<PAGE> 1
As filed with the Securities and Exchange Commission on May 24, 1996
Registration No. 333-00503
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. 1 (X)
---------------------------------------
POST-EFFECTIVE AMENDMENT NO. ( )
---------------------------------------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Post-Effective Amendment No. 38 (X)
(Check appropriate box or boxes)
- --------------------------------------------------------------------------------
WRL SERIES ANNUITY ACCOUNT
(Exact Name of Registrant)
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
(Name of Depositor)
201 Highland Avenue
Largo, Florida 34640
(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code:
(813) 585-6565
--------------------------------------------------------
Thomas E. Pierpan, Esq.
Vice President and Counsel
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, Florida 34640
(Name and Address of Agent for Service)
Copy to:
Stephen E. Roth, Esq.
Sutherland, Asbill & Brennan
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
--------------------------------------------
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of the Registration Statement.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant
hereby elects to register an indefinite amount of securities being offered.
The filing fee was paid with the initial filing of the Registration Statement
on January 29, 1996.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 2
WRL SERIES ANNUITY ACCOUNT
PRE-EFFECTIVE AMENDMENT NO. 1 TO
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 ON FORM N-4
Cross Reference Sheet
Showing Location in Prospectus
and Statement of Additional Information
As Required by Form N-4
<TABLE>
<CAPTION>
FORM N-4 ITEM PROSPECTUS CAPTION
------------- ------------------
<S> <C>
1. Cover Page ..................... Cover Page
2. Definitions .................... Definitions of Special Terms
3. Synopsis or Highlights ......... Summary
4. Condensed Financial
Information .................... Condensed Financial Information
5. General Description of
Registrant, Depositor,
and Portfolio Companies ....... Western Reserve, the Series Account, and
the Trust; Voting Rights
6. Deductions ..................... Charges and Deductions; Distribution of the Contr
7. General Description of
Variable Annuity Contracts...... Western Reserve, the Series Account
and the Trust; The
Contract; Statement of Additional
Information
8. Annuity Period ................. The Contract - Annuity Provisions
9. Death Benefit .................. The Contract - Accumulation
Provisions - Death Benefits during
the Accumulation Period; The
Contract - Annuity Provisions -
Death Benefits after the Maturity
Date
10. Purchases and Contract
Value .......................... The Contract - Accumulation
Provisions - Purchase Payments,
Net Purchase Payments,
Accumulation Unit Value;
Distribution of the Contracts
</TABLE>
(i)
<PAGE> 3
<TABLE>
<CAPTION>
FORM N-4 ITEM PROSPECTUS CAPTION
- ------------- ------------------
<S> <C> <C>
11. Redemptions ................... The Contract - Accumulation Provisions - Partial
Withdrawals and Surrenders; Other Matters
Relating to the Contract - Right to Examine
Contract
12. Taxes ......................... Federal Tax Matters
13. Legal Proceedings ............. Legal Proceedings
14. Table of Contents of the
Statement of Additional
Information ................... Statement of Additional Information
<CAPTION>
STATEMENT OF ADDITIONAL
FORM N-4 ITEM INFORMATION CAPTION
- ------------- -------------------
<S> <C> <C>
15. Cover Page ..................... Cover Page
16. Table of Contents .............. Table of Contents
17. General Information and
History ........................ Not Applicable
18. Services ....................... Custodian; Independent
Accountants
19. Purchase of Securities Being
Offered ........................ Addition, Deletion, and Substitution
of Investments
20. Underwriters.................... Distribution of Contracts
21. Calculation of Performance
Data ........................... Calculation of Performance
Related Information
22. Annuity Payments .............. Not Applicable
23. Financial Statements........... Financial Statements
</TABLE>
(ii)
<PAGE> 4
PART A
INFORMATION REQUIRED IN A PROSPECTUS
<PAGE> 5
<TABLE>
<S> <C>
MERIDIAN/ WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
INVESCO
SECTOR 201 HIGHLAND AVENUE
VARIABLE LARGO, FLORIDA 34640
ANNUITY (800) 851-9777
Flexible Payment (813) 585-6565
Variable Accumulation This Prospectus describes the Meridian/INVESCO Sector Variable Annuity (the
Deferred Annuity "Contract"), a tax deferred variable annuity contract issued by Western
Contract Reserve Life Assurance Co. of Ohio ("Western Reserve").
The Contract provides for accumulation of Contract values on a variable
basis, a fixed basis, or a combination of both. The Contract also provides
for the payment of periodic annuity payments on a variable basis or a fixed
basis. If the variable basis is chosen, Contract values will be held in the
WRL Series Annuity Account (the "Series Account") and will vary according
to the investment performance of three underlying investment portfolios of
the WRL Series Fund, Inc. (the "Fund") offered through this Contract. If
the fixed basis is chosen, Contract values will be allocated to the Fixed
Account and earn interest at no less than the minimum guaranteed rate.
There are currently three Sub-Accounts of the Series Account (in addition
to the Fixed Account) available through this Contract during the
Accumulation Period and after the Maturity Date. Each Sub-Account invests
in one corresponding investment portfolio of the Fund and Net Purchase
Payments will be allocated to one or more of these Sub-Accounts or the
Fixed Account as directed by the Owner. These three investment portfolios
of the Fund are: the Meridian/INVESCO US Sector Portfolio, Meridian/INVESCO
Global Sector Portfolio and Meridian/INVESCO Foreign Sector Portfolio.
This Prospectus sets forth information about the Contract that a
prospective investor should know before investing. Additional information
about the Series Account has been filed with the Securities and Exchange
Commission in a Statement of Additional Information, dated May 1, 1996,
which is incorporated herein by reference. The Statement of Additional
Information is available upon written or oral request and without charge
from Western Reserve, P.O. Box 9051, Clearwater, FL 34618-9051; telephone
number (800) 851-9777. The table of contents for the Statement of
Additional Information appears on page 25 of this Prospectus.
PROSPECTUS DATED THE CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED OR ENDORSED
May 1, 1996 BY, A BANK OR DEPOSITORY INSTITUTION AND THE CONTRACT IS NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER AGENCY AND INVOLVES INVESTMENT RISK, INCLUDING POSSIBLE
LOSS OF PRINCIPAL AMOUNT INVESTED.
THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY CURRENT PROSPECTUSES FOR
THE WRL SERIES FUND, INC. CERTAIN PORTFOLIOS MAY NOT BE AVAILABLE IN ALL
STATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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 UPON.
THIS PROSPECTUS SHOULD BE RETAINED FOR FUTURE REFERENCE.
</TABLE>
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
DEFINITIONS OF SPECIAL TERMS.......................................................................... 1
SUMMARY............................................................................................... 3
CONDENSED FINANCIAL INFORMATION....................................................................... 5
CALCULATION OF YIELDS AND TOTAL RETURNS............................................................... 5
OTHER PERFORMANCE DATA................................................................................ 6
PUBLISHED RATINGS..................................................................................... 7
WESTERN RESERVE, THE SERIES ACCOUNT, AND THE FUND..................................................... 7
- Western Reserve Life Assurance Co. of Ohio..................................................... 7
- WRL Series Annuity Account..................................................................... 7
- WRL Series Fund, Inc........................................................................... 7
CHARGES AND DEDUCTIONS................................................................................ 8
- Withdrawal Charge.............................................................................. 8
- Transfer Charge................................................................................ 9
- Mortality and Expense Risk Charge.............................................................. 10
- Annual Contract Charge......................................................................... 10
- Administrative Charge.......................................................................... 10
- Premium Taxes.................................................................................. 10
- Deductions for Other Taxes..................................................................... 10
- Expenses of the Fund........................................................................... 10
THE CONTRACT.......................................................................................... 10
ACCUMULATION PROVISIONS.......................................................................... 10
- Purchase Payments.............................................................................. 10
- Net Purchase Payments.......................................................................... 11
- Accumulation Unit Value........................................................................ 12
- Experience Factor.............................................................................. 12
- Computing Sub-Account Value.................................................................... 12
- Transfers to and from, and among Allocation Options............................................ 12
- Dollar Cost Averaging.......................................................................... 13
- Partial Withdrawals and Surrenders............................................................. 13
- Contract Loans For 401(a), 401(k), and 403(b) Contracts........................................ 14
- Death Benefits during the Accumulation Period.................................................. 15
ANNUITY PROVISIONS............................................................................... 17
- Maturity Date and Selection of Annuity Options................................................. 17
- Fixed Account Annuity Options.................................................................. 18
- Series Account Annuity Options................................................................. 18
- Death Benefits after the Maturity Date......................................................... 18
- Improved Annuity Rates......................................................................... 18
- Proof of Age, Sex, and Survival................................................................ 18
OTHER MATTERS RELATING TO THE CONTRACT................................................................ 18
- Changes in Purchase Payments................................................................... 18
- Right To Examine Contract...................................................................... 18
- Contract Payments.............................................................................. 18
- Ownership...................................................................................... 19
- Annuitant...................................................................................... 19
- Beneficiary.................................................................................... 19
- Modification or Waiver......................................................................... 19
FEDERAL TAX MATTERS................................................................................... 19
- Introduction................................................................................... 19
- Company Tax Status............................................................................. 20
- Taxation of Annuities.......................................................................... 20
- Qualified Plans................................................................................ 21
- Additional Considerations...................................................................... 22
THE FIXED ACCOUNT..................................................................................... 23
- Minimum Guaranteed and Current Interest Rates.................................................. 23
- Fixed Account Value............................................................................ 24
- Allocations, Transfers and Partial Withdrawals................................................. 24
DISTRIBUTION OF THE CONTRACTS......................................................................... 24
VOTING RIGHTS......................................................................................... 25
LEGAL PROCEEDINGS..................................................................................... 25
STATEMENT OF ADDITIONAL INFORMATION................................................................... 25
</TABLE>
<PAGE> 7
DEFINITIONS OF SPECIAL TERMS
<TABLE>
<S> <C>
ACCUMULATION PERIOD The period between the Contract Date and the Maturity Date while the Contract is
In Force.
ACCUMULATION UNIT VALUE An accounting unit of measure used to calculate Sub-Account values during the
Accumulation Period.
ADMINISTRATIVE OFFICE Western Reserve's administrative office for variable annuity products, the address
of which is P.O. Box 5068, Clearwater, Florida 34618-9068. Telephone number:
1-800-851-9777; Fax number: 1-800-572-0159.
ALLOCATION OPTIONS The Fixed Account and the Sub-Accounts of the Series Account.
ANNUITANT The person named in the application, or as subsequently changed, to receive
annuity payments. The Annuitant may be changed as provided in the Contract's death
benefit provisions and annuity provisions.
ANNUITY PROCEEDS The amount applied to purchase periodic annuity payments. Such amount is the
Annuity Value on the Maturity Date, less any applicable premium tax.
ANNUITY VALUE The sum of the Series Account Value and the Fixed Account Value.
ANNUITY UNIT VALUE An accounting unit of measure used to calculate annuity payments from certain
Sub-Accounts after the Maturity Date.
ANNIVERSARY The same day and month as the Contract Date for each succeeding year the Contract
remains In Force.
ATTAINED AGE The Issue Age plus the number of completed Contract Years.
BENEFICIARY The person(s) entitled to receive the death benefit proceeds under the Contract.
CASH VALUE The Annuity Value less any applicable premium taxes and any Withdrawal Charge.
CODE The Internal Revenue Code of 1986, as amended.
CONTINGENT BENEFICIARY The person named in the application, or subsequently designated, to become the new
Beneficiary upon the current Beneficiary's death.
CONTRACT DATE The later of the date on which the initial Purchase Payment is received and the
date that the properly completed application is received at Western Reserve's
Administrative Office.
CONTRACT YEAR A period of twelve consecutive months beginning on the Contract Date and any
Anniversary thereafter.
FIXED ACCOUNT An Allocation Option under the Contract, other than the Series Account, that
provides for accumulation of Net Purchase Payments, and options for annuity
payments on a fixed basis. For Contracts issued in the State of Washington, the
Fixed Account is used solely for Contract loans, and is not available for
allocation of Net Purchase Payments or transfers of Annuity Value from the
Sub-Accounts. For Contracts issued in the State of Washington, the Fixed Account
is used solely for Contract loans, and is not available for allocation of Net
Purchase Payments or transfers of Annuity Value from the Sub-Accounts.
FIXED ACCOUNT VALUE During the Accumulation Period, a Contract's value allocated to the Fixed Account.
FUND WRL Series Fund, Inc.
IN FORCE Condition under which the Contract is active and the Owner is entitled to exercise
all rights under the Contract.
ISSUE AGE Refers to the age on the birthday nearest the Contract Date.
MATURITY DATE The date on which the Accumulation Period ends and annuity payments are to
commence.
NET PURCHASE PAYMENT The Purchase Payment less any applicable premium taxes.
NON-QUALIFIED CONTRACTS Contracts issued other than in connection with retirement plans. Non-Qualified
Contracts do not qualify for special Federal income tax treatment under the Code.
</TABLE>
1
<PAGE> 8
DEFINITIONS OF SPECIAL TERMS (CONTINUED)
<TABLE>
<S> <C>
OWNER The person(s) entitled to exercise all rights under the Contract. The Annuitant is
the Owner unless the application states otherwise, or unless a change of ownership
is made at a later time.
PORTFOLIO A separate investment portfolio of the Fund.
PURCHASE PAYMENTS Amounts paid by an Owner or on the Owner's behalf to Western Reserve as
consideration for the benefits provided by the Contract.
QUALIFIED CONTRACTS Contracts issued in connection with retirement plans that qualify for special
Federal income tax treatment under the Code.
SERIES ACCOUNT (OR
SEPARATE ACCOUNT) WRL Series Annuity Account, a separate investment account composed of several Sub-
Accounts established to receive and invest Net Purchase Payments not allocated to
the Fixed Account.
SERIES ACCOUNT VALUE During the Accumulation Period, the value in the Series Account allocable to a
Contract, which value is equal to the total of the values allocable to a Contract
in each of the Sub-Accounts during the Accumulation Period.
SUB-ACCOUNT A sub-division of the Series Account that invests exclusively in the shares of a
specified Portfolio and supports the Contracts. Sub-Accounts corresponding to each
applicable Portfolio hold assets under the Contract during the Accumulation
Period. Other Sub-Accounts corresponding to each applicable Portfolio will hold
assets after the Maturity Date if a Series Account annuity option is selected.
SURRENDER The termination of a Contract at the option of the Owner.
VALUATION DATE Each day on which the New York Stock Exchange is open for business.
VALUATION PERIOD The period commencing at the end of one Valuation Date and continuing to the end
of the next succeeding Valuation Date.
</TABLE>
2
<PAGE> 9
SUMMARY
This summary provides you with an overview of the tax deferred variable annuity
contract offered by Western Reserve and funded by the Series Account and the
Fixed Account.
THE CONTRACT
The Contract is a tax deferred variable annuity contract that may be purchased
by submitting a completed application to Western Reserve for its approval. The
Contract provides for accumulation of Annuity Values on a variable basis, a
fixed basis, or a combination of both. The Contract also provides for the
payment of periodic annuity payments on a variable basis or a fixed basis. (See
"THE CONTRACT-- ACCUMULATION PROVISIONS" on page 10 and "--ANNUITY PROVISIONS"
on page 17.) (For information about tax status, see "FEDERAL TAX MATTERS" on
pages 19-23.)
RIGHT TO EXAMINE CONTRACT
If an Owner is not satisfied with the Contract, it may be cancelled by returning
it within ten days after receipt together with a written request for
cancellation. In such event, Western Reserve will pay the Owner an amount equal
to the sum of: (i) the Purchase Payments received; plus (or minus) (ii) the
accumulated gains (or losses), if any, in the Series Account for the Contract as
of the date Western Reserve receives the returned Contract. (In certain states,
Western Reserve will refund the Purchase Payments.) (See "OTHER MATTERS RELATING
TO THE CONTRACT--Right to Examine Contract" on page 18.)
THE FUND
The underlying variable investments for the Contracts are shares of three of the
Portfolios of the Fund, namely: the Meridian/INVESCO US Sector Portfolio,
Meridian/INVESCO Global Sector Portfolio and Meridian/INVESCO Foreign Sector
Portfolio. Western Reserve reserves the right to offer additional investment
portfolios or other mutual funds with differing investment objectives. (See
"WESTERN RESERVE, THE SERIES ACCOUNT, AND THE FUND--WRL Series Fund, Inc." on
page 7.)
PURCHASE PAYMENTS
The Owner may make Purchase Payments at such frequency as the Owner elects. The
initial Purchase Payment generally must accompany the application, and for Non-
Qualified Contracts must be at least $5,000; however, a minimum initial Purchase
Payment of $1,000 is allowed provided the application reflects anticipated
additional monthly periodic Purchase Payments of at least $100, via electronic
funds transfer from the Owner's bank account. For Individual Retirement
Annuities ("IRAs"), the minimum initial Purchase Payment is $1,000. For
Qualified Contracts other than IRAs, the minimum initial Purchase Payment is
$50. For all Contracts, subsequent Purchase Payments must be at least $50,
unless Western Reserve consents to a smaller amount. The maximum amount of
Purchase Payments that may be made in any Contract Year is $1,000,000, unless
Western Reserve consents to a larger amount. Western Reserve reserves the right
to reject any Purchase Payment for any reason permitted by law. (See
"ACCUMULATION PROVISIONS--Purchase Payments" on page 10.)
PARTIAL WITHDRAWAL AND SURRENDER PRIVILEGE
A Contract may be surrendered or portions of the Cash Value may be partially
withdrawn at any time prior to the Maturity Date. The Cash Value may not,
however, be reduced by any partial withdrawal to less than $5,000. (See "THE
CONTRACT--Partial Withdrawals and Surrenders" on page 13.) For Qualified
Contracts issued under Code Section 403(b), certain restrictions will apply.
Moreover, a partial withdrawal or Surrender may have Federal income tax
consequences. (See "FEDERAL TAX MATTERS--Qualified Plans" on pages 21-22.)
WITHDRAWAL CHARGE
No deductions for sales expenses are made from Purchase Payments. A Withdrawal
Charge, which is a contingent deferred sales charge, may, however, be assessed
against Annuity Value when partially withdrawn or surrendered.
The length of time from receipt of a Purchase Payment to the time of a partial
withdrawal or Surrender of that Purchase Payment determines whether the
Withdrawal Charge will be deducted. The charge is a percentage of the amount of
each Purchase Payment partially withdrawn or surrendered within seven years of
its payment. Purchase Payments are considered withdrawn or surrendered on a
first-in, first-out basis and Contract value in excess of aggregate Purchase
Payments is considered withdrawn or surrendered before any Purchase Payment. The
charge is as follows:
<TABLE>
<CAPTION>
NUMBER OF YEARS
FROM RECEIPT OF EACH
CHARGE PURCHASE PAYMENT
---------------------- --------------------
<S> <C>
8% 0-1
7% 2
6% 3
5% 4
4% 5
3% 6
2% 7
0% Over 7
</TABLE>
For the first withdrawal or series of Systematic Partial Withdrawals during each
Contract Year, the Withdrawal Charge is waived for the first 10% of the Annuity
Value that is subject to the Withdrawal Charge. No Withdrawal Charge will be
assessed if Annuity Values are applied to any annuity option under the Contract.
(See "CHARGES AND DEDUCTIONS--Withdrawal Charge" on pages 8-9.) Additionally, a
10% penalty tax under Code Section 72(q) is currently imposed on partial
withdrawals or Surrenders from Non-Qualified Contracts if such partial
withdrawals or Surrenders are made prior to age 59 1/2 and other exceptions do
not apply. (See "FEDERAL TAX MATTERS" on page 20.)
3
<PAGE> 10
MORTALITY AND EXPENSE RISK CHARGE
For assuming mortality and expense risks under the Contracts, Western Reserve
imposes a 1.25% per annum charge against all Annuity Value held in the Series
Account. (See "CHARGES AND DEDUCTIONS--Mortality and Expense Risk Charge" on
page 10.)
ANNUAL CONTRACT CHARGE
An Annual Contract Charge of $35 is deducted annually on the Anniversary. (See
"CHARGES AND DEDUCTIONS-- Annual Contract Charge", page 10.)
ADMINISTRATIVE CHARGE
Western Reserve imposes a daily Administrative Charge equal to an annual rate of
0.15% against all Annuity Value held in the Series Account. (See "CHARGES AND
DEDUCTIONS--Administrative Charge" on page 10.)
PREMIUM TAXES
No deduction is made for premium taxes unless Western Reserve incurs a premium
tax under state law. Certain states impose premium taxes ranging up to 3.5% of
Purchase Payments. (See "CHARGES AND DEDUCTIONS--Premium Taxes" on page 10.)
CHARGES BY THE FUND
The Fund is subject to certain fees, charges and expenses. (See "WESTERN
RESERVE, THE SERIES ACCOUNT, AND THE FUND--WRL Series Fund, Inc." on page 7 and
the Prospectus for the Portfolios.)
SUMMARY OF CHARGES AND EXPENSES
The following illustrates the charges and deductions under the Contract during
the Accumulation Period, as well as the fees and expenses of the Fund.
<TABLE>
<S> <C>
OWNER TRANSACTION EXPENSES
Sales Load Imposed on Purchases............ None
Maximum Withdrawal Charge
(as a % of each Purchase Payment
surrendered or partially withdrawn
received within the previous 7 years).... 8%
Transfer Charge
On first 12 transfers each year.......... None
On each transfer thereafter.............. $10.00
ANNUAL CONTRACT CHARGE....................... $35.00 Per Contract
SEPARATE ACCOUNT ANNUAL EXPENSES (as a % of
average Series Account Value)
Mortality and Expense Risk Charge.......... 1.25%
Other Account Fees and Expenses (See
"Administrative Charge," page 18)........ 0.15%
Total Separate Account Annual Expenses..... 1.40%
</TABLE>
- --------------------------------------------------------------------------------
Fund Annual Expenses* (as a % of Fund average net assets)
<TABLE>
<CAPTION>
MERIDIAN/INVESCO MERIDIAN/INVESCO MERIDIAN/INVESCO
US SECTOR GLOBAL SECTOR FOREIGN SECTOR
PORTFOLIO PORTFOLIO PORTFOLIO
---------------- ---------------- ----------------
<S> <C> <C> <C>
Management Fees................................. 1.10% 1.10% 1.10%
Other Expenses (after reimbursement)............ 0.20% 0.20% 0.20%
Total Fund Annual Expenses...................... 1.30% 1.30% 1.30%
</TABLE>
- ------------------------------
* Because these Portfolios commenced operations on May 1, 1996, the percentages
set forth as "Other Expenses" and "Total Fund Annual Expenses" are estimates.
The purpose of the preceding Table is to assist the Owner in understanding the
various costs and expenses that an Owner will bear directly and indirectly.
Expenses of the Fund may be higher or lower in the future. Certain states and
other governmental entities may impose a premium tax, which the Table does not
include. For more information on the charges described in this Table, see
"CHARGES AND DEDUCTIONS" on page 8 and the Prospectus for the Portfolios which
accompanies this Prospectus.
EXAMPLES
1. If you surrender your Contract at the end of the applicable time period:
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
Meridian/INVESCO US Sector Sub-Account.................... $ 114 $ 164 $ 217 $368
Meridian/INVESCO Global Sector Sub-Account................ 114 164 217 368
Meridian/INVESCO Foreign Sector Sub-Account............... 114 164 217 368
</TABLE>
4
<PAGE> 11
2. If you annuitize or do not surrender at the end of the applicable time
period (note that annuitization is not available prior to a Contract's fifth
anniversary):
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
Meridian/INVESCO US Sector Sub-Account.................... $34 $ 104 $ 177 $368
Meridian/INVESCO Global Sector Sub-Account................ 34 104 177 368
Meridian/INVESCO Foreign Sector Sub-Account............... 34 104 177 368
</TABLE>
THE ABOVE EXAMPLES ASSUME THAT NO TRANSFER CHARGES HAVE BEEN ASSESSED. IN
ADDITION, THE EXAMPLES FACTOR IN THE $35 ANNUAL CONTRACT CHARGE BASED ON AN
AVERAGE SERIES ACCOUNT VALUE PER CONTRACT OF $5,000, WHICH CONVERTS THAT CHARGE
TO AN ANNUAL RATE OF 0.70% OF THE SERIES ACCOUNT VALUE.
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND THE ACTUAL EXPENSES PAID MAY BE GREATER OR LESS THAN THOSE SHOWN.
THE ASSUMED 5% ANNUAL RETURN IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE GREATER OR LESS
THAN THE ASSUMED AMOUNT.
DEATH BENEFIT
If the Annuitant is also the Owner or if the Owner is not a natural person, and
the Annuitant dies at any time before the Maturity Date, a death benefit will be
provided, unless certain elections have been made that would keep the Contract
in force. After the Maturity Date, death benefits will be paid in accordance
with the annuity option then in effect. (See "ACCUMULATION PROVISIONS--Death
Benefits during the Accumulation Period" on page 15 and "ANNUITY
PROVISIONS--Death Benefits after the Maturity Date" on page 18.)
