issued by the
Company (or our affiliates) to the same Owner during any calendar year will be
treated as one annuity contract for purposes of determining the amount
includible in gross income under section 72(e) of the Code. Amounts received
under any such Contract may be taxable (and may be subject to the 10% Penalty
Tax) to the extent of the combined income in all such Contracts. In addition,
the Treasury Department has specific authority to issue regulations that prevent
the avoidance of section 72(e) through the serial purchase of annuity contracts
or otherwise. Congress has also indicated that the Treasury Department may have
authority to treat the combination purchase of an immediate annuity contract and
separate deferred annuity contracts as a single annuity contract under its
general authority to prescribe rules as may be necessary to enforce the income
tax laws.
Withholding
Annuity distributions generally are subject to withholding for the
recipient's federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions. Certain distributions from IRAs are subject to mandatory federal
income tax withholding.
Possible Changes in Taxation
In past years, legislation has been proposed that would have adversely
modified the federal taxation of certain annuities. For example, one such
proposal would have changed the tax treatment of non-qualified annuities that
did not have "substantial life contingencies" by taxing income as it is credited
to the annuity. There is always the possibility that the tax treatment of
annuities could change by legislation or other means (such as IRS regulations,
revenue rulings, judicial decisions, etc.). Moreover, it is also possible that
any change could be retroactive (that is, effective prior to the date of the
change).
Section 1035 Exchanges
Code Section 1035 provides that no gain or loss shall be recognized on
the exchange of one annuity contract for another. Contracts issued on or after
January 19, 1985 in an exchange for another annuity contract are treated as new
contracts for purposes of the penalty and distribution at death rules. Special
rules apply to Contracts issued prior to August 14, 1982. Prospective Owners
wishing to take advantage of a Section 1035 exchange should consult their tax
adviser.
Individual Retirement Annuities
The Contract may be used with IRAs as described in Section 408 of the
Code. Section 408 of the Code permits eligible individuals to contribute to an
individual retirement program known as an Individual Retirement Annuity. Also,
certain kinds of distributions from certain types of qualified and non-qualified
retirement plans may be "rolled over" following the rules set out in the Code to
maintain favorable tax treatment, to an Individual Retirement Annuity. The sale
of a Contract for use with an IRA may be subject to special disclosure
requirements of the Internal Revenue Service. Purchasers of the Contract for use
with IRA's will be provided with supplemental information required by the
Internal Revenue Service or other appropriate agency. Such purchasers will have
the right to revoke their purchase within seven days of purchase of the IRA
Contract.
Various tax penalties may apply to contributions in excess of specified
limits, distributions that do not satisfy specified requirements, and certain
other transactions. The Contract will be amended as necessary to conform to the
requirements of the Code. Purchasers should seek competent advice as to the
suitability of the Contract for use with IRA's.
If a Contract is issued in connection with an employer's Simplified
Employee Pension ("SEP") plan, Owners, Annuitants and Beneficiaries are
cautioned that the rights of any person to any of the benefits under the
Contract may be subject to the terms and conditions of the plan itself,
regardless of the terms and conditions of the Contract.
If a Contract is purchased to fund an IRA the Annuitant must also be the
Owner. In addition, if a Contract is purchased to fund an IRA, minimum
distributions must commence not later than April 1st of the calendar year
following the calendar year in which you attain age 70 1/2. You should consult
your tax adviser concerning these matters.
At the time the Initial Contribution is paid, a prospective purchaser
must specify whether he or she is purchasing a Non-Qualified Contract or an IRA.
If the initial Contribution is derived from an exchange or surrender of another
annuity contract, we may require that the prospective purchaser provide
information with regard to the federal income tax status of the previous annuity
contract. We will require that persons purchase separate Contracts if they
desire to invest monies qualifying for different annuity tax treatment under the
Code. Each such separate Contract would require the minimum initial Contribution
stated above. Additional Contributions under a Contract must qualify for the
same federal income tax treatment as the initial Contribution under the
Contract; we will not accept an additional Contribution under a Contract if the
federal income tax treatment of such Contribution would be different from that
of the initial Contribution.
Seek Tax Advice
The foregoing discussion of the federal income tax consequences is only
a brief summary and is not intended as tax advice. Further, the federal income
tax consequences discussed herein reflect our understanding of current law and
the law may change. Federal estate tax consequences and state and local estate,
inheritance, and other tax consequences of ownership or receipt of distributions
under a Contract depend on the individual circumstances of each Owner or
recipient of the distribution. A COMPETENT TAX ADVISER SHOULD BE CONSULTED FOR
FURTHER INFORMATION.
- ----------------------------------------------------------------------------
ASSIGNMENTS OR PLEDGES
- ----------------------------------------------------------------------------
Generally, rights in the Contract may be assigned or pledged for loans
at any time during the life of the Annuitant; however, if the Contract is an
IRA, the Owner may not assign the Contract as collateral.
If a non-IRA Contract is assigned, the interest of the assignee has
priority over the interest of the Owner and the interest of the Beneficiary. Any
amount payable to the assignee will be paid in a single sum.
A copy of any assignment must be submitted to the Company at the Schwab
Annuity Service Center. Any assignment is subject to any action taken or payment
made by the Company before the assignment was processed. The Company is not
responsible for the validity or sufficiency of any assignment.
If any portion of the Annuity Account Value is assigned or pledged for a
loan, it may be treated as a distribution. A competent tax adviser should be
consulted for further information.
- ----------------------------------------------------------------------------
PERFORMANCE DATA
- ----------------------------------------------------------------------------
From time to time, we may advertise yields and average annual total
returns for the Investment Divisions. In addition, we may advertise the
effective yield of the Schwab Money Market Investment Division. These figures
will be based on historical information and are not intended to indicate future
performance.
The yield of the Schwab Money Market Investment Division refers to the
annualized income generated by an investment in that Investment Division over a
specified seven-day period. The yield is calculated by assuming that the income
generated for that seven-day period is generated each seven-day period over a
52-week period and is shown as a percentage of the investment. The effective
yield is calculated similarly but, when annualized, the income earned by an
investment in that Investment Division is assumed to be reinvested. The
effective yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment.
The yield of an Investment Division (other than the Schwab Money Market
Investment Division) refers to the annualized income generated by an investment
in that Investment Division over a specified thirty-day period. The yield is
calculated by assuming that the income generated by the investment during that
thirty-day period is generated each thirty-day period over a twelve-month period
and is shown as a percentage of the investment.
The yield calculations do not reflect the effect of any Premium Tax that
may be applicable to a particular Contract. To the extent that premium taxes are
applicable to a particular Contract, the yield of that Contract will be reduced.
For a description of the methods used to determine yield and total returns, see
the Statement of Additional Information.
Investment Division Yield Effective Yield
Money Market 5.13% 5.27%
The following table illustrates standardized and non-standardized
average annual total return for the one, three, five and ten year periods (or
since inception, as appropriate) ended December 31, 1997. Average annual total
return quotations represent the average annual compounded rate of return that
would equate an initial investment of $1,000 to the redemption value of that
investment (excluding Premium Taxes, if any) as of the last day of each of the
periods for which total return quotations are provided. Both the standardized
and non-standardized data reflect the deduction of all fees and charges under
the Contract; however, the standardized data is calculated form the inception
date of the Investment Division and the non-standardized data is calculated for
periods preceding the inception date of the Investment Division. certain of the
Investment Divisions presently have no standardized data. Such data will
provided when it becomes available. For additional information regarding yields
and total returns calculated using the standard formats briefly described
herein, please refer to the Statement of Additional Information.
<PAGE>
<TABLE>
Investment Division Since Since
Inception Inception of
One Three Five Ten of Inception Date of Underlying Inception Date of
Year Year Year Year Investment Investment Division Fund Underlying Fund
Division
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alger American 24.69% 23.72% 18.26% NA 23.27% 10/31/96 18.46% 1/9/89
Growth Portfolio
Alger American Small 10.45% 17.74% 11.69% NA 9.71% 10/31/96 18.21% 9/21/88
Capitalization
Portfolio
<PAGE>
American Century
VP Capital -4.09% 5.75% 4.88% 7.77% -6.75% 10/31/96 8.41% 11/20/87
Appreciation
American Century
VP International
17.63% 14.07% NA NA 19.85% 10/31/96 9.67% 5/1/94
Berger IPT-Small
Company Growth Fund 20.31% NA NA NA 37.54% 4/30/97 10.99% 5/1/96
Federated American
Leaders Fund II 31.27% 27.87% NA NA 30.76% 10/31/96 20.30% 2/1/94
Federated Fund for
U.S. Government 7.45% 6.01% NA NA 6.03% 10/31/96 5.28% 3/29/94
Securities
Federated Utility
Fund II
25.57% 19.58% NA NA 24.50% 4/30/97 15.58% 4/14/94
INVESCO VIF-High 16.34% 16.68% NA NA 17.66% 10/31/96 13.91% 5/27/94
Yield Portfolio
INVESCO VIF-Industrial 27.12% 25.45% NA NA 27.45% 10/31/96 22.53% 8/10/94
Income Portfolio
INVESCO VIF-Total 21.88% 18.18% NA NA 21.24% 10/31/96 15.33% 6/2/94
Return Portfolio
Janus Aspen Aggressive 11.72% 14.76% NA NA 8.90% 10/31/96 18.21% 9/13/93
Growth Portfolio
Janus Aspen 21.71% 22.55% NA NA 20.95% 10/31/96 16.61% 9/13/93
Growth Portfolio
Janus Aspen Worldwide 21.12% 25.05% NA NA 22.05% 10/31/96 21.85% 9/13/93
Growth Portfolio
Lexington Emerging
Markets Fund -12.31% -3.82% NA NA -8.67% 10/31/96 -2.67% 3/30/94
Montgomery Variable
Series: 27.49% NA NA NA 26.86% 10/31/96 28.62% 2/9/96
Growth Fund
Montgomery Variable
Series: -5.91% NA NA NA -0.98% 10/31/96 -0.97% 9/30/96
International
Small-Cap Fund
SAFECO RST Equity
Portfolio
23.79% 25.00% 21.76% 18.23% 18.32% 4/30/97 15.18% 4/3/87
Schwab MarketTrack
Growth 23.49% NA NA NA 23.50% 11/1/96 23.50% 11/1/96
Portfolio II
Schwab S&P 500
Portfolio
31.34% NA NA NA 31.95% 11/1/96 31.95% 11/1/96
SteinRoe Special
Venture Fund 6.90% 14.24% 15.01% NA 8.36% 10/31/96 15.50% 1/3/89
Strong Discovery
Fund II
10.45% 13.97% 10.94% NA 12.99% 10/31/96 11.18% 5/8/92
Van Eck Worldwide
Hard Assets Fund -2.56% 7.68% 14.14% NA 0.36% 10/31/96 6.27%
9/1/89
Van Kampen American
Capital 20.45% NA NA NA 5.56% 9/15/97 26.85%
LIT-Morgan Stanley
Real Estate 7/3/95
Securities Portfolio
</TABLE>
<PAGE>
Performance information for any Investment Division reflects only the
performance of a hypothetical Contract under which Annuity Account Value is
allocated to an Investment Division during a particular time period on which the
calculations are based. Performance information should be considered in light of
the investment objectives and policies and characteristics of the Eligible Funds
in which the Investment Division invests, and the market conditions during the
given time period, and should not be considered as a representation of what may
be achieved in the future.
Reports and promotional literature may also contain other information
including (1) the ranking of any Investment Division derived from rankings of
variable annuity separate accounts or their investment products tracked by
Lipper Analytical Services, Inc., VARDS, Morningstar, Value Line, IBC/Donoghue's
Money Fund Report, Financial Planning Magazine, Money Magazine, Bank Rate
Monitor, Standard & Poor's Indices, Dow Jones Industrial Average, and other
rating services, companies, publications, or other persons who rank separate
accounts or other investment products on overall performance or other criteria,
and (2) the effect of tax-deferred compounding on investment returns, or returns
in general, which may be illustrated by graphs, charts, or otherwise, and which
may include a comparison, at various points in time, of the return from an
investment in a Contract (or returns in general) on a tax-deferred basis
(assuming one or more tax rates) with the return on a currently taxable basis.
Other ranking services and indices may be used.
1
We may from time to time also disclose cumulative (non-annualized) total
returns for the Investment Divisions. We may from time to time also disclose
yield and standard total returns for any or all Investment Divisions.
We may also advertise performance figures for the Investment Divisions
based on the performance of an Eligible Fund prior to the time the Series
Account commenced operations.
For additional information regarding the calculation of other
performance data, please refer to the Statement of Additional Information.
---------------------------------------------------------------------------
DISTRIBUTION OF THE CONTRACTS
- ----------------------------------------------------------------------------
Charles Schwab & Co., Inc. ("Schwab") is the principal underwriter and
distributor of the Contracts. Schwab is registered with the Securities and
Exchange Commission as a broker/dealer and is a member of the National
Association of Securities Dealers, Inc. ("NASD"). Its principal offices are
located at 101 Montgomery, San Francisco, California 94104, telephone
800-838-0650.
Certain administrative services are provided by Schwab to assist the
Company in the processing of the Contracts, which services are described in
written agreements between Schwab and the Company. The Company has agreed to
indemnify Schwab (and its agents, employees, and controlling persons) for
certain damages arising out of the sale of the Contracts, including those
arising under the securities laws.
---------------------------------------------------------------------------
SELECTED FINANCIAL DATA
----------------------------------------------------------------------------
The following is a summary of certain financial data of the Company.
This summary has been derived in part from, and should be read in conjunction
with, the financial statements of the Company included elsewhere in this
Prospectus.
<TABLE>
Millions Years Ended December 31
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
INCOME STATEMENT DATA
<S> <C> <C> <C> <C> <C>
Premiums and other income $1,279 $ 1,199 $ 1,067 $ 1,000 $ 696
Net investment income 897 837 835 768 792
Realized investment gains 10 (21) (72) 25
(losses) 8
----------- ----------- ----------- ----------- -----------
Total Revenues 2,186 2,015 1,910 1,696 1,513
Total benefits and expenses 1,930 1,824 1,733 1,593 1,417
Income tax expense 97 29 31
56 49
=========== =========== =========== =========== ===========
Net Income $ 159 $ 135 $ 128 $ 74 $ 65
=========== =========== =========== =========== ===========
BALANCE SHEET DATA
Investment assets $13,206 $12,717 $12,473 $11,791 $11,592
Separate account assets 7,847 5,485 3,999 2,555 1,680
Total assets 22,078 19,351 17,682 15,616 14,296
Total policyholder liabilities 11,791 11,687 11,492 10,929 10,592
Total shareholder's equity 1,186 993 777 821
1,034
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company
Great-West Life & Annuity Insurance Company (the "Company") is a stock
life insurance company originally organized under the laws of the State of
Kansas in 1907 as the National Interment Association. Its name was changed to
Ranger National Life Insurance Company and to Insuramerica Corporation prior to
changing to its current name in 1982. In September of 1990, the Company
redomesticated and is now organized under the laws of the State of Colorado. The
Company ranks in the top 2% of all U.S. life insurers in terms of assets.
The Company is authorized to engage in the sale of life insurance,
accident and health insurance and annuities. It is qualified to do business in
all states in the United States except New York, and in the District of
Columbia, Puerto Rico and Guam. The Company conducts business in New York
through First Great-West Life & Annuity Insurance Company, a subsidiary New York
life insurance company.
The Company operates in one business segment as a provider of life,
health and annuity products; however, the business operations of the Company
will be discussed in terms of its major business units, which are:
Employee Benefits - life, health, disability income and 401(k) products
for group clients.
Financial Services - accumulation and payout annuity products
for both group and individual clients, primarily in
the public/non-profit sector, as well as insurance
products for individual clients.
Investment Operations - management of assets, both general
account and separate accounts which segregate, from
the Company's general account, the assets and
liabilities of contractholders of variable products
("Separate Accounts").
Management's discussion and analysis of financial condition and results
of operations of the Company for the three years ended December 31, 1997
follows. In connection with, and because it desires to take advantage of, the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, the Company cautions readers regarding certain forward-looking statements
contained in the following discussion and elsewhere in this report and in any
other statements made by, or on behalf of, the Company, whether or not in future
filings with the SEC. Forward-looking statements are statements not based on
historical information and which relate to future operations, strategies,
financial results, or other developments. In particular, statements using verbs
such as "expect," "anticipate," "believe," or words of similar import generally
involve forward-looking statements. Without limiting the foregoing,
forward-looking statements include statements which represent the Company's
beliefs concerning future or projected levels of sales of the Company's
products, investment spreads or yields, or the earnings or profitability of the
Company's activities.
Forward-looking statements are necessarily based upon estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Company's control and many of which, with respect to future business decisions,
are subject to change. These uncertainties and contingencies can affect actual
results and could cause actual results to differ materially from those expressed
in any forward-looking statements made by, or on behalf of, the Company. Whether
or not actual results differ materially from forward-looking statements may
depend on numerous foreseeable and unforeseeable events or developments, some of
which may be national in scope, such as general economic conditions and interest
rates, some of which may be related to the insurance industry generally, such as
pricing competition, regulatory developments and industry consolidation, and
others of which may relate to the Company specifically, such as credit,
volatility and other risks associated with the Company's investment portfolio,
and other factors. Other risks and uncertainties are discussed in documents
filed by the Company with the SEC.