ANNUITY PAYMENT OPTIONS
Annuity payment options are available under the Contract for distribution of the
Annuity Proceeds after the Maturity Date. The Maturity Date may not be earlier
than the end of the fifth Contract Year and cannot be deferred beyond the
Annuitant reaching Attained Age 90. Subject to these limitations, the default
Maturity Date may be changed by the Owner, at any time prior to that date, by
delivering a written request to Western Reserve. (See "ANNUITY
PROVISIONS--Maturity Date and Selection of Annuity Options" on page 17.)
TRANSFERS
Prior to the Maturity Date, the Owner may transfer any or all of the Annuity
Value from a Sub-Account to the Fixed Account, from the Fixed Account to a
Sub-Account (subject to certain restrictions), or among the Sub-Accounts. (For
Contracts issued in the State of Washington, the Fixed Account is not available
for transfers of Annuity Value from the Sub-Accounts.) (See "THE
CONTRACT -- ACCUMULATION PROVISIONS -- Transfers to and from, and among
Allocation Options" on page 12.) Twelve transfers are permitted without charge
in a Contract Year. Each additional transfer will be subject to a transfer
charge of $10. This charge will not be increased. Certain restrictions apply to
transfers from the Fixed Account. Western Reserve may at any time revoke or
modify the transfer privilege. (See "ACCUMULATION PROVISIONS--Transfers to and
from, and among Allocation Options" on page 12 and "THE FIXED
ACCOUNT--Allocations, Transfers and Partial Withdrawals" on page 24.)
FIXED ACCOUNT
Fixed Account Values will be held in the general account of Western Reserve and
earn interest at no less than the minimum guaranteed rate. The Fixed Account is
discussed in the section entitled "THE FIXED ACCOUNT" beginning on page 23.
CONDENSED FINANCIAL INFORMATION
Because the Meridian/INVESCO US Sector, Meridian/INVESCO Global Sector and
Meridian/INVESCO Foreign Sector Sub-Accounts did not commence operations until
May 1, 1996, there is no condensed financial information for these Sub-Accounts
for the year ended December 31, 1995.
CALCULATION OF YIELDS AND TOTAL RETURNS
From time to time, Western Reserve may disclose in advertisements and sales
literature yields and total returns for the Sub-Accounts representing the
Accumulation Period under a Contract. In addition, Western Reserve may, on the
same basis, advertise the effective yield of a Sub-Account under a Contract.
THESE YIELDS AND TOTAL RETURNS ARE BASED ON THE SUB-ACCOUNTS' HISTORICAL
PERFORMANCE ONLY AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. For more
detailed information about the performance data calculations described below,
see the Statement of Additional Information.
5
<PAGE> 12
YIELD
The yield of a Sub-Account refers to the income produced by a hypothetical
Series Account Value in the Sub-Account under a Contract over a specified thirty
day period expressed as a percentage rate of return for that period. The yield
is calculated by assuming that the income produced by the investment during that
thirty day period is produced each thirty day period over a twelve month period
and is shown as a percentage of the Series Account Value.
TOTAL RETURN
The total return of a Sub-Account for a Contract refers to return quotations
assuming a hypothetical Series Account Value in the Sub-Account has been held
for various periods of time including, but not limited to, a period measured
from the date the Sub-Account commenced operations. When a Sub-Account has been
in operation for one, five, and ten years, respectively, the total return for
these periods will be provided. The total return quotations for a hypothetical
Series Account Value will represent the average annual compounded rates of
return that would equate an initial Series Account Value of $1,000 under a
Contract to the redemption value of that investment as of the last day of each
of the periods for which total return quotations are provided. FOR PURPOSES OF
THE TOTAL RETURN QUOTATIONS, THE CALCULATIONS TAKE INTO ACCOUNT ALL FEES AND
CHARGES THAT ARE CHARGED TO ALL CONTRACTS DURING THE ACCUMULATION PERIOD. Such
fees and charges include the $35 Annual Contract Charge, calculated on the basis
of an average Series Account Value per Contract of $5,000, which converts that
charge to an annual rate of 0.70% of the Series Account Value. The calculations
also assume a complete surrender as of the end of the period and deduction of
the Withdrawal Charge. THE CALCULATIONS DO NOT INCLUDE A DEDUCTION FOR ANY
PREMIUM TAXES THAT MAY BE APPLICABLE TO A PARTICULAR CONTRACT.
Because the Meridian/INVESCO US Sector, Meridian/ INVESCO Global Sector and
Meridian/INVESCO Foreign Sector Sub-Accounts had not yet commenced operations as
of December 31, 1995, no performance information is provided for these
Sub-Accounts.
OTHER PERFORMANCE DATA
Western Reserve may from time to time disclose in advertisements and sales
literature average annual total return in non-standard formats and cumulative
total return for the Contracts.
Western Reserve may from time to time also disclose in advertisements and sales
literature yields and non-standard total returns for the Sub-Accounts (some of
which do not include Contract and Series Account fees and charges) including
such disclosure for periods prior to the date the Series Account commenced
operations.
NON-STANDARD PERFORMANCE DATA WILL ONLY BE DISCLOSED IF THE STANDARD PERFORMANCE
DATA FOR THE REQUIRED PERIODS IS ALSO DISCLOSED.
Because the Meridian/INVESCO US Sector, Meridian/INVESCO Global Sector,
Meridian/INVESCO Foreign Sector Sub-Accounts did not commence operations until
May 1, 1996, no performance information is provided for these Sub-Accounts.
Western Reserve may compare the performance of each Sub-Account in advertising
and sales literature to the performance of other variable annuity issuers in
general or to the performance of particular types of variable annuities
investing in mutual funds, or investment series of mutual funds with investment
objectives similar to each of the Sub-Accounts. For this purpose, Western
Reserve may use as sources of performance comparison such organizations as
Lipper Analytical Services, Inc. ("Lipper"), Variable Annuity Research & Data
Service ("VARDS"), CDA Investment Technologies, Inc. ("CDA") and Morningstar,
Inc. ("Morningstar") or reported by other services, companies, individuals or
other industry or financial publications of general interest, such as Forbes,
Money, The Wall Street Journal, Business Week, Barron's, Kiplinger's Personal
Finance and Fortune. Lipper, VARDS and Morningstar are independent services
which monitor and rank the performances of variable annuity issuers in each of
the major categories of investment objectives on an industry-wide basis.
Lipper's and Morningstar's rankings include variable life insurance issuers as
well as variable annuity issuers. VARDS and CDA rankings compare only variable
annuity issuers. The performance analysis prepared by Lipper, VARDS, CDA and
Morningstar each rank such issuers on the basis of total return, assuming
reinvestment of distributions, but do not take sales charges, redemption fees or
certain expense deductions at the separate account level into consideration. In
addition, VARDS prepares risk adjusted rankings, which consider the effects of
market risk on total return performance. This type of ranking provides data as
to which funds provide the highest total return within various categories of
funds defined by the degree of risk inherent in their investment objectives.
Western Reserve may also compare, as appropriate, the performance of each
Sub-Account in advertising and sales literature to the widely used measures of
stock market performance, such as the Standard and Poor's Index of 500 Common
Stocks, Dow Jones Industrials Average, Value Line (Arithmetic) Index,
CDA/Wiesenberger Long Term Growth Average - VA, Wilshire 5000, FT World Index
Ex-USA (Financial Times), Morgan Stanley Capital International World Index, FT
World Index, Lehman Brothers Government/Corporate Bond Index, Dow Jones
Utilities Average, Donahue's Taxable Money Fund Average and others. Unmanaged
indices may assume the reinvestment of dividends, but usually do not reflect any
"deduction" for the expense of operating or managing an investment portfolio.
In addition, Western Reserve may, as appropriate, compare each Sub-Account's
performance to that of other types of
6
<PAGE> 13
investments such as certificates of deposit, savings accounts and U.S.
Treasuries, or to certain interest rate and inflation indices, such as the
Consumer Price Index, which is published by the U.S. Department of Labor and
measures the average change in prices over time of a fixed "market basket" of
certain specified goods and services. Similar comparisons of Sub-Account
performance may also be made with appropriate indices measuring the performance
of a defined group of securities widely recognized by investors as representing
a particular segment of the securities markets. For example, Sub-Account
performance may be compared with Donoghue Money Market Institutional Averages
(money market rates), Lehman Brothers Corporate Bond Index (corporate bond
interest rates) or Lehman Brothers Government Bond Index (long-term U.S.
Government obligation interest rates).
PUBLISHED RATINGS
Western Reserve may from time to time publish in advertisements, sales
literature and reports to Owners, the ratings and other information assigned to
it by one or more independent rating organizations such as A.M. Best Company
("A.M. Best"), Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Insurance Rating Services ("Standard & Poor's"), and Duff & Phelps Credit Rating
Co. ("Duff & Phelps"). A.M. Best's and Moody's ratings reflect their current
opinion on the relative financial strength and operating performance of an
insurance company in comparison to the norms of the life/health insurance
industry. Standard & Poor's and Duff & Phelps provide ratings which measure the
claims-paying ability of insurance companies. These ratings are opinions of an
operating insurance company's financial capacity to meet the obligations of its
insurance policies in accordance with their terms. Claims-paying ability ratings
do not refer to an insurer's ability to meet non-policy obligations (i.e.,
debt/commercial paper).
WESTERN RESERVE, THE SERIES ACCOUNT, AND THE FUND
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
Western Reserve was originally incorporated under the laws of Ohio on October 1,
1957. Western Reserve is engaged in the business of writing life insurance
policies and annuity contracts. Western Reserve is admitted to do business in 49
states and the District of Columbia. The Administrative Office of Western
Reserve is located in Largo, Florida; however, the mailing address is P.O. Box
9051, Clearwater, FL 34618-9051. Western Reserve is wholly-owned by First AUSA
Life Insurance Company ("First AUSA"), a stock life insurance company which is
wholly-owned by AEGON USA, Inc. ("AEGON"). AEGON is a financial services holding
company whose primary emphasis is on life and health insurance and annuity and
investment products. AEGON is a wholly-owned indirect subsidiary of AEGON nv, a
Netherlands corporation, which is a publicly traded international insurance
group.
WRL SERIES ANNUITY ACCOUNT
The Series Account was established by Western Reserve as a separate account and
a unit investment trust on April 12, 1988. The Series Account meets the
definition of a "separate account" under the Federal securities laws. The Series
Account will receive and invest Net Purchase Payments paid under the Contracts.
In addition, the Series Account may be used for other variable annuity contracts
issued by Western Reserve.
Although the assets of the Series Account belong to Western Reserve, Ohio
insurance law provides that the assets in the Series Account attributable to
variable annuity contracts are not chargeable with liabilities arising out of
any other business of Western Reserve. However, the assets of the Series Account
are available to cover the liabilities of the general asset account of Western
Reserve to the extent that the Series Account's assets exceed the liabilities
arising under variable annuity contracts supported by it.
The Series Account is currently divided into twenty-one Sub-Accounts, three of
which are offered under this Contract. Each Sub-Account invests exclusively in
shares of a single Portfolio of the Fund. Income and both realized and
unrealized gains or losses from the assets of each Sub-Account are credited to
or charged against that Sub-Account without regard to income, gains or losses
from any other Sub-Account or arising out of any other business of Western
Reserve. Western Reserve may add, delete or substitute investments held by the
Sub-Accounts, and Western Reserve reserves the right to add or remove Sub-
Accounts. Western Reserve further reserves the right to change the investment
objective of any Sub-Account, subject to applicable law as described in the
Statement of Additional Information.
WRL SERIES FUND, INC.
The Series Account currently invests only in shares of the Fund, a series mutual
fund that is registered with the Securities and Exchange Commission ("SEC")
under the Investment Company Act of 1940, as amended (the "1940 Act") as an
open-end diversified management investment company.
The Fund currently has twenty-one Portfolios, three of which are offered under
this Contract: the Meridian/INVESCO US Sector Portfolio, Meridian/INVESCO Global
Sector Portfolio and Meridian/INVESCO Foreign Sector Portfolio. The assets of
each Portfolio are held separate from the assets of the other Portfolios, and
each Portfolio has different investment objectives and policies. Thus, each
Portfolio operates as a separate investment vehicle, and the income or losses of
one Portfolio are unrelated to that of any other Portfolio.
The investment objectives and policies of each Portfolio are summarized below.
There is no assurance that any Portfolio will achieve its stated objective. More
detailed information, including a description of risks, can be found in the
Prospectus for the Portfolios, which should be read carefully.
7
<PAGE> 14
Meridian/INVESCO US Sector Portfolio: This Portfolio seeks growth of capital by
investing, under normal circumstances, at least 65% of its total assets in the
equity securities of United States issuers.
Meridian/INVESCO Global Sector Portfolio: This Portfolio seeks growth of
capital by following an asset allocation strategy that shifts among a wide range
of asset categories and within them, market sectors.
Meridian/INVESCO Foreign Sector Portfolio: This Portfolio seeks growth of
capital by investing, under normal circumstances, at least 65% of its total
assets in the equity securities of foreign issuers.
Western Reserve serves as investment adviser to the Fund and manages its assets
in accordance with policies, programs and guidelines established by the Board of
Directors of the Fund.
Meridian Investment Management Corporation ("Meridian") and INVESCO Global Asset
Management Limited ("INVESCO") serve as Co-Sub-Advisers to the Portfolios of the
Fund.
Meridian, located at 12835 East Arapahoe Road, Tower II, 7th Floor, Englewood,
Colorado 80112, is a wholly-owned subsidiary of Meridian Management & Research
Corporation ("MM&R"). Michael Hart and Craig Callahan each own 50% of MM&R.
INVESCO, located at Rosebank, 12 Bermudiana Road, Hamilton, Bermuda HMII, is an
indirect wholly-owned subsidiary of INVESCO PLC, a global firm that managed
approximately $84 billion in assets as of December 31, 1995.
In performing services under its Sub-Advisory Agreement with Western Reserve,
INVESCO is authorized to use INVESCO-affiliated companies and their employees,
provided that INVESCO supervises and remains fully responsible for all such
services. Pursuant to this authority, INVESCO has entered into agreements with
INVESCO Asset Management Limited, 11 Devonshire Square, London, EC2M 4YR
England, for assistance in managing the Portfolios' investments in foreign
securities, and with INVESCO Trust Company, 7800 East Union Avenue, Denver,
Colorado 80237, for assistance in managing the Portfolios' investments in U.S.
securities. These agreements were approved by the Board of Directors of the
Fund, including a majority of the Directors who were not "interested persons" of
the Fund (as defined in the 1940 Act) on March 18, 1996.
Shares of other portfolios of the Fund are sold through different variable
annuity contracts offered through the Series Account. In addition to the Series
Account, shares of certain portfolios of the Fund are sold to the WRL Series
Life Account, a separate account established by Western Reserve for its variable
life insurance policies, the PFL Endeavor Variable Annuity Account, a separate
account of PFL Life Insurance Company, the AUSA Endeavor Variable Annuity
Account, a separate account of AUSA Life Insurance Company Inc., and to the AUSA
Series Life Account, a separate account of AUSA Life Insurance Company, Inc.,
all affiliates of Western Reserve. In addition, shares of the Meridian/INVESCO
Global Sector Portfolio are offered to other variable annuity contracts offered
through the Series Account. Shares of the Fund may in the future be sold to
other separate accounts, including separate accounts established for variable
life insurance policies or variable annuity contracts issued by Western Reserve
or its affiliates. It is conceivable that, in the future, it may become
disadvantageous for variable life insurance separate accounts and variable
annuity separate accounts to invest in the Fund simultaneously. Although neither
Western Reserve nor the Fund currently foresees any such disadvantages, either
to variable life insurance policyowners or to variable annuity contract owners,
the Fund's Board of Directors intends to monitor events in order to identify any
material conflicts between the interests of such variable life insurance
policyowners and variable annuity contract owners and to determine what action,
if any, it should take. Such action could include the sale of Fund shares by one
or more of the separate accounts, which could have adverse consequences.
Material conflicts could result from, for example, (1) changes in state
insurance laws, (2) changes in Federal income tax laws, or (3) differences in
voting instructions between those given by variable life insurance policyowners
and those given by variable annuity contract owners. If the Board of Directors
were to conclude that separate funds should be established for variable life and
variable annuity separate accounts, Western Reserve will bear the attendant
expenses, but variable life insurance policyowners and variable annuity contract
owners would no longer have the economies of scale resulting from a larger
combined fund.
CHARGES AND DEDUCTIONS
Certain charges will be deducted in connection with the Contracts to compensate
Western Reserve for (1) administering the Contracts; (2) assuming certain risks
in connection with the Contracts; and (3) incurring expenses in distributing the
Contracts. The nature and amount of these charges are described more fully
below.
WITHDRAWAL CHARGE
No deductions for sales expenses are made from Purchase Payments. A Withdrawal
Charge, which is a contingent deferred sales charge, may be assessed against
Annuity Values when partially withdrawn or surrendered. No Withdrawal Charge
will be assessed if Annuity Values are applied to an annuity option provided for
under the Contract.
For the first partial withdrawal or Systematic Partial Withdrawal (see, THE
CONTRACT--ACCUMULATION PROVISIONS--Partial Withdrawals and Surrenders, page 13)
during each Contract Year, any applicable Withdrawal Charge is currently waived
on that portion of the amount withdrawn which equals 10% of the Contract's
Annuity Value on the date of the withdrawal. For example, if the
8
<PAGE> 15
amount of the first partial withdrawal during a Contract Year is $2,000, and the
Contract's Annuity Value on the date of the withdrawal is $25,000, then 10% of
$25,000 equals $2,500, and the Withdrawal Charge is waived on the entire $2,000
withdrawn. Thereafter, the full amount of any subsequent partial withdrawal or
Systematic Partial Withdrawal during the remainder of that Contract Year will be
subject to the Withdrawal Charge. However, no waiver of a Withdrawal Charge will
be made in connection with a Surrender. In determining which amounts withdrawn
are subject to the Withdrawal Charge, partial withdrawals and Surrenders will be
deemed made first from Purchase Payments on a first-in, first-out basis, and
then from any Contract earnings.
The length of time from receipt of a Purchase Payment to the time of a partial
withdrawal or surrender determines whether the Withdrawal Charge will be
deducted. The charge is a percentage of each respective Purchase Payment
partially withdrawn or surrendered within seven years of its payment. The charge
is as follows:
<TABLE>
<CAPTION>
NUMBER OF YEARS
FROM RECEIPT OF EACH
CHARGE PURCHASE PAYMENT
---------------------- --------------------
<S> <C>
8%................. 0-1
7%................. 2
6%................. 3
5%................. 4
4%................. 5
3%................. 6
2%................. 7
0%................. Over 7
</TABLE>
For Contracts issued with an appropriate endorsement, if the Owner or a joint
Owner is confined to a nursing care facility (as defined in the endorsement) for
thirty (30) consecutive days or longer, Western Reserve will also waive the
Withdrawal Charge on partial withdrawals or Surrenders as follows. Such
confinement must begin after the Contract Date. Western Reserve must receive
satisfactory written evidence of such confinement within two (2) months after
the confinement ends. Western Reserve will waive the Withdrawal Charge under the
endorsement only for Surrenders and partial withdrawals made during such
confinement or within two (2) months after the confinement ends. The endorsement
is not available in all States.
The Withdrawal Charge is deducted from the Annuity Value by cancelling the
number of Accumulation Units equal to the charge. The amount of the Withdrawal
Charge will be determined as of the date the partial withdrawal or Surrender
payment is processed. In the event of a partial withdrawal, the Owner will
receive the full amount requested, and an amount equal to the Withdrawal Charge
will also be withdrawn in order for the Owner to receive the full amount
requested. For example, if the Owner requests a distribution in the amount of
$100 during the second Contract Year (such distribution is deemed to be made
from the initial Purchase Payment) and the Withdrawal Charge is to be imposed on
the full amount, the Owner would receive $100, the total Annuity Value partially
withdrawn would be $107.53, and the Withdrawal Charge would be $7.53 (which is
7% of $107.53). Any partial withdrawal or Surrender may be subject to tax, and
the Owner should, therefore, consult with his or her tax adviser before
requesting any partial withdrawal or Surrender. (See "FEDERAL TAX
MATTERS--Taxation of Annuities" on pages 20-21 and "--Qualified Plans" on pages
21-22.)
The Withdrawal Charge is imposed to enable Western Reserve to recover certain
sales expenses it advances, including the cost of printing prospectuses and
sales literature and any advertising costs. The proceeds of this charge may not
be sufficient to cover these expenses. To the extent they are not, Western
Reserve will cover the shortfall from its general account assets, which may
include profits from the Mortality and Expense Risk Charge, described below.
The Withdrawal Charge may be reduced when sales of Contracts are made to a group
of directors, officers and employees of the same employer (including directors,
officers and employees of Western Reserve and its affiliates) as outlined in the
following paragraph. The amount of reduction will depend on factors such as the
size of the group, total Purchase Payments, and other relevant factors that
might tend to reduce expenses incurred in connection with such sales.
The Withdrawal Charge may be eliminated for the sale of the Contract to: (a)
current and retired directors, officers, full-time employees and agents of
Western Reserve and its affiliates; (b) current and retired directors, officers,
full-time employees and registered representatives of InterSecurities, Inc., an
affiliate of Western Reserve, and any broker-dealer which has a sales agreement
with InterSecurities, Inc.; (c) any Trust, pension, profit-sharing or other
employee benefit plan of any of the foregoing persons or entities; (d) current
and retired directors, officers and full-time employees of WRL Series Fund, Inc.
and any IDEX mutual fund, and any investment adviser or investment sub-adviser
thereto; and (e) any member of a family of any of the foregoing (e.g., spouse,
child, sibling, parent or parent-in-law). Western Reserve reserves the right to
modify or terminate this arrangement at any time.
TRANSFER CHARGE
After twelve free transfers of Annuity Value among the Sub-Accounts during any
one Contract Year, each additional transfer will be subject to a Transfer Charge
of $10, which will be deducted from the amount transferred to compensate Western
Reserve for the costs of the transfer. All transfers made on any one day will be
considered a single transfer, with any transfer charge allocated equally. The
Transfer Charge will not be increased. Western Reserve does not anticipate
making a profit from this charge. Western Reserve may, at any time, revoke or
modify this transfer privilege.
9
<PAGE> 16
MORTALITY AND EXPENSE RISK CHARGE
Western Reserve will deduct a daily Mortality and Expense Risk Charge from the
Series Account at an annual rate of 1.25% of the average daily net assets of the
Series Account. Western Reserve assumes two mortality risks: (1) that the
annuity rates under the Contracts cannot be changed to the detriment of Owners
even if Annuitants live longer than projected; and (2) Western Reserve may be
obligated to pay a death benefit claim in excess of a Contract's Cash Value.
(See "ANNUITY PROVISIONS-- Improved Annuity Rates" on page 18 and "ACCUMULATION
PROVISIONS--Death Benefits during the Accumulation Period" on page 15.) Western
Reserve also assumes an expense risk through its guarantee not to increase the
charges for issuing and administering the Contracts and the Series Account,
regardless of its actual expenses.
If the Mortality and Expense Risk Charge is insufficient to cover actual costs,
the loss will be borne by Western Reserve; conversely, if the amount deducted
proves more than sufficient, the excess will be a profit to Western Reserve.
This charge is deducted from the Series Account both during the Accumulation
Period and after the Maturity Date. The Mortality and Expense Risk Charge will
not be assessed against either the Fixed Account Value or monies that have been
applied to purchase a Fixed Account annuity option.
ANNUAL CONTRACT CHARGE
On each Anniversary through the Maturity Date, Western Reserve will deduct an
Annual Contract Charge of $35 as partial compensation for the cost of providing
administrative services under the Contracts. The Annual Contract Charge is
deducted from each Sub-Account and the Fixed Account in proportion to the value
each bears to the Annuity Value. If the Annuity Value is surrendered other than
on an Anniversary, a full $35 fee will be deducted.
Western Reserve does not expect to earn a profit on the Annual Contract Charge.
Therefore, Western Reserve may reduce the amount of the Annual Contract Charge
when sales of Contracts are made to a group of employees of the same employer,
employer group or similar group, under an arrangement which results in a savings
in administrative service expenses. Even if administrative expenses of the
Account increase, Western Reserve guarantees that it will not increase the
amount of the Annual Contract Charge.
ADMINISTRATIVE CHARGE
Western Reserve deducts a daily Administrative Charge from values remaining in
the Series Account at an annual rate of 0.15% of the average daily net assets of
the Series Account for the cost of providing administrative services under the
Contracts and the Account. This charge is deducted from the Series Account both
during the Accumulation Period and after the Maturity Date.
Western Reserve does not expect to earn a profit on the Administrative Charge.
Even if administrative expenses of the Contract and the Account increase,
Western Reserve guarantees that it will not increase the amount of the
Administrative Charge.
PREMIUM TAXES
Certain states and other governmental entities may impose a premium tax, ranging
up to 3.5% of Purchase Payments. If applicable, and if Western Reserve has
incurred or reasonably expects to incur expenses in respect of premium taxes,
the tax will be deducted, either from the Purchase Payment when received, from
amounts partially withdrawn or surrendered, from death benefit proceeds, or from
the amount applied to effect an annuity at the time annuity payments commence.
Western Reserve will deduct any applicable premium taxes when it incurs them,
but reserves the right to defer deduction to a later date as long as such
deferral is equitable to Owners.
Premium tax rates are subject to change by the respective state legislatures,
administrative interpretations, or judicial acts. The amount of any such tax
will depend on, among other things, the Owner's state of residence, the status
of Western Reserve in that state, and the insurance tax laws of such state.
DEDUCTIONS FOR OTHER TAXES
Currently no charge is made to the Series Account for Federal income taxes
attributable to the Series Account. Western Reserve may, however, make such a
charge in the future subject to obtaining any necessary regulatory approvals.
Charges for any other applicable taxes including any tax or other economic
burden resulting from the application of tax laws that Western Reserve
determines to be properly attributable to the Account may also be made. (See
"FEDERAL TAX MATTERS--Company Tax Status" on page 20.)
EXPENSES OF THE FUND
Because the Series Account purchases shares of the Fund, the net assets of the
Series Account will reflect the investment advisory fee and other expenses
incurred by the Fund, as described in the Portfolios' Prospectus.
THE CONTRACT
ACCUMULATION PROVISIONS
PURCHASE PAYMENTS
Owners may make Purchase Payments as frequently as they elect. Purchase Payments
after the initial Purchase Payment are payable at Western Reserve's
Administrative Office. The initial Purchase Payment generally must accompany the
application, and for Non-Qualified Contracts must be at least $5,000; however, a
minimum initial Purchase Payment of $1,000 is allowed provided the application
reflects anticipated additional monthly periodic Purchase Payments of at least
$100, via electronic funds transfer from the owner's bank account. For IRAs the
minimum initial Purchase Payment is $1,000 and for Qualified Con-
10
<PAGE> 17
tracts other than IRAs the minimum initial Purchase Payment is $50. For all
Contracts, subsequent Purchase Payments are not required but may be made at any
time and in any amount provided that each payment is for a minimum of $50,
unless Western Reserve consents to a smaller amount and further provided that
total Purchase Payments in any Contract Year do not exceed $1,000,000, unless
Western Reserve consents to a larger amount.
As an accommodation to Owners, Western Reserve will accept transmittal of both
initial and subsequent Purchase Payments of at least $1,000 by wire transfer.
For initial Purchase Payments, the wire transfer must be accompanied by a
simultaneous telephone facsimile transmission of an application ("FAXED
Application"). Initial Purchase Payments accepted via wire transfer with FAXED
Application will be invested at the value next determined following receipt.
Initial Purchase Payments made by wire transfer not accompanied by simultaneous
FAXED Application, or accompanied by an incomplete FAXED Application, will be
retained for a period up to five business days while Western Reserve attempts to
obtain the FAXED Application or complete the essential information required to
establish the Contract and allocate the initial Purchase Payment at the
Accumulation Unit Value which will be determined after receipt of the FAXED
Application or information necessary to complete the application. If Western
Reserve cannot obtain the FAXED Application or essential information within five
business days, Western Reserve will return the initial Purchase Payment to the
applicant, unless the applicant consents to allow Western Reserve to retain the
initial Purchase Payment until the required FAXED Application or essential
information is received. When the FAXED Application contains all information
necessary to issue the Contract and allocate the Net Purchase Payment, but the
FAXED Application has not been signed by the Owner, Western Reserve will issue
the Contract and allocate the Net Purchase Payment as indicated in the FAXED
Application. At the same time, Western Reserve will also electronically prepare
a new application form, containing the same information received on the FAXED
Application, for delivery with the Contract to the Owner. Upon delivery, the
Owner will sign the electronically prepared application, which will be retained
by Western Reserve.
In the event the original application with original signature is later received
and the allocation instructions in that application are, for any reason,
inconsistent with those previously designated on the FAXED Application, the
initial Purchase Payment will be reallocated in accordance with the allocation
instructions in the application with original signature at the Accumulation Unit
Value next determined after receipt of such application.
Owners wishing to make payments via bank wire should instruct their banks to
wire Federal Funds as follows to:
Barnett Bank of Pinellas County
ABA # 063000047
For credit to: Western Reserve Life
Account #: 1263627596
Owner's Name:
Contract Number:
Attention: Annuity Accounting
Fax Number: (813) 588-1620
Western Reserve may reject any application or Purchase Payment for any reason
permitted by law.
NET PURCHASE PAYMENTS
The Net Purchase Payment is equal to the Purchase Payment less any premium
taxes. (See "Premium Taxes," page 10.) Initial and subsequent Net Purchase
Payments are allocated according to the Owner's direction among the Sub-Accounts
of the Series Account, to the Fixed Account, or to a combination of both. (For
Contracts issued in the State of Washington, the Fixed Account is not available
for allocation of Net Purchase Payments.) The Owner, or the registered
representative/agent of record for the Contract upon instructions from the
Owner, may change the allocation of subsequent Purchase Payments at any time
upon written notice to Western Reserve, or by telephone by calling Western
Reserve's toll-free number, 1-800-851-9777. Western Reserve will employ the same
procedures to confirm that such telephone instructions are genuine as it employs
regarding transfers among Sub-Accounts and the Fixed Account by telephone.
Western Reserve reserves the right to limit such change to once each Contract
Year. Upon allocation to the Series Account, Net Purchase Payments are converted
into units of the appropriate Sub-Account based upon the Accumulation Unit Value
in that Sub-Account on or following the Valuation Date on which the Purchase
Payment is received at Western Reserve's Administrative Office. (See
"Accumulation Unit Value," page 12.) If the Contract application and other
information necessary for processing the request to apply the Purchase Payment
(collectively, "application") are complete upon receipt, Western Reserve will
accept the application and apply the initial Net Purchase Payment within two
business days of receipt. If it is incomplete, Western Reserve will attempt to
have it properly completed within five business days of receipt, and if unable
to do so, Western Reserve will inform the prospective purchaser of the reasons
that the application is incomplete and request that the prospective purchaser
consent to Western Reserve retaining the Purchase Payment until the application
is properly completed. If such consent is not obtained, Western Reserve will
immediately return the entire Purchase Payment. Once the application is
complete, Western Reserve will accept it and apply the initial Net Purchase
Payment within two business days.
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ACCUMULATION UNIT VALUE
The Accumulation Unit Value will vary from one Valuation Period to the next
depending on the investment results experienced by each Sub-Account. When the
Sub-Accounts were first established, the initial Accumulation Unit Value for
each Sub-Account was arbitrarily set at $10. The Accumulation Unit Value for
each Sub-Account at the close of a Valuation Period is determined by multiplying
the Accumulation Unit Value for that Sub-Account at the close of the immediately
preceding Valuation Period by the experience factor for that Sub-Account for the
current Valuation Period. The Accumulation Unit Value may increase, decrease, or
remain the same from Valuation Period to Valuation Period.
EXPERIENCE FACTOR
During the Accumulation Period, the experience factor measures investment
experience for a Valuation Period. Each Sub-Account has its own distinct
experience factor. In calculating a Sub-Account's experience factor for a
Valuation Period, the net asset value for each share of the corresponding
Portfolio of the Fund at the end of the current Valuation Period is increased by
the amount per portfolio share of any dividend or capital gain distribution
received by the Portfolio during the current Valuation Period and decreased by a
per portfolio share charge for any applicable taxes. The total is then divided
by the net asset value per portfolio share at the end of the preceding Valuation
Period. A charge equal to 1.25% on an annual basis of the net assets for each
day in the Valuation Period is then subtracted to compensate Western Reserve for
certain mortality and expense risks and a charge equal to 0.15% on an annual
basis of the net assets for each day in the Valuation Period is also subtracted
to compensate Western Reserve for certain administrative expenses. (See "CHARGES
AND DEDUCTIONS--Mortality and Expense Risk Charge" on page 10 and
"--Administrative Charge" on page 10.)
COMPUTING SUB-ACCOUNT VALUE
At the end of any Valuation Period, a Sub-Account's value is equal to the number
of Units that the Contract has in the Sub-Account, multiplied by the
Accumulation Unit Value of that Sub-Account.
The number of units that a Contract has in each Sub-Account is equal to:
1. The initial units purchased on the Contract Date; plus
2. Units purchased at the time additional Net Purchase Payments are allocated to
the Sub-Account; plus
3. Units purchased through transfers from another Sub-Account or the Fixed
Account; minus
4. Any units that are redeemed to pay for partial withdrawals; minus
5. Any units that are redeemed as part of a transfer to another Sub-Account or
the Fixed Account; minus
6. Any units that are redeemed to pay the Annual Contract Charge, any premium
taxes and any transfer charge.
Portfolio Share Net Asset Value. The net asset value per share of shares of the
Fund is determined, once daily, as of the close of the regular session of
business on the New York Stock Exchange ("Exchange") (usually 4:00 p.m. Eastern
time), on each day the Exchange is open.
TRANSFERS TO AND FROM, AND AMONG ALLOCATION OPTIONS
Before the Maturity Date, the Owner may, at any time, transfer amounts among
Sub-Accounts or from Sub-Accounts to the Fixed Account. (For Contracts issued in
the State of Washington, the Fixed Account is not available to receive Annuity
Value transferred from the Sub-Accounts.) Transfers may also be made from the
Fixed Account to the Sub-Accounts, subject to certain restrictions. (See "THE
FIXED ACCOUNT--Allocations, Transfers and Partial Withdrawals" on page 24.)
Transfers are not available if the owner has elected Dollar Cost Averaging or
Systematic Partial Withdrawal.
The amount of Contract Value available for transfer from any Sub-Account or the
Fixed Account, is determined at the end of the Valuation Period during which the
transfer request is received at Western Reserve's Administrative Office. As
explained in the previous paragraph, the net asset value for each share of the
corresponding Portfolio of any Sub-Account is determined, once daily, as of the
close of the regular business session of the Exchange (usually 4:00 p.m.,
Eastern time), which coincides with the end of each Valuation Period. Therefore,
any transfer request received after 4:00 p.m., Eastern time, on any day the
Exchange is open for business will be processed utilizing the net asset value
for each share of the applicable Portfolio determined as of 4:00 p.m., Eastern
time, on the next day the Exchange is open for business.
The amount available for transfer from the Fixed Account will be determined in
the same manner. Owners may make transfer requests in writing, or by telephone.
Written requests must be in a form acceptable to Western Reserve. The registered
representative/agent of record for the Contract may, upon instructions from the
Owner, make telephone transfers upon request without the necessity for the Owner
to have previously authorized telephone transfers in writing. If, for any
reason, an Owner does not want the ability to make transfers by telephone, the
Owner should provide written notice to Western Reserve. All telephone transfers
should be made by calling Western Reserve at our toll-free number
1-800-851-9777.
Western Reserve will not be liable for complying with telephone instructions it
reasonably believes to be authentic, nor for any loss, damage, costs or expense
in acting on such telephone instructions, and Owners will bear the risk of any
such loss. Western Reserve will employ reasonable procedures to confirm that
telephone instructions are genuine. If Western Reserve does not employ such
procedures, it may be liable for losses due to unauthorized or fraudulent
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<PAGE> 19
instructions. Such procedures may include, among others, requiring forms of
personal identification prior to acting upon such telephone instructions,
providing written confirmation of such transactions to Owners and/or tape
recording of telephone transfer request instructions received from Owners.
Western Reserve may, at any time, revoke or modify the transfer privilege.
Western Reserve ordinarily will effect transfers and determine all values in
connection with transfers at the end of the Valuation Period during which the
transfer request is received at Western Reserve's Administrative Office. Western
Reserve currently imposes a $10 charge for each transfer after the first twelve
transfers during any Contract Year. (See "CHARGES AND DEDUCTIONS--Transfer
Charge" on page 9.)
DOLLAR COST AVERAGING
The Owner may direct Western Reserve to automatically transfer specified amounts
from the Fixed Account on a monthly basis to a Sub-Account. This service is
intended to allow the Owner to utilize "Dollar Cost Averaging," a long-term
investment method which provides for regular, level investments over time.
Western Reserve makes no guarantees that Dollar Cost Averaging will result in a
profit or protect against loss.
To qualify for Dollar Cost Averaging, a minimum of $10,000 must be in the Fixed
Account and at least $1,000, in the aggregate, must be transferred each month,
unless Western Reserve consents to a smaller amount. To further qualify for
Dollar Cost Averaging from the Fixed Account, no more than one-tenth ( 1/10) of
the amount in the Fixed Account at the commencement of Dollar Cost Averaging can
be transferred each month. Other types of transfers from the Fixed Account may
also be subject to certain other restrictions. (See "THE FIXED
ACCOUNT--Allocations, Transfers and Partial Withdrawals" on page 24.)
A written election of this service, on a form provided by Western Reserve, must
be completed by the Owner in order to begin transfers. The first transfer will
occur during the month which follows receipt of the form, providing the form is
received by the 25th day of the month. Once elected, transfers from the Fixed
Account will be processed monthly until the entire value is completely depleted
or the Owner instructs Western Reserve in writing to cancel the monthly
transfers.
There is no charge for Dollar Cost Averaging. However, each transfer which
occurs under the Dollar Cost Averaging service will be counted towards the
twelve free transfers allowed during each Contract Year. (See "CHARGES AND
DEDUCTIONS--Transfer Charge" on page 9.) Western Reserve reserves the right to
discontinue offering Dollar Cost Averaging upon 30 days written notice to
Owners. Dollar Cost Averaging is not available if the Owner has elected
Systematic Partial Withdrawals.
PARTIAL WITHDRAWALS AND SURRENDERS
1. Partial Withdrawals. Prior to the earlier of the Maturity Date or the death
of the Annuitant (when no Contingent Annuitant has been named), the Owner may
partially withdraw a portion of the Series Account Value upon written request,
complete with all necessary information, to Western Reserve's Administrative
Office. Unless Western Reserve consents, no partial withdrawal is permitted if
the Cash Value would be reduced below $5,000. No partial withdrawals from the
Fixed Account may be made without the consent of Western Reserve. (See "THE
FIXED ACCOUNT--Allocations, Transfers and Partial Withdrawals" on page 24.) All
partial withdrawals are processed at the Accumulation Unit Value for each
Sub-Account next computed after receipt and acceptance of the request for
partial withdrawal by Western Reserve at its Administrative Office. Western
Reserve will cancel units equal to the amount requested from each Sub-Account,
and an amount equal to the Withdrawal Charge and any premium tax will also be
withdrawn in order for the Owner to receive the full amount requested. (See
"CHARGES AND DEDUCTIONS --Withdrawal Charge" on pages 8-9 and "Premium Taxes" on
page 10.) The Sub-Accounts for a partial withdrawal may be specified and the
amount requested to be withdrawn from each specified Sub-Account may not exceed
the value of that Sub-Account. If not specified, the amount requested will be
withdrawn on a pro-rata basis from each Sub-Account.
2. Systematic Partial Withdrawals. The Owner may elect in writing on a form
provided by Western Reserve to partially withdraw from the Series Account up to
10% of the Cash Value annually (10% of the initial Purchase Payment if elected
at time of application for a Contract), in equal monthly payments ("Systematic
Partial Withdrawals") of at least $200 per month. The first withdrawal will
occur during the month which follows receipt of the form, providing the form is
received by the 25th day of the month. If Systematic Partial Withdrawals are
elected at the time of application for a Contract, a minimum initial Purchase
Payment of at least $25,000 must accompany the application, unless Western
Reserve consents to a smaller amount. A subsequent election is subject to the
Contract then having a minimum of $25,000 of Cash Value, unless Western Reserve
consents to a smaller amount. Western Reserve will pay the Systematic Partial
Withdrawal amount requested and cancel units equal to the amount withdrawn from
the Sub-Accounts in the same manner as the current Net Purchase Payment
allocation instructions, except no Systematic Partial Withdrawals are permitted
from the Fixed Account. The amount to be partially withdrawn from each
Sub-Account may not exceed the Cash Value of the Sub-Account. Western Reserve
will not process a Systematic Partial Withdrawal if the Cash Value for the
entire Contract would be reduced below $5,000.
Systematic Partial Withdrawals are not available if the Owner has elected Dollar
Cost Averaging. Systematic Partial Withdrawals may be discontinued by the Owner
at any time by notifying Western Reserve in writing. Western Reserve reserves
the right to discontinue offering System-
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atic Partial Withdrawals upon 30 days' written notice to Owners. Western Reserve
also reserves the right to assess a processing fee for this service. Generally,
under a Non-Qualified Contract, Systematic Partial Withdrawals, like other
distributions prior to the Maturity Date, are first treated as taxable income to
the extent that the Contract Value immediately before a withdrawal exceeds the
"investment in the contract" at that time. Any additional amount withdrawn is
not taxable. Further under a Non-Qualified Contract, a 10% penalty tax will
generally be imposed on the taxable portion of a partial withdrawal and a
Systematic Partial Withdrawal made prior to the Owner's age 59 1/2, unless
certain exceptions apply. The Owner should, therefore, consult with his or her
tax adviser before requesting any partial withdrawal or Systematic Partial
Withdrawals. (See "FEDERAL TAX MATTERS--Taxation of Annuities" on pages 20-21.)
3. Surrenders. The Owner may completely surrender the Contract at any time
prior to the Maturity Date. All requests for Surrender are processed at the
Accumulation Unit Value for each Sub-Account next computed after receipt and
acceptance of the Surrender request by Western Reserve at its Administrative
Office. Western Reserve will deduct the $35 Annual Contract Charge, any
applicable premium taxes, and any applicable Withdrawal Charge from the
Surrender proceeds.
4. Partial Withdrawals and Surrenders. The amount of any partial withdrawal or
Surrender will be paid promptly, and in any event within seven days of receipt
of the written request, complete with all necessary information at Western
Reserve's Administrative Office, except that Western Reserve reserves the right
to defer the right of partial withdrawal or Surrender under certain
circumstances. (See "OTHER MATTERS RELATING TO THE CONTRACT--Contract Payments"
on page 18.) Under Non-Qualified Contracts, Western Reserve will withhold from
each partial withdrawal, systematic partial withdrawal or Surrender for tax
purposes the minimum amount required by law, unless the Owner affirmatively
elects, before payments begin, to have either nothing withheld or a different
amount withheld. When Western Reserve incurs extraordinary charges, such as wire
transfers or overnight mail expenses, for expediting delivery of a partial
withdrawal or Surrender payment to a Contract Owner, Western Reserve will deduct
such charges from the payment. The current charge for a wire transfer is $15.
The current charge for overnight delivery is $20. For the protection of Owners,
all requests for partial withdrawals or Surrenders of more than $100,000, or
where the partial withdrawal or Surrender proceeds are to be sent to an address
other than the address of record, will require a signature guarantee. All
required guarantees of signatures must be made by a national or state bank, a
member firm of a national stock exchange or any other institution which is an
eligible guarantor institution as defined by rules and regulations of the SEC.
If the Owner is a corporation, partnership, trust or fiduciary, evidence of the
authority of the person seeking redemption is required before the request for
withdrawal is accepted, including withdrawals under $100,000. For additional
information, Owners may call Western Reserve at (800) 851-9777. Partial
withdrawals, Systematic Partial Withdrawals, and Surrenders may be subject to
tax including a 10% penalty tax. (See "FEDERAL TAX MATTERS--Taxation of
Annuities" on pages 20-21.) For certain Qualified Contracts, a partial
withdrawal may require the consent of the Owner's spouse under the Code and the
regulations promulgated thereunder by the Treasury Department (the "Treasury
Regulations"). (See "FEDERAL TAX MATTERS-- Qualified Plans" on pages 21-22.) For
Qualified Contracts issued under Code Section 403(b) and Contracts issued under
the Texas Optional Retirement Program, certain restrictions will apply. (See
"FEDERAL TAX MATTERS-- Qualified Plans" on pages 21-22.)
CONTRACT LOANS FOR 401(A), 401(K), AND 403(B) CONTRACTS
After the ten day Right to Examine Contract Period and during the Accumulation
Period, (1) Owners of Contracts used in connection with a Tax Sheltered Annuity
Plan ("TSA Plan") under Section 403(b) of the Code, if the TSA Plan is not
subject to the Employee Retirement Income Security Act of 1974, and (2) Owners
of Contracts purchased by a pension, profit-sharing, or other similar plan
qualified under Section 401(a) of the Code (a "401 Plan"), including a Section
401(k) plan, where a plan trustee is the Owner, may elect a Contract loan
endorsement under which the Owner can receive Contract loans. The availability
of Contract loans will also be governed by the provisions of the TSA Plans or
401 Plans involved. An Owner of a Contract used in connection with a TSA Plan or
401 Plan may be subject to income tax or tax penalties if loans from the plan
are not repaid in accordance with applicable provisions of the Code. In
addition, Internal Revenue Service authorities suggest that a Contract loan may,
at least in certain circumstances, result in adverse tax consequences for the
TSA Plan or 401 Plan. Accordingly, a competent tax advisor should be consulted
before a Contract loan is requested.
If the Contract loan endorsement is available, the Owner can borrow against the
Contract an amount which may not exceed the lesser of (1) 50% of the Cash Value
or (2) $50,000 reduced by the highest outstanding loan balance during the 1-year
period ending on the day before the loan date (determined below). However, if
the Cash Value is less than $20,000, the Owner may borrow against the Contract
the lesser of (1) 80% of the Cash Value or (2) $10,000. In all events, the
minimum amount that can be borrowed is $1,000. The Owner has the sole
responsibility for requesting loans and making loan repayments that comply with
applicable tax requirements.
When a loan is made, an amount equal to the loan will be withdrawn from the
Sub-Accounts specified by the Owner and transferred to the loan reserve. The
loan reserve is part
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of the Fixed Account used as collateral for any Contract loan. If no
Sub-Accounts are specified, the loan will be made from each Sub-Account in
accordance with the Owner's current purchase payment allocation. Amounts
transferred to the loan reserve do not participate in the investment experience
of the Allocation Options from which they were withdrawn.
All loan requests are processed at the Accumulation Unit Value for each
Sub-Account next computed after receipt and acceptance of the loan request by
Western Reserve at its Administrative Office. The loan date is the date Western
Reserve processes the loan request. Under its current procedures, Western
Reserve does not charge a fee to cover loan processing and expenses associated
with establishment and administration of the loan reserve. However, Western
Reserve reserves the right to charge such a fee or change it from time to time.
The Contract will be the sole security for the loan. Western Reserve reserves
the right to limit the number of loans an Owner may make during a Contract Year.
On each Contract Anniversary, Western Reserve will compare the amount of the
outstanding loan to the amount in the loan reserve. Western Reserve will also
make this comparison whenever the Owner repays all or part of the loan. At each
such time, if the amount of the outstanding loan (plus any unpaid interest)
exceeds the amount in the loan reserve, Western Reserve will withdraw the
difference from the Contract's Sub-Accounts and transfer it to the loan reserve,
in the same fashion as when a loan is made. If the amount in the loan reserve
exceeds the amount of the outstanding loan, Western Reserve will withdraw the
difference from the loan reserve and transfer it to the Sub-Accounts in
accordance with the Owner's current payment allocation. However, Western Reserve
reserves the right to require the transfer to the Fixed Account if the amount
was transferred from the Fixed Account to establish the loan.
If the Contract loan at any time exceeds the Cash Value of the Contract, Western
Reserve will mail a notice to the last known address of the Owner and any
assignee of record. If the excess amount is not paid within 31 days after
mailing of the notice, the Contract will terminate without value.
Loan Interest. Interest on any loan will be at the Contract loan annual rate of
6% in arrears unless, under a 401 Plan, a higher rate is requested by the Owner
in the loan application. (See "Repayment of Loans," below.)
Amounts in the loan reserve will earn interest at a minimum guaranteed effective
annual interest rate of 4% per year. Western Reserve may declare from time to
time higher current interest rates. Different current interest rates may be
applied to the Fixed Account attributable to the loan reserve than to the rest
of the Fixed Account.
Repayment of Loans. Principal and interest must be repaid in substantially
level quarterly or monthly payments over a 5-year period or, if the loan is used
to acquire the Owner's principal residence, a 10, 15, or 20-year period, but
such an extended period cannot go beyond the year the Owner attains age 70 1/2.
If a loan installment repayment is not received within 31 days from the
installment's original due date, a deemed distribution of the entire amount of
the outstanding loan principal and interest due, and any applicable charges
under the Contract including any Withdrawal Charge, will take place. Under a TSA
Plan, this distribution may be subject to income tax and a penalty tax, and may
cause the Contract to fail to qualify under Section 403(b) of the Code. (See
"Federal Tax Matters -- Qualified Plans," pages 21-22.)
While the Contract is in force and during the Accumulation Period, any loan may
be repaid in full. If not repaid, loans will automatically reduce the amount of
any death benefit proceeds, the amount payable upon a partial withdrawal or
Surrender of the Contract and the amount applied on the Maturity Date to provide
annuity payments.