Comparison of Years Ended December 31, 1997 and 1996
The Company's consolidated net income for 1997 increased $24.4 million or
18% to $158.8 million, when compared to 1996.
Premiums and other income increased 7% from $1,199.2 million in 1996 to
$1,278.9 million in 1997. The increase was primarily due to growth in individual
participating insurance premiums and an increase in fee income from assets under
management.
Net investment income increased $61.0 million from $836.6 million in
1996 to $897.6 million in 1997. This change reflected improved interest income
on investments and additional investment management fees recognized in prior
years by Great-West Life.
The Company's realized investment gains (losses) changed from a net
realized loss of $21.1 million in 1996 to a net realized gain of $9.8 million in
1997. The decrease in interest rates in 1997 resulted in realized gains on the
sale of fixed maturities totaling $16.0 million, while higher interest rates
contributed to $11.6 million of fixed maturity losses recorded in 1996. There
was also a 28% improvement in the provision for asset losses as the change in
the provision was reduced from $10.6 million in 1996 to $7.6 million in 1997.
Total benefits and expenses includes life and other policy benefits,
increases in reserves, interest paid or credited to contractholders, expenses,
and dividends to policyholders. The increase of 6% from $1,824.3 million in 1996
to $1,929.9 million in 1997 was primarily the result of increased operating
expenses associated with the cost of developing HMOs, system enhancements, and
developing FASCorp's business.
In October 1996 the Company recaptured certain pieces of an individual
participating block of business previously reinsured to Great-West Life. In June
1997 the Company recaptured all remaining pieces of that block of business. The
Company recorded various assets and liabilities related to the recaptures as
discussed in Note 2 to the financial statements. In recording the recaptures,
both life insurance premiums and benefits were increased by the amounts
recaptured ($155.8 million and $164.8 million in 1997 and 1996, respectively).
Consequently, the net financial results of the Company were not impacted by
recording the reinsurance transactions.
Included in the 1997 and 1996 results of operations was the effect of a
release of $47.8 million and $25.6 million for 1997 and 1996, respectively, from
a previously recorded contingent tax liability that the Company assumed from
Great-West Life in 1993 (see Note 10 to the financial statements). Of the $47.8
million released in 1997, $15.1 million was attributable to participating
policyholders and reflected as a liability on the balance sheet.
In addition to the contingent tax liability release, the Company also in
the normal course of business reviewed its deferred tax assets and liabilities
and increased its deferred tax liability by $21.6 million in 1997 (of which
$10.1 million was attributable to participating policyholders), which resulted
in a $11.5 million reduction in net income.
The effect of the non-recurring transactions described above was to
decrease net income by $4.4 million from 1996 to 1997. Excluding the effect of
these transactions, the growth in net income reflected higher variable fee
income from assets under management, improved investment income, increased
realized capital gains and favorable mortality.
The effective income tax rates were affected by the release of the
contingent tax liability discussed above in 1997 and 1996 as these amounts were
not taxable, although the increase in the deferred tax liability discussed above
negated the impact of the 1997 release.
Comparison of Years Ended December 31, 1996 and 1995
The Company's 1996 consolidated net income increased 5% to $134.6
million, when compared to 1995.
Premiums and other income increased 12% from $1,067.4 million in 1995 to
$1,199.2 million in 1996. The 1996 premiums included $164.8 million of
reinsurance premium associated with the recapture of a block of participating
individual insurance business from Great-West Life. This transaction did not
impact consolidated net income, as it was offset by an increase in reserves (see
discussion of policy benefits below). Therefore, premiums and other income from
operations were down from 1995 levels, which reflects a 7% reduction in group
life and health premiums due to high termination rates associated with price
sensitivity and competition from managed care companies.
Net investment income increased $1.5 million from $835.1 million in 1995
to $836.6 million in 1996. This change reflected an increase in the amount of
invested assets of $243.8 million, which was largely offset by a lower effective
yield on investments purchased in late 1995 and early 1996. The increase in
invested assets is primarily the result of growth in policy loans on the
Corporate-Owned Life Insurance ("COLI") business.
The Company's realized investment gains (losses) changed from a net
realized gain of $7.5 million in 1995 to a net realized loss of $21.1 million in
1996. The increase in interest rates in 1996 resulted in realized losses on the
sale of fixed maturities totaling $11.6 million, while lower interest rates
contributed to $28.2 million of fixed maturity gains recorded in 1995. The 50%
improvement in the provision for asset losses helped to partially offset the
fixed maturities capital losses, as the change in provision was reduced from
$22.0 million in 1995 to $10.6 million in 1996.
Total benefits and expenses includes life and other policy benefits,
increase in reserves, interest paid or credited to contractholders, expenses,
and dividends to policyholders. The increase of 5% from $1,733.3 million in 1995
to $1,824.3 million in 1996 is primarily the result of the increase in reserves
of $164.8 million associated with the recapture of insurance from Great-West
Life. After this adjustment the total benefits and expenses actually decreased
from 1995 to 1996. This is the result of a reduction in group health claims
which is consistent with the premium decrease discussed previously.
Net income in 1996 also reflects a $25.6 million release of a previously
recorded contingent liability that the Company assumed from Great-West Life in
1993. The release was triggered by the resolution of 1988 and 1989 tax issues
with the Internal Revenue Service.
The effective income tax rates were reduced in 1996 by the release of
the contingent liability which was not taxable and in 1995 by the release of a
$13.3 million deferred tax valuation allowance in a subsidiary investment
company.
Investment Operations
The Company's primary investment objective is to acquire assets whose
durations and cash flows reflect the characteristics of the Company's
liabilities, while meeting industry, size, issuer and geographic diversification
standards. Formal liquidity and credit quality parameters have also been
established.
The Company follows rigorous procedures to control interest rate risk
and observes strict asset and liability matching guidelines. These guidelines
are designed to ensure that even in changing interest rate environments, the
Company's assets will always be able to meet the cash flow and income
requirements of its liabilities. Through dynamic modeling, using
state-of-the-art software to analyze the effects of a wide range of possible
market changes upon investments and policyholder benefits, the Company ensures
that its investment portfolio is appropriately structured to fulfill financial
obligations to its policyholders.
A summary of the Company's invested assets (Millions) follows:
<TABLE>
1997 1996
---- ----
Fixed maturities, available for sale,
<S> <C> <C>
at fair value $6,698 $6,206
Fixed maturities, held-to-maturity,
at amortized cost 2,083 1,993
Mortgage loans 1,236 1,488
Real estate and common stock 133 88
Short-term investments 399 419
Policy loans 2,657 2,523
-------- --------
$13,206 $12,717
======= =======
</TABLE>
Fixed Maturities
Fixed maturity investments include publicly traded bonds, privately
placed bonds and public and private structured assets. This latter category
contains both asset-backed and mortgage-backed securities, including
collateralized mortgage obligations ("CMOs"). The Company's strategy related to
structured assets is to focus on those with lower volatility and minimal credit
risk. The Company does not invest in higher risk CMOs such as interest-only and
principal-only strips, and currently has no plans to invest in such securities.
Private placement investments, which are primarily in the
held-to-maturity category, are generally less marketable than publicly traded
assets, yet they typically offer covenant protection which allows the Company,
if necessary, to take appropriate action to protect its investment. The Company
believes that the cost of the additional monitoring and analysis required by
private placements is more than offset by their enhanced yield.
One of the Company's primary objectives is to ensure that its fixed
maturity portfolio is maintained at a high average quality, so as to limit
credit risk. In excess of 85% of the value of the securities in this portfolio
are rated by external rating agencies. If not externally rated, the securities
are rated by the Company on a basis intended to be similar to that of the rating
agencies.
The distribution of the fixed maturity portfolio (both available for
sale and held to maturity) by credit rating is summarized as:
<TABLE>
<S> <C> <C>
Credit Rating 1997 1996
------------- ---- ----
AAA 45.7% 45.9%
AA 8.8 8.1
A 23.8 23.7
BBB 20.7 20.9
BB and Below (non-investment grade) 1.0 1.4
------- -------
TOTAL 100.0% 100.0%
</TABLE>
At December 31, 1997, the Company had no bonds in default. At December
31, 1996, there was one bond in default with a carrying value of $8 million.
Mortgage Loans
During 1997, the mortgage portfolio declined 17% to $1.2 billion, net of
impairment reserves. The Company has not actively sought new loan opportunities
since 1989 and, as such, has experienced an ongoing reduction in this
portfolio's balance.
The Company follows a comprehensive approach to the management of
mortgage loans which includes ongoing analysis of key mortgage characteristics
such as debt service coverage, net collateral cash flow, property condition,
loan to value ratios and market conditions. Collateral valuations are performed
for those mortgages which, after review, are determined by management to present
possible risks and exposures. These valuations are then incorporated into the
determination of the Company's allowance for credit losses.
The average balance of impaired loans continued to remain low at $37.9
million in 1997 compared with $39.1 million in 1996, and foreclosures totaled
$14.1 million and $13.0 million in 1997 and 1996, respectively. The low levels
of problematic mortgages relative to the Company's overall balance sheet are due
to the ongoing decrease in the size of the mortgage portfolio, the Company's
active loan management program and improvement in market conditions.
Occasionally, the Company elects to restructure certain loans if the
economic benefits to the Company are believed to be more advantageous than those
achieved by acquiring the collateral through foreclosure. At December 31, 1997
and 1996, the Company's loan portfolio included $64.4 million and $68.3 million,
respectively, of non-impaired restructured loans.
Real Estate and Common Stock
The Company's real estate portfolio is composed primarily of the Home
Office property ($56.9 million) and properties acquired through the foreclosure
of troubled mortgages. The Company operates a wholly owned real estate
subsidiary which attempts to maximize the value of these properties through
rehabilitation, leasing and sale. The Company anticipates limited, if any,
investments in real estate assets during 1998.
The common stock portfolio is composed of mutual fund seed money and
some private equity investments. The Company anticipates a limited participation
in the stock markets in 1998.
<PAGE>
Derivatives
The Company uses certain derivatives, such as futures, options, and
swaps, for purposes of hedging interest rate and foreign exchange risk. These
derivatives, when taken alone, may subject the Company to varying degrees of
market and credit risk; however, when used for hedging, these instruments
typically reduce risk. The Company controls the credit risk of its financial
contracts through credit approvals, limits and monitoring procedures. The
Company has also developed controls within its operations to ensure that only
Board authorized transactions are executed. Note 6 to the financial statements
contains a summary of the Company's outstanding financial hedging derivatives.
Outlook
General economic conditions continued to improve during 1997, including
improvement or stabilization in many real estate markets. The Company does not
expect to recognize any asset chargeoffs or restructurings which would result in
a material adverse effect upon the Company's financial condition in 1998.
Liquidity and Capital Resources
The Company's operations have liquidity requirements that vary among the
principal product lines. Life insurance and pension plan reserves are primarily
long-term liabilities. Accident and health reserves, including long-term
disability, consist of both short-term and long-term liabilities. Life insurance
and pension plan reserve requirements are usually stable and predictable, and
are supported primarily by long-term, fixed income investments. Accident and
health claim demands are stable and predictable but generally shorter term,
requiring greater liquidity.
Generally, the Company has met its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio and utilizing
positive cash flows from operations. Liquidity for the Company has remained
strong, as evidenced by significant amounts of short-term investments and cash,
which totaled $525.4 million and $544.2 million as of December 31, 1997 and
1996, respectively.
Funds provided from premiums and fees, investment income and maturities
of investment assets are reasonably predictable and normally exceed liquidity
requirements for payment of claims, benefits and expenses. However, since the
timing of available funds cannot always be matched precisely to commitments,
imbalances may arise when demands for funds exceed those on hand. Also, a demand
for funds may arise as a result of the Company taking advantage of current
investment opportunities. The Company's capital resources represent funds
available for long-term business commitments and primarily consist of retained
earnings and proceeds from the issuance of commercial paper and equity
securities. Capital resources provide protection for policyholders and the
financial strength to support the underwriting of insurance risks, and allow for
continued business growth. The amount of capital resources that may be needed is
determined by the Company's senior management and Board of Directors as well as
by regulatory requirements. The allocation of resources to new long-term
business commitments is designed to achieve an attractive return, tempered by
considerations of risk and the need to support the Company's existing business.
The Company's financial strength provides the capacity and flexibility
to enable it to raise funds in the capital markets through the issuance of
commercial paper. The Company continues to be well capitalized, with sufficient
borrowing capacity to meet the anticipated needs of its business. The Company
had $54.1 million of commercial paper outstanding at December 31, 1997, compared
with $84.7 million at December 31, 1996. The commercial paper has been given a
rating of A-1+ by Standard & Poor's Corporation and a rating of P-1 by Moody's
Investors Service, each being the highest rating available.
<PAGE>
Accounting Pronouncements
During the fourth quarter of 1995, the Financial Accounting Standards
Board issued a guide to implementation of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", which permits a one-time opportunity
to reclassify securities subject to SFAS No. 115. Consequently, the Company
reassessed the classification of its investment portfolio in December 1995 and
reclassed securities totaling $2.1 billion from held-to-maturity to
available-for-sale. In connection with this reclassification, an unrealized
gain, net of related policyholder amounts and deferred income taxes, of $23.4
million was recognized in stockholder's equity at the date of transfer.
In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The implementation of this statement had
no material effect on the Company's results of operations, liquidity or
financial condition.
In connection with the employee transfer discussed in Note 2 to the
financial statements, effective January 1, 1997 the Company implemented SFAS No.
87, "Employers Accounting for Pensions" and SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions". Previously, employee expenses
(including costs for benefit plans) were transferred from Great-West Life to the
Company through administrative services agreements. Accordingly, the
implementation of these standards had no material effect on the financial
results of the Company.
Effective January 1, 1998, the Company will implement SFAS No. 125,
"Accounting for Transfer and Servicing of Financial Assets and Extinguishments
of Liabilities", as it relates to repurchase agreements and securities lending
arrangements. Management estimates that this change will not have a material
effect on the Company's financial results.
Effective January 1, 1998, the Company will implement SFAS No. 130,
"Reporting Comprehensive Income", which requires the disclosure of comprehensive
income and its components. The Company recognizes unrealized gains and losses,
net of adjustments, on its investments available for sale portfolio. These items
will be disclosed as comprehensive income.
Effective October 1, 1998, the Company will implement the disclosure
requirements of SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information". SFAS No. 131 redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. The Company anticipates, with
the adoption of SFAS No. 131, that it will incorporate segment disclosures of
its current operating units. The Company believes the segment information
required to be disclosed under SFAS No. 131 will be more comprehensive than
previously provided, including expanded disclosures of income statement and
balance sheet items for each of its reportable operating segments.
Effective January 1, 1998, the Company will implement SFAS No. 132,
"Employer's Disclosures About Pensions and Other Postretirement Benefits". The
Company expects to modify its disclosure for its postretirement benefit plans to
conform to the requirements of SFAS No. 132.
Year 2000
The Company has a number of existing computer programs that use only two
digits to identify a year in the date field, which creates a problem with the
upcoming change in the century. The Company has developed detailed plans that it
expects to rectify the year 2000 problem. These plans include modifying programs
where necessary, replacing certain programs with year 2000 compliant software,
and working with vendors and business partners, including banks, custodians and
investment managers, who need to become year 2000 compliant. The resources that
are being devoted to this effort are substantial. Management estimates that the
total cost to implement these plans will not be material, and has budgeted the
expense as part of its computer systems operating costs in 1998 and early 1999.
The Company anticipates that its systems will be year 2000 compliant on or about
first quarter 1999, but there can be no assurance that the Company will be
successful, or that interaction with other service providers will not impair the
Company's services at that time.
Regulation
General
The Company must comply with the insurance laws of all jurisdictions in
which it is licensed to do business. Although the intent of regulation varies,
most jurisdictions have laws and regulations governing rates, solvency,
standards of business conduct and various insurance and investment products. The
form and content of statutory financial reports and the type and concentration
of investments are also regulated.
The Company's operations and accounts are subject to examination by the
Colorado Insurance Division and other regulators at specified intervals. The
latest financial examination by the Colorado Insurance Division was completed in
1997, and covered the five year period ending December 31, 1995. This
examination produced no significant adverse findings regarding the Company.
Solvency Regulation
The National Association of Insurance Commissioners has adopted
risk-based capital rules for life insurance companies. These rules recommend a
specified level of capital depending upon the types and quality of investments
held, the types of business written, and the types of liabilities maintained.
Depending on the ratio of the insurer's adjusted capital to its risk based
capital, the insurer could be subject to various regulatory actions ranging from
increased scrutiny to conservatorship. Based on the Company's December 31, 1997
statutory financial reports, the Company was well within these rules.
The National Association of Insurance Commissioners Insurance Regulatory
Information System ratios are another set of tools used by regulators to provide
an "early warning" as to when a company may require special attention. There are
twelve categories of financial data with defined usual ranges for each. For
1997, the Company was within the usual ranges in all categories.
Insurance Holding Company Regulations
The Company is subject to and complies with insurance holding company
regulations in Colorado. These regulations contain certain restrictions and
reporting requirements for transactions between an insurer and its affiliates,
including the payments of dividends. They also regulate changes in control of an
insurance company.