DEATH BENEFITS DURING THE ACCUMULATION PERIOD
1. General
In general, if the Annuitant dies during the Accumulation Period and the Owner
is a natural person other than the Annuitant, the Owner will automatically
become the new Annuitant, the Contract will continue In Force, and no death
benefit will be payable to the Beneficiary. If the Annuitant dies during the
Accumulation Period and the Owner is either the same individual as the Annuitant
or other than a natural person, Western Reserve will pay the death benefit
proceeds to the Beneficiary in a lump sum upon receipt of due proof of death,
unless a written Alternative Election, as described below, is made.
2. Amount of Death Benefit Proceeds
If the Annuitant dies during the Accumulation Period and prior to the eighth
Contract Year, and the Owner is either the same person as the Annuitant or other
than a natural person the death benefit proceeds, if payable, will be the
greater of: (i) the Cash Value as of the date Western Reserve receives due proof
of death and a written election as to the method of payment, as described above;
or (ii) the excess of (a) the amount of Purchase Payments paid less (b) any
amounts partially withdrawn from the Contract to pay for partial withdrawals,
increased by 5% on each Contract Anniversary prior to the Owner's age 80
(Annuitant's age 80 if the Owner is not a natural person), up to an amount not
to exceed 200% of the Purchase Payments less partial withdrawals.
If the Annuitant dies during the Accumulation Period and after the seventh
Contract Year and the Owner is either the same person as the Annuitant or other
than a natural person, the death benefit proceeds, if payable, will be the
greatest of: (i) the Cash Value as of the date Western Reserve receives due
proof of death and a written election as to the method of payment, as described
above; or (ii) the excess of (a) the amount of Purchase Payments paid less (b)
any amounts partially withdrawn from the Contract to pay for partial
withdrawals, increased by 5% on
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each Contact Anniversary prior to the Owner's age 80 (Annuitant's age 80 if the
Owner is not a natural person), up to an amount not to exceed 200% of the
Purchase Payments less partial withdrawals; or (iii) the Cash Value as of the
seventh Contract Anniversary, less any amounts partially withdrawn from the
Contract after the seventh Contract Year to pay for partial withdrawals. In
certain states, the calculation of death benefit proceeds under item (iii) may
vary. The Contract should be consulted for details.
The Insurance Department of Pennsylvania has disapproved for Contracts issued in
Pennsylvania that portion of item (ii) of the death benefit provision described
in the two preceding paragraphs, which increases the death benefit payable by 5%
on each Contract Anniversary, as contrary to Pennsylvania Insurance Laws.
Therefore, for Contracts issued in Pennsylvania, when the amount of death
benefit payable under the Contract is the excess of (a) the amount of Purchase
Payments paid less (b) any amount partially withdrawn from the Contract to pay
for partial withdrawals, such amount of death benefit will not be increased by
5% on each Contract Anniversary.
3. Alternative Elections
If the Beneficiary is entitled to receive the death benefit proceeds as in 2.
above and is the spouse of the deceased Annuitant, then the Beneficiary may
elect to become the new Owner and Annuitant and keep the Contract in force in
lieu of receiving the death benefit proceeds. If the Beneficiary is not the
spouse of the deceased Annuitant and is entitled to receive the death benefit
proceeds, the Beneficiary may elect, in lieu of a lump sum payment, one of the
following options that provide for complete distribution of the death benefit
proceeds and termination of the Contract: (i) within five years of the date of
such Annuitant's death; (ii) over the lifetime of the Beneficiary; or (iii) over
a period that does not exceed the life expectancy of such Beneficiary, as
defined by the Code and the Treasury Regulations. Options (ii) and (iii) may be
elected only if the Beneficiary is a natural person and payments start within
one year of the date of the Annuitant's death. (For a more detailed explanation
of these requirements, see "FEDERAL TAX MATTERS--Additional Considerations" on
page 22.) Multiple Beneficiaries may choose individually among any of the three
options.
For options (i) and (iii) above, the Annuity Value as of the date Western
Reserve receives due proof of death and a written election as to the method of
payment, if any, will be adjusted to equal the death benefit proceeds, as
described below, and the Contract will remain in force as a deferred annuity
until the end of the elected distribution period. Under option (i) above,
Western Reserve will:
- Allow the Beneficiary, at the time of electing (i), to make a partial
withdrawal. Further partial withdrawals during the duration of the
five-year period are not permitted;
- Allow the Beneficiary, at the time of electing (i), to make "one-time"
transfer of Contract values among Sub-Accounts and to the Fixed Account,
and transfers from the Fixed Account to the Sub-Accounts;
- Not deduct the Annual Contract Charge during the duration of the
five-year period;
- Not apply the Withdrawal Charge in the event of a partial withdrawal upon
election of (i), or upon a total distribution of all Contract values
during or at the end of the five-year period;
- Not allow annuitization during or at the end of the five-year period.
Distribution of all Contract values will be made in a lump sum;
- In the event of the death of the Beneficiary prior to the end of the
five-year period, pay remaining Contract value, according to its value at
the time of payment, to the Beneficiary's estate, unless a Contingent
Beneficiary has been named by the Owner, in which event payment will be
made to the Contingent Beneficiary. The Beneficiary is NOT entitled to
name his or her own beneficiary of the Contract's value.
For option (ii), the Maturity Date will be changed to the date Western Reserve
receives due proof of death and a written election as to the method of payment,
if any, and the death benefit proceeds will be used to purchase annuity payments
under the annuity provisions of the Contract. (See "ANNUITY PROVISIONS" page
17.)
4. Death of an Owner Who is not an Annuitant
If an Owner is not the same individual as the Annuitant and dies before the
Annuitant:
(a) If no Successor Owner has been named or, if named, is no longer alive, the
Owner's estate will become the new Owner. The Cash Value must be distributed
within five years of the former Owner's death; or
(b) If a Successor Owner has been named, is alive and is the Owner's spouse, the
Contract will continue with the spouse as the new Owner; or
(c) If a Successor Owner has been named, is alive and is not the Owner's spouse,
the Successor Owner will become the new Owner. The Cash Value must be
distributed either:
(1) within five years of the former Owner's death; or
(2) over the lifetime of the new Owner, if a natural person, with payments
beginning within one year of the former Owner's death; or
(3) over a period that does not exceed the life expectancy (as defined by the
Internal Revenue Code and Regulations adopted under the Code) of the new
Owner, if a natural person, with payments beginning within one year of the
former Owner's death.
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5. Qualified Contracts
If a Qualified Contract is issued to a retirement plan, similar provisions will
apply upon the death of the plan participant. However, the required distribution
rules are more complex in the case of a Qualified Contract held by a plan. Plan
participants should consult a qualified pension or tax advisor concerning the
operation of these rules.
ANNUITY PROVISIONS
MATURITY DATE AND SELECTION OF ANNUITY OPTIONS
Provided the Contract is still In Force, annuity payments will begin on the
Maturity Date, which is, for both Non-Qualified Contracts and Qualified
Contracts, the Anniversary nearest the Annuitant's Attained Age 90. However, the
Owner may change the Maturity Date at any time prior to the Maturity Date by
written request. Any new Maturity Date must be at least five years after the
Contract Date, and the Attained Age of the Annuitant as of the new Maturity Date
cannot be greater than 90. After the Maturity Date, no additional purchase
payments, partial withdrawals, transfers, full Surrenders, or change of
Annuitants or annuity options may be made under the Contract. The Qualified
Contract is designed for use with several types of qualified plans. A tax
advisor should be consulted about the use of a Qualified Contract with qualified
plans, including the specified minimum distribution rules applicable to such
plans.
Annuity Payments will be paid under Option D (described on page 18), with 120
payments guaranteed, unless the Owner elects otherwise. The Owner may change the
annuity option by written request at any time prior to the Maturity Date. Thirty
days prior to the Maturity Date, Western Reserve will mail to the Owner a notice
and a form upon which the Owner can select Allocation Options for the annuity
proceeds as of the Maturity Date, which cannot be changed thereafter and will
remain in effect until the Contract terminates. If a Series Account annuity
option is chosen, the Owner must include in the written notice the Sub-Account
allocation of the Annuity Proceeds as of the Maturity Date. If Western Reserve
does not receive that form or other written notice acceptable to Western Reserve
prior to the Maturity Date, the Contract's existing Allocation Options will
remain in effect until the Contract terminates. The Owner may also, prior to the
Maturity Date, select or change the frequency of annuity payments, which may be
monthly, quarterly, semi-annually or annually, provided that the annuity option
and payment frequency provides for payments of at least $100 per period. If none
of these is possible, a lump sum payment will be made.
The Owner may select one of the Fixed Account annuity options or Series Account
annuity options described below or any alternate form of settlement acceptable
to Western Reserve. Treasury Regulations may preclude the availability of
certain annuity options in connection with certain Qualified Contracts.
Fixed Account annuity options provide equal periodic (monthly, quarterly,
semi-annual or annual) payments of a specific amount that Western Reserve
guarantees will not change. The amount of the periodic annuity payment will be
based on the Annuity Proceeds on the Maturity Date, the annuity option selected
(i.e., the form and duration of payments), the age of the Annuitant or
Beneficiary (or ages of Co-Annuitants), the sex of the Annuitant (except for
certain Qualified Contracts), and the applicable annuity rate shown in the
Contract (or a more favorable current rate available under the Contracts on the
Maturity Date). The annuity rates shown in the Contract are based on the Society
of Actuaries 1983 Table A with projection and an assumed investment rate of 3%.
Western Reserve may in its sole discretion increase the amount of a payment or
payments once payments begin.
Series Account annuity options (i.e., variable annuity options) are similar to
fixed annuity options except that the amount of each periodic payment after the
first will vary to reflect the net investment experience of the Sub-Accounts
selected by the Owner. The amount of the first annuity payment is determined in
the manner described in the Statement of Additional Information for a Series
Account annuity option. Under a Series Account annuity option, the Owner applies
the Annuity Proceeds to one or more of the three Sub-Accounts designated to
support annuity payments by purchasing units issued in connection with one or
more of these Sub-Accounts. The number of units purchased is equal to the amount
of the first annuity payment allocated to a particular Sub-Account divided by
the Annuity Unit Value for that Sub-Account on the Maturity Date. The number of
units of a particular Sub-Account supporting payments to an Annuitant never
changes, but the second and subsequent payments will vary with the Annuity Unit
Value because each payment will equal the number of units in each selected
Sub-Account multiplied by the Annuity Unit Value of that Sub-Account on the date
the payment is processed. Annuity Proceeds allocated to Series Account annuity
options are subject to a daily Mortality and Expense Risk Charge of 1.25% per
annum and a daily Administrative Charge of 0.15% per annum.
The Annuity Unit Value for a Sub-Account, designed to support annuity payments,
is first calculated in the same manner as the Accumulation Unit Value
corresponding to the same Fund Portfolio would be calculated (see "THE
CONTRACT--ACCUMULATION PROVISIONS--Accumulation Unit Value" on page 12), and
then is adjusted to reflect a 5% assumed investment return. The adjustment
results in the Annuity Unit Value increasing to the extent that the net
investment factor increases at greater than an annual rate of 6.4%. It results
in the Annuity Unit Value decreasing to the extent that the net investment
factor decreases or increases at less than an annual rate of 6.4%. Consequently,
if, for a monthly periodic payment, the net investment experience of a
Sub-Account for a given month exceeds an annual rate of 6.4%, the monthly
payment from that Sub-Account will be greater than the previous payment.
Likewise, if the net investment experience for that
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month is less than an annual rate of 6.4%, the payment will be less than the
previous payment.
FIXED ACCOUNT ANNUITY OPTIONS
The following options are available for payment of fixed account monthly annuity
payments.
Option A--Fixed Installments. The Annuity Proceeds will be paid in equal
installments over a fixed period of 5, 10, 15, or 20 years or any other fixed
period acceptable to Western Reserve.
Option B--Life Income. The Annuity Proceeds will be paid in equal installments:
(1) during the lifetime of the Annuitant only ("Life Annuity"); (2) during a 10
year fixed period certain and for the remaining lifetime of the Annuitant
("Certain Period"); or (3) until the sum of installments paid equals the Annuity
Proceeds applied and for the remaining life of the Annuitant ("Installment
Refund").
Option C--Joint and Survivor Life Income. The Annuity Proceeds will be paid
during the joint lifetimes of the Annuitant and a designated Co-Annuitant and
will continue upon the death of the first payee for the remaining lifetime of
the survivor.
SERIES ACCOUNT ANNUITY OPTIONS
Under the Series Account annuity options, the Contract's Annuity Proceeds will
be used to purchase annuity units of the Sub-Accounts selected by the Owner. The
following Series Account annuity options are available:
Option D--Variable Life Income. The Annuity Proceeds will be paid in
installments determined in accordance with the table set forth in the Contract.
Such installments are payable (1) during the payee's lifetime only ("Variable
Life Annuity"); or (2) during a 10 year fixed period certain and for the payee's
remaining lifetime ("Variable Certain Period").
Option E--Variable Joint and Survivor Life Income. The Annuity Proceeds will be
paid in installments during the joint lifetime of two payees and continuing upon
the death of the first payee for the remaining lifetime of the survivor.
DEATH BENEFITS AFTER THE MATURITY DATE
The death benefit, if any, payable after the Maturity Date and after the
commencement of annuity payments depends upon the annuity option selected. If a
payee dies on or after the commencement of annuity payments, the remaining
portion of any interest in the Contract will be distributed at least as rapidly
as under the method of distribution being used as of the date of the payee's
death. (For additional information about death benefit payments under the
Contract, see "ACCUMULATION PROVISIONS-- Death Benefits during the Accumulation
Period" on page 15.)
IMPROVED ANNUITY RATES
Western Reserve may offer improved annuity rates to Owners if, at the Maturity
Date, it is offering annuity contracts of the same type and class as the
Contract with more favorable rates than those contained in the Contract's income
tables.
PROOF OF AGE, SEX, AND SURVIVAL
Western Reserve may require proper proof of age and sex of any Annuitant or
Co-Annuitant prior to making the first annuity payment. Prior to making any
payment, Western Reserve may require proper proof that the Annuitant or Co-
Annuitant is alive and legally qualified to receive such payment. If required by
law to ignore differences in sex of any payee, annuity payments will be
determined using unisex rates.
OTHER MATTERS RELATING TO THE CONTRACT
CHANGES IN PURCHASE PAYMENTS
The Owner may change the amount and the mode of the anticipated Purchase Payment
pattern specified in the Contract if agreed to by Western Reserve.
RIGHT TO EXAMINE CONTRACT
An Owner may, within ten days of receipt of the Contract (the "Free-Look
Period"), return it to Western Reserve at its Administrative Office, and obtain
a refund equal to the sum of: (1) the Purchase Payments received; plus (or
minus) (2) the accumulated gains (or losses), if any, in the Series Account for
the Contract as of the date Western Reserve receives the returned Contract.
Certain states require a Free-Look Period longer than ten days, either for all
Contract Owners or for certain classes of Contract Owners. The Owner bears the
investment risk during the Free-Look Period. Certain states require Western
Reserve to refund the Purchase Payment, which may be greater or less than the
amount computed above. In these states, Western Reserve bears the investment
risk during the Free-Look Period. The specific terms applicable to a particular
Contract will be set forth in the "Right to Examine Contract" provision of that
Contract.
CONTRACT PAYMENTS
All payments under the Contract will be paid in one sum unless the Owner elects
otherwise. Western Reserve reserves the right to suspend or postpone the right
of partial withdrawal and Surrender or postpone the date of payment for any
period: (1) the New York Stock Exchange is closed, other than customary weekend
and holiday closing, or trading on the New York Stock Exchange is restricted as
determined by the SEC; (2) the SEC by order permits postponement for the
protection of Owners; or (3) an emergency exists, as determined by the SEC, as a
result of which valuation or disposal of securities is not reasonably
practicable. Transfers may also be postponed under these circumstances.
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Payments of any amounts derived from Purchase Payments paid by check or bank
draft may be delayed until the check or bank draft has cleared the payor's bank.
OWNERSHIP
The Owner is the person entitled to exercise all rights under the Contract.
Prior to the Maturity Date, the Owner is the person designated on the Contract
Schedule Page or as subsequently named. These rights may be subject to the
consent of any assignee or irrevocable Beneficiary.
A Successor Owner can be named in the application for the Contract or by
notifying Western Reserve in writing. If the Owner is not the Annuitant, the
Successor Owner will become the new Owner of the Contract upon the death of the
Owner prior to the death of the Annuitant. (See "THE CONTRACT--ACCUMULATION
PROVISIONS--Death Benefits during the Accumulation Period--4. Death of an Owner
Who is Not an Annuitant, on page 16.)
With regard to Non-Qualified Contracts, ownership of the Contract may be changed
or the Contract collaterally assigned at any time during the lifetime of the
Annuitant and prior to the Maturity Date, subject to the rights of any
irrevocable Beneficiary. The assignment of a Contract will be treated as a
distribution of the Annuity Value for Federal tax purposes. (See "FEDERAL TAX
MATTERS--Taxation of Annuities" on pages 20-21.) Any change of ownership or
assignment must be made in writing and accepted by Western Reserve, and, if
accepted, will be effective as of the date accepted by Western Reserve. Western
Reserve assumes no liability for any payments made or actions taken before a
change is accepted and shall not be responsible for the validity or effect of
any change of ownership or assignment.
Changing the Owner or naming a new Successor Owner cancels any prior designation
of Successor Owner, but it does not change the Beneficiary or Annuitant.
With regard to Qualified Contracts, ownership of the Contract generally may be
assigned, but only to the extent permitted by the Code and the terms of the
underlying retirement plan.
ANNUITANT
The Annuitant is the person named in the application to receive annuity
payments. If no person is so named, the Owner will be the Annuitant. Prior to
the Maturity Date, if the Owner is a natural person and upon agreement with
Western Reserve, the Owner may elect a different Annuitant. As of the Maturity
Date, and upon agreement with Western Reserve, the Owner may elect a different
Annuitant or, if either annuity Option C or Option E has been selected, add a
joint annuitant. On the Maturity Date, the Annuitant(s) will become the payee(s)
and receive the annuity payments.
BENEFICIARY
The Beneficiary is the person or persons named in the application or as
subsequently changed. The Beneficiary may be changed during the lifetime of the
Annuitant, subject to the rights of any irrevocable Beneficiary. Any change must
be made in writing and received at Western Reserve's Administrative Office and,
if accepted, will be effective as of the date on which signed by the Owner.
Western Reserve assumes no liability for any payments made or actions taken
before the change is received and shall not be responsible for the validity or
effect of the change. Prior to the Maturity Date, if no Beneficiary survives the
Annuitant, the Owner, if living, or the Owner's estate will be the Beneficiary.
The interest of any Beneficiary is subject to that of any assignee. In the case
of certain Qualified Contracts, the Treasury Regulations prescribe certain
limitations on the designation of a Beneficiary.
Unless Western Reserve receives written notice from the Owner to the contrary,
no Beneficiary may assign any payments under the Contract before such payments
are due. To the extent permitted by law, no payments under the Contract will be
subject to the claims of any Beneficiary's creditors.
MODIFICATION OR WAIVER
The contract and the application constitute the entire Contract. Only statements
in the application can be used to void the Contract or defend a claim. The
statements are considered representations and not warranties. No Contract
provision can be waived or changed except by endorsement. Only the President or
Secretary of Western Reserve can agree to change or waive any provision of the
Contract.
The Contract may not be modified by Western Reserve without the consent of the
Owner, except as may be required to make it conform to any law or regulation or
ruling issued by a governmental agency or to improve the rights and/or benefits
under the Contract.
FEDERAL TAX MATTERS
INTRODUCTION
The Contracts are designed for use by individuals to accumulate Annuity Value
and may be used by retirement plans, regardless of whether the plans qualify for
special Federal income tax treatment. The ultimate effect of Federal income
taxes on the amounts held under a Contract, on annuity payments, and on the
economic benefits to the Owner, Annuitant or Beneficiary depends on Western
Reserve's tax status, on the type of retirement plan for which the Contract is
purchased, and upon the tax and employment status of the individual concerned.
The following discussion is general in nature and is not intended as tax advice.
Each person concerned should consult a competent tax advisor. No attempt is made
to consider any applicable state or other tax laws. Moreover, the discussion is
based upon Western Reserve's under-
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standing of the Federal income tax laws as they are currently interpreted.
Western Reserve makes no representations regarding the likelihood of
continuation of the Federal income tax laws, the Treasury Regulations, or the
current interpretations by the Internal Revenue Service (the "Service"). For a
discussion of Federal income taxes as they relate to the Fund, please see the
accompanying Prospectus for the Portfolios of the Fund.
COMPANY TAX STATUS
Western Reserve is taxed as a life insurance company under Part 1 of Subchapter
L of the Code. Because the Series Account is not an entity separate from Western
Reserve and its operations form a part of Western Reserve, it will not be taxed
separately as a "regulated investment company" under Subchapter M of the Code.
Investment income and realized capital gains on the assets of the Series Account
are reinvested and taken into account in determining the Annuity Value. Western
Reserve believes that under existing Federal income tax law, the Series
Account's investment income, including realized net capital gains, will not be
taxed to Western Reserve. Based upon this belief, it is anticipated that no
charges will be made against the Series Account for Federal income tax. If any
such charge is made, a Contract's Annuity Value will reflect a deduction for the
charge. Western Reserve reserves the right to make a deduction from the assets
of the Series Account should any tax or other economic burden resulting from the
application of tax laws that Western Reserve determines to be properly
attributable to the Account be imposed with respect to such items in the future.
TAXATION OF ANNUITIES
The following discussion assumes the Contract will qualify as an annuity
contract for Federal income tax purposes.
1. In General. Code Section 72 governs taxation of annuities. In general, an
Owner is not taxed on increases in value under a Contract until some form of
distribution is made under the Contract. The exception to this rule is that
generally, an Owner of any deferred annuity contract who is not a natural person
must include in income any increase in the excess of the Contract's Annuity
Value over the investment in the Contract during the taxable year. However,
there are some exceptions to this exception and you may wish to discuss these
with your tax counsel. The taxable portion of a distribution (in the form of an
annuity or lump sum payment) is generally taxed as ordinary income. For this
purpose, the assignment, pledge, or agreement to assign or pledge any portion of
the Annuity Value generally will be treated as a distribution.
2. Partial Withdrawals and Surrenders. In the case of a partial withdrawal,
Systematic Partial Withdrawal, or Surrender distributed to a participant or
Beneficiary under a Qualified Contract (other than a Qualified Contract used in
a retirement plan that qualifies for special Federal income tax treatment under
section 457 of the Code as to which there are special rules), a ratable portion
of the amount received is taxable, generally based on the ratio of the
investment in the Contract to the total Annuity Value. The "investment in the
contract" generally equals the portion, if any, of any Purchase Payments paid by
or on behalf of an individual under a Contract which is not excluded from the
individual's gross income. For Contracts issued in connection with qualified
plans, the "investment in the contract" can be zero.
Generally, in the case of a partial withdrawal, Systematic Partial Withdrawal,
or Surrender under a Non-Qualified Contract before the Maturity Date, amounts
received are first treated as taxable income to the extent that the Annuity
Value immediately before the partial withdrawal, Systematic Partial Withdrawal,
or Surrender exceeds the "investment in the contract" at that time. Any
additional amount partially withdrawn, applied to a Systematic Partial
Withdrawal, or Surrender is not taxable. In the event of a partial withdrawal or
Systematic Partial Withdrawal from, or Surrender of, a Non-Qualified Contract,
Western Reserve will withhold for tax purposes the minimum amount required by
law, unless the Owner affirmatively elects, before payments begin, to have
either nothing withheld or a different amount withheld.
3. Annuity Payments. Although the tax consequences may vary depending on the
Annuity Payment elected under the Contract, in general, only the portion of the
Annuity Payment that represents the amount by which the Annuity 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 variable annuity payments, the taxable portion is generally
determined by an equation that establishes a specific dollar amount of each
payment that is not taxed. The dollar amount is determined by dividing the
"investment in the contract" by the total number of expected periodic payments.
However, the entire distribution will be taxable once the recipient has
recovered the dollar amount of his or her "investment in the contract." 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 until the
recovery of the "investment in the contract", and thereafter the full amount or
each Annuity Payment is taxable. If death occurs before full recovery of the
"investment in the contract", the unrecovered amount may be deducted on the
Annuitant's final tax return.
4. Penalty Tax on Certain Distributions. In the case of a distribution pursuant
to a Non-Qualified Contract, a penalty tax may be imposed equal to 10% of the
amount treated as taxable income. The penalty tax is not imposed in certain
circumstances, including, generally, distributions: (1) made on or after the
date on which the Owner attains age 59 1/2, (2) made as a result of death of the
Owner or disability of the taxpayer, or (3) received in substantially equal
installments as a life annuity. Other tax penalties may
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apply to certain distributions pursuant to a Qualified Contract.
5. Taxation of Death Benefit Proceeds. Amounts may be distributed from a
Contract because of the death of an Owner or an Annuitant. Generally, such
amounts are includable 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
of the Contract, as described above, or (2) if distributed under an annuity
option, they are taxed in the same manner as Annuity Payments, as described
above.
6. Multiple Contracts. All non-qualified, deferred annuity contracts entered
into after October 21, 1988 that are issued by Western Reserve (or its
affiliates) to the same Owner during any calendar year are to be treated as one
annuity contract for purposes of determining the amount includable in an
individual's gross income. There may be other situations in which the Treasury
may conclude that it would be appropriate to aggregate two or more annuity
contracts purchased by the same owner. Accordingly, an Owner should consult a
competent tax adviser before purchasing more than one Contract or other annuity
contracts.
7. Transfers, Assignments or Exchanges of Contracts. A transfer of ownership or
assignment of a Contract, the designation of an Annuitant or other Beneficiary
who is not also the Owner, or a change of Annuitant, may result in certain
income or gift tax consequences to the Owner that are beyond the scope of this
discussion. An Owner contemplating any such transfer, assignment or change
should contact a competent tax adviser in respect to the potential tax effects
of such a transaction.
8. 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. Although as of the date of this
Prospectus Congress is not considering any legislation regarding the taxation of
annuities, there is always the possibility that the tax treatment of annuities
could change by legislation or other means (such as the IRS regulations, revenue
rulings, judicial decisions, etc.). Moreover, it is also possible that any
change could be effective prior to the date of the change.
QUALIFIED PLANS
The Qualified Contract is designed for use with several types of qualified
retirement plans. The tax rules applicable to participants and beneficiaries in
such qualified plans vary according to the type of plan and the terms and
conditions of the plan itself. Special favorable tax treatment may be available
for certain types of contributions and distributions (including special rules
for certain lump sum distributions). Adverse tax consequences may result from
contributions in excess of specified limits, distributions prior to age 59 1/2
(subject to certain exceptions), distributions that do not conform to specified
minimum distribution rules, aggregate distributions in excess of a specified
annual amount, and in certain other circumstances. Therefore, Western Reserve
makes no attempt to provide more than general information about use of the
Contract with the various types of qualified plans. Owners and participants
under qualified plans as well as Annuitants and Beneficiaries are cautioned that
the rights of any person to any benefits under qualified plans may be subject to
the terms and conditions of the plan themselves, regardless of the terms and
conditions of the Contract issued in connection therewith. Some retirement plans
are subject to distribution and other requirements that are not incorporated
into our Contract administration procedures. Owners, participants and
beneficiaries are responsible for determining that contributions, distributions
and other transactions with respect to the Contracts comply with applicable law.
Purchasers of Contracts for use with any qualified plan should seek competent
legal and tax advice regarding the suitability of the Contract therefor.
1. (a) Section 403(b) Plans. Under Section 403(b) of the Code, payments made by
public school systems and certain tax exempt organizations to purchase annuity
policies for their employees are excludable from the gross income of the
employee, subject to certain limitations. However, such payments may be subject
to FICA (Social Security) taxes. Additionally, in accordance with the
requirements of the Code, Section 403(b) annuities generally may not permit
distribution of (i) elective contributions made in years beginning after
December 31, 1988, and (ii) earnings on those contributions, and (iii) earnings
on amounts attributed to elective contributions held as of the end of the last
year beginning before January 1, 1989. Distributions of such amounts will be
allowed only upon the death of the employee, on or after attainment of age
59 1/2, separation from service, disability, or financial hardship, except that
income attributable to elective contributions may not be distributed in the case
of hardship.
(b) Restrictions Under the Texas Optional Retirement Programs. Section 36.105
of the Texas Educational Code permits participants in the Texas Optional
Retirement Program (ORP) to withdraw their interest in a variable annuity
contract issued under the ORP only upon: (1) termination of employment in the
Texas public institutions of higher education; (2) retirement; or (3) death.
Accordingly, a participant in the ORP (or the participant's estate if the
participant has died) will be required to obtain a certificate of termination
from the employer or a certificate of death before the account can be redeemed.
(c) Restrictions Under Qualified Contracts. Other restrictions with respect to
the election, commencement, or distribution of benefits may apply under
Qualified Contracts or under the terms of the plans in respect of which
Qualified Contracts are issued.
2. Individual Retirement Annuities. Sections 219 and 408 of the Code permit
individuals or their employers to contrib-
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ute to an individual retirement program known as an "Individual Retirement
Annuity" or an "IRA". Individual Retirement Annuities are subject to limitation
on the amount which may be contributed and deducted and the time when
distributions may commence. In addition, distributions from certain other types
of qualified plans may be placed into an Individual Retirement Annuity on a
tax-deferred basis. The Service has not reviewed the Contract for qualification
as an IRA, and has not addressed in a ruling of general applicability whether a
death benefit provision such as the provision in the Contract comports with IRA
qualification requirements.
3. Corporate Pension and Profit-Sharing Plans and H.R. 10 Plans. Section 401(a)
and 403(a) of the Code permit corporate employers to establish various types of
retirement plans for employees and permit self-employed individuals to establish
qualified plans for themselves and their employees. Such retirement plans may
permit the purchase of the Contracts to provide benefits under the plans. These
retirement plans may permit the purchase of the Contracts to accumulate
retirement savings under the plans. Adverse tax or other legal consequences to
the plan, to the participant or to both may result if this Contract is assigned
or transferred to any individual as a means to provide benefit payments.
4. Deferred Compensation Plans. Section 457 of the Code, although not actually
providing for a qualified plan as that term is normally used, provides for
certain deferred compensation plans with respect to service for state
governments, local governments, political subdivisions, agencies,
instrumentalities and certain affiliates of such entities and tax exempt
organizations which enjoy special treatment. The Contracts can be used with such
plans. Under such plans, a participant may specify the form of investment in
which his or her participation will be made. All such investments, however, are
owned by, and are subject to, the claims of the general creditors of the
sponsoring employer. Depending on the terms of the particular plan, the employer
may be entitled to draw on deferred amounts for purposes unrelated to its
section 457 plan obligations. In general, all amounts received under a section
457 plan are taxable and are subject to federal income tax withholding as wages.
5. Distributions from Qualified Plans. Under the tax qualification rules for
Section 401(a), 403(b), 408 and 457 plans, distributions generally must commence
no later than April 1 of the calendar year following the calendar year in which
the Owner (or plan participant) reaches age 70 1/2, and must be made in a
specified form and manner. Special rules and other restrictions may apply
depending on the type of plan and the particular circumstances. Each Owner is
responsible for requesting distributions under the Contract that satisfy
applicable tax rules, and should consult a qualified tax adviser.
The above description of Federal income tax consequences pertaining to the
different types of qualified plans that may be funded by the Contracts is only a
brief summary and is not intended as tax advice. The rules governing the
provisions of qualified plans are extremely complex and often difficult to
comprehend. In addition, the Tax Reform Act has significantly changed a great
many rules for qualified plans. Anything less than full compliance with the
applicable rules, all of which are subject to change, may have significant
adverse tax consequences. A prospective purchaser considering the purchase of a
Contract in connection with a qualified plan should first consult a qualified
and competent tax advisor with regard to the suitability of the Contract as an
investment vehicle for the qualified plan.
ADDITIONAL CONSIDERATIONS
1. Diversification. Section 817(h) of the Code requires that the investments of
the Series Account must be "adequately diversified" in accordance with Treasury
Regulations in order for the Contracts to qualify as annuity contracts under
Section 72 of the Code. The Series Account, through the Fund, intends to comply
with the diversification requirements prescribed by the Treasury in Reg. Sec.
1.817.5, which affect how the Fund's assets may be invested. Western Reserve
believes the Series Account will, thus, meet the diversification requirements of
Section 817(h). If the Series Account does not meet those diversification
requirements, Owners would be taxed currently on any investment income under the
Contract.
In certain circumstances, owners of variable annuity contracts may be considered
the owners, for Federal income tax purposes, of the assets of the separate
account used to support their contracts. In those circumstances, income and
gains from the separate account assets would be includable in the variable
annuity contract owner's gross income. The Treasury Department has stated in
published rulings that a variable annuity contract owner will be considered the
owner of separate account assets if the contract owner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection with
the issuance of regulations concerning investment diversification, that those
regulations "do not provide guidance concerning the circumstances in which
investor control of the investments of a segregated asset account may cause the
investor (i.e., the contract owner), rather than the insurance company, to be
treated as the owner of the assets in the account." This announcement further
states that guidance would be issued by way of regulations or rulings on the
"extent to which policyholders may direct their investments to particular
subaccounts without being treated as owners of the underlying assets."
The ownership rights under the Contract are similar to, but different in certain
respects from, those described by the IRS in rulings in which it was determined
that contract owners were not owners of separate account assets. For example,
the owner of a Contract has the choice of more sub-accounts in which to allocate
net purchase payments
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<PAGE> 29
and Contract values, and may be able to transfer among sub-accounts more
frequently than in such rulings. These differences could result in an Owner
being treated as the owner of the assets of the Series Account. In addition,
Western Reserve does not know what standards will be set forth, if any, in the
regulations or rulings which the Treasury Department has stated it expects to
issue. Western Reserve therefore reserves the right to modify the Contract as
necessary to attempt to prevent an Owner from being considered the owner of a
pro rata share of the assets of the Series Account.
2. Distribution-at-Death Rules. The Code also requires Non-Qualified Contracts
to contain specific provisions for distribution of the Contract proceeds upon
the death of the Owner. In order to be treated as an annuity contract for
Federal income tax purposes, the Code requires that such Contract provide that
(a) if any Owner dies on or after the Maturity Date and before the entire
interest in the Contract has been distributed, the remaining portion must be
distributed at least as rapidly as under the method in effect on the Owner's
death; and (b) if any Owner dies before the Maturity Date, the entire interest
in the Contract must generally be distributed within 5 years after the Owner's
date of death. These requirements will be considered satisfied if the entire
interest of the Contract is used to purchase an immediate annuity under which
payments will begin within one year of the Owner's death and will be made for
the life of the Beneficiary or for a period not extending beyond the life
expectancy of the Beneficiary. The Owner's Beneficiary is the person to whom
ownership of the Contract passes because of death and must be a natural person.
(In the Contract, the successor owner is the Owner's Beneficiary.) If the
Beneficiary is the Owner's surviving spouse, the Contract may be continued with
the surviving spouse as the new Owner. Non-Qualified Contracts will be reviewed
and modified, if necessary, to attempt to assure that they comply with the Code
requirements when clarified by regulation or otherwise. Other rules may apply to
Qualified Contracts.
3. Withholding. Withholding of Federal income taxes on the taxable portion of
all distributions may be required unless the recipient elects not to have any
such amounts withheld and properly notifies Western Reserve of that election.
Different rules may apply to United States citizens or expatriates living
abroad. In addition, some states have enacted legislation requiring withholding.
Effective January 1, 1993, certain distributions from Section 401(a), 403(a) and
403(b) plans are subject to mandatory withholding.
4. Section 1035 Exchanges. Code Section 1035 generally provides that no gain or
loss shall be recognized on the exchange of one annuity contract for another. If
the surrendered Contract was issued prior to August 14, 1982, the tax rules that
formerly provided that the Surrender was taxable only to the extent the amount
received exceeds the Owner's investment in the Contract will continue to apply
to amounts allocable to investment in the Contract before August 14, 1982. In
contrast, Contracts issued on or after January 19, 1985 in a Code Section 1035
exchange are treated as new Contracts for purposes of the penalty and
distribution-at-death rules. Special rules and procedures apply to Code Section
1035 transactions. Prospective purchasers wishing to take advantage of Code
Section 1035 should consult their tax advisors.
5. Diversification and Qualified Plans. Code Section 817(h) applies to variable
annuity contracts other than pension plan contracts. The regulations reiterate
that the diversification requirements do not apply to pension plan contracts.
All of the qualified retirement plans (described above) are defined as pension
plan contracts for these purposes. Notwithstanding the exception of Qualified
Contracts from application of the diversification rules, the investment vehicle
for Western Reserve's Qualified Contracts (i.e., the Fund) will be structured to
comply with the diversification standards because it serves as the investment
vehicle for Non-Qualified Contracts as well as Qualified Contracts.
THE FIXED ACCOUNT
An Owner may allocate Net Purchase Payments and transfer Annuity Value to the
Fixed Account, which is part of Western Reserve's general account. The Insurance
Department of the State of Washington has disapproved, for Contracts issued in
Washington, the ability both to allocate Net Purchase Payments to the Fixed
Account and to transfer Annuity Value from Sub-Accounts to the Fixed Account.
Because of exemptive and exclusionary provisions, interests in the Fixed Account
have not been registered under the Securities Act of 1933 and neither the Fixed
Account nor the general account has been registered as an investment company
under the 1940 Act. Accordingly, neither the Fixed Account, the general account
or any interests therein are generally subject to the provisions of these acts,
and Western Reserve has been advised that the staff of the SEC has not reviewed
the disclosure in this Prospectus relating to the Fixed Account. Disclosure
regarding the Fixed Account may, however, be subject to certain generally
applicable provisions of the Federal securities laws relating to the accuracy
and completeness of statements made in prospectuses.
The portion of the Annuity Value allocated to the Fixed Account (the "Fixed
Account Value") will be credited with rates of interest, as described below.
Because the Fixed Account Value becomes part of Western Reserve's general
account, Western Reserve assumes the risk of investment gain or loss on this
amount. All assets in the general account are subject to Western Reserve's
general liabilities from business operations.
23
<PAGE> 30
MINIMUM GUARANTEED AND CURRENT INTEREST RATES
The Fixed Account Value is guaranteed to accumulate at a minimum effective
annual interest rate of 4%. Western Reserve presently credits the Fixed Account
Value with current rates in excess of the minimum guarantee, but it is not
obligated to do so. These current interest rates are influenced by, but do not
necessarily correspond to, prevailing general market interest rates. Because
Western Reserve, at its sole discretion, anticipates changing the current
interest rate from time to time, different allocations to and from the Fixed
Account Value will be credited with different current interest rates.
Western Reserve further guarantees that when a higher or lower current interest
rate is declared on an allocation to the Fixed Account Value, that new interest
rate will be guaranteed on such allocation for at least a one year period
measured from the date of each Purchase Payment or transfer (the "Guarantee
Period"). At the end of the Guarantee Period, Western Reserve reserves the right
to declare a new current interest rate on such allocation and accrued interest
thereon (which may be a different current interest rate than the current
interest rate on new allocations to the Fixed Account Value on that date). The
rate declared on such allocation and accrued interest thereon at the end of each
Guarantee Period will be guaranteed again for another Guarantee Period. At the
end of any Guarantee Period, any interest credited on the Fixed Account Value in
excess of the minimum guaranteed rate of 4% per year will be determined in the
sole discretion of Western Reserve. The Owner assumes the risk that interest
credited may not exceed the guaranteed minimum rate.
Allocations from the Fixed Account Value to provide: a) partial withdrawal
amounts, b) transfers to the Series Account, or c) the Annual Contract Charge
are currently, for the purpose of crediting interest, accounted for on a last
in, first out ("LIFO") method.
Western Reserve reserves the right to change the method of crediting interest
from time to time, provided that such changes will not have the effect of
reducing the guaranteed rate of interest below 4% per annum.
FIXED ACCOUNT VALUE
At the end of any Valuation Period, the Fixed Account Value is equal to:
1. The sum of all Net Purchase Payments allocated to the Fixed Account; plus
2. Any amounts transferred from a Sub-Account to the Fixed Account; plus
3. Total interest credited to the Fixed Account; minus
4. Any amounts withdrawn from the Fixed Account to pay for partial withdrawals;
minus
5. Any amounts transferred to a Sub-Account from the Fixed Account; minus
6. Any amounts charged to pay the Annual Contract Charge, premium tax, and
transfer charges, if any.
ALLOCATIONS, TRANSFERS AND PARTIAL WITHDRAWALS
Net Purchase Payments and transfers to the Fixed Account will be allocated to
the Fixed Account on the first Valuation Date on or following the date Western
Reserve receives the payment or transfer request at its Administrative Office,
except that any allocation of the initial Net Purchase Payment will take place
on the Contract Date.
Transfers may be made from the Fixed Account to a Sub-Account once each Contract
Year. The amount that may be transferred is currently the entire amount
available in the Fixed Account; however, Western Reserve reserves the right to
limit the amount available to be transferred to the greater of (a) 25% of the
amount in the Fixed Account, or (b) the amount transferred in the prior Contract
Year from the Fixed Account, unless Western Reserve consents otherwise. No
transfer charge will apply to transfers from the Fixed Account to a Sub-Account.
Amounts may be withdrawn from the Fixed Account for partial withdrawals and
Surrenders only upon written request and (other than for Surrenders) only with
Western Reserve's consent. Western Reserve further reserves the right to defer
payment of transfers, partial withdrawals, or Surrenders from the Fixed Account
for up to six months. In addition, Contract provisions relating to transfers,
partial withdrawals or Surrenders from the Series Account will also apply to the
Fixed Account. Dollar Cost Averaging may be done from the Fixed Account. (See
"THE CONTRACT--ACCUMULATION PROVISIONS--Transfers to and from, and among
Allocation Options" on page 12.)
DISTRIBUTION OF THE CONTRACTS
The Contracts will be sold by individuals who, in addition to being licensed as
life insurance agents for Western Reserve, are also registered representatives
of InterSecurities, Inc. which has the same address as Western Reserve, an
affiliate of Western Reserve and the principal underwriter of the Contracts, or
of broker-dealers who have entered into written sales agreements with the
principal underwriter. InterSecurities, Inc. is registered with the SEC under
the Securities Exchange Act of 1934 and is a member of the National Association
of Securities Dealers, Inc. No amounts have been retained by InterSecurities,
Inc. for acting as principal underwriter for the Contracts. Broker-dealers will
generally receive sales commissions of up to 6% of Purchase Payments. In
addition, certain production, persistency and managerial bonuses may be paid.
Subject to applicable Federal and state laws and regulations, Western Reserve
may also pay compensation to banks and other financial institutions for their
services in connection with the sale and servicing of the Contracts. The level
of such compensation will not exceed that paid to broker-dealers for their sale
of the Contracts. The offering of Contracts will be made on a continuing basis.
24
<PAGE> 31
VOTING RIGHTS
To the extent required by law, Western Reserve will vote the Fund shares held in
the Series Account at shareholder meetings of the Fund in accordance with
instructions received from persons having voting interests in the corresponding
Sub-Accounts of the Series Account. Except as required by the 1940 Act, the Fund
does not hold regular or special shareholder meetings. If the 1940 Act or any
regulation thereunder should be amended or if the present interpretation thereof
should change, and as a result Western Reserve determines that it is permitted
to vote the Fund shares in its own right, it may elect to do so.
The number of votes that an Owner has the right to instruct will be calculated
separately for each Sub-Account, and will be determined during the Accumulation
Period by dividing the portion of the Annuity Value in that Sub-Account by $100.
Fractional shares will be counted. After the Maturity Date, the number of votes
that an Annuitant has the right to instruct will be calculated based on the
liability for future variable annuity payments. This liability will be
calculated on the basis of the mortality assumptions used in determining the
number of units purchased by the Annuitant. Because this liability generally
declines as any Annuitant ages, the number of votes attributable to that
Annuitant will decrease over time.
The number of votes of the Portfolio that the Owner or Annuitant has the right
to instruct will be determined as of the date established by that Portfolio for
determining shareholders eligible to vote at the meeting of the Fund. Voting
instructions will be solicited by written communications prior to such meeting
in accordance with procedures established by the Fund.
Western Reserve will vote Fund shares as to which no timely instructions are
received and Fund shares that are not attributable to Owners in proportion to
the voting instructions that are received with respect to all Contracts
participating in that Portfolio. Voting instructions to abstain on any item to
be voted upon will reduce the votes eligible to be cast by Western Reserve.
Each person having a voting interest in a Sub-Account will receive proxy
materials, reports and other materials relating to the appropriate Portfolio.
LEGAL PROCEEDINGS
There are at present no legal proceedings to which the Series Account is a party
or to which the assets of the Series Account are subject. Western Reserve is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Series Account. InterSecurities, Inc., the
Series Account's principal underwriter, is not presently a party to any legal
proceedings that are likely to have a material adverse effect upon its ability
to perform its contract with the Series Account.
STATEMENT OF ADDITIONAL INFORMATION
The Statement of Additional Information contains information and financial
statements relating to the Series Account and Western Reserve. The Table of
Contents of the Statement of Additional Information is set forth below:
1. Custodian
2. Independent Accountants
3. Legal Matters
4. Calculation of Performance Related Information
5. Addition, Deletion, and Substitution of Investments
6. Calculation of Variable Annuity Payments
7. Financial Statements
Inquiries and requests for a Statement of Additional Information should be
directed to Western Reserve Life Assurance Co. of Ohio, P.O. Box 9051,
Clearwater, Florida 34618-9051; telephone number (800) 851-9777.
25
<PAGE> 32
PART B
INFORMATION REQUIRED IN A STATEMENT OF
ADDITIONAL INFORMATION
<PAGE> 33
WRL SERIES ANNUITY ACCOUNT
MERIDIAN/INVESCO SECTOR VARIABLE ANNUITY
Flexible Payment Variable
Deferred Annuity Contract
issued by
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, Florida 34640
Telephone: (800) 851-9777
(813) 585-6565
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a Prospectus and should be
read in conjunction with the Meridian/INVESCO Sector Variable Annuity
Prospectus, dated May 1, 1996, which is available without charge by contacting
Western Reserve Life Assurance Co. of Ohio ("Western Reserve") at P.O. Box 9051,
Clearwater, Florida 34618-9051 or at the telephone numbers above.
May 1, 1996
WRL00103-05/96
<PAGE> 34
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Custodian.............................................................................. 3
Independent Accountants................................................................ 3
Legal Matters.......................................................................... 3
Calculation of Performance Related Information......................................... 3
Addition, Deletion, and Substitution of Investments.................................... 5
Calculation of Variable Annuity Payments............................................... 6
Financial Statements................................................................... 7
</TABLE>
2
<PAGE> 35
CUSTODIAN
The assets of WRL Series Annuity Account (the "Series Account") are held by
Western Reserve. The assets of the Series Account are kept physically segregated
and held apart from the general account and any other separate accounts of
Western Reserve. Western Reserve maintains records of all purchases and
redemptions of shares of the WRL Series Fund, Inc. (the "Fund"). Additional
protection for the assets of the Series Account is provided by a blanket
fidelity bond issued to AEGON U.S. Holding Corporation ("AEGON U.S.") in the
amount of $5 million (subject to a $1 million deductible), covering all of the
employees of AEGON U.S. and its affiliates, including Western Reserve. A
Stockbrokers Blanket Bond, issued to AEGON U.S.A. Securities, Inc. provides
additional fidelity coverage to a limit of $11 million subject to a $50,000
deductible.
INDEPENDENT ACCOUNTANTS
The accounting firm of Price Waterhouse LLP, independent accountants,
provided audit services to the Series Account for the year ended December 31,
1995. The principal business address of Price Waterhouse LLP is 1055 Broadway,
Kansas City, Missouri 64105. The accounting firm of Ernst & Young LLP,
independent auditors, provided audit services to Western Reserve for the year
ended December 31, 1995. The principal business address of Ernst & Young LLP is
801 Grand Avenue, Suite 3400, Des Moines, Iowa 50309-2764.
LEGAL MATTERS
Sutherland, Asbill & Brennan, Washington, D.C., has provided advice on
certain legal matters concerning Federal securities laws in connection with the
Contracts. All matters of Ohio law pertaining to the Contracts, including the
validity of the Contracts and Western Reserve's right to issue the Contracts
under Ohio insurance law, have been passed upon by Thomas E. Pierpan, Esq., Vice
President and Counsel of Western Reserve.
CALCULATION OF PERFORMANCE RELATED INFORMATION
A. Total Return and Yield Quotations for the Meridian/INVESCO Global
Sector, Meridian/INVESCO US Sector, and Meridian/INVESCO Foreign Sector
Sub-Accounts
The total return quotations set forth in the Prospectus for the
Sub-Accounts holding assets for the Contracts during the Accumulation Period are
average annual total return quotations for the one, five, and ten-year periods
(or, while the Series Account or a Sub-Account has been in existence for a
period of less than one, five or ten years, for such lesser period) ended on the
date of the most recent balance sheet of the Series Account, and for the period
from the date the Sub-Accounts commenced operations until the aforesaid date.
The quotations are computed by determining the average annual compounded rates
of return over the relevant periods that would equate the initial amount
invested to the ending redeemable value, according to the following formula:
P(1 + T)n = ERV
<TABLE>
<C> <C> <S>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the particular period of a
hypothetical $1,000 payment made at the beginning of the
particular period
</TABLE>
3
<PAGE> 36
For purposes of the total return quotations for the Sub-Accounts, the
calculations take into account all fees that are charged to all Owner accounts
during the Accumulation Period. Such fees include the $35 Annual Contract
charge, calculated on the basis of an average Series Account Value per Contract
of $5,000, which converts that charge to an annual rate of 0.70% of the Series
Account Value. The calculations also assume a complete redemption as of the end
of the particular period. The calculations do not reflect any deductions for
premium taxes, the Withdrawal Charge, or any Transfer Charges that may be
applicable to a particular Contract.