Securities Laws
The Company is subject to various levels of regulation under federal
securities laws. The Company's broker-dealer subsidiaries are regulated by the
Securities and Exchange Commission ("SEC") and the National Association of
Securities Dealers, Inc. The Company's investment advisor subsidiary and
transfer agent subsidiary are regulated by the SEC. Certain of the Company's
Separate Accounts and mutual funds are registered under the Investment Company
Act of 1940 and the offerings of certain of the Company's variable insurance and
annuity products are registered under the Securities Act of 1933.
HMO Regulation
The Company's HMO subsidiaries are subject to regulation by various
government agencies in the states in which they are licensed to do business.
This involves the regulation of solvency, contracts, rates, quality assurance,
minimum levels of benefits, and the availability and continuity of care.
Guaranty Funds
Under insurance guaranty fund laws existing in all states, insurers
doing business in those states can be assessed (up to prescribed limits) for
certain obligations of insolvent insurance companies. The Company has
established a reserve of $8.7 million as of December 31, 1997 to cover future
assessments of known insolvencies. The Company has historically recovered more
than half of the guaranty fund assessments through statutorily permitted premium
tax offsets. The Company has a prepaid asset associated with guaranty fund
assessments of $5.6 million at December 31, 1997.
Canadian Regulation
Because the Company is a subsidiary of Great-West Life, which is a
Canadian company, the Office of the Superintendent of Financial Institutions
Canada conducts periodic examinations of the Company and approves certain
investments in subsidiary companies.
Ratings
The Company is rated by a number of nationally recognized rating
agencies. The ratings represent the opinion of the rating agencies on the
financial strength of the Company and its ability to meet the obligations of its
insurance policies; however, these ratings and the Company's financial strength
do not extend to the investment return or principal value of the Company's
separate accounts. <TABLE>
<S> <C> <C> <C> <C> <C> <C>
Rating Agency Measurement Rating
- ----------------------------- ------------------------------------------ ------------
A.M. Best Company Financial Condition and Operating A++ *
Performance
Duff & Phelps Corporation Claims Paying Ability AAA *
Standard & Poor's Claims Paying Ability AA+ **
Corporation
Moody's Investors Service Insurance Financial Strength Aa2 ***
* Highest ratings available.
** Second highest rating out of 19 rating categories.
*** Third highest rating out of 19 rating categories.
</TABLE>
Miscellaneous
No customer accounted for 10% or more of the Company's consolidated
revenues in 1997. In addition, no unit of the Company's business is dependent on
a single customer or a few customers, the loss of which would have a significant
effect on the Company or any of its business units. The loss of business from
any one, or a few, independent brokers or agents would not have a material
adverse effect on the Company or any of its business units. The Company had
approximately 4,600 employees at December 31, 1997.
The executive offices of the Company consist of a 517,633 square foot
office complex located in Englewood, Colorado. The office complex is owned by a
subsidiary of the Company. The Company leases sales and claims offices
throughout the United States.
<PAGE>
Directors and Officers
Set forth below is information concerning the Company's directors and
executive officers, together with their principal occupation for the past five
years. Unless otherwise indicated, all of the directors have been engaged for
not less than five years in their present principal occupations or in another
executive capacity with the companies or firms identified.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Director Principal Occupation(s) For
Last Five Years
James Balog Company Director
James W. Burns, O.C. Chairman of the Boards of Great-West Lifeco,
Great-West Life, London Insurance Group Inc. and
London Life Insurance Company; Deputy Chairman,
Power Corporation
Orest T. Dackow President and Chief Executive Officer, Great-West
Lifeco
Robert G. Graham Company Director since January 1996; previously
Chairman and Chief Executive Officer, Inter-City
Products Corporation
Robert Gratton Chairman of the Board of the Company; President
and Chief Executive Officer, Power Financial
N. Berne Hart Company Director
Kevin P. Kavanagh Company Director
William Mackness Company Director since July 1995; previously Dean,
Faculty of Management, University of Manitoba
William T. McCallum President and Chief Executive Officer of the
Company; President and Chief Executive Officer,
United States Operations, Great-West Life
Jerry E.A. Nickerson Chairman of the Board, H.B. Nickerson & Sons
Limited
The Honourable Vice-Chairman, Power Corporation; Member of the
P. Michael Pitfield, P.C., Q.C. Senate of Canada
Michel Plessis-Belair, F.C.A. Vice-Chairman and Chief Financial Officer, Power
Corporation; Executive Vice-President and Chief
Financial Officer, Power Financial
Brian E. Walsh Co-Founder and Managing Partner, Veritas Capital
Management, LLC since September 1997; previously
Partner, Trinity L.P. from January 1996;previously
Managing Director and Co-Head, Global Investment
Bank, Bankers Trust Company
Executive Officers Principal Occupation(s) For
Last Five Years
William T. McCallum President and President and Chief Executive Officer of the
Chief Company; President and Chief Executive Officer,
Executive Officer United States Operations, Great-West Life
Dennis Low Executive Vice President, Financial Services of
Executive Vice President,
Financial Services the Company and Great-West Life
Alan D. MacLennan Executive Vice President, Employee Benefits of the
Executive Vice President,
Employee Company and Great-West Life
Benefits
James D. Motz Executive Vice President, Employee Benefits of the
Executive Vice President, Company and Great-West Life
Employee Benefits
Douglas L. Wooden Executive Vice President, Financial Services of
Executive Vice President, the Company and
Financial Services Great-West Life
John A. Brown Senior Vice President, Sales, Financial Services
Senior Vice President,
Sales, of the Company and Great-West Life
Financial Services
Donna A. Goldin Executive Vice President and Chief Operating
Executive Vice President
and Chief Officer, One Corporation since June 1996;
Operating Officer, previously Executive Vice President and Chief
One Corporation Operating Officer, Harris Methodist Health Plan
since March 1995; previously Executive Vice
President and Chief Operating Officer, Private
Healthcare Systems, Inc.
Mitchell T.G. Graye Senior Vice President, Chief Financial Officer of
Senior Vice President,
Chief Financial the Company; Senior Vice President, Chief
Officer Financial Officer, United States, Great-West Life
John T. Hughes Senior Vice President, Chief Investment Officer of
Senior Vice President, the Company; Senior Vice President, Chief
Chief Investment Officer Investment Officer, United States, Great-West Life
D. Craig Lennox Senior Vice President, General Counsel and
Senior Vice President,
General Counsel Secretary of the Company; Senior Vice President
and Secretary and Chief U.S. Legal Officer, Great-West Life
Steve H. Miller Senior Vice President, Employee Benefits Sales of
Senior Vice President, Employee the Company and Great-West Life
Benefits Sales
Charles P. Nelson Senior Vice President,
Senior Vice President,
Public Public Non-Profit Markets of the Company and
Non-Profit Markets Great-West Life
Martin Rosenbaum Senior Vice President, Employee Benefits
Senior Vice President, Employee Operations of the Company and Great-West Life
Benefits Operations
Robert K. Shaw Senior Vice President, Individual Markets of the
Senior Vice President,
Individual Company and Great-West Life
Markets
Executive Compensation
</TABLE>
The following table sets out all compensation paid to the individuals
who were, at December 31, 1997, the Chief Executive Officer and the other four
most highly compensated executive officers of the Company (collectively the
"Named Executive Officers") for services rendered to the Company and its
subsidiaries, and Great-West Life, in all capacities for fiscal years ended
1995, 1996 and 1997, respectively.
<TABLE>
- ---------------------------------------------------------------------- =========================
Annual compensation Long-term compensation
awards
- ---------------------------------------------------------------------- =========================
- ------------------------- ------------- ------------- ---------------- =========================
<S> <C>
Name and Year Salary Bonus Options (1)
principal position ($) ($) (#)
- ------------------------- ------------- ------------- ---------------- =========================
- ------------------------- ------------- ------------- ---------------- =========================
W.T. McCallum, 1997 608,708 406,250 300,000 (3)
President and 1996 561,818 370,500 300,000 (2)
Chief Executive Officer 1995 523,958 351,000 -
225,000(4)
- ------------------------- ------------- ------------- ---------------- =========================
- ------------------------- ------------- ------------- ---------------- =========================
J.T. Hughes, 1997 324,000 162,000 -
Senior Vice President, 1996 312,000 136,968 80,000 (2)
Chief Investment Officer 1995 301,000 150,500 -
- ------------------------- ------------- ------------- ---------------- =========================
- ------------------------- ------------- ------------- ---------------- =========================
D. Low, Executive Vice 1997 340,000 132,000 50,000 (3)
President, Financial 1996 325,000 146,250 150,000 (2)
Services 1995 305,000 150,500 -
- ------------------------- ------------- ------------- ---------------- =========================
- ------------------------- ------------- ------------- ---------------- =========================
A.D. MacLennan, 1997 340,000 132,000 50,000 (3)
Executive Vice 1996 325,000 115,000 150,000 (2)
President, Employee 1995 312,000 125,000 -
Benefits
- ------------------------- ------------- ------------- ---------------- =========================
- ------------------------- ------------- ------------- ---------------- =========================
D.L. Wooden 1997 300,000 150,000 150,000 (3)
Executive Vice 1996 287,000 143,500 100,000 (2)
President, Financial 1995 275,500 137,500 -
Services
- ------------------------- ------------- ------------- ---------------- =========================
</TABLE>
(1) The options set out are options for common shares of Great-West Lifeco
which are granted by Great-West Lifeco pursuant to the Great-West Lifeco
Stock Option Plan ("Lifeco Options").
(2) These Lifeco Options become exercisable 20% per year commencing on the
first anniversary of the grant and expire ten years after the date of
the grant.
(3) All or portions of these Lifeco Options become exercisable if certain
financial targets are attained. If exercisable, the exercise period runs
from April 1, 2002 to June 26, 2007.
(4) A special one-time bonus payment with respect to long-term performance.
The following table describes options granted to the Named Executive
Officers during the most recently completed fiscal year. All options are Lifeco
Options granted pursuant to the Great-West Lifeco Stock Option Plan. Lifeco
Options are issued with an exercise price in Canadian dollars. Canadian dollar
amounts have been translated to U.S. dollars at a rate of 1/1.43.
<TABLE>
- ------------------------------------------------------------------------ ==========================
Potential realizable
value at assumed annual
Individual grants rates of stock price
appreciation for option
term
- ------------------------------------------------------------------------ ==========================
Percent of
total
Options options Exercise
Name granted granted to or base Expiration date 5% 10%
(#) employees in price ($) ($)
fiscal year ($/share)
- ---------------- ----------- -------------- ----------- ---------------- ------------ =============
- ---------------- ----------- -------------- ----------- ---------------- ------------ =============
<S> <C> <C> <C> <C> <C> <C> <C>
W.T. McCallum 300,000 19.43 22.70 June 26, 2007 4,282,772 10,853,386
- ---------------- ----------- -------------- ----------- ---------------- ------------ =============
- ---------------- ----------- -------------- ----------- ---------------- ------------ =============
J.T. Hughes - - - - - -
- ---------------- ----------- -------------- ----------- ---------------- ------------ =============
- ---------------- ----------- -------------- ----------- ---------------- ------------ =============
D. Low 50,000 3.24 22.70 June 26, 2007 713,795 1,808,898
- ---------------- ----------- -------------- ----------- ---------------- ------------ =============
- ---------------- ----------- -------------- ----------- ---------------- ------------ =============
A.D. MacLennan 50,000 3.24 22.70 June 26, 2007 713,795 1,808,898
- ---------------- ----------- -------------- ----------- ---------------- ------------ =============
D.L. Wooden 150,000 9.72 22.70 June 26, 2007 2,141,386 5,426,693
- ---------------- ----------- -------------- ----------- ---------------- ------------ =============
</TABLE>
Prior to April 24,1996, the Named Executive Officers participated in the
Power Financial Employee Share Option Plan pursuant to which options to acquire
common shares of Power Financial ("PFC Options") were granted. The following
table describes all PFC Options exercised in 1997, and all unexercised PFC
Options held as of December 31, 1997, by the Named Executive Officers. PFC
Options are issued with an exercise price in Canadian dollars. Canadian dollar
amounts have been translated to U.S. dollars at a rate of 1/1.43.
<TABLE>
- ----------------------------------------------- --------------------------- ============================
Unexercised options at Value of unexercised
fiscal year-end in-the-money options at
(#) fiscal year-end
($)
- ----------------------------------------------- --------------------------- ============================
Shares
acquired Value
Name on exercise realized Exercisable Exercisable
(#) ($) Unexercisable Unexercisable
================= --------------- ------------- ------------- ------------- -------------- =============
<S> <C> <C> <C> <C>
W.T. McCallum 12,000 240,445 40,000 - 1,201,486 -
------------- =============
================= --------------- ------------- ------------- ------------- -------------- =============
J.T. Hughes - - 120,000 - 3,312,063 -
------------- =============
================= --------------- ------------- ------------- ------------- -------------- =============
D. Low 74,600 1,123,970 - - - -
------------- =============
================= --------------- ------------- ------------- ------------- -------------- =============
A.D. MacLennan - - - - - -
------------- =============
================= =============== ============= ============= ============= ============== =============
D.L. Wooden - - 88,000 - 2,449,038 -
================= =============== ============= ============= ============= ============== =============
</TABLE>
Commencing April 24,1996, the Named Executive Officers began
participating in the Great-West Lifeco Stock Option Plan. The following table
describes all Lifeco Options exercised in 1997, and all unexercised Lifeco
Options held as of December 31, 1997, by the Named Executive Officers. Lifeco
Options are issued with an exercise price in Canadian dollars. Canadian dollar
amounts have been translated to U.S. dollars at a rate of 1/1.43.
<TABLE>
- ----------------------------------------------- --------------------------- ============================
Unexercised options at Value of unexercised
fiscal year-end in-the-money options at
(#) fiscal year-end
($)
- ----------------------------------------------- --------------------------- ============================
Shares
acquired Value
Name on exercise realized Exercisable Exercisable
(#) ($) Unexercisable Unexercisable
================= --------------- ------------- ------------- ------------- -------------- =============
<S> <C> <C> <C> <C>
W.T. McCallum - - 60,000 540,000 903,941 4,881,489
------------- =============
================= --------------- ------------- ------------- ------------- -------------- =============
J.T. Hughes - - 16,000 64,000 241,051 964,204
------------- =============
================= --------------- ------------- ------------- ------------- -------------- =============
D. Low - - 30,000 170,000 451,970 2,018,836
------------- =============
================= --------------- ------------- ------------- ------------- -------------- =============
A.D. MacLennan - - 30,000 170,000 451,970 2,018,836
------------- =============
================= =============== ============= ============= ============= ============== =============
D.L. Wooden - - 20,000 230,000 301,314 1,838,117
================= =============== ============= ============= ============= ============== =============
</TABLE>
Pension Plan Table
The following table sets out the pension benefits payable to the Named
Executive Officers by Great-West Life or the Company.
<TABLE>
PENSION PLAN TABLE
========================= =============================================================
Years of service
=============================================================
Remuneration
($)
15 20 25 30 35
========================= =============================================================
<S> <C> <C> <C> <C> <C>
400,000 120,000 160,000 200,000 240,000 240,000
========================= =============================================================
500,000 150,000 200,000 250,000 300,000 300,000
========================= =============================================================
600,000 180,000 240,000 300,000 360,000 360,000
========================= =============================================================
700,000 210,000 280,000 350,000 420,000 420,000
- ------------------------- =============================================================
800,000 240,000 320,000 400,000 480,000 480,000
- ------------------------- =============================================================
- ------------------------- =============================================================
900,000 270,000 360,000 450,000 540,000 540,000
- ------------------------- =============================================================
========================= =============================================================
1,000,000 300,000 400,000 500,000 600,000 600,000
========================= =============================================================
</TABLE>
<PAGE>
The Named Executive Officers have the following years of service.
Name Years of Service
W.T. McCallum 31
J.T. Hughes 7
D. Low 32
A.D. MacLennan 31
D.L. Wooden 6
For W.T. McCallum, the benefits shown are payable commencing December
31, 2000, and remuneration is the average of the highest 36 consecutive months
of compensation during the last 84 months of employment. For J.T. Hughes, D.
Low, A.D. MacLennan and D.L. Wooden, the benefits shown are payable upon the
attainment of age 62, and remuneration is the average of the highest 60
consecutive months of compensation during the last 84 months of employment.
Compensation includes salary and bonuses prior to any deferrals. The normal form
of pension is a life only annuity. Other optional forms of pension payment are
available on an actuarially equivalent basis. The benefits listed in the table
are subject to deduction for social security and other retirement benefits.
Directors of the Company
The following sets out remuneration paid by the Company to its
directors.
For each director of the Company who is not also a director of
Great-West Life, the Company pays an annual fee of $15,000, and a meeting fee of
$1,000 for each meeting of the Board of Directors or a committee thereof
attended. With the exception of the President and Chief Executive Officer of
Great-West Lifeco and the President and Chief Executive Officer of the Company,
for each director of the Company who is also a director of Great-West Life, the
Company pays a meeting fee of $1,000 for each meeting of the Board of Directors
or a committee thereof attended which is not coincident with a Great-West Life
meeting. In addition, all directors are reimbursed for incidental expenses.
The above amounts are paid in the currency of the country of residence
of the director.