The yield quotations for the Sub-Accounts representing the accumulation
period set forth in the Prospectus is based on the thirty-day period ended on
the date of the most recent balance sheet of the Series Account and are computed
by dividing the net investment income per unit earned during the period by the
maximum offering price per unit on the last date of the period, according to the
following formula:
a-b
YIELD = 2[(cd + 1)6 - 1]
<TABLE>
<S> <C> <C> <C>
Where: a = net investment income earned during the period by the corresponding
Portfolio of the Fund attributable to shares owned by the Sub-Account
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of units outstanding during the period
d = the maximum offering price per unit on the last day of the period
</TABLE>
For purposes of the yield quotations for the Sub-Accounts, the calculations
take into effect all fees that are charged to all Owner accounts during the
Accumulation Period. Such fees include the $35 Annual Contract Charge,
calculated on the basis of an average Series Account Value per Contract of
$5,000, which converts that charge to an annual rate of 0.70% of the Series
Account Value. The calculations do not take into account any premium taxes, the
Withdrawal Charge or any transfer charges.
Premium taxes currently range from 0% to 3.5% of Purchase Payments
depending upon the jurisdiction in which the Contract is delivered. A Withdrawal
Charge may be assessed at the time of redemption in an amount ranging up to 8%
of the requested redemption amount, with the specific percentage applicable to a
particular redemption depending on the length of time Purchase Payments were
held under the Contract, and whether redemptions had been previously made during
that Contract Year. (See "Charges and Deductions - Withdrawal Charge" on page 8
of the Prospectus.)
B. Other Performance Data
Western Reserve may from time to time disclose average annual total return
in non-standard formats and cumulative total return for Contracts funded by
these Sub-Accounts.
Western Reserve may from time to time also disclose in advertisements and
sales literature yield, standard total returns, and non-standard total returns
for the Fund's Portfolios, which do not include Contract and Series Account fees
and charges, including such disclosure for the Sub-Accounts for periods prior to
the date the Sub-Accounts commenced operations. For periods prior to the date
each Sub-Account commenced operations, performance information will be
calculated based on the performance of the Fund's corresponding Portfolios that
commenced operations prior to each Sub-Account, and the assumption that each
Sub-Account was in existence for the same periods as those indicated for each
respective Portfolio, with a level of fees and charges equal to those currently
assessed against each Sub-Account and the Contract. The Prospectus contains a
table which shows average annual total returns for periods prior to the date
each Sub-Account commenced operations. The Prospectus also contains a similar
table for the same periods which shows average annual total returns which do not
reflect any charge on amounts partially withdrawn or surrendered. The total
returns in the second table are calculated in exactly the same manner as those
in the preceding table, except that the ending redeemable value of the
hypothetical account for the
4
<PAGE> 37
periods is replaced with an ending value for the periods that does not take into
account any charge on amounts partially withdrawn or surrendered. Non-standard
performance data will only be disclosed if the standard performance data for the
required periods is also disclosed.
C. Advertising and Sales Literature
From time to time Western Reserve may refer to the diversifying process of
asset allocation based on the Modern Portfolio Theory developed by Nobel Prize
winning economist Harry Markowitz. The basic assumptions of Modern Portfolio
Theory are the selection of individual investments has little impact on
portfolio performance, market timing strategies seldom work, markets are
efficient, and portfolio selection should be made among asset classes. Modern
Portfolio Theory allows an investor to determine an efficient portfolio
selection that will provide a higher return with the same risk or the same
return with lower risk.
When presenting the asset allocation process Western Reserve may outline
the process of personal and investment risk analysis including determining
individual risk tolerances and a discussion of the different types of investment
risk. Western Reserve may classify investors into four categories based on their
risk tolerance and will quote various industry experts on which types of
investments are best suited to each of the four risk categories. The industry
experts quoted may include Ibbotson Associates, CDA Investment Technologies,
Lipper Analytical Services and any other expert which has been deemed by the
Company to be appropriate. Western Reserve may also provide a historical
overview of the performance of a variety of investment market indices, the
performance of these indices over time, and the performance of different asset
classes, such as stocks, bonds, cash equivalents, etc. Western Reserve may also
discuss investment volatility including the range of returns for different asset
classes and over different time horizons, and the correlation between the
returns of different asset classes. Western Reserve may also discuss the basis
of portfolio optimization including the required inputs and the construction of
efficient portfolios using sophisticated computer-based techniques. Finally,
Western Reserve may describe various investment strategies and methods of
implementation, the periodic rebalancing of diversified portfolios, the use of
dollar cost averaging techniques, a comparison of the tax impact of purchase
payments made on a "before tax" basis through a tax-qualified plan with those
made on an "after tax" basis outside of a tax-qualified plan, and a comparison
of tax-deferred versus non tax-deferred accumulation of purchase payments.
ADDITION, DELETION, AND SUBSTITUTION OF INVESTMENTS
Western Reserve reserves the right, subject to compliance with applicable
law, to make additions to, deletions from or substitutions for the shares that
are held by the Series Account or that the Series Account may purchase. Western
Reserve reserves the right to eliminate the shares of any of the Portfolios of
the Fund and to substitute shares of another Portfolio of the Fund or of another
open-end registered investment company, if the shares of a Portfolio are no
longer available for investment, or if in Western Reserve's judgment further
investment in any Portfolio should become inappropriate in view of the purposes
of the Series Account. Western Reserve will not, however, substitute any shares
attributable to an Owner's interest in a Sub-Account without notice to and prior
approval of the Securities and Exchange Commission, to the extent required by
the Investment Company Act of 1940, as amended (the "1940 Act") or other
applicable law.
Western Reserve also reserves the right to establish additional
Sub-Accounts, each of which would invest in a new Portfolio of the Fund, or in
shares of another investment company, with a specified investment objective. New
Sub-Accounts may be established when, in the sole discretion of Western Reserve,
marketing, tax or investment conditions warrant, and any new Sub-Accounts will
be made available to existing Owners on a basis to be determined by Western
Reserve. Western Reserve may also eliminate one or more Sub-Accounts if, in its
sole discretion, marketing, tax or investment conditions warrant.
In the event of any such substitution or change, Western Reserve may by
appropriate endorsement make such changes in the Contracts and other annuity
contracts as may be necessary or appropriate to reflect such substitution or
change. If deemed by Western Reserve to be in the best interests of persons
5
<PAGE> 38
having voting rights under the Contracts, the Series Account may be operated as
a management company under the 1940 Act, or, subject to any required approval,
it may be deregistered under that Act in the event such registration is no
longer required.
Western Reserve reserves the right to change the investment objective of
any Sub-Account. Additionally, if required by law or regulation, Western Reserve
will not materially change an investment objective of the Series Account or of a
Portfolio designated for a Sub-Account unless a statement of the change is filed
with and approved by the appropriate insurance official of the state of Western
Reserve's domicile or deemed approved in accordance with such law or regulation.
CALCULATION OF VARIABLE ANNUITY PAYMENTS
Under a Series Account annuity option, the Owner applies his or her Annuity
Proceeds (or a portion thereof) on the Maturity Date to one or more of the three
Sub-Accounts designated to support annuity payments by purchasing units issued
in connection with each Sub-Account selected by the Owner. The Annuity Unit
Value of any Sub-Account will increase or decrease in accordance with the
investment experience of that Sub-Account. The Annuity Unit Value of any
Sub-Account at the end of a Valuation Period is equal to the product of (a) the
Annuity Unit Value for that Sub-Account at the end of the immediately preceding
Valuation Period, multiplied by (b) the net investment factor for that
Sub-Account for the Valuation Period, multiplied by (c) the "assumed investment
return adjustment factor" for the Valuation Period.
The "assumed investment return adjustment factor" for a Valuation Period is
the product of discount factors of .99986634 per day, and is designed to
recognize the 5% effective annual assumed investment return.
The net investment factor used to calculate the Annuity Unit Value in each
Sub-Account for the Valuation Period is equal to (a) the net result of (1) the
net asset value of a Fund share held in that Sub-Account determined as of the
end of the current Valuation Period; plus (2) the per share amount of any
dividend or capital gain distributions made by the Fund for shares held in that
Sub-Account if the ex-dividend date occurs during the Valuation Period; plus or
minus (3) a per share charge or credit for any taxes reserved for, which Western
Reserve determines to have resulted from the investment operations of the
Sub-Account; divided by (b) the net asset value of a Fund share held in the
Sub-Account determined as of the end of the immediately preceding Valuation
Period; minus (c) a factor representing the mortality and expense risk charge
and administrative charge. This factor is equal, on an annual basis, to 1.40% of
the daily net asset value of a Fund share held in the Series Account for the
Sub-Account.
DETERMINATION OF THE FIRST VARIABLE PAYMENT. The amount of the first
variable payment is determined by multiplying the Annuity Proceeds times the
appropriate rate for the variable option selected. The rates are based on the
Society of Actuaries 1983 Individual Mortality Table A with projection and a 5%
effective annual assumed investment return and assuming a Maturity Date in the
year 2000. Gender based mortality tables will be used unless prohibited by law.
The amount of the first payment depends upon the adjusted age of the
Annuitant. The adjusted age is the Annuitant's actual age nearest birthday at
the Maturity Date, adjusted as follows:
<TABLE>
<CAPTION>
Maturity Date Adjusted Age
- ------------- -------------------
<S> <C>
Before 2001 Actual Age
2001 - 2010 Actual Age minus 1
2011 - 2020 Actual Age minus 2
2021 - 2030 Actual Age minus 3
2031 - 2040 Actual Age minus 4
</TABLE>
After the year 2040 as determined by Western Reserve.
6
<PAGE> 39
DETERMINATION OF SUBSEQUENT VARIABLE PAYMENTS. The amount of variable
annuity payments after the first will increase or decrease according to the
Annuity Unit Value which reflects the investment experience of the selected
Sub-Account(s). Each variable annuity payment after the first will be equal to
the number of units attributable to the Contract in each selected Sub-Account
multiplied by the Annuity Unit Value of that Sub-Account on the date the payment
is processed. The number of such units is determined by dividing the first
payment allocated to that Sub-Account by the Annuity Unit Value of that
Sub-Account on the date the first annuity payment is processed.
FINANCIAL STATEMENTS
There are no financial statements for the sub-accounts of the Series
Account included in this Statement of Additional Information because the
sub-accounts had not commenced operations as of the date of this Statement of
Additional Information.
The financial statements of Western Reserve which are included in this
Statement of Additional Information should be considered only as bearing on the
ability of Western Reserve to meet its obligations under the Contracts. They
should not be considered as bearing on the investment performance of the assets
held in the Series Account.
Financial Statements for Western Reserve for the years ended December 31,
1995, 1994 and 1993 have been prepared on the basis of statutory accounting
principles, rather than generally accepted accounting principles ("GAAP").
INDEX TO FINANCIAL STATEMENTS
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO:
Report of Independent Auditors dated February 23, 1996
Statutory-Basis balance sheets at December 31, 1995 and 1994
Statutory-Basis statements of operations for the years ended December 31,
1995, 1994 and 1993
Statutory-Basis statements of capital and surplus for the years ended
December 31, 1995, 1994 and 1993
Statutory-Basis statements of cash flows for the years ended December 31,
1995, 1994 and 1993
Notes to Statutory-Basis financial statements
Statutory-Basis financial statement schedules
7
<PAGE> 40
Report of Independent Auditors
The Board of Directors
Western Reserve Life Assurance Co. of Ohio
We have audited the accompanying statutory-basis balance sheets of Western
Reserve Life Assurance Co. of Ohio as of December 31, 1995 and 1994, and the
related statutory-basis statements of operations, changes in capital and
surplus, and cash flows for each of the three years in the period ended
December 31, 1995. Our audits also included the statutory-basis financial
statement schedules required by Regulation S-X, Article 7. These financial
statements and schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the "Separate Account Assets" and "Separate
Account Liabilities" in the balance sheet of the Company. The Separate Account
financial statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to the data included
for the Separate Account, is based solely upon the reports of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
The Company presents its financial statements in conformity with the accounting
practices prescribed or permitted by the Insurance Department of the State of
Ohio. The variances between such practices and generally accepted accounting
principles are described in Note 1. The effects of these variances are not
reasonably determinable but we believe they are material.
In our opinion, because of the materiality of the effects of the variances
between generally accepted accounting principles and the accounting practices
referred to in the preceding paragraph, the financial statements referred to
above are not intended to and do not present fairly, in conformity with
generally accepted accounting principles, the financial position of Western
Reserve Life Assurance Co. of Ohio at December 31, 1995 and 1994, or the
results of its operations or its cash flows for each of the three years in the
period ended December 31, 1995.
8
<PAGE> 41
In addition, in our opinion, based on our audits and the reports of other
auditors, the financial statements referred to above present fairly, in all
material respects, the financial position of Western Reserve Life Assurance Co.
of Ohio at December 31, 1995 and 1994, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1995 in conformity with accounting practices prescribed or permitted by the
Insurance Department of the State of Ohio. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
statutory-basis financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Des Moines, Iowa
February 23, 1996
9
<PAGE> 42
Western Reserve Life Assurance Co. of Ohio
Balance Sheets - Statutory Basis
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
-------------------------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments $ 4,999 $ 46,722
Bonds 452,474 423,758
Stocks:
Preferred, at market (cost: $78 in 1994) - 14
Common, at market (cost: $473 in 1995 and
$1,944 in 1994) 834 2,541
Mortgage loans on real estate 6,181 9,539
Home office properties, at cost less
accumulated depreciation ($1,505 in 1995
and $1,358 in 1994) 5,121 4,818
Policy loans 37,125 27,520
------------------------
Total cash and invested assets 506,734 514,912
Premiums deferred and uncollected 1,787 1,763
Accrued investment income 7,565 7,505
Receivable from affiliates 4,337 481
Other assets 4,264 3,504
Separate account assets 2,419,205 1,596,736
------------------------
Total admitted assets $2,943,892 $2,124,901
========================
</TABLE>
See accompanying notes.
10
<PAGE> 43
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
-------------------------
<S> <C> <C>
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life $ 73,163 $ 84,689
Annuity 319,353 314,124
Policy and contract claim reserves 6,612 5,119
Other policyholders' funds 2,384 2,495
Remittances and items not allocated 5,136 4,613
Federal income taxes payable 1,417 96
Asset valuation reserve 5,590 8,491
Interest maintenance reserve 6,392 6,720
Payable to affiliate - 674
Other liabilities 10,102 8,239
Separate account liabilities 2,415,804 1,594,621
------------------------
Total liabilities 2,845,953 2,029,881
Commitments and contingencies
Capital and surplus:
Common stock, $1.00 par value, 1,500 shares
authorized, issued and outstanding 1,500 1,500
Paid-in surplus 68,015 68,015
Unassigned surplus 28,424 25,505
------------------------
Total capital and surplus 97,939 95,020
------------------------
Total liabilities and capital and surplus $2,943,892 $2,124,901
========================
</TABLE>
See accompanying notes.
11
<PAGE> 44
Western Reserve Life Assurance Co. of Ohio
Statements of Operations - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
--------------------------------------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net of
reinsurance:
Life $ 191,508 $ 150,991 $ 107,008
Annuity 378,390 449,141 449,361
Net investment income 40,891 40,139 46,197
Amortization of interest maintenance reserve 882 726 618
Commissions and expense allowances on
reinsurance ceded 11 12 14
Other income 8,237 6,354 4,322
----------------------------------
619,919 647,363 607,520
Benefits and expenses:
Benefits paid or provided for:
Death, surrender and other life insurance
and annuity benefits 243,658 230,511 111,785
Increase (decrease) in aggregate reserves
for policies and contracts:
Life (15,023) (11,332) (4,259)
Annuity 5,229 (78,590) (12,486)
----------------------------------
233,864 140,589 95,040
Insurance expenses:
Net transfers to separate accounts 242,427 386,174 414,357
Commissions 82,903 78,168 60,975
General insurance expenses 37,246 33,100 24,701
Taxes, licenses and fees 8,919 5,931 5,682
----------------------------------
371,495 503,373 505,715
----------------------------------
605,359 643,962 600,755
----------------------------------
Gain from operations before federal income
taxes and realized capital gains (losses)
on investments 14,560 3,401 6,765
Federal income tax expense 8,917 3,406 4,206
----------------------------------
Gain (loss) from operations before realized
capital gains (losses) on investments 5,643 (5) 2,559
Net realized capital gains (losses) on
investments (net of related federal income
taxes and amounts transferred to interest
maintenance reserve) (1,678) (1,133) 2,348
----------------------------------
Net income (loss) $ 3,965 $ (1,138) $ 4,907
==================================
</TABLE>
See accompanying notes.
12
<PAGE> 45
Western Reserve Life Assurance Co. of Ohio
Statements of Changes in Capital and Surplus - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional Total
Common Paid-In Unassigned Capital and
Stock Capital Surplus Surplus
--------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1993 $1,500 $23,015 $19,109 $43,624
Net income for 1993 - - 4,907 4,907
Net unrealized capital gains - - 1,503 1,503
Decrease in non-admitted assets - - 5,535 5,535
Increase in asset valuatio reserves - - (1,706) (1,706)
Increase in surplus in separate accounts - - 633 633
Dividend to stockholder - - (5,600) (5,600)
Other adjustments - - 513 513
-------------------------------------------
Balance at December 31, 1993 1,500 23,015 24,894 49,409
Capital contribution - 45,000 - 45,000
Net loss for 1994 - - (1,138) (1,138)
Net unrealized capital losses - - (9) (9)
Decrease in non-admitted assets - - 368 368
Decrease in asset valuation reserves - - 4,321 4,321
Decrease in surplus in separate accounts - - (748) (748)
Other adjustments - - (2,183) (2,183)
-------------------------------------------
Balance at December 31, 1994 1,500 68,015 25,505 95,020
Net income for 1995 - - 3,965 3,965
Net unrealized capital losses - - (500) (500)
Decrease in non-admitted assets - - 903 903
Decrease in asset valuation reserve - - 2,901 2,901
Decrease in surplus in separate accounts - - 541 541
Change in reserve valuation - - (3,496) (3,496)
Other adjustments - - (1,395) (1,395)
-------------------------------------------
Balance at December 31, 1995 $1,500 $68,015 $28,424 $97,939
===========================================
</TABLE>
See accompanying notes.
13
<PAGE> 46
Western Reserve Life Assurance Co. of Ohio
Statements of Cash Flows - Statutory Basis
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
---------------------------------
<S> <C> <C> <C>
SOURCES OF CASH
Premiums and other considerations, net of reinsurance $569,934 $600,405 $556,353
Net investment income 42,359 41,977 47,424
Other income 8,052 6,311 4,245
------------------------------
620,345 648,693 608,022
Life claims (16,759) (14,660) (12,820)
Surrender benefits and other fund withdrawals (206,250) (196,169) (81,902)
Other benefits to policyholders (19,041) (18,251) (17,385)
Commissions, other expenses and taxes (128,314) (119,755) (92,572)
Dividends to policyholders (26) (22) (44)
Federal income taxes (7,531) (3,378) (3,573)
Net increase in policy loans (9,605) (4,496) (4,686)
Net transfers to separate accounts (242,427) (386,174) (414,357)
------------------------------
Net cash used by operations (9,608) (94,212) (19,317)
Proceeds from investments sold, matured or repaid:
Bonds and redeemable preferred stock 108,554 99,241 203,547
Common stocks 2,108 80,066 81,391
Mortgage loans on real estate 1,954 132 764
Real estate - - 109
Miscellaneous - (28) -
------------------------------
Total cash from investments 112,616 179,411 285,811
Capital contribution - 45,000 -
Other sources 2,830 6,135 5,899
------------------------------
Total sources of cash 105,838 136,334 272,393
APPLICATIONS OF CASH
Cost of investments acquired:
Bonds and redeemable preferred stock 139,402 47,214 165,967
Common stocks 589 65,911 82,767
Mortgage loans on real estate 6 1,004 290
Real estate 449 37 478
------------------------------
Total investments acquired 140,446 114,166 249,502
Dividend to stockholder - - 5,600
Other applications, net 7,115 6,086 1,959
------------------------------
Total applications of cash 147,561 120,252 257,061
------------------------------
Net change in cash and short-term investments (41,723) 16,082 15,332
Cash and short-term investments at beginning of year 46,722 30,640 15,308
------------------------------
Cash and short-term investments at end of year $ 4,999 $ 46,722 $ 30,640
==============================
</TABLE>
See accompanying notes.
14
<PAGE> 47
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis
(Dollars in thousands)
December 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Western Reserve Life Assurance Co. of Ohio ("the Company") is a stock life
insurance company and is a wholly-owned subsidiary of First AUSA Life Insurance
Company which, in turn, is a wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"). AEGON is a wholly-owned subsidiary of AEGON nv, a holding company
organized under the laws of the Netherlands.
NATURE OF BUSINESS
The Company operates predominantly in the variable universal life and variable
annuity areas of the life insurance business. The Company is licensed in 49
states and the District of Columbia. Sales of the Company's products are
through financial planners, independent representatives, financial institutions
and stockbrokers. The majority of the Company's new life insurance written and
a substantial portion of new annuities written is done through one marketing
organization; the Company expects to maintain this relationship for the
foreseeable future.
BASIS OF PRESENTATION
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in
the financial statements and accompanying notes. Such estimates and
assumptions could change in the future as more information becomes known, which
could impact the amounts reported and disclosed herein.
The accompanying financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Insurance Department of the
State of Ohio, which practices differ in some respects from generally accepted
accounting principles. The more significant of these differences are as
follows: (a) bonds are generally carried at amortized cost rather than
segregating the portfolio into held-to-maturity (carried at amortized cost),
available-for-sale (carried at fair value), and trading (carried at fair value)
classifications; (b) acquisition costs of acquiring new business are charged to
current operations as incurred rather than deferred and amortized over the life
of the policies; (c) policy reserves on traditional life products are based on
statutory mortality rates and interest which may differ from reserves based on
reasonable assumptions of expected mortality, interest, and withdrawals which
include a provision for possible unfavorable deviation from such assumptions;
(d) policy reserves on certain investment products use discounting
methodologies utilizing statutory interest rates rather than full account
values; (e) reinsurance amounts are netted against the corresponding receivable
or payable rather than shown as gross amounts on the balance sheet; (f)
deferred income taxes are not provided for the difference between the financial
statement and income tax bases of assets and liabilities; (g) net realized
gains or losses attributed to changes in the
15
<PAGE> 48
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
level of interest rates in the market are deferred and amortized over the
remaining life of the bond or mortgage loan, rather than recognized as gains or
losses in the statement of operations when the sale is completed; (h) declines
in the estimated realizable value of investments are provided for through the
establishment of a formula-determined statutory investment reserve (carried as
a liability) changes to which are charged directly to surplus, rather than
through recognition in the statement of operations for declines in value, when
such declines are judged to be other than temporary; (i) certain assets
designated as "non-admitted assets" have been charged to surplus rather than
being reported as assets; (j) revenues for universal life and investment
products consist of premiums received rather than policy charges for the cost
of insurance, policy administration charges, amortization of policy initiation
fees and surrender charges assessed; and (k) pension expense is recorded as
amounts are paid. The effects of these variances have not been determined by
the Company.
The National Association of Insurance Commissioners (NAIC) currently is in the
process of recodifying statutory accounting practices, the result of which is
expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in
1996, will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the
Company uses to prepare its statutory-basis financial statements.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with remaining maturities of one year or less when purchased
to be cash equivalents. This amount includes $6,500 of short-term intercompany
notes receivable at December 31, 1995.
INVESTMENTS
Investments in bonds (except those to which the Securities Valuation Office of
the NAIC has ascribed a value), mortgage loans on real estate and short-term
investments are reported at cost adjusted for amortization of premiums and
accrual of discounts. Amortization is computed using methods which result in a
level yield over the expected life of the security. The Company reviews its
prepayment assumptions on mortgage and other asset backed securities at regular
intervals and adjusts amortization rates prospectively when such assumptions
are changed due to experience and/or expected future patterns. Investments in
preferred stocks in good standing are reported at cost. Investments in
preferred stocks not in good standing are reported at the lower of cost or
market. Common stocks are carried at market and include shares of mutual funds
(money market and other). Real estate is reported at cost less allowances for
depreciation. Depreciation is computed principally by the straight-line
method. Policy loans are reported at unpaid principal. Other "admitted assets"
are valued, principally at cost, as required or permitted by Ohio Insurance
Laws.
16
<PAGE> 49
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for
anticipated losses in the event of default by issuers of certain invested
assets. These amounts are determined using a formula prescribed by the NAIC
and are reported as a liability. The formula for the AVR provides for a
corresponding adjustment for realized gains and losses, net of amounts
attributed to changes in the general level of interest rates. Under a formula
prescribed by the NAIC, the Company defers, in the Interest Maintenance Reserve
(IMR), the portion of realized gains and losses on sales of fixed income
investments, principally bonds and mortgage loans, attributable to changes in
the general level of interest rates and amortizes those deferrals over the
remaining period to maturity of the security.
During 1995, 1994 and 1993, net realized capital gains of $554, $436 and
$4,270, respectively, were credited to the IMR rather than being immediately
recognized in the statements of operations. Amortization of these net gains
aggregated $882, $726 and $618 for the years ended December 31, 1995, 1994 and
1993, respectively.
Interest income is recognized on an accrual basis. The Company does not accrue
income on bonds in default, mortgage loans on real estate in default and/or
foreclosure or which are delinquent more than twelve months, or real estate
where rent is in arrears for more than three months. Further, income is not
accrued when collection is uncertain. At December 31, 1995, 1994 and 1993, the
Company excluded investment income due and accrued of $1, $237 and $0,
respectively, with respect to such practices.
AGGREGATE RESERVES FOR POLICIES
Life and annuity reserves are developed by actuarial methods and are determined
based on published tables using statutorily specified interest rates and
valuation methods that will provide, in the aggregate, reserves that are
greater than or equal to the minimum required by law.
The aggregate policy reserves for traditional life insurance policies are based
principally upon the 1941, 1958, and 1980 Commissioners' Standard Ordinary
Mortality Tables. The reserves are calculated using interest rates ranging
from 2.25% to 5.50% and are computed principally on the Net Level Valuation and
the Commissioner's Reserve Valuation Method (CRVM). Reserves for universal
life policies are based on account balances adjusted for the CRVM.
17
<PAGE> 50
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred annuity reserves are calculated according to the Commissioners'
Annuity Reserve Valuation Method plus excess interest reserves to cover
situations where the future interest guarantees plus the decrease in surrender
charges are in excess of the maximum valuation rates of interest. Reserves for
immediate annuities and supplementary contracts with and without life
contingencies are equal to the present value of future payments assuming
interest rates ranging from 7.00% to 9.25% and mortality rates, where
appropriate, from a variety of tables.
POLICY AND CONTRACT CLAIM RESERVES
Claim reserves represent the estimated accrued liability for claims reported to
the Company and claims incurred but not yet reported through the statement
date. These reserves are estimated using either individual case-basis
valuations or statistical analysis techniques. Because estimates are subject
to the effects of trends in claim severity and frequency, the estimates are
continually reviewed and adjusted as necessary as experience develops or new
information becomes available.
SEPARATE ACCOUNT
Assets held in trust for purchases of variable universal life and variable
annuity contracts and the Company's corresponding obligation to the contract
owners are shown separately in the balance sheets. The assets in the separate
accounts are valued at market. Income and gains and losses with respect to the
assets in the separate accounts accrue to the benefit of the policyholders.
The Company received variable contract premiums of $467,142, $533,536 and
$489,243 in 1995, 1994 and 1993, respectively. All variable account contracts
are subject to discretionary withdrawal by the policyholder at the market value
of the underlying assets less the current surrender charge.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 and 1993 financial
statements to conform to the 1995 presentation.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", requires disclosure of fair value information
about financial instruments, whether or not recognized in the statutory-basis
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the
18
<PAGE> 51
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparisons to independent
markets and, in many cases, could not be realized in immediate settlement of
the instrument. Statement of Financial Accounting Standards No. 107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements and allows companies to forego the disclosures when
those estimates can only be made at excessive cost. Accordingly, the aggregate
fair value amounts presented do not represent the underlying value of the
Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash, Cash Equivalents, and Short-Term Investments: The carrying amounts
reported in the statutory-basis balance sheet for these instruments
approximate their fair values.
Investment Securities: Fair values for fixed maturity securities (including
redeemable preferred stocks) are based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair values
are estimated using values obtained from independent pricing services or (in
the case of private placements) are estimated by discounting expected future
cash flows using a current market rate applicable to the yield, credit
quality, and maturity of the investments. The fair values for equity
securities are based on quoted market prices and are recognized in the
statutory-basis balance sheet.
Mortgage Loans and Policy Loans: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans are assumed to equal their carrying
value.
Investment Contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with maturities consistent with those remaining for the contracts
being valued.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
19
<PAGE> 52
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The following sets forth a comparison of the fair values and carrying values
of the Company's financial instruments subject to the provisions of Statement
of Financial Accounting Standards No. 107:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------------------------------------------------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds $ 452,474 $ 479,656 $ 423,758 $ 414,541
Stocks 834 834 2,555 2,555
Mortgage loans on real estate 6,181 6,536 9,539 7,915
Policy loans 37,125 37,125 27,520 27,520
Cash and short-term investments 4,999 4,999 46,722 46,722
Separate account assets 2,419,205 2,419,205 1,596,736 1,596,736
LIABILITIES
Investment contract liabilities 309,556 279,347 302,890 245,161
Separate account annuities 1,930,590 1,930,590 1,316,237 1,316,237
</TABLE>
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt securities
are as follows:
<TABLE>
<CAPTION>
ESTIMATED GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
-----------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Bonds:
United States Government and agencies $ 11,611 $ 64 $129 $ 11,546
State, municipal and other government 15,079 940 - 16,019
Public utilities 16,143 1,425 - 17,568
Industrial and miscellaneous 219,764 17,444 550 236,658
Mortgage-backed securities 189,877 8,228 240 197,865
---------------------------------------------
Total bonds $452,474 $28,101 $919 $479,656
=============================================
</TABLE>
20
<PAGE> 53
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
-----------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
Bonds:
United States Government and agencies $ 11,277 $ 17 $ 1,048 $ 10,246
State, municipal and other government 13,117 - 423 12,694
Public utilities 13,296 75 432 12,939
Industrial and miscellaneous 238,389 3,668 7,543 234,514
Mortgage-backed securities 147,679 1,597 5,128 144,148
-----------------------------------------------
Total bonds 423,758 5,357 14,574 414,541
Preferred stock 14 - - 14
-----------------------------------------------
$423,772 $5,357 $14,574 $414,555
===============================================
</TABLE>
Preferred stock required writedowns for the securities not in good standing to
fair values of $64 in 1994.
The carrying value and fair value of bonds at December 31, 1995 by contractual
maturity are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without penalties.
<TABLE>
<CAPTION>
ESTIMATED
CARRYING FAIR
VALUE VALUE
---------------------
<S> <C> <C>
Due in one year or less $ 23,820 $ 23,842
Due one through five years 109,362 114,336
Due five through ten years 91,534 101,034
Due after ten years 37,881 42,579
---------------------
262,597 281,791
Mortgage and other asset backed securities 189,877 197,865
---------------------
$452,474 $479,656
=====================
</TABLE>
21
<PAGE> 54
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
---------------------------
<S> <C> <C> <C>
Interest on bonds $38,047 $37,318 $43,744
Dividends on equity investments 30 700 1,533
Interest on mortgage loans 573 616 832
Interest on policy loans 2,353 1,830 1,465
Other investment income 1,919 1,802 1,010
---------------------------
Gross investment income $42,922 42,266 48,584
Investment expenses (2,031) (2,127) (2,387)
---------------------------
Net investment income $40,891 $40,139 $46,197
===========================
</TABLE>
Proceeds from sales and maturities of debt securities and related gross
realized gains and losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
-------------------------------
<S> <C> <C> <C>
Proceeds $108,554 $99,241 $203,547
-------------------------------
Gross realized gains $ 1,631 $ 2,019 $ 7,584
Gross realized losses 1,346 1,362 703
-------------------------------
Net realized gains $ 285 $ 657 $ 6,881
===============================
</TABLE>
At December 31, 1995, bonds with an aggregate carrying value of $4,483 were on
deposit with certain state regulatory authorities or were restrictively held in
bank custodial accounts for benefit of such state regulatory authorities, as
required by statute.
22
<PAGE> 55
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
Realized investment gains (losses) and changes in unrealized gains (losses) for
investments are summarized below:
<TABLE>
<CAPTION>
REALIZED
-------------------------------
YEAR ENDED DECEMBER 31
1995 1994 1993
-------------------------------
<S> <C> <C> <C>
Debt securities $ 285 $ 657 $ 6,881
Equity securities - (1,579) -
Mortgage loans (1,409) - -
Real estate - - (37)
-------------------------------
(1,124) (922) 6,844
Tax effect - 225 (226)
Transfer to interest maintenance reserve (554) (436) (4,270)
-------------------------------
Net realized gains (losses) $(1,678) $(1,133) $ 2,348
===============================
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
----------------------------
YEAR ENDED DECEMBER 31
1995 1994 1993
----------------------------
<S> <C> <C> <C>
Debt securities $36,399 $(43,354) $5,598
Common stock (236) 1,009 1,581
----------------------------
Change in unrealized appreciation (depreciation) $36,163 $(42,345) $7,179
============================
</TABLE>
Gross unrealized gains (losses) on common stocks were as follows:
<TABLE>
<CAPTION>
UNREALIZED
------------------------
YEAR ENDED DECEMBER 31
1995 1994 1993
------------------------
<S> <C> <C> <C>
Unrealized gains $361 $597 $1,045
Unrealized losses - - 1,457
------------------------
Net unrealized gains (losses) $361 $597 $ (412)
</TABLE> ========================
The Company issued no mortgage loans during 1995. The maximum percentage of
any one mortgage loan to the value of the underlying real estate at origination
was 73%. The Company requires all mortgagees to carry fire insurance equal to
the value of the underlying property.
23
<PAGE> 56
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
3. INVESTMENTS (CONTINUED)
During 1995, 1994 and 1993, no mortgage loans were foreclosed and transferred
to real estate. During 1994, a mortgage loan loss reserve of $1,033 was
established. This reserve was released in 1995 coincident with the loss
recognition of $1,409 on a loan payoff.
At December 31, 1995, the Company had no investments (excluding U. S.
Government guaranteed or insured issues) which individually represented more
than ten percent of capital and surplus and the asset valuation reserve.
4. REINSURANCE
The Company reinsures portions of certain insurance policies which exceed its
established limits, thereby providing a greater diversification of risk and
minimizing exposure on larger risks. The Company remains contingently liable
with respect to any insurance ceded, and this would become an actual liability
in the event that the assuming insurance company became unable to meet its
obligations under the reinsurance treaty.
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------------
<S> <C> <C> <C>
Direct premiums $570,413 $600,608 $556,641
Reinsurance assumed 1,569 1,232 1,015
Reinsurance ceded (2,084) (1,708) (1,287)
----------------------------------
Net premiums earned $569,898 $600,132 $556,369
==================================
</TABLE>
The Company received reinsurance recoveries in the amount of $512, $1,146 and
$1,135 during 1995, 1994 and 1993, respectively. At December 31, 1995 and
1994, estimated amounts recoverable from reinsurers that have been deducted
from policy and contract claim reserves totaled $2 and $85, respectively. The
aggregate reserves for policies and contracts were reduced for reserve credits
for reinsurance ceded at December 31, 1995 and 1994 of $848 and $807,
respectively.
24
<PAGE> 57
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
5. INCOME TAXES
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to gain from operations before taxes and
realized capital gains (losses) for the following reasons:
<TABLE>
<CAPTION>
1995 1994 1993
-----------------------
<S> <C> <C> <C>
Computed tax at federal statutory rate (35%) $5,096 $1,190 $2,368
Purchase accounting tax adjustments - - (424)
Deferred acquisition costs - tax basis 4,241 4,043 3,395
Tax reserve valuation (49) (1,353) (817)
Investment income differences 85 (109) (192)
Amortization of IMR (309) (254) (216)
Other, net (147) (111) 92
-----------------------
Federal income tax expense $8,917 $3,406 $4,206
=======================
</TABLE>
Prior to 1984, as provided for under the Life Insurance Company Tax Act of
1959, a portion of statutory income was not subject to current taxation, but
was accumulated for income tax purposes in a memorandum account referred to as
the policyholders' surplus account. No federal income taxes have been provided
for in the financial statements on income deferred in the policyholders'
surplus account ($293 at December 31, 1995). To the extent dividends are paid
from the amount accumulated in the policyholders' surplus account, net earnings
would be reduced by the amount of tax required to be paid. Should the entire
amount in the policyholders' surplus account become taxable, the tax thereon
computed at current rates would amount to approximately $103.
In 1995, the Company reached a final settlement with the Internal Revenue
Service for 1987 through 1993 resulting in taxes of $1,275 and interest of $120
(net of $65 tax effect). The assessment was charged to surplus as a prior
period adjustment.
During 1994, the Company settled tax years 1980 through 1986 with the Internal
Revenue Service. The agreed upon settlement totaled $2.26 million in taxes and
interest. The Company's former parent company, Kansas City Southern
Industries, is principally liable for reimbursing this amount to the Company
under the terms of an indemnification agreement made coincident with the sale
of the Company. A charge to surplus of $1.8 million was made as a prior period
adjustment related to this assessment.
25
<PAGE> 58
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES
Participating life insurance policies are issued by the Company which entitle
policyholders to a share in the earnings of the participating policies,
provided that a dividend distribution, which is determined annually based on
mortality and persistency experience of the participating policies, is
authorized by the Company. Participating insurance constituted approximately
7.7% and 8.2% of life insurance in force at December 31, 1995 and 1994,
respectively.
A portion of the Company's policy reserves and other policyholders' funds
relate to liabilities established on a variety of the Company's products that
are not subject to significant mortality or morbidity risk; however, there may
be certain restrictions placed upon the amount of funds that can be withdrawn
without penalty. The amount of reserves on these products, by withdrawal
characteristics are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
-------------------- --------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
-------------------- --------------------
<S> <C> <C> <C> <C>
Subject to discretionary
withdrawal with market value
adjustment $ 13,422 1% $ 12,345 1%
Subject to discretionary
withdrawal at book value less
surrender charge 60,970 3 73,733 4
Subject to discretionary
withdrawal at market value 1,930,590 85 1,316,237 81
Subject to discretionary
withdrawal at book value
(minimal or no charges or
adjustments) 227,549 10 207,779 13
Not subject to discretionary
withdrawal provision 20,034 1 22,788 1
-------------------- --------------------
$2,252,565 100% $1,632,882 100%
====== ====
Less reinsurance ceded - -
---------- ----------
Total policy reserves on
annuities and deposit fund
liabilities $2,252,565 $1,632,882
========== ==========
</TABLE>
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next
anniversary date. At December 31, 1995 and 1994, these assets (which are
reported as premiums deferred and uncollected) and the amounts of the related
gross premiums and loadings, are as follows:
26
<PAGE> 59
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
<TABLE>
<CAPTION>
GROSS LOADING NET
------------------------
<S> <C> <C> <C>
DECEMBER 31, 1995
Ordinary direct first year business $ 47 $ 17 $ 30
Ordinary direct renewal business 1,707 229 1,478
Group life direct business 379 - 379
Reinsurance ceded (100) - (100)
------------------------
$2,033 $246 $1,787
========================
DECEMBER 31, 1994
Ordinary direct first year business $ 46 $ 17 $ 29
Ordinary direct renewal business 1,649 252 1,397
Group life direct business 362 - 362
Reinsurance ceded (25) - (25)
------------------------
$2,032 $269 $1,763
========================
</TABLE>
At December 31, 1995 and 1994, the Company had insurance in force aggregating
$2,374 and $3,403, respectively, in which the gross premiums are less than the
net premiums required by the standard valuation standards established by the
Insurance Department of the State of Ohio. The Company established policy
reserves of $32 and $40 to cover these deficiencies at December 31, 1995 and
1994, respectively.
In 1994, the NAIC enacted a guideline to clarify reserving methodologies for
contracts that require immediate payment of claims upon proof of death of the
insured. Companies were allowed to grade the effects of the change in
reserving methodologies over five years. A direct charge to surplus of $3,496
and $450 was made for the years ended December 31, 1995 and 1994, respectively,
related to the change in reserve methodology.
7. DIVIDEND RESTRICTIONS
Generally, an insurance company's ability to pay dividends is limited to the
amount that their net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements. However,
payment of such amounts as dividends may be subject to approval by regulatory
authorities. The maximum dividend payout which may be made without prior
approval in 1996 is approximately $9,644.
27
<PAGE> 60
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
8. RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit plan sponsored by
AEGON. The Company has no legal obligation for the plan. The Company
recognizes pension expense equal to its allocation from AEGON. The pension
expense is allocated among the participating companies based on the FASB
Statement No. 87 expense as a percent of salaries. The benefits are based on
years of service and the employee's compensation during the highest five
consecutive years of employment. Pension expense aggregated $505, $397 and
$249 for the years ended December 31, 1995, 1994 and 1993, respectively. The
plan is subject to the reporting and disclosure requirements of the Employee
Retirement and Income Security Act of 1974.
The Company's employees also participate in a contributory defined contribution
plan sponsored by AEGON which is qualified under Section 401(k) of the Internal
Revenue Service Code. Employees of the Company who customarily work at least
1,000 hours during each calendar year and meet the other eligibility
requirements, are participants of the plan. Participants may elect to
contribute up to fifteen percent of their salary to the plan. The Company will
match an amount up to three percent of the participant's salary. Participants
may direct all of their contributions and plan balances to be invested in a
variety of investment options. The plan is subject to the reporting and
disclosure requirements of the Employee Retirement and Income Security Act of
1974. Pension expense related to this plan was $305, $250 and $176 for the
years ended December 31, 1995, 1994 and 1993, respectively.
AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Code. In addition, AEGON has established incentive deferred
compensation plans for certain key employees of the Company. AEGON also
sponsors an employee stock option plan for individuals employed at least three
years and a stock purchase plan for its producers, with the participating
affiliated companies establishing their own eligibility criteria, producer
contribution limits and company matching formula. These plans have been
accrued or funded as deemed appropriate by management of AEGON and the Company.
28
<PAGE> 61
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
8. RETIREMENT AND COMPENSATION PLANS (CONTINUED)
In addition to pension benefits, the Company participates in plans sponsored by
AEGON that provide postretirement medical, dental and life insurance benefits
to employees meeting certain eligibility requirements. Portions of the medical
and dental plans are contributory. The expenses of the postretirement plans
calculated on the pay-as-you-go basis are charged to affiliates in accordance
with an intercompany cost sharing arrangement. The Company expensed $86, $70
and $0 for the years ended December 31, 1995, 1994 and 1993, respectively.
9. RELATED PARTY TRANSACTIONS
The Company shares certain officers, employees and general expenses with
affiliated companies.
The Company receives investment advisory and management services from certain
affiliates. During 1995, 1994 and 1993, the Company paid $8,825, $7,497 and
$4,583, respectively, for such services, which approximates their costs to the
affiliates. The Company provides office space, marketing and administrative
services to certain affiliates. During 1995, 1994 and 1993, the Company
received $4,545, $3,261 and $1,900, respectively, for such services, which
approximates their cost. The Company had a receivable (payable) with
affiliates of $3,625 and $(674) at December 31, 1995 and 1994, respectively.
The Company paid a cash dividend to its immediate parent, First AUSA Life
Insurance Company, of $5,600 in 1993, and during 1994 received capital
contributions of $45,000.
The Company has an agreement with an affiliate through which net agents debit
balances are sold for cash. The net non-admitted assets sold during 1995, 1994
and 1993 aggregated $5,887, $3,553 and $4,555, respectively.
At December 31, 1995, the Company has a $6,500 short-term note receivable from
an affiliate. Interest on this note accrues at 5.82%.
29
<PAGE> 62
Western Reserve Life Assurance Co. of Ohio
Notes to Financial Statements - Statutory-Basis (continued)
(Dollars in thousands)
10. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business.
Although such litigation sometimes includes substantial demands for
compensatory and punitive damages in addition to contract liability, it is
management's opinion, after consultation with counsel and a review of available
facts, that damages arising from such demands will not be material to the
Company's financial position.
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance
companies for the benefit of policyholders and claimants in the event of
insolvency of other insurance companies. Assessments are charged to operations
when received by the Company except where right of offset against other taxes
paid is allowed by law; amounts available for future offsets are recorded as an
asset on the Company's balance sheet. The future obligation has been based on
the most recent information available from the National Organization of Life
and Health Insurance Guaranty Association. Potential future obligations for
unknown insolvencies are not determinable by the Company. The Company has
established a reserve of $4,445 at December 31, 1995 for its estimated share of
future guaranty fund assessments related to several post major insurer
insolvencies. An asset of $1,319 at December 31, 1995 has been recorded
relating to anticipated offsets available for certain state premium taxes to be
utilized in future periods. The guaranty fund expense was $1,950, $618 and
$329 at December 31, 1995, 1994 and 1993, respectively.
30
<PAGE> 63
Western Reserve Life Assurance Co. of Ohio
Summary of Investments Other Than
Investments in Related Parties
(Dollars in thousands)
December 31, 1995
SCHEDULE I
<TABLE>
<CAPTION>
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and govern-
ment agencies and authorities $108,398 $112,590 $108,213
Foreign governments 15,196 16,019 15,079
Public utilities 16,179 17,568 16,143
All other corporate bonds 315,676 333,479 313,039
---------------------------------
Total fixed maturities $455,449 $479,656 $452,474
EQUITY SECURITIES
Common stocks:
Industrial, miscellaneous and all
other 473 834 834
---------------------------------
Total equity securities 473 834 834
Mortgage loans on real estate 6,181 6,536 6,181
Real estate 5,121 5,121 5,121
Policy loans 37,125 37,125 37,125
Cash and short-term investments 4,999 4,999 4,999
---------------------------------
Total investments $509,348 $534,271 $506,734
=================================
</TABLE>
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accrual of discounts. Real estate is net of accumulated depreciation.
31
<PAGE> 64
Western Reserve Life Assurance Co. of Ohio
Supplementary Insurance Information
(Dollars in thousands)
SCHEDULE III
<TABLE>
<CAPTION>
FUTURE POLICY POLICY AND
BENEFITS AND UNEARNED CONTRACT
EXPENSES PREMIUMS LIABILITIES
-------------------------------------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Individual life $ 65,259 $41 $5,811
Group life and health 7,904 - 701
Annuity 319,353 - 100
-----------------------------------------
$392,516 $41 $6,612
=========================================
YEAR ENDED DECEMBER 31, 1994
Individual life $ 77,366 $52 $4,501
Group life 7,323 - 481
Annuity 314,124 - 137
-----------------------------------------
$398,813 $52 $5,119
=========================================
YEAR ENDED DECEMBER 31, 1993
Individual life $ 78,371 $56 $2,757
Group life 17,380 - 488
Annuity 392,714 - 763
-----------------------------------------
$488,465 $56 $4,008
=========================================
</TABLE>
32
<PAGE> 65
<TABLE>
<CAPTION>
NET BENEFITS OTHER
PREMIUM INVESTMENT AND CLAIMS OPERATING PREMIUMS
REVENUE INCOME EXPENSES EXPENSES WRITTEN
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
$188,143 $ 9,470 $ 36,066 $83,675 $ 99,115
3,365 1,054 2,217 946 780
378,390 30,367 205,375 44,447 342,949
- -----------------------------------------------------------------
$569,899 $40,891 $243,658 $129,068 $442,844
=================================================================
$147,282 $10,146 $ 29,272 $ 71,807 $ 89,467
3,709 372 1,754 1,329 1,846
449,141 29,621 199,485 44,063 421,176
- -----------------------------------------------------------------
$600,132 $40,139 $230,511 $117,199 $512,489
=================================================================
$101,621 $10,943 $ 24,086 $ 52,514 $62,600
5,387 201 1,293 1,104 4,063
449,361 35,053 86,406 37,740 419,037
- -----------------------------------------------------------------
$556,369 $46,197 $111,785 $ 91,358 $485,700
=================================================================
</TABLE>
33
<PAGE> 66
Western Reserve Life Assurance Co. of Ohio
Reinsurance
(Dollars in thousands)
SCHEDULE IV
<TABLE>
<CAPTION> ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER
31, 1995
Life insurance in force $21,057,581 $1,365,119 $ - $19,692,462 0.0%
=================================================================
Premiums:
Individual life $ 189,870 $ 1,727 $ - $ 188,143 0.0%
Group life and health 2,153 357 1,569 3,365 46.6
Annuity 378,390 - - 378,390 0.0
-----------------------------------------------------------------
$ 570,413 $ 2,084 $ 1,569 $ 569,898 0.2%
=================================================================
YEAR ENDED DECEMBER
31, 1994
Life insurance in force $14,321,386 $1,090,845 $1,271,402 $14,501,943 8.8%
=================================================================
Premiums:
Individual life $148,766 $ 1,484 $ - $ 147,282 0.0%
Group life 2,701 224 1,232 3,709 33.0
Annuity 449,141 - - 449,141 0.0
-----------------------------------------------------------------
$600,608 $ 1,708 $ 1,232 $ 600,132 0.4%
=================================================================
YEAR ENDED DECEMBER
31, 1993
Life insurance in force $ 9,881,904 $ 851,042 $1,009,201 $10,040,063 10.1%
=================================================================
Premiums:
Individual life $ 102,817 $ 1,196 $ - $ 101,621 0.0%
Group life 4,463 91 1,015 5,387 18.8
Annuity 449,361 - - 449,361 0.0
-----------------------------------------------------------------
$ 556,641 $ 1,287 $ 1,015 $ 556,369 0.2%
=================================================================
</TABLE>
34
<PAGE> 67
WRL Series Annuity Account
PART C
OTHER INFORMATION
<TABLE>
Item 24. Financial Statements and Exhibits
<S> <C>
(a) Financial Statements
The financial statements for Western Reserve Life Assurance Co. of Ohio
("Western Reserve") are included in Part B.