Compensation Committee Interlocks and Insider Participation
Executive compensation is determined by the Company's Board of Directors.
W.T. McCallum, President and Chief Executive Officer of the Company, is a member
of the Board of Directors. Mr. McCallum participated in executive compensation
matters generally but was not present when his own compensation was discussed or
determined.
Security Ownership of Certain Beneficial Owners
As of March 1, 1998, the following sets out the beneficial owners of more
than 5% of the Company's voting securities:
(1) 100% of the Company's 7,032,000 outstanding common shares are owned by The
Great-West Life Assurance Company, 100 Osborne Street North, Winnipeg,
Manitoba, Canada R3C 3A5.
(2) 99.5% of the outstanding common shares of The Great-West Life Assurance
Company are owned by Great-West Lifeco Inc., 100 Osborne Street North,
Winnipeg, Manitoba, Canada R3C 3A5.
(3) 81.2% of the outstanding common shares of Great-West Lifeco Inc. are
controlled by Power Financial Corporation, 751 Victoria Square,
Montreal, Quebec, Canada H2Y 2J3.
(4) 67.7% of the outstanding common shares of Power Financial Corporation are
owned by 171263 Canada Inc., 751 Victoria Square, Montreal, Quebec, Canada
H2Y 2J3.
(5) 100% of the outstanding common shares of 171263 Canada Inc. are owned by
Marquette Communications Corporation, 751 Victoria Square, Montreal,
Quebec, Canada H2Y 2J3.
(6) 100% of the outstanding common shares of Marquette Communications
Corporation are owned by Power Corporation of Canada, 751 Victoria
Square, Montreal, Quebec, Canada H2Y 2J3.
(7) Mr. Paul Desmarais, 751 Victoria Square, Montreal, Quebec, Canada H2Y
2J3, through a group of private holding companies, which he controls,
has voting control of Power Corporation of Canada.
Security Ownership of Management
The following table sets out the number of equity securities, and
exercisable options for equity securities, of the Company or any of its parents
or subsidiaries, beneficially owned, as of March 1, 1998, by (i) the directors
of the Company; (ii) the Named Executive Officers; and (iii) the directors and
executive officers of the Company as a group.
<PAGE>
<TABLE>
- ------------------------ ------------------------------------------------------------------------
Company
------------------------------------------------------------------------
----------------- ---------------- ----------------- -------------------
The Great-West Great-West Power Financial Power Corporation
Life Assurance Lifeco Inc. Corporation of Canada
Company
(1) (2) (3) (4)
----------------- ---------------- ----------------- -------------------
Directors
- -------------------------------------------------------------------------------------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
J. Balog - - - -
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
<S> <C> <C> <C> <C>
J. W. Burns 50 56,000 4,000 200,320
101,750 options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
O.T. Dackow 16 35,881 10,000 options -
100,000 options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
A. Desmarais 50 20,000 10,800 170,800
306,750 options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
P. Desmarais, Jr. 50 30,000 - 306,750 options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
R.G. Graham - - - -
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
R. Gratton - 165,000 155,000 2,500
2,160,000 150,000 options
options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
N.B. Hart - - - -
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
K. P. Kavanagh - 27,584 - -
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
W. Mackness - - - -
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
W.T. McCallum 17 35,133 52,000 -
60,000 options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
J.E.A. Nickerson - - - -
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
P.M. Pitfield - 45,000 35,000 50,000
121,750 options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
M. Plessis-Belair - 10,000 1,000 7,900
21,750 options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
B.E. Walsh - - - 3,700
- ------------------------ ----------------- ---------------- ----------------- -------------------
<PAGE>
- -------------------------------------------------------------------------------------------------
Named Executive Officers
- -------------------------------------------------------------------------------------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
W.T. McCallum 17 35,133 52,000 -
60,000 options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
J.T. Hughes - 4,788 120,000 options -
16,000 options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
D. Low - 8,266 64,600 -
30,000 options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
A.D. MacLennan - 9,502 - -
30,000 options
- ------------------------ ----------------- ---------------- ----------------- -------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
D.L. Wooden - 20,000 options 88,000 options -
- ------------------------ ----------------- ---------------- ----------------- -------------------
- -------------------------------------------------------------------------------------------------
Directors and Executive
Officers as a Group
- -------------------------------------------------------------------------------------------------
- ------------------------ ----------------- ---------------- ----------------- -------------------
183 470,520 322,400 435,220
353,600 options 2,378,000 1,008,750 options
options
- ------------------------ ----------------- ---------------- ----------------- -------------------
</TABLE>
(1) All holdings are common shares of The Great-West Life Assurance Company. (2)
All holdings are common shares, or where indicated, exercisable options for
common shares, of Great-West Lifeco
Inc.
(3) All holdings are common shares, or where indicated, exercisable options for
common shares, of Power Financial Corporation.
(4) All holdings are subordinate voting shares, or where indicated,
exercisable options for subordinate voting shares, of Power Corporation
of Canada.
The number of common shares and exercisable options for common shares
of Power Financial Corporation held by R. Gratton represents 1.31% of the total
number of common shares and exercisable options for common shares of Power
Financial Corporation outstanding. The number of common shares and exercisable
options for common shares of Power Financial Corporation held by the directors
and executive officers as a group represents 1.53% of the total number of common
shares and exercisable options for common shares of Power Financial Corporation
outstanding. The number of subordinate voting shares and exercisable options for
subordinate voting shares of Power Corporation of Canada held by the directors
and executive officers as a group represents 1.44% of the total number of
subordinate voting shares and exercisable options for subordinate voting shares
of Power Corporation of Canada outstanding. None of the remaining holdings set
out above exceed 1% of the total number of shares and exercisable
<PAGE>
- ----------------------------------------------------------------------------
VOTING RIGHTS
----------------------------------------------------------------------------
To the extent required by applicable law, all Eligible Fund shares held
in the Series Account will be voted by the Company at regular and special
shareholder meetings of the respective Eligible Funds in accordance with
instructions received from persons having voting interests in the corresponding
Investment Division. If, however, the 1940 Act or any regulation thereunder
should be amended, or if the present interpretation thereof should change, or if
we determine that we are allowed to vote all Eligible Funds shares in our own
rights, we may elect to do so.
Before the annuity commencement date, you the Owner, have the voting
interest. The number of votes which are available to you will be calculated
separately for each of your Variable Sub-Accounts. That number will be
determined by applying your percentage interest, if any, in a particular
Investment Division to the total number of votes attributable to that Investment
Division. You hold a voting interest in each Investment Division to which your
Annuity Account Value is allocated. If you select a variable annuity option, the
votes attributable to a Contract will decrease as annuity payments are made.
The number of votes of an Eligible Fund will be determined as of the
date coincident with the date established by that Eligible Fund for determining
shareholders eligible to vote at the meeting of the Eligible Funds. Voting
instructions will be solicited by written communication prior to such meeting in
accordance with procedures established by the respective Eligible Funds.
Shares as to which no timely instructions are received and shares held
by us as to which Owners have no beneficial interest will be voted in proportion
to the voting instructions which are received with respect to all Contracts
participating in the Investment Division. Voting instructions to abstain on any
item to be voted upon will be applied on a pro rata basis to reduce the votes
eligible to be cast.
Each person or entity having a voting interest in a Investment Division
will receive proxy material, reports and other material relating to the
appropriate Eligible Fund.
It should be noted that generally the Eligible Funds are not required
to, and do not intend to, hold annual or other regular meetings of shareholders.
Contract Owners have no voting rights in the Company.
- ----------------------------------------------------------------------------
RIGHTS RESERVED BY THE COMPANY
- ----------------------------------------------------------------------------
The Company reserves the right to make certain changes if, in its
judgment, they would best serve the interests of Owners and Annuitants or would
be appropriate in carrying out the purposes of the Contracts. Any changes will
be made only to the extent and in the manner permitted by applicable laws. Also,
when required by law, the Company will obtain your approval of the changes and
approval from any appropriate regulatory authority. Such approval may not be
required in all cases, however. Examples of the changes the Company may make
include:
- To operate the Series Account in any form permitted under the
Investment Company Act of 1940 or in any other form permitted by law.
- To transfer any assets in any Investment Division to another
Investment Division, or to one or more separate accounts, or to a
Guarantee Period; or to add, combine or remove Investment Divisions of
the Series Account.
- To substitute, for the Eligible Fund shares in any Investment
Division, the shares of another Eligible Fund or shares of another
investment company or any other investment permitted by law.
- To make any changes required by the Internal Revenue Code or by any
other applicable law in order to continue treatment of the Contract as
an annuity.
- To change the time or time of day at which a Valuation Date is
deemed to have ended.
- To make any other necessary technical changes in the Contract in order
to conform with any action the above provisions permit the Company to
take, including to change the way the Company assess charges, but
without increasing as to any then outstanding Contract the aggregate
amount of the types of charges which the Company has guaranteed.
----------------------------------------------------------------------------
LEGAL PROCEEDINGS
----------------------------------------------------------------------------
There are at present no material legal proceedings to which the Series
Account is a party or to which the assets of the Series Account are subject. The
Company is not currently a party to, and its property is not currently subject
to, any material legal proceedings. The lawsuits to which the Company is a party
are, in the opinion of management, in the ordinary course of business, and are
not expected to have a material adverse effect on the financial results,
conditions or prospects of the Company.
- ----------------------------------------------------------------------------
LEGAL MATTERS
----------------------------------------------------------------------------
Advice regarding certain legal matters concerning the federal securities
laws applicable to the issue and sale of the Contract has been provided by
Jorden Burt Boros Cicchetti Berenson & Johnson LLP. The organization of the
Company, the Company's authority to issue the Contract, and the validity of the
form of the Contract have been passed upon by Ruth B. Lurie, Vice President,
Counsel and Associate Secretary of the Company.
- ----------------------------------------------------------------------------
EXPERTS
- ----------------------------------------------------------------------------
The consolidated financial statements of Great-West Life & Annuity
Insurance Company at December 31, 1997 and 1996, and for each of the three years
in the period ended December 31, 1997 included in this prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
- ----------------------------------------------------------------------------
AVAILABLE INFORMATION
- ----------------------------------------------------------------------------
We have filed a registration statement ("Registration Statement") with
the Commission under the 1933 Act relating to the Contracts offered by this
Prospectus. This Prospectus has been filed as a part of the Registration
Statement and does not contain all of the information set forth in the
Registration Statement and exhibits thereto. Reference is hereby made to the
Registration Statement and exhibits for further information relating to us and
the Contracts. Statements contained in this Prospectus, as to the content of the
Contracts and other legal instruments, are summaries. For a complete statement
of the terms thereof, reference is made to the instruments as filed as exhibits
to the Registration Statement. The Registration Statement and its exhibits may
be inspected and copied at the offices of the Commission located at 450 Fifth
Street, N.W., Washington, D.C.
The Statement of Additional Information contains more specific
information relating to the Series Account and GWL&A. The Table of Contents of
the Statement of Additional Information is set forth below:
1. General Information
2. Great-West Life & Annuity Insurance Company and the Variable
Annuity-1 Series Account
3. Calculation of Annuity Payments
4. Postponement of Payments
5. Services
6. Withholding
7. Calculation of Performance Data
<PAGE>
Appendix A
The standard nonforfeiture rate in all states, other than those listed below is
3%.
Florida 0%
Mississippi 0%
Oklahoma 0%
<PAGE>
Appendix B
On the following pages are four examples of Market Value Adjustments
illustrating (1) increasing interest rates, (2) decreasing interest rates, (3)
flat interest rates (i and j are within .10% of each other), and (4) less than 6
months to maturity.
Example #1 - Increasing Interest Rates
Deposit: $25,000 on November 1, 1996
Maturity Date: December 31, 2005
Interest Guarantee Period: 10 years
i: assumed to be 6.15%
Surrender Date: July 1, 2000
j: 7.00%
Amount Surrendered: $10,000
N: 65
MVAF = {[(1 + i)/(1 + j + .10%)]N/12} - 1
= {[1.0615/1.071]65/12} - 1
= .952885 - 1
= .047115
MVA = (amount Transferred or surrendered) x MVAF
= $10,000 x - .047115
= - $471.15
Surrender Value = (amount Transferred or surrendered + MVA)
= ($10,000 + - $471.15)
= $9,528.85
Example #2 - Decreasing Interest Rates
Deposit: $25,000 on November 1, 1996
Maturity Date: December 31, 2005
Interest Guarantee Period: 10 years
i: assumed to be 6.15%
Surrender Date: July 1, 2000
j: 5.00%
Amount Surrendered: $10,000
N: 65
MVAF = {[(1 + i)/(1 + j + .10%)]N/12} - 1
= {[1.0615/1.05]65/12} - 1
= .0055323
MVAF = (amount Transferred or surrendered) x MVAF
= $10,000 x .0055323
= $553.23
Surrender Value = (amount Transferred or surrendered + MVA)
= ($10,000 + $553.23)
= $10,553.23
<PAGE>
Example #3 - Flat Interest Rates (i and j are within .10% of each other)
Deposit: $25,000 on November 1, 1996
Maturity Date: December 31, 2005
Interest Guarantee Period: 10 years
i: assumed to be 6.15%
Surrender Date: July 1, 2000
j: 6.24%
Amount Surrendered: $10,000
N: 65
MVAF = {[(1 + i)/(1 + j + .10%)]N/12} - 1
= {[1.0615/1.0634]65/12} - 1
= .99036 - 1
= -.00964
However, [i-j] is less than .10%, so MVAF = 0
MVAF = (amount Transferred or surrendered) x MVAF
= $10,000 x 0
= $0
Surrender Value = (amount Transferred or surrendered + MVA)
= ($10,000 + $0)
= $10,000
Example #4 - N is less than 6 (less than 6 months to maturity)
Deposit: $25,000 on November 1, 1996
Maturity Date: December 31, 2005
Interest Guarantee Period: 10 years
i: assumed to be 6.15%
Surrender Date: July 1, 2005
j: 7.00%
Amount Surrendered: $10,000
N: 5
MVAF = {[(1 + i)/(1 + j + .10%)]N/12} - 1
= {[1.0615/1.071]5/12} - 1
= .99629 - 1
= -.00371
However, N is less than 6, so MVAF = 0
MVAF = (amount Transferred or surrendered) x MVAF
= $10,000 x 0
= $0
Surrender Value = (amount Transferred or surrendered + MVA)
= ($10,000 + $0)
= $10,000
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 1997, 1996, AND 1995
AND INDEPENDENT AUDITORS' REPORT
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder
of Great-West Life & Annuity Insurance Company:
We have audited the accompanying consolidated balance sheets of Great-West Life
& Annuity Insurance Company (a wholly-owned subsidiary of The Great-West Life
Assurance Company) and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholder's equity, and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Great-West Life & Annuity Insurance
Company and subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
January 23, 1998
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS 1997 1996
- ------
-------------- ---------------
INVESTMENTS:
Fixed Maturities:
Held-to-maturity, at amortized cost (fair value $2,151,476
and $ 2,082,716 $ 1,992,681
$2,041,064)
Available-for-sale, at fair value (amortized cost $6,541,422
and 6,698,629 6,206,478
$6,151,519)
Common stock 39,021 19,715
Mortgage loans on real estate, net 1,235,594 1,487,575
Real estate, net 93,775 67,967
Policy loans 2,657,116 2,523,477
Short-term investments, available-for-sale (cost approximates 399,131 419,008
fair value)
-------------- ---------------
Total Investments 13,205,982 12,716,901
Cash 126,278 125,182
Reinsurance receivable 84,364 196,958
Deferred policy acquisition costs 255,442 282,780
Investment income due and accrued 165,827 198,441
Other assets 121,543 57,244
Premiums in course of collection 77,008 74,693
Deferred income taxes 193,820 214,404
Separate account assets 7,847,451 5,484,631
-------------- ---------------
TOTAL ASSETS $ 22,077,715 $ 19,351,234
============== ===============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY 1997 1996
- ------------------------------------
-------------- ---------------
POLICY BENEFIT LIABILITIES:
Policy reserves $ 11,102,719 $ 11,022,595
Policy and contract claims 375,499 372,327
Policyholders' funds 165,106 153,867
Experience refunds 84,935 87,399
Provision for policyholders' dividends 62,937 51,279
GENERAL LIABILITIES:
Due to Parent Corporation 126,656 151,431
Repurchase agreements 325,538 286,736
Commercial paper 54,058 84,682
Other liabilities 605,032 488,818
Undistributed earnings on
participating business 141,865 133,255
Separate account liabilities 7,847,451 5,484,631
-------------- ---------------
Total Liabilities 20,891,796 18,317,020
-------------- ---------------
STOCKHOLDER'S EQUITY:
Preferred stock, $1 par value,
50,000,000 shares authorized:
Series A, cumulative, 1500 shares authorized,
liquidation value of $100,000 per share,
600 shares issued and outstanding 60,000 60,000
Series B, cumulative, 1500 shares authorized,
liquidation value of $100,000 per share,
200 shares issued and outstanding 20,000 20,000
Series C, cumulative, 1500 shares authorized,
none outstanding
Series D, cumulative, 1500 shares authorized,
none outstanding
Series E, non-cumulative, 2,000,000
shares authorized, issued, and outstanding,
liquidation value of $20.90 per share 41,800 41,800
Common stock, $1 par value; 50,000,000 shares authorized;
7,032,000 shares issued and outstanding 7,032 7,032
Additional paid-in capital 690,748 664,265
Unrealized gains (losses) on securities available-for-sale, net 52,807 14,951
Retained earnings 313,532 226,166
-------------- ---------------
Total Stockholder's Equity 1,185,919 1,034,214
-------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 22,077,715 $ 19,351,234
============== ===============
</TABLE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------
1997 1996 1995
------------- ------------- -------------
REVENUES:
<S> <C> <C> <C>
Annuity contract charges and premiums $ 115,054 $ 91,881 $ 79,816
Life, accident, and health premiums earned (net of
premiums ceded (recaptured) totaling $(94,646),
$(104,250) and $60,880) 1,163,855 1,107,367 987,611
Net investment income 897,572 836,642 835,046
Net realized gains (losses) on investments 9,800 (21,078) 7,465
------------- ------------- -------------
2,186,281 2,014,812 1,909,938
------------- ------------- -------------
BENEFITS AND EXPENSES:
Life and other policy benefits (net of reinsurance
recoveries totaling $44,871, $52,675,
and $43,574) 543,903 515,750 557,469
Increase in reserves 245,811 229,198 98,797
Interest paid or credited to contractholders 527,784 561,786 562,263
Provision for policyholders' share of earnings
(losses)
on participating business 3,753 (7) 2,027
Dividends to policyholders 63,799 49,237 48,150
------------- ------------- -------------
1,385,050 1,355,964 1,268,706
Commissions 102,150 106,561 122,926
Operating expenses 419,616 336,719 314,810
Premium taxes 23,108 25,021 26,884
------------- -------------
-------------
1,929,924 1,824,265 1,733,326
INCOME BEFORE INCOME TAXES 256,357 190,547 176,612
------------- ------------- -------------
PROVISION FOR INCOME TAXES:
Current 103,794 77,134 88,366
Deferred (6,197) (21,162) (39,434)
------------- ------------- -------------
97,597 55,972 48,932
------------- ------------- -------------
NET INCOME $ 158,760 $ 134,575 $ 127,680
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(Dollars in Thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Net
Additional Unrealized
Preferred Stock Common Stock Paid-In Gains Retained
---------------------- ---------------------
Shares Amount Shares Amount Capital (Losses) Earnings Total
---------- ---------- ----------- -------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 2,000,800 $ 121,800 7,032,000 $ 7,032 $ 657,265 $ (78,427) $ 69,561 $ 777,231
Change in net unrealized
gains (losses) 137,190 137,190
Dividends (48,980) (48,980)
Net income 127,680 127,680
---------- ---------- ----------- -------- ---------- ----------- ---------- ------------
BALANCE, DECEMBER 31, 1995 2,000,800 121,800 7,032,000 7,032 657,265 58,763 148,261 993,121
Change in net unrealized
gains (losses) (43,812) (43,812)
Capital contributions 7,000 7,000
Dividends (56,670) (56,670)
Net income 134,575 134,575
---------- ---------- ----------- -------- ---------- ----------- ---------- ------------
BALANCE, DECEMBER 31, 1996 2,000,800 121,800 7,032,000 7,032 664,265 14,951 226,166 1,034,214
Change in net unrealized
gains (losses) 37,856 37,856
Capital contributions 26,483 26,483
Dividends (71,394) (71,394)
Net income 158,760 158,760
---------- ---------- ----------- -------- ---------- ----------- ---------- ------------
BALANCE, DECEMBER 31, 1997 2,000,800 $ 121,800 7,032,000 $ 7,032 $ 690,748 $ 52,807 $ 313,532 $ 1,185,919
========== ========== =========== ======== ========== =========== ========== ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------
1997 1996 1995
-------------- ------------- -------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 158,760 $ 134,575 $ 127,680
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain (loss) allocated to participating 3,753 (7) 2,027
policyholders
Amortization of investments 409 15,518 26,725
Realized losses (gains) on disposal of
investments
and provisions for mortgage loans and (9,800) 21,078 (7,465)
real estate
Amortization 46,929 49,454 49,464
Deferred income taxes (6,224) (20,258) (39,763)
Changes in assets and liabilities:
Policy benefit liabilities 498,114 358,393 346,975
Reinsurance receivable 112,594 136,966 (38,776)
Accrued interest and other receivables 30,299 24,778 (17,617)
Other, net 58,865 (8,076) 8,834
-------------- ------------- -------------
Net cash provided by operating 893,699 712,421 458,084
activities
-------------- ------------- -------------
INVESTING ACTIVITIES:
Proceeds from sales, maturities, and
redemptions of investments:
Fixed maturities
Held-to-maturity
Sales 18,821
Maturities and redemptions 359,021 516,838 655,993
Available-for-sale
Sales 3,174,246 3,569,608 4,211,649
Maturities and redemptions 771,737 803,369 253,747
Mortgage loans 248,170 235,907 260,960
Real estate 36,624 2,607 4,401
Common stock 17,211 1,888
Purchases of investments:
Fixed maturities
Held-to-maturity (439,269) (453,787) (490,228)
Available-for-sale (4,314,722) (4,753,154) (4,932,566)
Mortgage loans (2,532) (23,237) (683)
Real estate (64,205) (15,588) (5,302)
Common stock (29,608) (12,113) (4,218)
-------------- ------------- -------------
Net cash used in investing (243,327) (127,662) (27,426)
activities
-------------- ------------- -------------
(Continued)
</TABLE>
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------
1997 1996 1995
------------- ------------- -------------
FINANCING ACTIVITIES:
<S> <C> <C> <C>
Contract withdrawals, net of deposits $ (577,538) $ (413,568) $ (217,190)
Due to Parent Corporation (19,522) 1,457 (9,143)
Dividends paid (71,394) (56,670) (48,980)
Net commercial paper repayments (30,624) (172) (4,832)
Net repurchase agreements (repayments) borrowings 38,802 (88,563) (191,195)
Capital contributions 11,000 7,000
------------- ------------- -------------
Net cash used in financing activities (649,276) (550,516) (471,340)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH 1,096 34,243 (40,682)
CASH, BEGINNING OF YEAR 125,182 90,939 131,621
------------- ------------- -------------
CASH, END OF YEAR $ 126,278 $ 125,182 $ 90,939
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Income taxes $ 86,829 $ 103,700 $ 83,841
Interest 15,124 15,414 17,016
See notes to consolidated financial statements. (Concluded)
</TABLE>
<PAGE>
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996,
AND 1995 (Amounts in Thousands, except Share Amounts)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Great-West Life & Annuity Insurance Company (the Company)
is a wholly-owned subsidiary of The Great-West Life Assurance Company
(the Parent Corporation). The Company is an insurance company domiciled
in the State of Colorado. The Company offers a wide range of life
insurance, health insurance, and retirement and investment products to
individuals, businesses, and other private and public organizations
throughout the United States.
Basis of Presentation - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The consolidated financial
statements include the accounts of the Company and its subsidiaries. All
material intercompany transactions and balances have been eliminated in
consolidation.
Investments - Investments are reported as follows:
1. Management determines the classification of fixed maturities at
the time of purchase. Fixed maturities are classified as
held-to-maturity when the Company has the positive intent and
ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost unless fair value is less
than cost and the decline is deemed to be other than temporary,
in which case they are written down to fair value and a new cost
basis is established.
Fixed maturities not classified as held-to-maturity are
classified as available-for-sale. Available-for-sale securities
are carried at fair value, with the net unrealized gains and
losses reported as a separate component of stockholder's equity.
The net unrealized gains and losses in derivative financial
instruments used to hedge available-for-sale securities are
included in the separate component of stockholder's equity.
The amortized cost of fixed maturities classified as
held-to-maturity or available-for-sale is adjusted for
amortization of premiums and accretion of discounts using the
effective interest method over the estimated life of the related
bonds. Such amortization is included in net investment income.
Realized gains and losses, and declines in value judged to be
other-than-temporary are included in net realized gains (losses)
on investments.
2. Mortgage loans on real estate are carried at their unpaid
balances adjusted for any unamortized premiums or discounts and
any valuation reserves. Interest income is accrued on the unpaid
principal balance. Discounts and premiums are amortized to net
investment income using the effective interest method. Accrual of
interest is discontinued on any impaired loans where collection
of interest is doubtful.
The Company maintains an allowance for credit losses at a level
that, in management's opinion, is sufficient to absorb possible
credit losses on its impaired loans and to provide adequate
provision for any possible future losses in the portfolio.
Management's judgment is based on past loss experience, current
and projected economic conditions, and extensive situational
analysis of each individual loan. The measurement of impaired
loans is based on the fair value of the collateral.
3. Real estate is carried at the lower of cost or fair value, net of
costs of disposal. Effective January 1, 1996, the Company adopted
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". The implementation
of this statement had no material effect on the Company's
financial statements.
4. Investments in common stock are carried at fair value.
5. Policy loans are carried at their unpaid balances.
6. Short-term investments include securities purchased with initial
maturities of one year or less and are carried at amortized cost.
The Company considers short-term investments to be
available-for-sale and amortized cost approximates fair value.
Gains and losses realized on disposal of investments are determined on a
specific identification basis.
Cash - Cash includes only amounts in demand deposit accounts.
Deferred Policy Acquisition Costs - Policy acquisition costs, which
consist of sales commissions and other costs that vary with and are
primarily related to the production of new and renewal business, have
been deferred to the extent recoverable. Deferred costs associated with
the annuity products are being amortized over the life of the contracts
in proportion to the emergence of gross profits. Retrospective
adjustments of these amounts are made when the Company revises its
estimates of current or future gross profits. Deferred costs associated
with traditional life insurance are amortized over the premium paying
period of the related policies in proportion to premium revenues
recognized. Amortization of deferred policy acquisition costs totaled
$44,298, $47,089, and $48,054 in 1997, 1996, and 1995, respectively.
Separate Account - Separate account assets and related liabilities are
carried at fair value. The Company's separate accounts invest in shares
of Maxim Series Fund, Inc. and Orchard Series Fund, Inc., both
diversified, open-end management investment companies which are
affiliates of the Company, shares of other external mutual funds, or
government or corporate bonds.
Life Insurance and Annuity Reserves - Life insurance and annuity policy
reserves with life contingencies of $5,741,596 and $5,242,753, at
December 31, 1997 and 1996, respectively, are computed on the basis of
estimated mortality, investment yield, withdrawals, future maintenance
and settlement expenses, and retrospective experience rating premium
refunds. Annuity contract reserves without life contingencies of
$5,346,516 and $5,766,533, at December 31, 1997 and 1996, respectively,
are established at the contractholder's account value.
Reinsurance - Policy reserves ceded to other insurance companies are
carried as reinsurance receivable on the balance sheet (See Note 3). The
cost of reinsurance related to long-duration contracts is accounted for
over the life of the underlying reinsured policies using assumptions
consistent with those used to account for the underlying policies.
Policy and Contract Claims - Policy and contract claims include
provisions for reported claims in process of settlement, valued in
accordance with the terms of the related policies and contracts, as well
as provisions for claims incurred and unreported based primarily on
prior experience of the Company.
Participating Fund Account - Participating life and annuity policy
reserves are $3,901,297 and $3,591,077 at December 31, 1997 and 1996,
respectively. Participating business approximates 50.5% and 50.3% of the
Company's ordinary life insurance in force and 91.1% and 92.2% of
ordinary life insurance premium income at December 31, 1997 and 1996,
respectively.
The liability for undistributed earnings on participating business was
increased (decreased) by $8,610 and $(3,362) in 1997 and 1996, which
represented $3,753 and $(7) of gains (losses) on participating business,
increases (decreases) of $2,102 and $(2,924) to reflect the net change
in unrealized gains on securities classified as available-for-sale, net
of certain adjustments to policy reserves and income taxes, and
increases (decreases) of $2,755 and $(431) due to reinsurance
transactions (See Note 2).
The amount of dividends to be paid from undistributed earnings on
participating business is determined annually by the Board of Directors.
Amounts allocable to participating policyholders are consistent with
established Company practice.
The Company has established a Participating Policyholder Experience
Account (PPEA) for the benefit of all participating policyholders which
is included in the accompanying consolidated balance sheet. Earnings
associated with the operation of the PPEA are credited to the benefit of
all participating policyholders. In the event that the assets of the
PPEA are insufficient to provide contractually guaranteed benefits, the
Company must provide such benefits from its general assets.
The Company has also established a Participation Fund Account (PFA) for
the benefit of the participating policyholders previously transferred to
the Company from the Parent under an assumption reinsurance transaction.
The PFA is part of the PPEA. Earnings derived from the operation of the
PFA accrue solely for the benefit of the acquired participating
policyholders.
Recognition of Premium Income and Benefits and Expenses - Life insurance
premiums are recognized as earned. Annuity premiums with life
contingencies are recognized as received. Accident and health premiums
are earned on a monthly pro rata basis. Revenues for annuity and other
contracts without significant life contingencies consist of contract
charges for the cost of insurance, contract administration, and
surrender fees that have been assessed against the contract account
balance during the period. Benefits and expenses on policies with life
contingencies are associated with premium income by means of the
provision for future policy benefit reserves, resulting in recognition
of profits over the life of the contracts. The average crediting rate on
annuity products was approximately 6.6%, 6.8%, and 7.2% in 1997, 1996,
and 1995.
Income Taxes - Income taxes are recorded using the asset and liability
approach which requires, among other provisions, the recognition of
deferred tax assets and liabilities for expected future tax consequences
of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, all
expected future events (other than the enactments or changes in the tax
laws or rules) are considered. Although realization is not assured,
management believes it is more likely than not that the deferred tax
asset, net of a valuation allowance, will be realized.
Repurchase Agreements and Securities Lending - The Company enters into
repurchase agreements with third-party broker-dealers in which the
Company sells securities and agrees to repurchase substantially similar
securities at a specified date and price. Such agreements are accounted
for as collateralized borrowings. Interest expense on repurchase
agreements is recorded at the coupon interest rate on the underlying
securities. The repurchase fee received or paid is amortized over the
term of the related agreement and recognized as an adjustment to
investment income.
The Company will implement Statement of Financial Accounting Standards
(SFAS) No. 125 "Accounting for Transfer and Servicing of Financial
Assets and Extinguishments of Liabilities" in 1998 as it relates to
repurchase agreements and securities lending arrangements. Management
estimates the effect of the change will not have a material affect on
the Company's financial statements.
Derivatives - The Company makes limited use of derivative financial
instruments to manage interest rate, market, and foreign exchange risk.
Such hedging activity consists of interest rate swap agreements,
interest rate floors and caps, foreign currency exchange contracts and
equity swaps. The differential paid or received under the terms of these
contracts are recognized as an adjustment to net investment income on
the accrual method. Gains and losses on foreign exchange contracts are
deferred and recognized in net investment income when the hedged
transactions are realized.
Interest rate swap agreements are used to convert the interest rate on
certain fixed maturities from a floating rate to a fixed rate. Interest
rate swap transactions generally involve the exchange of fixed and
floating rate interest payment obligations without the exchange of the
underlying principal amount. Interest rate floors and caps are interest
rate protection instruments that require the payment by a counter-party
to the Company of an interest rate differential. The differential
represents the difference between current interest rates and an
agreed-upon rate, the strike rate, applied to a notional principal
amount. Foreign currency exchange contracts are used to hedge the
foreign exchange rate risk associated with bonds denominated in other
than U.S. dollars. Equity swap transactions generally involve the
exchange of variable market performance of a basket of securities for a
fixed interest rate.
Although derivative financial instruments taken alone may expose the
Company to varying degrees of market and credit risk when used solely
for hedging purposes, these instruments typically reduce overall market
and interest rate risk. The Company controls the credit risk of its
financial contracts through credit approvals, limits, and monitoring
procedures. As the Company generally enters into transactions only with
high quality institutions, no losses associated with non-performance on
derivative financial instruments have occurred or are expected to occur.
2. RELATED-PARTY TRANSACTIONS
On June 30, 1997 the Company recaptured all remaining pieces of an
individual participating insurance block of business previously
reinsured to the Parent Corporation on December 31, 1992. The Company
recorded, at estimated fair value, the following at June 30, 1997 as a
result of this transaction:
<TABLE>
Assets Liabilities and Stockholder's
Equity
-------- -------------------------------
<S> <C> <C>
Cash $ 160,000 Policy reserves $ 155,798
Bonds 17,975 Due to parent corporation 9,373
Other 60 Deferred income taxes 2,719
Undistributed earnings on
participating business (855)
Stockholder's equity 11,000
----------- ----------
$ 178,035 $ 178,035
=========== ==========
</TABLE>
<PAGE>
On October 31, 1996 the Company recaptured certain pieces of an
individual participating insurance block of business previously
reinsured to the Parent Corporation on December 31, 1992. The Company
recorded, at estimated fair value, the following at October 31, 1996 as
a result of this transaction:
<TABLE>
Assets Liabilities and Stockholder's
Equity
--------- -------------------------------
<S> <C> <C>
Cash $ 162,000 Policy reserves $ 164,839
Mortgages 19,753 Due to parent corporation 9,180
Other 118 Deferred income taxes 1,283
Undistributed earnings on
participating business (431)
Stockholder's equity 7,000
============ ===========
$ 181,871 $ 181,871
============ ===========
</TABLE>
Effective January 1, 1997 all employees of the U.S. operations of the
Parent Corporation and the related benefit plans were transferred to the
Company. All related employee benefit plan assets and liabilities were
also transferred to the Company (see Note 9). The transfer did not have
a material effect on the Company's operating expenses as the costs
associated with the employees and the benefit plans were charged
previously to the Company under administrative service agreements
between the Company and the Parent Corporation.
Prior to January 1997, the Parent Corporation administered, distributed,
and underwrote business for the Company and administered the Company's
investment portfolio under various administrative agreements. As of
January 1, 1997, the Company performs these services for the U.S.
operations of the Parent Corporation. The following represents
allocations between the two companies for services provided pursuant to
these service agreements:
<TABLE>
Years Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Investment management revenue (expense) $ 801 $ (14,800) $ (15,182)
Administrative and underwriting revenue 6,292 (304,599) (301,529)
(payments)
</TABLE>
At December 31, 1997 and 1996, due to Parent Corporation includes $8,957
and $31,639 due on demand and $117,699 and $119,792 of notes payable
which bear interest and mature at various dates through December 31,
2005. These notes may be prepaid in whole or in part at any time without
penalty; the issuer may not demand payment before the maturity date. The
due on demand to the Parent Corporation bears interest at the public
bond rate (7.1% and 7.0% at December 31, 1997 and 1996, respectively)
while the remainder bear interest at various rates ranging from 6.6% to
9.5%.
3. REINSURANCE
In the normal course of business, the Company seeks to limit its
exposure to loss on any single insured and to recover a portion of
benefits paid by ceding risks to other insurance enterprises under
excess coverage and co-insurance contracts. The Company retains a
maximum of $1.5 million of coverage per individual life.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company; consequently, allowances are
established for amounts deemed uncollectible. The Company evaluates the
financial condition of its reinsurers and monitors concentrations of
credit risk arising from similar geographic regions, activities, or
economic characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. At December 31, 1997 and
1996, the reinsurance receivable had a carrying value of $84,364 and
$196,958, respectively.
Total reinsurance premiums assumed from the Parent Corporation were
$1,712, $1,693, and $1,606 in 1997, 1996, and 1995, respectively.
The Company considers all accident and health policies to be
short-duration contracts. The following schedule details life insurance
in force and life and accident/health premiums:
<TABLE>
Assumed
Ceded Primarily Percentage
Primarily From of Amount
to
Gross the Parent Other Net Assumed to
Amount Corporation Companies Amount Net
------------- ------------ ------------ ------------- -----------
December 31, 1997:
Life insurance in
force:
<S> <C> <C> <C> <C> <C>
Individual $ 24,598,679 $ 4,040,398 $ 3,667,235 $ 24,225,516 15.1%
Group 51,179,343 2,031,477 53,210,820 3.8%
------------- ------------ ------------ -------------
Total $ 75,778,022 $ 4,040,398 $ 5,698,712 $ 77,436,336
============= ============ ============ =============
Premiums:
Life insurance $ 361,093 $ (127,291)$ 19,923 $ 508,307 3.9%
Accident/health 628,398 32,645 59,795 655,548 9.1%
------------- ------------ ------------ -------------
Total $ 989,491 $ (94,646)$ 79,718 $ 1,163,855
============= ============ ============ =============
December 31, 1996:
Life insurance in
force:
Individual $ 23,409,823 $ 5,246,079 $ 3,482,118 $ 21,645,862 16.1%
Group 47,682,237 1,817,511 49,499,748 3.7%
------------- ------------ ------------ -------------
Total $ 71,092,060 $ 5,246,079 $ 5,299,629 $ 71,145,610
============= ============ ============ =============
Premiums:
Life insurance $ 334,127 $ (111,743)$ 19,633 $ 465,503 4.2%
Accident/health 592,577 7,493 56,780 641,864 8.8%
------------- ------------ ------------ -------------
Total $ 926,704 $ (104,250)$ 76,413 $ 1,107,367
============= ============ ============ =============
December 31, 1995:
Life insurance in
force:
Individual $ 22,388,520 $ 7,200,882 $ 3,476,784 $ 18,664,422 18.6%
Group 48,415,592 1,954,313 50,369,905 3.9%
============= ============ ============ =============
Total $ 70,804,112 $ 7,200,882 $ 5,431,097 $ 69,034,327
============= ============ ============ =============
Premiums:
Life insurance $ 339,342 $ 51,688 $ 21,028 $ 308,682 6.8%
Accident/health 623,626 9,192 64,495 678,929 9.5%
------------- ------------ ------------ -------------
Total $ 962,968 $ 60,880 $ 85,523 $ 987,611
============= ============ ============ =============
</TABLE>
<PAGE>
<TABLE>
4. NET INVESTMENT INCOME
Net investment income is summarized as follows:
Years Ended December 31,
------------------------------------------------
1997 1996 1995
--------------- --------------- --------------
Investment income:
Fixed maturities and short-term
<S> <C> <C> <C>
investments $ 633,975 $ 601,913 $ 591,561
Mortgage loans on real estate 118,274 140,823 171,008
Real estate 20,990 5,292 3,936
Policy loans 194,826 175,746 163,547
Other 22,119 3,321
--------------- --------------- --------------
990,184 927,095 930,052
Investment expenses, including
interest on amounts charged
by the Parent Corporation
of $9,758, $11,282, and $10,778 92,612 90,453 95,006
--------------- --------------- --------------
Net investment income $ 897,572 $ 836,642 $ 835,046
=============== =============== ==============
5. NET REALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized gains (losses) on investments are as follows:
Years Ended December 31,
-------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
Realized gains (losses):
Fixed Maturities $ 15,966 $ (11,624) $ 28,166
Mortgage loans on real estate 1,081 1,143 1,309
Real estate 363 (10)
Provisions (7,610) (10,597) (22,000)
--------------- --------------- ---------------
Net realized gains (losses) on $ 9,800 $ (21,078) $ 7,465
investments
=============== =============== ===============
</TABLE>
<PAGE>
6. SUMMARY OF INVESTMENTS
Fixed maturities owned at December 31, 1997 are summarized as follows:
<TABLE>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
---------- --------- ---------- ----------- -----------
Held-to-Maturity:
U.S. Treasury Securities
<S> <C> <C> <C> <C>
and obligations of U.S. $ $ 1,186 $ 25 $ 27,044 $ 25,883
Government 25,883
Agencies - Other:
Collateralized mortgage 174
obligations 5,006 5,180 5,006
Public utilities 11,214 3
245,394 256,605 245,394
Corporate bonds 1,668,710 57,036 3,069 1,722,677
1,668,710
Foreign governments 659
10,268 10,927 10,268
State and municipalities 1,588
127,455 129,043 127,455
--------- ---------- -----------
---------- -----------
$ 2,082,716 $ 71,857 $ 3,097 $ 2,151,476 $
2,082,716
========== ========= ========== =========== ===========
Available-for-Sale:
U.S. Treasury Securities
and
obligations of U.S.
Government
Agencies
Collateralized mortgage
obligations $ $ 17,339 $ 310 $ $
652,975 670,004 670,004
Direct mortgage
pass-through
certificates 7,911 2,668
917,216 922,459 922,459
Other 1,794 244
297,337 298,887 298,887
Collateralized mortgage
obligations 19,494 1,453
682,158 700,199 700,199
Public utilities 8,716 1,320
549,435 556,831 556,831
Corporate bonds 3,265,039 107,740 4,350
3,368,429 3,368,429
Foreign governments 4,115 60
131,586 135,641 135,641
State and municipalities 503
45,676 46,179 46,179
-----------
---------- --------- ---------- -----------
$ 6,541,422 $ 167,612 $ 10,405 $ $
6,698,629 6,698,629
========== ========= ========== =========== ===========
</TABLE>
<PAGE>
6. SUMMARY OF INVESTMENTS [Continued]
Fixed maturities owned at December 31, 1996 are summarized as follows:
<TABLE>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
---------- ---------- ---------- ---------- -----------
Held-to-Maturity:
U.S. Treasury Securities
and
<S> <C> <C> <C>
obligations of U.S. $ $ 630 $ 106 $ $
Government 10,935 11,459 10,935
Agencies - Other:
Public utilities 12,755 320
284,954 297,389 284,954
Corporate bonds 1,634,745 41,195 7,360 1,668,580
1,634,745
Foreign governments 556 3
12,577 13,130 12,577
State and municipalities 1,051 15
49,470 50,506 49,470
---------- ---------- ----------
---------- -----------
$ 1,992,681 $ 56,187 $ 7,804 $ 2,041,064 $
1,992,681
========== ========== ========== ========== ===========
Available-for-Sale:
U.S. Treasury Securities
and
obligations of U.S.
Government
Agencies:
Collateralized mortgage
obligations $ $ 8,058 $ 3,700 $ $
658,612 662,970 662,970
Direct mortgage
pass-through
certificates 5,093 10,908
844,291 838,476 838,476
Other 596 2,686
359,220 357,130 357,130
Collateralized mortgage
obligations 13,619 3,553
614,773 624,839 624,839
Public utilities 6,523 5,375
628,382 629,530 629,530
Corporate bonds 2,907,875 56,551 5,250 2,959,176
2,959,176
Foreign governments 1,762 5,673
110,013 106,102 106,102
State and municipalities 21 119
28,353 28,255 28,255
-----------
---------- ---------- ---------- ----------
$ 6,151,519 $ 92,223 $ 37,264 $ 6,206,478 $
6,206,478
========== ========== ========== ========== ===========
</TABLE>
The collateralized mortgage obligations consist primarily of sequential
and planned amortization classes with final stated maturities of two to
thirty years and average lives of less than one to fifteen years.
Prepayments on all mortgage-backed securities are monitored monthly and
amortization of the premium and/or the accretion of the discount
associated with the purchase of such securities is adjusted by such
prepayments.
In November 1995, the Financial Accounting Standards Board issued a
special report entitled "A Guide to Implementation of Statement of
Financial Accounting Standards No. 115 (SFAS No. 115) on Accounting for
Certain Investments in Debt and Equity Securities". In accordance with
the adoption of this guidance, the Company reassessed the classification
of its investment portfolio in December 1995 and reclassed securities
totalling $2,119,814 from held-to-maturity to available-for-sale. In
connection with this reclassification, an unrealized gain, net of
related adjustments, of $23,449 was recognized in stockholder's equity
at the date of transfer.
See Note 8 for additional information on policies regarding estimated
fair value of fixed maturities.
The amortized cost and estimated fair value of fixed maturity
investments at December 31, 1997, by projected maturity, are shown
below. Actual maturities will likely differ from these projections
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
<TABLE>
Held-to-Maturity Available-for-Sale
------------------------- -------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 286,088 $ 290,164 $ 447,703 $ 462,719
Due after one year through five 787,376 809,237 1,182,390 1,209,692
years
Due after five years through ten 718,818 751,753 842,019 865,153
years
Due after ten years 129,957 137,190 447,642 466,949
Mortgage-backed securities 5,006 5,180 2,252,349 2,292,662
Asset-backed securities 155,471 157,952 1,369,319 1,401,454
------------ -----------
=========== ============ ===========
$ 2,082,716 $ 2,151,476 $ 6,541,422 $ 6,698,629
============ =========== ============ ===========
</TABLE>
Proceeds from sales of securities available-for-sale were $3,174,246,
$3,569,608, and $4,211,649 during 1997, 1996, and 1995, respectively.
The realized gains on such sales totaled $20,543, $24,919, and $39,755
for 1997, 1996, and 1995, respectively. The realized losses totaled
$10,643, $40,748, and $15,516 for 1997, 1996, and 1995, respectively.
During 1997, 1996, and 1995 held-to-maturity securities with an
amortized cost of $0, $0, and $18,087 were sold due to credit
deterioration with insignificant realized gains and losses.
At December 31, 1997 and 1996, pursuant to fully collateralized
securities lending arrangements, the Company had loaned $162,817 and
$230,419 of fixed maturities, respectively.
The Company engages in hedging activities to manage interest rate and
exchange risk. The following table summarizes the 1997 financial hedge
instruments:
<TABLE>
Notional Strike/Swap
December 31, 1997 Amount Rate Maturity
--------------------------------- --------------- ---------------------- -----------------
<S> <C> <C> <C>
Interest Rate Floor $ 100,000 4.5% (LIBOR) 1999
Interest Rate Caps 565,000 6.75% to 11.82%(CMT) 1999 to 2002
Interest Rate Swaps 212,139 6.20% to 9.35% 01/98 to 02/2003
Foreign Currency
Exchange Contracts 57,168 N/A 09/98 to 07/2006
Equity Swap 100,000 5.64% 12/98
</TABLE>
<PAGE>
The following table summarizes the 1996 financial hedge instruments:
<TABLE>
Notional Strike/Swap
December 31, 1996 Amount Rate Maturity
--------------------------------- --------------- ---------------------- ---------------
<S> <C> <C> <C>
Interest Rate Floor $ 100,000 4.5% [LIBOR] 1999
Interest Rate Caps 260,000 11.0% to 11.82%[CMT] 2000 to 2001
Interest Rate Swaps 187,847 6.20% to 9.35% 01/98 to 02/2003
Foreign Currency
Exchange Contracts 61,012 N/A 09/98 to 03/2003
</TABLE>
LIBOR - London Interbank Offered Rate
CMT - Constant Maturity Treasury Rate
The Company has established specific investment guidelines designed to
emphasize a diversified and geographically dispersed portfolio of
mortgages collateralized by commercial and industrial properties located
in the United States. The Company's policy is to obtain collateral
sufficient to provide loan-to-value ratios of not greater than 75% at
the inception of the mortgages. At December 31, 1997 approximately 32%
and 10% of the Company's mortgage loans were collateralized by real
estate located in California and Michigan, respectively.
The following represents impairments and other information with respect
to impaired loans:
<TABLE>
1997 1996
----------- -----------
<S> <C> <C> <C>
Loans with related allowance for credit losses of $2,493 and $ 13,193 $ 16,443
$2,793
Loans with no related allowance for credit losses 20,013 31,709
Average balance of impaired loans during the year 37,890 39,064
Interest income recognized [while impaired] 2,428 923
Interest income received and recorded [while impaired] using
the 2,484 1,130
cash basis method of recognition
</TABLE>
As part of an active loan management policy and in the interest of
maximizing the future return of each individual loan, the Company may
from time to time alter the original terms of certain loans. These
restructured loans, all performing in accordance with their modified
terms that are not impaired, aggregated $64,406, and $68,254 at December
31, 1997, and 1996, respectively.
The following table presents changes in the allowance for credit losses:
<TABLE>
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balance, beginning of year $ 65,242 63,994 $ 57,987 $
Provision for loan losses 4,521 4,470 15,877
Chargeoffs (2,521) (3,468) (10,480)
Recoveries 246 610
================ ================ ================
Balance, end of year $ 67,242 65,242 $ 63,994 $
================ ================ ================
</TABLE>
<PAGE>
7. COMMERCIAL PAPER
The Company has a commercial paper program which is partially supported
by a $50,000 standby letter-of-credit. At December 31, 1997, commercial
paper outstanding has maturities ranging from 41 to 99 days and interest
rates ranging from 5.6% to 5.8%. At December 31, 1996, maturities ranged
from 49 to 123 days and interest rates ranged from 5.4% to 5.6%.
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table provides estimated fair value for all assets and
liabilities and hedge contracts considered to be financial instruments:
<TABLE>
December 31,
-------------------------------------------------------
1997 1996
---------------------------- --------------------------
Estimated
Carrying Estimated Carrying Fair
Amount Fair Value Amount Value
------------ -------------- ----------- -------------
ASSETS:
Fixed maturities and
short-
<S> <C> <C> <C> <C>
term investments $ 9,180,476 $ 9,249,235 $ 8,618,167 $ 8,666,550
Mortgage loans on
real estate 1,235,594 1,261,949 1,487,575 1,506,162
Policy loans 2,657,116 2,657,116 2,523,477 2,523,477
Common stock 39,021 39,021 19,715 19,715
LIABILITIES:
Annuity contract reserves
without life 5,346,516 5,373,818 5,766,533 5,808,095
contingencies
Policyholders' funds 165,106 165,106 153,867 153,867
Due to Parent Corporation 126,656 124,776 151,431 154,479
Repurchase agreements 325,538 325,538 286,736 286,736
Commercial paper 54,058 54,058 84,682 84,682
HEDGE CONTRACTS:
Interest rate floor 25 25 62 124
Interest rate cap 130 130 173 173
Interest rate swaps 4,265 4,265 4,746 4,746
Foreign currency
exchange contracts 3,381 3,381 (8,954) (8,954)
Equity swaps 856 856
</TABLE>
The estimated fair value of financial instruments has been determined
using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required to
interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented are not necessarily indicative of
the amounts the Company could realize in a current market exchange. The
use of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
The estimated fair value of fixed maturities that are publicly traded
are obtained from an independent pricing service. To determine fair
value for fixed maturities not actively traded, the Company utilized
discounted cash flows calculated at current market rates on investments
of similar quality and term.
Mortgage loans fair value estimates generally are based on a discounted
cash flow basis. A discount rate "matrix" is incorporated whereby the
discount rate used in valuing a specific mortgage generally corresponds
to that mortgage's remaining term. The rates selected for inclusion in
the discount rate "matrix" reflect rates that the Company would quote if
placing loans representative in size and quality to those currently in
the portfolio.
Policy loans accrue interest generally at variable rates with no fixed
maturity dates and, therefore, estimated fair value approximates
carrying value.
The fair value of annuity contract reserves without life contingencies
is estimated by discounting the cash flows to maturity of the contracts,
utilizing current credited rates for similar products.
The estimated fair value of policyholders' funds is the same as the
carrying amount as the Company can change the crediting rates with 30
days notice.
The estimated fair value of due to Parent Corporation is based on
discounted cash flows at current market spread rates on high quality
investments.
The carrying value of repurchase agreements and commercial paper is a
reasonable estimate of fair value due to the short-term nature of the
liabilities.
The estimated fair value of financial hedge instruments, all of which
are held for other than trading purposes, is the estimated amount the
Company would receive or pay to terminate the agreement at each
year-end, taking into consideration current interest rates and other
relevant factors. Included in the net gain position for interest rates
swaps are $0 and $160 of unrealized losses in 1997 and 1996,
respectively. Included in the net loss position for foreign currency
exchange contracts are $0 and $8,954 of loss exposures in 1997 and 1996,
respectively.
9. EMPLOYEE BENEFIT PLANS
Effective January 1, 1997, all employees of the U.S. operations of the
Parent Corporation and the related benefit plans were transferred to
the Company. See Note 2 for further discussion.
The Company's defined benefit pension plan (pension plan) covers
substantially all of its employees. The benefits are based on years of
service, age at retirement, and the compensation during the last seven
years of employment. The Company's funding policy is to contribute
annually the maximum amount that can be deducted for federal income tax
purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned
in the future. Investments of the pension plan are managed by the
Company and invested primarily in investment contracts and separate
accounts.
The Company's Parent had previously accounted for the pension plan under
the Canadian Institute of Chartered Accountants (CICA) guidelines and
had recorded a prepaid pension asset of $19,091. As generally accepted
accounting principles do not materially differ from CICA guidelines and
the transfer is between related parties, the prepaid pension asset was
transferred at cost. As a result, the Company recorded the following
effective January 1, 1997:
<TABLE>
<S> <C> <C>
Prepaid pension cost $ 19,091 Undistributed earnings $ 3,608
on
participating
business
Stockholder's equity 15,483
=============== ==============
$ 19,091 $ 19,091
=============== ==============
</TABLE>
<PAGE>
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
87, "Employers Accounting for Pensions" effective January 1, 1997,
immediately following the transfer. The following table sets forth the
pension plan's funded status and amounts at December 31, 1997, in
accordance with SFAS No. 87:
<TABLE>
Actuarial present value of accumulated benefit obligation,
<S> <C> <C>
including vested benefits of $88,235 $ 91,387
Actuarial present value of projected benefit obligation
for service rendered to date 112,331
Plan assets at fair value 162,422
--------------
Plan assets in excess of projected benefit obligation 50,091
Unrecognized net (gain) loss from past experience
different from that assumed (8,595)
Unrecognized net obligation being recognized over 15 years (21,198)
--------------
Prepaid pension cost included in other assets $ 20,298
==============
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of
the projected benefit obligation were 7.0% and 4.5%, respectively.
Components of net pension cost for the year ended December 31, 1997 were
as follows:
Service cost - benefits earned during the period $ 5,491
Interest accrued on projected benefit obligation 7,103
Return on plan assets (28,072)
Net amortization and deferral 14,271
---------------
Net pension benefit $ (1,207)
===============
</TABLE>
The Company also sponsors a post-retirement medical plan (medical plan)
which provides health benefits to employees who have worked for 15 years
and attained age 65 while in service with the Company. The medical plan
is contributory and contains other cost sharing features which may be
adjusted annually for the expected general inflation rate. The Company's
policy will be to fund the cost of the medical plan benefits in amounts
determined at the discretion of management. The Plan as of January 1,
1997 was not funded. The Parent Company was not required under CICA
guidelines to record any liability related to the Plan.
Effective January 1, 1997, on the date of transfer, the Company has
adopted SFAS No. 106, "Post-retirement Benefits Other Than Pensions."
The Company has elected to delay recognition of the unfunded accumulated
post-retirement benefit obligation and has set up a transition
obligation to be amortized over 20 years.
<PAGE>
The following table sets forth the medical plan status of December 31, 1997:
<TABLE>
Accumulated post-retirement benefit obligation:
<S> <C>
Retirees $ 4,985
Fully eligible active plan participants 2,438
Other active plan participants 12,031
---------------
19,454
Unrecognized net gain (loss) from past experience different from (1,500)
that assumed
Unrecognized net transition obligation at December 31, 1997,
being recognized over 20 years (15,352)
---------------
Accrued post-retirement benefit obligation included in other $ 2,602
liabilities
===============
</TABLE>
For measurement purposes, a 7.5% annual rate of increase in the per
capita cost of covered health care benefits was assumed. The health care
cost trend rate assumption has a significant effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend
rates by 1% in each year would increase the accumulated post-retirement
benefit obligation as of December 31, 1997 by $3,847.
The weighted average discount rate used in determining the accumulated
post-retirement benefit obligation was 7.0%.
Components of net other post-retirement benefit cost for the year ended
December 31, 1997 were as follows:
<TABLE>
<S> <C>
Service cost - benefits earned during the year $ 1,158
Interest accrued on benefits obligation 1,191
Net amortization and deferral 808
---------------
Net other post-retirement benefit cost $ 3,157
===============
</TABLE>
The Company sponsors a defined contribution 401(k) retirement plan which
provides eligible participants with the opportunity to defer up to 15%
of compensation. The Company matches 50% of the first 5% of participant
contributions. Company contributions for the year ended December 31,
1997 totalled $3,475.
10. FEDERAL INCOME TAXES
The following is a reconciliation between the federal income tax rate
and the Company's effective rate:
<TABLE>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Federal tax rate 35.0 % 35.0 % 35.0 %
Change in tax rate resulting from:
Settlement of prior years tax (6.5) (4.7)
Provision for contingencies 8.4
Change in valuation allowance 0.8 (7.8)
Investment income not subject to (0.3) (1.0) (0.5)
federal tax
State and environmental taxes 0.6 0.7 0.7
Other, net 0.9 (1.4) 0.3
======== ======== ========
Total 38.1 % 29.4 % 27.7 %
======== ======== ========
</TABLE>
<PAGE>
Temporary differences which give rise to the deferred tax assets and liabilities
as of December 31, 1997 and 1996 are as follows:
<TABLE>
1997 1996
-------------------------- --------------------------
Deferred Deferred Tax Deferred Deferred Tax
Tax Asset Liability Tax Asset Liability
----------- ------------- ----------- -------------
<S> <C> <C> <C>
Policyholder reserves $ 163,975 $ $ 151,239 $
Deferred policy acquisition 47,463 57,031
costs
Deferred acquisition cost
proxy tax 79,954 70,413
Investment assets 2,226 35,658
Net operating loss 9,427 12,295
carryforwards
Other 10,729 5,366
----------- ------------ ---------- ------------
Subtotal 255,582 58,192 274,971 57,031
Valuation allowance (3,570) (3,536)
=========== ============ ========== ============
Total Deferred Taxes $ 252,012 $ 58,192 $ 271,435 $ 57,031
=========== ============ ========== ============
</TABLE>
Amounts related to investment assets above include $30,085 and $8,530
related to the unrealized gains on the Company's fixed maturities
available-for-sale at December 31, 1997 and 1996, respectively.
The Company files a separate tax return and, therefore, losses incurred
by subsidiaries cannot be offset against operating income of the
Company. At December 31, 1997, the Company's subsidiaries have
approximately $26,934 of net operating loss carryforwards, expiring
through the year 2011. The tax benefit of subsidiaries' net operating
loss carryforwards, net of a valuation allowance of $3,570 and $3,536
are included in the deferred tax assets at December 31, 1997 and 1996,
respectively.
The Company's valuation allowance was increased/(decreased) in 1997,
1996, and 1995 by $34, $1,463, and $(13,145), respectively, as a result
of the re-evaluation by management of future estimated taxable income in
the subsidiaries.
Under pre-1984 life insurance company income tax laws, a portion of life
insurance company gain from operations was not subject to current income
taxation but was accumulated, for tax purposes, in a memorandum account
designated as "policyholders' surplus account." The aggregate
accumulation in the account is $7,742 and the Company does not
anticipate any transactions which would cause any part of the amount to
become taxable. Accordingly, no provision has been made for possible
future federal income taxes on this accumulation.
Pursuant to a December 31, 1993 agreement between the Company and its
Parent whereby the Company assumed responsibility for the Parent
Corporation's income tax liability for fiscal years prior to 1994, the
Company had previously recorded a contingent liability provision. The
Company's 1997 and 1996 results of operations include a release of
$47,750 and $25,600 from the provision, to reflect the resolution of
certain tax issues related to 1990 - 1991 and 1988 - 1989 audit years,
respectively, with the Internal Revenue Service (IRS). In addition, in
1997 the tax provision was increased for contingent items related to
open tax years. The IRS is currently auditing tax years 1992 and 1993.
In the opinion of Company management, the amounts paid or accrued are
adequate; however, it is possible that the Company's accrued amounts may
change as a result of the completion of the IRS audits.
<PAGE>
11. STOCKHOLDER'S EQUITY, DIVIDEND RESTRICTIONS, AND OTHER MATTERS
All of the Company's outstanding series of preferred stock are owned by
the Parent Corporation. The dividend rate on the Series A Stated Rate
Auction Preferred Stock (STRAPS) is 7.3% through December 30, 2002. The
Series A STRAPS are redeemable at the option of the Company on or after
December 29, 2002 at a price of $100,000 per share, plus accumulated and
unpaid dividends.
Through December 30, 1997, the Series B STRAPS had a dividend rate of
5.8%. Thereafter, short-term dividend periods of approximately 49 days
will be in effect. The dividend rate for each short-term dividend period
will be determined in accordance with a formula set out in the share
conditions. The Series B STRAPS are redeemable at the option of the
Company at the end of any short-term dividend period, at a price of
$100,000 per share, plus accumulated and unpaid dividends.
The Company's Series E 7.5% non-cumulative, non-redeemable preferred
shares are redeemable by the Company after April 1, 1999. The shares are
convertible into common shares at the option of the holder on or after
September 30, 1999, at a conversion price negotiated between the holder
and the Company or at a formula determined conversion price in
accordance with the share conditions.
The Company's net income and capital and surplus, as determined in
accordance with statutory accounting principles and practices for
December 31 are as follows:
<TABLE>
1997 1996 1995
-------------- -------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Net Income $ 181,312 $ 180,634 $ 114,931
Capital and Surplus 759,429 713,324 653,479
</TABLE>
The maximum amount of dividends which can be paid to stockholders by
insurance companies domiciled in the State of Colorado is subject to
restrictions relating to statutory surplus and statutory net gain from
operations. Statutory surplus and net gains from operations at December
31, 1997 were $759,429 and $180,834 (unaudited), respectively. The
Company should be able to pay up to $180,834 (unaudited) of dividends in
1998.
Dividends of $8,854, $8,587, and $9,217, were paid on preferred stock in
1997, 1996, and 1995, respectively. In addition, dividends of $62,540,
$48,083, and $39,763, were paid on common stock in 1997, 1996 and 1995,
respectively. Dividends are paid as determined by the Board of
Directors.
The Company is involved in various legal proceedings which arise in the ordinary
course of its business. In the opinion of management, after consultation with
counsel, the resolution of these proceedings should not have a material adverse
effect on its financial position or results of operations.
<PAGE>
II-22
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of the issuance and distribution of the
Contracts, other than commissions on sales of the Contracts are as follows:
Securities and Exchange Commission fee $ 68,965.52
---------
Accounting fees and expenses $ 5,000.00
---------
Legal fees and expenses $ 20,000.00
---------
Item 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Provisions exist under the Colorado Business Corporation Act and the
Bylaws of GWL&A whereby GWL&A may indemnify a director, officer, or controlling
person of GWL&A against liabilities arising under the Securities Act of 1933.
The following excerpts contain the substance of these provisions:
Colorado Business Corporation Act
Article 109 - INDEMNIFICATION
Section 7-109-101. Definitions.
As used in this Article:
(1) "Corporation" includes any domestic or foreign entity that is a
predecessor of the corporation by reason of a merger, consolidation, or
other transaction in which the predecessor's existence ceased upon
consummation of the transaction.
(2) "Director" means an individual who is or was a director of a
corporation or an individual who, while a director of a corporation, is
or was serving at the corporation's request as a director, officer,
partner, trustee, employee, fiduciary or agent of another domestic or
foreign corporation or other person or employee benefit plan. A director
is considered to be serving an employee benefit plan at the
corporation's request if his or her duties to the corporation also
impose duties on or otherwise involve services by, the director to the
plan or to participants in or beneficiaries of the plan.
(3) "Expenses" includes counsel fees.
(4) "Liability" means the obligation incurred with respect to a
proceeding to pay a judgment, settlement, penalty, fine, including an
excise tax assessed with respect to an employee benefit plan, or
reasonable expenses.
(5) "Official capacity" means, when used with respect to a director, the
office of director in the corporation and, when used with respect to a
person other than a director as contemplated in Section 7-109-107, means
the office in the corporation held by the officer or the employment,
fiduciary, or agency relationship undertaken by the employee, fiduciary,
or agent on behalf of the corporation. "Official capacity" does not
include service for any other domestic or foreign corporation or other
person or employee benefit plan.
(6) "Party" includes a person who was, is, or is threatened to be made a
named defendant or respondent in a proceeding.
(7) "Proceeding" means any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or
investigative and whether formal or informal.
<PAGE>
Section 7-109-102. Authority to indemnify directors.
(1) Except as provided in subsection (4) of this section, a corporation
may indemnify a person made a party to the proceeding because the person
is or was a director against liability incurred in any proceeding if:
(a) The person conducted himself or herself in good faith;
(b) The person reasonably believed:
(I) In the case of conduct in an official capacity with
the corporation, that his or her conduct was in the
corporation's best interests; or
(II) In all other cases, that his or her conduct was at
least not opposed to the corporation's best interests; and
(c) In the case of any criminal proceeding, the person had no
reasonable cause to believe his or her conduct was unlawful.
(2) A director's conduct with respect to an employee benefit plan for a
purpose the director reasonably believed to be in the interests of the
participants in or beneficiaries of the plan is conduct that satisfies
the requirements of subparagraph (II) of paragraph (b) of subsection (1)
of this section. A director's conduct with respect to an employee
benefit plan for a purpose that the director did not reasonably believe
to be in the interests of the participants in or beneficiaries of the
plan shall be deemed not to satisfy the requirements of subparagraph (a)
of subsection (1) of this section.
(3) The termination of any proceeding by judgment, order, settlement, or
conviction, or upon a plea of nolo contendere or its equivalent, is not,
of itself, determinative that the director did not meet the standard of
conduct described in this section.
(4) A corporation may not indemnify a director under this section:
(a) In connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the
corporation; or
(b) In connection with any proceeding charging that the director
derived an improper personal benefit, whether or not involving
action in his official capacity, in which proceeding the director
was adjudged liable on the basis that he or she derived an
improper personal benefit.
(5) Indemnification permitted under this section in connection with a
proceeding by or in the right of a corporation is limited to reasonable
expenses incurred in connection with the proceeding.
Section 7-109-103. Mandatory Indemnification of Directors.
Unless limited by the articles of incorporation, a corporation shall be
required to indemnify a person who is or was a director of the corporation and
who was wholly successful, on the merits or otherwise, in defense of any
proceeding to which he was a party, against reasonable expenses incurred by him
in connection with the proceeding.
Section 7-109-104. Advance of Expenses to Directors.
(1) A corporation may pay for or reimburse the reasonable expenses
incurred by a director who is a party to a proceeding in advance of the
final disposition of the proceeding if:
(a) The director furnishes the corporation a written affirmation
of his good-faith belief that he has met the standard of conduct
described in Section 7-109-102;
(b) The director furnishes the corporation a written undertaking,
executed personally or on the director's behalf, to repay the
advance if it is ultimately determined that he or she did not
meet such standard of conduct; and
(c) A determination is made that the facts then known to those
making the determination would not preclude indemnification under
this article.
(2) The undertaking required by paragraph (b) of subsection (1) of this
section shall be an unlimited general obligation of the director, but
need not be secured and may be accepted without reference to financial
ability to make repayment.
(3) Determinations and authorizations of payments under this section
shall be made in the manner specified in Section 7-109-106.
Section 7-109-105. Court-Ordered Indemnification of Directors.
(1) Unless otherwise provided in the articles of incorporation, a
director who is or was a party to a proceeding may apply for
indemnification to the court conducting the proceeding or to another
court of competent jurisdiction. On receipt of an application, the
court, after giving any notice the court considers necessary, may order
indemnification in the following manner:
(a) If it determines the director is entitled to mandatory
indemnification under section 7-109-103, the court shall order
indemnification, in which case the court shall also order the
corporation to pay the director's reasonable expenses incurred to
obtain court-ordered indemnification.
(b) If it determines that the director is fairly and reasonably
entitled to indemnification in view of all the relevant
circumstances, whether or not the director met the standard of
conduct set forth in section 7-109-102 (1) or was adjudged liable
in the circumstances described in Section 7-109-102 (4), the
court may order such indemnification as the court deems proper;
except that the indemnification with respect to any proceeding in
which liability shall have been adjudged in the circumstances
described Section 7-109-102 (4) is limited to reasonable expenses
incurred in connection with the proceeding and reasonable
expenses incurred to obtain court-ordered indemnification.
Section 7-109-106. Determination and Authorization of Indemnification of
Directors.
(1) A corporation may not indemnify a director under Section 7-109-102
unless authorized in the specific case after a determination has been
made that indemnification of the director is permissible in the
circumstances because he has met the standard of conduct set forth in
Section 7-109-102. A corporation shall not advance expenses to a
director under Section 7-109-104 unless authorized in the specific case
after the written affirmation and undertaking required by Section
7-109-104(1)(a) and (1)(b) are received and the determination required
by Section 7-109-104(1)(c) has been made.
(2) The determinations required to be made under subsection (1) of this
section shall be made:
(a) By the board of directors by a majority vote of those present
at a meeting at which a quorum is present, and only those
directors not parties to the proceeding shall be counted in
satisfying the quorum.
(b) If a quorum cannot be obtained, by a majority vote of a
committee of the board of directors designated by the board of
directors, which committee shall consist of two or more directors
not parties to the proceeding; except that directors who are
parties to the proceeding may participate in the designation of
directors for the committee.
(3) If a quorum cannot be obtained as contemplated in paragraph (a) of
subsection (2) of this section, and the committee cannot be established
under paragraph (b) of subsection (2) of this section, or even if a
quorum is obtained or a committee designated, if a majority of the
directors constituting such quorum or such committee so directs, the
determination required to be made by subsection (1) of this section
shall be made:
(a) By independent legal counsel selected by a vote of the board
of directors or the committee in the manner specified in
paragraph (a) or (b) of subsection (2) of this section or, if a
quorum of the full board cannot be obtained and a committee
cannot be established, by independent legal counsel selected by a
majority vote of the full board of directors; or
(b) By the shareholders.
(4) Authorization of indemnification and evaluation as to reasonableness
of expenses shall be made in the same manner as the determination that
indemnification is permissible; except that, if the determination that
indemnification is permissible is made by independent legal counsel,
authorization of indemnification and advance of expenses shall be made
by the body that selected such counsel.
Section 7-109-107. Indemnification of Officers, Employees, Fiduciaries, and
Agents.
(1) Unless otherwise provided in the articles of incorporation:
(a) An officer is entitled to mandatory indemnification under
section 7-109-103, and is entitled to apply for court-ordered
indemnification under section 7-109-105, in each case to the same
extent as a director;
(b) A corporation may indemnify and advance expenses to an
officer, employee, fiduciary, or agent of the corporation to the
same extent as a director; and
(c) A corporation may indemnify and advance expenses to an
officer, employee, fiduciary, or agent who is not a director to a
greater extent, if not inconsistent with public policy, and if
provided for by its bylaws, general or specific action of its
board of directors or shareholders, or contract.
Section 7-109-108. Insurance.
A corporation may purchase and maintain insurance on behalf of a person
who is or was a director, officer, employee, fiduciary, or agent of the
corporation and who, while a director, officer, employee, fiduciary, or agent of
the corporation, is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee, fiduciary, or agent of any other
domestic or foreign corporation or other person or of an employee benefit plan
against any liability asserted against or incurred by the person in that
capacity or arising out of his or her status as a director, officer, employee,
fiduciary, or agent whether or not the corporation would have the power to
indemnify the person against such liability under the Section 7-109-102,
7-109-103 or 7-109-107. Any such insurance may be procured from any insurance
company designated by the board of directors, whether such insurance company is
formed under the laws of this state or any other jurisdiction of the United
States or elsewhere, including any insurance company in which the corporation
has an equity or any other interest through stock ownership or otherwise.
Section 7-109-109. Limitation of Indemnification of Directors.
(1) A provision concerning a corporation's indemnification of, or
advance of expenses to, directors that is contained in its articles of
incorporation or bylaws, in a resolution of its shareholders or board of
directors, or in a contract, except for an insurance policy or
otherwise, is valid only to the extent the provision is not inconsistent
with Sections 7-109-101 to 7-109-108. If the articles of incorporation
limit indemnification or advance of expenses, indemnification or advance
of expenses are valid only to the extent not inconsistent with the
articles of incorporation.
(2) Sections 7-109-101 to 7-109-108 do not limit a corporation's power
to pay or reimburse expenses incurred by a director in connection with
an appearance as a witness in a proceeding at a time when he or she has
not been made a named defendant or respondent in the proceeding.
<PAGE>
Section 7-109-110. Notice to Shareholders of Indemnification of Director.
If a corporation indemnifies or advances expenses to a director under
this article in connection with a proceeding by or in the right of the
corporation, the corporation shall give written notice of the indemnification or
advance to the shareholders with or before the notice of the next shareholders'
meeting. If the next shareholder action is taken without a meeting at the
instigation of the board of directors, such notice shall be given to the
shareholders at or before the time the first shareholder signs a writing
consenting to such action.
Bylaws of GWL&A
Article II, Section 11. Indemnification of Directors.
The Company may, by resolution of the Board of Directors, indemnify and
save harmless out of the funds of the Company to the extent permitted by
applicable law, any director, officer, or employee of the Company or any member
or officer of any committee, and his heirs, executors and administrators, from
and against all claims, liabilities, costs, charges and expenses whatsoever that
any such director, officer, employee or any such member or officer sustains or
incurs in or about any action, suit, or proceeding that is brought, commenced,
or prosecuted against him for or in respect of any act, deed, matter or thing
whatsoever made, done, or permitted by him in or about the execution of his
duties of his office or employment with the Company, in or about the execution
of his duties as a director or officer of another company which he so serves at
the request and on behalf of the Company, or in or about the execution of his
duties as a member or officer of any such Committee, and all other claims,
liabilities, costs, charges and expenses that he sustains or incurs, in or about
or in relation to any such duties or the affairs of the Company, the affairs of
such Committee, except such claims, liabilities, costs, charges or expenses as
are occasioned by his own wilful neglect or default. The Company may, by
resolution of the Board of Directors, indemnify and save harmless out of the
funds of the Company to the extent permitted by applicable law, any director,
officer, or employee of any subsidiary corporation of the Company on the same
basis, and within the same constraints as, described in the preceding sentence.
Item 15. RECENT SALES OF UNREGISTERED SECURITIES
Not applicable.
Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Form of Principal Underwriter and Distribution Agreement is
incorporated by reference to Registrant's Pre-Effective Amendment no.
2 to the Registration Statement.
2. Not applicable.
3. (i) Articles of Incorporation of Great-West Life & Annuity Insurance
Company is incorporated by reference to Registrant's Pre-Effective
Amendment no. 2 to the Registration Statement.
(ii) Bylaws of Great-West Life & Annuity Insurance Company is incorporated
by reference to Registrant's Pre-Effective Amendment no. 2 to the
Registration Statement.
4. (a) Form of Combination Fixed and Variable Group Annuity Contract is
incorporated by reference to Registrant's Pre-Effective Amendment No.
1 to the Registration Statement.
(b) Form of IRA Endorsement is incorporated by reference to
Registrant's Pre-Effective Amendment No. 1 to the Registration
Statement.
5. Opinion and consent of Ruth B. Lurie, Vice President, Counsel and
Associate Secretary as to the legality of the securities being
registered, is incorporated by reference to Registrant's
Registration Statement.
6. Not applicable.
7. Not applicable.
8. Not applicable.
9. Not applicable.
10. Not applicable.
11. Not applicable.
12. Not applicable.
13. Not applicable.
14. Not applicable.
15. Not applicable.
16. Not applicable.
17. Not applicable.
18. Not applicable.
19. Not applicable.
20. Not applicable.
21. List of significant subsidiaries of Great-West Life & Annuity
Insurance Company, the state of incorporation or organization or
each, and the names under which such subsidiaries do business, is
attached as Exhibit 21.
22. Not applicable.
23. (a) Consent of Jorden Burt Boros Cicchetti Berenson & Johnson LLP
is attached as Exhibit 23a.
(b) Consent of Deloitte & Touche LLP is attached as Exhibit 23b.
(c) Consent of Ruth B. Lurie is attached as Exhibit 23c.
24. Power of Attorney for Messrs. Balog, Burns, Dackow, Desmarais,
Jr., Gratton, Hart, Mackness, McCallum, Nickerson, Pitfield,
Plessis-Belair, Turner and Walsh are incorporated by referenced
to Registrant's Registration Statement. Power of Attorney for
Messrs. Graham and Kavanagh are incorporated by reference to
Registrant's Pre-Effective Amendment No. 1 to the Registration
Statement.
25. Not applicable.
26. Not applicable.
27. Financial Data Schedule for Great-West Life & Annuity Insurance
Company.
Item 17. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement, including (but not limited to) any
addition or deletion of a managing underwriter.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liability arising under the
Securities Act of 1933 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Post-Effective Amendment No. 1 to the
Registration Statement on Form S-1 to be signed on its behalf, in the City of
Englewood, State of Colorado, on this 13th day of April , 1998.
GREAT-WEST LIFE & ANNUITY
INSURANCE COMPANY
(Depositor)
By: /s/ W.T. McCallum
W. T. McCallum, President
and Chief Executive Officer
As required by the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities with Great-West Life
& Annuity Insurance Company and on the dates indicated:
Signature and Title Date
/s/ R. Gratton* 4/13, 1998
Director, Chairman of the
Board (Robert Gratton)
/s/ W.T. McCallum 4/13, 1998
Director, President and Chief Executive
Officer (William T. McCallum)
/s/ M.T.G. Graye 4/13, 1998
Senior Vice President and Chief
Financial Officer (M.T.G. Graye)
Signature and Title Date
/s/ J. Balog* 4/13, 1998
Director, (James Balog)
/s/ J.W. Burns* 4/13, 1998
Director, (James W. Burns)
/s/ O.T. Dackow* 4/13, 1998
Director (Orest T. Dackow)
, 1998
Director (Andre Desmarais)
/s/ P. Desmarais, Jr.* 4/13, 1998
Director (Paul Desmarais, Jr.)
/s/ R.G. Graham* 4/13, 1998
Director (Robert G. Graham)
/s/ N.B. Hart* 4/13, 1998
Director (N. Berne Hart)
/s/ K.P. Kavanagh* 4/13, 1998
Director (Kevin P. Kavanagh)
/s/ W. Mackness* 4/13, 1998
Director (William Mackness)
Signature and Title Date
/s/ J.E.A. Nickerson* 4/13, 1998
Director (Jerry E.A. Nickerson)
/s/ P.M. Pitfield* 4/13, 1998
Director (P. Michael Pitfield)
/s/ Michel Plessis-Belair* 4/13, 1998
Director (Michel Plessis-Belair)
/s/ B.E. Walsh* 4/13, 1998
Director (Brian E. Walsh)
*By: /s/ D.C. Lennox 4/13, 1998 D. C. Lennox Attorney-in-fact pursuant to Powers
of Attorney filed with the Registration Statement and Amendment No. 1 thereto.
<PAGE>
Exhibit Table
Form S-1
Exhibit
1. Form of Underwriting agreement and
and Distribution Agreement 3
3. (i) Articles of Incorporation 3
(ii) Bylaws 3
4. (i) Form of Combination Fixed and
Variable Annuity Contract 2
(ii) Form of IRA Endorsement 2
5. Opinion and consent of Ruth B. Lurie 1
21. List of Subsidiaries 4
23. (a) Consent of Jorden Burt Berenson & Johnson LLP 4
(b) Consent of Deloitte & Touche 4
(c) Consent of Ruth B. Lurie 4
24. Powers of Attorney for Messrs. Balog, Burns, Dackow,
Desmarais, Jr., Gratton, Hart, Mackness, McCallum,
Nickerson, Pitfield, Plessis-Belair and Walsh 1
Powers of Attorney for Messrs. Graham and Kavanagh2
27. Financial Data Schedule 4
1 Filed with Registration Statement.
2 Filed with Pre-Effective Amendment No. 1 to the Registration Statement.
3 Filed with this Post-Effective Amendment No. 1 to the Registration Statement.
<PAGE>
Exhibit 21
<PAGE>
SUBSIDIARIES OF GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
JURISDICTION OF INCORPORATION OR
ORGANIZATION
SUBSIDIARY
Benefits Communication Corporation (1) Delaware
BenefitsCorp Equities, Inc. Delaware
Confed Admin Services, Inc. Delaware
Financial Administrative Services Corporation (2) Colorado
First Great-West Life & Annuity Insurance Company New York
Great-West Benefit Services, Inc. Delaware
Great-West Realty Investments, Inc. Delaware
Greenwood Property Corporation Colorado
GW Capital Management, LLC Colorado
GWL Properties, Inc. Colorado
Maxim Series Fund, Inc. Maryland
One Corporation Colorado
One Health Plan of Arizona, Inc. Arizona
One Health Plan of California, Inc. California
One Health Plan of Colorado, Inc. Colorado
One Health Plan of Florida, Inc. Florida
One Health Plan of Georgia, Inc. Georgia
One Health Plan of Illinois, Inc. Illinois
One Health Plan of Indiana, Inc. Indiana
One Health Plan of Massachusetts, Inc. Massachusetts
One Health Plan of North Carolina, Inc. North Carolina
One Health Plan of Ohio, Inc. Ohio
One Health Plan of Oregon, Inc. Oregon
One Health Plan of Tennessee, Inc. Tennessee
One Health Plan of Texas, Inc. Texas
One Health Plan of Washington, Inc. Washington
One Orchard Equities, Inc. Colorado
Orchard Capital Management, LLC Colorado
Orchard Series Fund Delaware
(1) Also doing business as Benefits Insurance Services, Inc.
(2) Also doing business as Financial Administrative Services Corporation of
Colorado.
Exhibit 23(a)
<PAGE>
Jorden Burt Boros Cicchetti Berenson & Johnson
Suite 400 East
1025 Thomas Jefferson St., N.W.
Washington, D.C. 20007
April 13, 1998
Great-West Life & Annuity Insurance Company
8515 East Orchard Road
Englewood, Colorado 80111
Re: Amendment No. 2 to the Registration Statement on Form S-1
File No. 333-01173
Ladies and Gentlemen:
We have acted as counsel to Great-West Life & Annuity Insurance Company,
a Colorado corporation, regarding the federal securities laws applicable to the
issuance and sale of Contracts described herein. We hereby consent to the
reference to us under the heading "Legal Matters" in the prospectus filed today
with the Securities and Exchange Commission.
Very truly yours,
/s/ Jorden Burt Boros Cicchetti Berenson & Johnson LLP
JORDEN BURT BOROS CICCHETTI BERENSON & JOHNSON LLP
Exhibit 23(b)
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 2to the Registration
Statement on Form S-1 (Registration No. 333-01173) of Great-West Life & Annuity
Insurance Company of our reports on the financial statements of Great-West Life
& Annuity Insurance Company dated January 23, 1998 and on the financial
statements of Variable Annuity-1 Series Account dated February 12, 1998, and to
the reference to us under the heading "Experts" appearing in the prospectus,
which is a part of such Registration Statement.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Denver, Colorado
April 13, 1998
Exhibit 23(c)
<PAGE>
April 13, 1998
Great-West Life & Annuity Insurance Company
8515 East Orchard Road
Englewood, CO 80110
Re: Great-West Life & Annuity Insurance Company
Ladies and Gentlemen:
I hereby consent to the use of my name under the caption "Legal Matters" in the
Prospectus for Great-West Life & Annuity Insurance Company contained in
Post-Effective Amendment No. 2 to the Registration Statement on Form S-1
(Registration No. 333-01173) filed by Great-West Life & Annuity Insurance with
the Securities and Exchange Commission under the Securities Act of 1933 and the
amendments thereto.
Sincerely,
/s/ Ruth B. Lurie
Ruth B. Lurie
Vice President, Counsel
and Associate Secretary
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
</LEGEND>
<CIK> 0000744455
<NAME> GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 6698629
<DEBT-CARRYING-VALUE> 2082716
<DEBT-MARKET-VALUE> 2151476
<EQUITIES> 39021
<MORTGAGE> 1235594
<REAL-ESTATE> 0
<TOTAL-INVEST> 13205982
<CASH> 126278
<RECOVER-REINSURE> 84364
<DEFERRED-ACQUISITION> 255442
<TOTAL-ASSETS> 22077715
<POLICY-LOSSES> 11478218
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 454843
<NOTES-PAYABLE> 54058
0
121800
<COMMON> 7032
<OTHER-SE> 1057087
<TOTAL-LIABILITY-AND-EQUITY> 22077715
1278909
<INVESTMENT-INCOME> 897572
<INVESTMENT-GAINS> 9800
<OTHER-INCOME> 0
<BENEFITS> 1385050
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 44298
<INCOME-PRETAX> 500576
<INCOME-TAX> 256357
<INCOME-CONTINUING> 97597
<DISCONTINUED> 158760
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 158760
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