The financial statements for the WRL Series Annuity Account will be
included in a future Amendment.
(b) Exhibits
(1) Copy of resolution of the Board of Directors of Western Reserve
establishing the Series Account. 1/
(2) Not Applicable.
(3) Distribution of Contracts
(a) Form of Master Service and Distribution Compliance Agreement. 5/
(b) Form of Broker/Dealer Supervisory and Service Agreement. 2/
(c) Form of Broker/Dealer Supervisory and Service Agreement. 8/
(4) (a) Specimen Flexible Payment
Variable Accumulation Deferred Annuity Contract. 7/
(5) Application for Flexible Payment Variable Accumulation Deferred
Annuity Contract. 9/
(6) (a) Copy of Second Amended Articles of Incorporation of Western
Reserve. 3/
(b) Copy of Amended Code of Regulations of Western Reserve. 5/
(7) Not Applicable.
(8) Not Applicable.
(9) Opinion and Consent of William H. Geiger, Esq. as to Legality
of Securities Being Registered. 8/
(10) (a) Written Consent of Sutherland, Asbill & Brennan.
(b) Written Consent of Ernst & Young LLP.
(c) Written Consent of Price Waterhouse LLP.
</TABLE>
C-1
<PAGE> 68
(11) Not Applicable.
(12) Not Applicable.
(13) Schedules for Computation of Performance Quotations 9/
(14) Not Applicable.
(15) Power of Attorney. 10/
_____________________________________
1/ This exhibit was previously filed on Form N-4 dated October 11, 1988
(File No. 33-24856) and is incorporated herein by reference.
2/ This exhibit was previously filed on Pre-Effective Amendment No. 1 to the
Form S-6 Registration Statement dated December 19, 1989 (File No.
33-31140) and is incorporated herein by reference.
3/ This exhibit was previously filed on Post-Effective Amendment No. 1 to
the Form N-4 Registration Statement dated May 1, 1989 (File No. 33-24856)
and is incorporated herein by reference.
4/ This exhibit was previously filed on Post-Effective Amendment No. 2 to
the Form N-4 Registration Statement dated May 1, 1990 (File No. 33-24856)
and is incorporated herein by reference.
5/ This exhibit was previously filed on Post-Effective Amendment No. 3 to
the Form N-4 Registration Statement dated March 1, 1991 (File No.
33-24856) and is incorporated herein by reference.
6/ This exhibit was previously filed on Post-Effective Amendment No. 4 to
the Form N-4 Registration Statement dated May 1, 1991 (File No. 33-24856)
and is incorporated herein by reference.
7/ This exhibit was previously filed on the Form N-4 Registration Statement
dated July 10, 1992 (File No. 33-49556) and is incorporated herein by
reference.
8/ This exhibit was previously filed on Pre-Effective Amendment No. 1 to the
Form N-4 Registration Statement dated October 2, 1992 (File No. 33-49556)
and is incorporated herein by reference.
9/ This exhibit was previously filed on Post-Effective Amendment No. 1 to
the Form N-4 Registration Statement dated April 28, 1993 (File No.
33-49558) and is incorporated herein by reference.
10/ This exhibit was previously filed on Post-Effective Amendment No. 4 to
Form N-4 Registration Statement dated April 25, 1995 (File No. 33-49556)
and is incorporated herein by reference.
C-2
<PAGE> 69
Item 25. Directors and Officers of the Depositor
<TABLE>
<CAPTION>
Principal Position and Offices
Name Business Address with Depositor
---- ---------------- --------------------
<S> <C> <C>
John R. Kenney (1) Chairman of the Board,
Chief Executive Officer
and President
Lyman H. Treadway 30195 Chagrin Blvd. Director
Suite 210N
Cleveland, Ohio 44124
Jack E. Zimmerman 507 St. Michel Circle Director
Kettering, Ohio 45429
Alan M. Yaeger (1) Executive Vice President,
Actuary and Chief Financial
Officer
G. John Hurley (1) Executive Vice President
and Chief Operating Officer
Richard B. Franz, II (1) Senior Vice President
and Treasurer
William H. Geiger (1) Senior Vice President,
Secretary and
General Counsel
Allan J. Hamilton (1) Vice President and
Controller
</TABLE>
________________________
(1) 201 Highland Avenue, Largo, Florida 34640
ITEM 26. Persons Controlled By Or Under Common Control With The Depositor Or
Registrant.
VERENGING AEGON Netherlands Membership Association
AEGON n.v. Netherlands Corporation (55.19%)
AEGON Netherland n.v. Netherlands Corporation (100%)
AEGON Nevark Holding B.V. Netherlands Corporation (100%)
Groninger Financieringen B.V. Netherlands Corporation (100%)
AEGON International B.V. Netherlands Corporation (100%)
Voting Trust - (Trustees - K.J. Storm, William H. Foster, H.B. Van Wijk)
C-3
<PAGE> 70
AEGON U.S. Holding Corporation (DE) (100%)
Short Hills Management Company (NJ) (100%)
CORPA Reinsurance Company (NY) (100%)
AEGON Management Company (IN) (100%)
RCC North America Inc. (DE) (100%)
AEGON USA, Inc. - Holding Co. (IA) (100%
First AUSA Life Insurance Company - Insurance Holding Co. (MD)(100%)
AUSA Life Insurance Company, Inc. - Insurance (NY) (100%)
Life Investors Insurance Company of America - Insurance (IA) (100%)
International Life Investors Insurance Company - Insurance
(NY) (100%)
Bankers United Life Assurance Company - Insurance (IA) (100%)
PFL Life Insurance Company - Insurance (IA) (100%)
Southwest Equity Life Insurance Company - Insurance (AZ) (100% Voting
Common)
Iowa Fidelity Life Insurance Company - Insurance (AZ) (100% Voting
Common)
Western Reserve Life Assurance Company of Ohio - Insurance (OH) (100%)
WRL Series Fund, Inc. - Mutual fund (MD)
Monumental Life Insurance Company - Insurance (MD) (100%)
Monumental General Casualty Company - Insurance (MD) (100%)
United Financial Services, Inc. - General Agency (MD) (100%)
Bankers Financial Life Insurance Company - Insurance (AZ)
The Whitestone Corporation - Insurance agency (MD) (100%)
Cadet Holding Corp. - Holding company (IA) (100%)
AUSA Holding Company - Holding company (MD) (100%)
Monumental General Insurance Group, Inc. - Holding company (MD) (100%)
Monumental General Administrators, Inc. - Provides management
services to unaffiliated third party administrator (MD) (100%)
Executive Management and Consultant Services, Inc. - Provides
actuarial consulting services (MD) (100%)
Monumental General Mass Marketing, Inc. - Marketing arm for sale of
mass marketed insurance coverages (MD) (100%)
AUSA Financial Markets, Inc. - Marketing (IA) (100%)
Universal Benefits Corporation - Third party administrator (IA) (100%)
Investors Warranty of America, Inc. - Provider of automobile extended
maintenance contracts (IA) (100%)
Massachusetts Fidelity Trust Company - Trust company (IA) (100%)
Money Services, Inc. - Provides financial counseling for employees and
agents of affiliated companies (DE) (100%)
Zahorik Company, Inc. - Broker-dealer (CA) (100%)
ZCI, Inc. (AL) (100%)
Intersecurities, Inc. - Broker-dealer (DE) (100%)
ISI Insurance Agency Inc. & its Subsidiaries - Insurance agency (CA)
(100%)
Associated Mariner Financial Group, Inc. - Holding company management
services (MI) (100%)
Mariner Financial Services, Inc. - Broker/Dealer (MI) (100%)
Mariner/ISI Planning Corporation - Financial planning (MI) (100%)
Associated Mariner Agency, Inc. and its Subsidiaries- Insurance
agency (MI) (100%)
Mariner Mortgage Corporation - Mortgage origination (MI) (100%)
Idex Investor Services, Inc. - Shareholder services (FL) (100%)
C-4
<PAGE> 71
Idex Management, Inc. - Investment advisor (DE) (50%)
Idex Fund - Mutual fund (MA)
Idex II Series Fund - Mutual fund (MA)
Idex Fund 3 - Mutual fund (MA)
Transunion Casualty Company - Insurance (IA) (100%)
AUSA Institutional Marketing Group, Inc. - Insurance agency (MN) (100%)
Colorado Annuity Agency, Inc. - Insurance agency (MN) (100%)
Diversified Investment Advisors, Inc. - Registered investment advisor (DE)
(100%)
Diversified Investors Securities Corporation - Broker-dealer (DE)
(100%)
AEGON USA Securities, Inc. - Broker-dealer (IA) (100%)
AEGON USA Managed Portfolios, Inc. - Mutual fund (MD)
American Forum for Fiscal Fitness, Inc. - Marketing (IA) (100%)
Supplemental Insurance Division, Inc. - Insurance (TN) (100%)
Creditor Resources, Inc. - Credit insurance (MI) (100%)
CRC Creditor Resources Canadian Dealer Network Inc. - Insurance
agency (Canada)
AEGON USA Investment Management, Inc. - Investment advisor (IA) (100%)
AEGON USA Realty Advisors, Inc. - Provides real estate administrative and
real estate investment services (IA) (100%)
Melson & Associates, Inc. - Real estate financial management
consulting (TX) (100%)
Landauer Realty Advisors, Inc. - Real estate counseling (IA) (100%)
Landauer Associates, Inc. - Real estate counseling (DE) (100%)
AEGON USA Realty Management, Inc. - Real estate management (IA) (100%
Realty Information Systems, Inc. - Information systems for real
estate investment management (IA) (100%)
USP Real Estate Investment Trust - Real estate investment trust (IA)
Cedar Income Fund Ltd. - Real estate investment trust (IA)
Forty-Six Hundred Limited Partnership - Limited partnership (IA)
JLW Financial Management Systems, Inc. - Provides management expertise and
administrative services for credit unions (IN) (60%)
Item 27. Number of Contractowners.
Because the offering has not yet commenced, there are no Contractowners.
Item 28. Indemnification
Provisions exist under the Ohio General Corporation Law, the Second
Amended Articles of Incorporation of Western Reserve and the Amended
Code of Regulations of Western Reserve whereby Western Reserve may
indemnify certain persons against certain payments incurred by such
persons. The following excerpts contain the substance of these
provisions.
Ohio General Corporation Law
SECTION 1701.13 AUTHORITY OF CORPORATION.
(E)(1) A corporation may indemnify or agree to indemnify any person who
was or is a party or is threatened to be made a party, to any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, other than an action by or in the right of
the
C-5
<PAGE> 72
corporation, by reason of the fact that he is or was a director, officer,
employee, or agent of the corporation, or is or was serving at the request of
the corporation as a director, trustee, officer, employee, or agent of
another corporation (including a subsidiary of this corporation), domestic or
foreign, nonprofit or for profit, partnership, joint venture, trust, or other
enterprise, against expenses, including attorneys' fees, judgments, fines,
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit, or proceeding if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendre or its equivalent,
shall not, of itself create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal
action or proceeding, he had reasonable cause to believe that his conduct was
unlawful.
(2) A corporation may indemnify or agree to indemnify any person who was
or is a party, or is threatened to be made a party to any threatened,
pending, or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, officer, employee, or agent of the corporation, or is or was
serving at the request of the corporation as a director, trustee, officer,
employee, or agent of another corporation, domestic or foreign, nonprofit or
for profit, partnership, joint venture, trust, or other enterprise, against
expenses, including attorneys' fees, actually and reasonably incurred by him
in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any of the following:
(a) Any claim, issue, or matter as to which such person shall have
been adjudged to be liable for negligence or misconduct in the performance of
his duty to the corporation unless, and only to the extent that the court of
common pleas, or the court in which such action or suit was brought
determines upon application that, despite the adjudication of liability, but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses as the court of common
pleas or such other court shall deem proper;
(b) Any action or suit in which the only liability asserted against
a director is pursuant to section 1701.95 of the Revised Code.
(3) To the extent that a director, trustee, officer, employee, or agent
has been successful on the merits or otherwise in defense of any action,
suit, or proceeding referred to in divisions (E)(1) and (2) of this section,
or in defense of any claim, issue, or matter therein, he shall be indemnified
against expenses, including attorneys' fees, actually and reasonably incurred
by him in connection therewith.
(4) Any indemnification under divisions (E)(1) and (2) of this section,
unless ordered by a court, shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of
the director, trustee, officer, employee, or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth
in divisions (E)(1) and (2) of this section. Such determination shall be
made as follows:
(a) By a majority vote of a quorum consisting of directors of the
indemnifying corporation who were not and are not parties to or threatened
with any such action, suit, or proceeding;
(b) If the quorum described in division (E)(4)(a) of this section
is not obtainable or if a majority vote of a quorum of disinterested
directors so directs, in a written opinion by independent legal counsel other
than an attorney, or a firm having associated with it an attorney, who has
been retained
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by or who has performed services for the corporation, or any person to be
indemnified within the past five years;
(c) By the shareholders;
(d) By the court of common pleas or the court in which such action,
suit, or proceeding was brought.
Any determination made by the disinterested directors under division
(E)(4)(a) or by independent legal counsel under division (E)(4)(b) of this
section shall be promptly communicated to the person who threatened or
brought the action or suit by or in the right of the corporation under
division (E)(2) of this section, and within ten days after receipt of such
notification, such person shall have the right to petition the court of
common pleas or the court in which such action or suit was brought to review
the reasonableness of such determination.
(5)(a) Unless at the time of a director's act or omission that is the
subject of an action, suit or proceeding referred to in divisions (E)(1) and
(2) of this section, the articles or the regulations of a corporation state
by specific reference to this division that the provisions of this division
do not apply to the corporation and unless the only liability asserted
against a director in an action, suit, or proceeding referred to in divisions
(E)(1) and (2) of this section is pursuant to section 1701.95 of the Revised
Code, expenses, including attorney's fees, incurred by a director in
defending the action, suit, or proceeding shall be paid by the corporation as
they are incurred, in advance of the final disposition of the action, suit,
or proceeding upon receipt of an undertaking by or on behalf of the director
in which he agrees to do both of the following:
(i) Repay such amount if it is proved by clear and convincing
evidence in a court of competent jurisdiction that his action or failure to
act involved an act or omission undertaken with deliberate intent to cause
injury to the corporation or undertaken with reckless disregard for the best
interests of the corporation;
(ii) Reasonably cooperate with the corporation concerning the
action, suit, or proceeding.
(b) Expenses, including attorneys' fees incurred by a director, trustee,
officer, employee, or agent in defending any action, suit, or proceeding
referred to in divisions (E)(1) and (2) of this section, may be paid by the
corporation as they are incurred, in advance of the final disposition of the
action, suit, or proceeding as authorized by the directors in the specific
case upon receipt of an undertaking by or on behalf of the director, trustee,
officer, employee, or agent to repay such amount, if it ultimately is
determined that he is entitled to be indemnified by the corporation.
(6) The indemnification authorized by this section shall not be
exclusive of, and shall be in addition to, any other rights granted to those
seeking indemnification under the articles or the regulations or any
agreement, vote of shareholders or disinterested directors, or otherwise,
both as to action in his official capacity and as to action in another
capacity while holding such office, and shall continue as to a person who has
ceased to be a director, trustee, officer, employee, or agent and shall inure
to the benefit of the heirs, executors, and administrators of such a person.
(7) A corporation may purchase and maintain insurance or furnish similar
protection, including but not limited to trust funds, letters of credit, or
self-insurance on behalf of or for any person who is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee, or
agent of another corporation, domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust, or other enterprise against any liability
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asserted against him and incurred by him in any such capacity, or arising out
of his status as such, whether or not the corporation would have the power to
indemnify him against such liability under this section. Insurance may be
purchased from or maintained with a person in which the corporation has a
financial interest.
(8) The authority of a corporation to indemnify persons pursuant to
divisions (E)(1) and (2) of this section does not limit the payment of
expenses as they are incurred, indemnification, insurance, or other
protection that may be provided pursuant to divisions (E)(5), (6), and (7) of
this section. Divisions (E)(1) and (2) of this section do not create any
obligation to repay or return payments made by the corporation pursuant to
divisions (E)(5), (6), or (7).
(9) As used in this division, references to "corporation" include all
constituent corporations in a consolidation or merger and the new or
surviving corporation, so that any person who is or was a director, officer,
employee, or agent of such a constituent corporation, or is or was serving at
the request of such constituent corporation as a director, trustee, officer,
employee or agent of another corporation, domestic or foreign, nonprofit or
for profit, partnership, joint venture, trust, or other enterprise, shall
stand in the same position under this section with respect to the new or
surviving corporation as he would if he had served the new or surviving
corporation in the same capacity.
Second Amended Articles of Incorporation of Western Reserve
ARTICLE EIGHTH
EIGHTH: (1) The corporation may indemnify or agree to indemnify any
person who was or is a party or is threatened to be made a party, to any
threatened, pending, or completed action, suit, or proceeding, whether civil,
criminal, administrative, or investigative, other than an action by or in the
right of the corporation, by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee, or
agent of another corporation (including a subsidiary of this corporation),
domestic or foreign, nonprofit or for profit, partnership, joint venture,
trust, or other enterprise, against expenses, including attorneys' fees,
judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit, or proceeding if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The termination of any action, suit, or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendre or
its equivalent, shall not, of itself create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in
or not opposed to the best interests of the corporation, and with respect to
any criminal action or proceeding, he had reasonable cause to believe that
his conduct was unlawful.
(2) The corporation may indemnify or agree to indemnify any person who
was or is a party, or is threatened to be made a party to any threatened,
pending, or completed action or suit by or in the right of the corporation
to procure a judgment in its favor by reason of the fact that he is or was
a director, officer, employee, or agent of the corporation, or is or was
serving at the request of the corporation as a director, trustee, officer,
employee, or agent of another corporation (including a subsidiary of this
corporation), domestic or foreign, nonprofit or for profit, partnership,
joint venture, trust, or other enterprise against expenses, including
attorneys' fees, actually and reasonably incurred by him in connection with
the defense or settlement of such action or suit if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made
in respect of any claim, issue, or matter as to which such person shall
have been adjudged to be liable for negligence or misconduct in the
performance of his duty to the corporation unless, and only to the extent
that the court of common
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pleas, or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability, but in view of
all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses as the court of common pleas or such
other court shall deem proper.
(3) To the extent that a director, trustee, officer, employee, or
agent has been successful on the merits or otherwise in defense of any
action, suit, or proceeding referred to in sections (1) and (2) of this
article, or in defense of any claim, issue, or matter therein, he shall be
indemnified against expenses, including attorneys' fees, actually and
reasonably incurred by him in connection therewith.
(4) Any indemnification under sections (1) and (2) of this article,
unless ordered by a court, shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification
of the director, trustee, officer, employee, or agent is proper in the
circumstances because he has met the applicable standard of conduct set
forth in sections (1) and (2) of this article. Such determination shall be
made (a) by a majority vote of a quorum consisting of directors of the
indemnifying corporation who were not and are not parties to or threatened
with any such action, suit, or proceeding, or (b) if such a quorum is not
obtainable or if a majority vote of a quorum of disinterested directors so
directs, in a written opinion by independent legal counsel other than an
attorney, or a firm having associated with it an attorney, who has been
retained by or who has performed services for the corporation, or any
person to be indemnified within the past five years, or (c) by the
shareholders, or (d) by the court of common pleas or the court in which
such action, suit, or proceeding was brought. Any determination made by
the disinterested directors under section (4)(a) or by independent legal
counsel under section (4)(b) of this article shall be promptly communicated
to the person who threatened or brought the action or suit by or in the
right of the corporation under section (2) of this article, and within ten
days after receipt of such notification, such person shall have the right
to petition the court of common pleas or the court in which such action or
suit was brought to review the reasonableness of such determination.
(5) Expenses, including attorneys' fees incurred in defending any
action, suit, or proceeding referred to in sections (1) and (2) of this
article, may be paid by the corporation in advance of the final disposition
of such action, suit, or proceeding as authorized by the directors in the
specific case upon receipt of a written undertaking by or on behalf of the
director, trustee, officer, employee, or agent to repay such amount, unless
it shall ultimately be determined that he is entitled to be indemnified by
the corporation as authorized in this article. If a majority vote of a
quorum of disinterested directors so directs by resolution, said written
undertaking need not be submitted to the corporation. Such a determination
that a written undertaking need not be submitted to the corporation shall
in no way affect the entitlement of indemnification as authorized by this
article.
(6) The indemnification provided by this article shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under the articles or the regulations or any agreement, vote of
shareholders or disinterested directors, or otherwise, both as to action in
his official capacity and as to action in another capacity while holding
such office, and shall continue as to a person who has ceased to be a
director, trustee, officer, employee, or agent and shall inure to the
benefit of the heirs, executors, and administrators of such a person.
(7) The Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee, or agent of the
corporation, or is or was serving at the request of the corporation as a
director, trustee, officer, employee, or agent of another corporation
(including a subsidiary of this corporation), domestic or foreign,
nonprofit or for profit, partnership, joint venture, trust, or other
enterprise against any liability asserted against him and incurred by him
in any such capacity or arising out of his status as such, whether or not
the corporation would have the power to indemnify him against such
liability under this section.
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(8) As used in this section, references to "the corporation" include
all constituent corporations in a consolidation or merger and the new or
surviving corporation, so that any person who is or was a director,
officer, employee, or agent of such a constituent corporation, or is or was
serving at the request of such constituent corporation as a director,
trustee, officer, employee or agent of another corporation (including a
subsidiary of this corporation), domestic or foreign, nonprofit or for
profit, partnership, joint venture, trust, or other enterprise shall stand
in the same position under this article with respect to the new or
surviving corporation as he would if he had served the new or surviving
corporation in the same capacity.
(9) The foregoing provisions of this article do not apply to any
proceeding against any trustee, investment manager or other fiduciary of an
employee benefit plan in such person's capacity as such, even though such
person may also be an agent of this corporation. The corporation may
indemnify such named fiduciaries of its employee benefit plans against all
costs and expenses, judgments, fines, settlements or other amounts actually
and reasonably incurred by or imposed upon said named fiduciary in
connection with or arising out of any claim, demand, action, suit or
proceeding in which the named fiduciary may be made a party by reason of
being or having been a named fiduciary, to the same extent it indemnifies
an agent of the corporation. To the extent that the corporation does not
have the direct legal power to indemnify, the corporation may contract with
the named fiduciaries of its employee benefit plans to indemnify them to
the same extent as noted above. The corporation may purchase and maintain
insurance on behalf of such named fiduciary covering any liability to the
same extent that it contracts to indemnify.
Amended Code of Regulations of Western Reserve
ARTICLE V
Indemnification of Directors and Officers
Each Director, officer and member of a committee of this Corporation,
and any person who may have served at the request of this Corporation as a
Director, officer or member of a committee of any other corporation in
which this Corporation owns shares of capital stock or of which this
Corporation is a creditor (and his heirs, executors and administrators)
shall be indemnified by the Corporation against all expenses, costs,
judgments, decrees, fines or penalties as provided by, and to the extent
allowed by, Article Eighth of the Corporation's Articles of Incorporation,
as amended.
Rule 484 Undertaking
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling
persons of Western Reserve pursuant to the foregoing provisions or
otherwise, Western Reserve 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 Western Reserve of expenses incurred or paid by a director,
officer or controlling person of Western Reserve 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,
Western Reserve 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 of 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.
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Item 29. Principal Underwriter
(a) InterSecurities, Inc. ("ISI"), formerly known
as Idex Distributors, Inc. and before that, as Pioneer
Western Distributors, Inc., currently distributes
securities of WRL Series Life Account and the mutual funds
managed by Idex Management, Inc., an affiliate of ISI.
(b) Directors and Officers of ISI
<TABLE>
<CAPTION>
Principal Position and Offices
Name Business Address with Underwriter
---- ----------------- --------------------
<S> <C> <C>
John R. Kenney (1) Chairman of the Board
J. Will Paull 17199 Laurel Park Dr. N. Director
Livonia, MI 48152
G. John Hurley (1) Director, President
and Chief Executive
Officer
Donald L. Cudney (1) Senior Vice President
Thomas R. Moriarty (1) Senior Vice President
William H. Geiger (1) Secretary and Director
Richard B. Franz, II (1) Treasurer
</TABLE>
_________________________
(1) 201 Highland Avenue, Largo, Florida 34640
(c) Compensation to Principal Underwriter
Not Applicable
Item 30. Location of Accounts and Records
All accounts, books, or other documents required to be maintained
by Section 31(a) of the 1940 Act and the rules promulgated
thereunder are maintained by the Registrant through Western
Reserve, 201 Highland Avenue, Largo, Florida 34640.
Item 31. Management Services
Not Applicable
Item 32. Undertakings
(a) Registrant hereby undertakes to file a
Post-Effective amendment to this registration statement as
frequently as is necessary to ensure that the audited
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<PAGE> 78
financial statements in the registration statement are never
more than sixteen (16) months old for so long as payments
under the variable annuity contracts may be accepted;
(b) Registrant hereby undertakes to include either
(1) as part of any application to purchase a Contract
offered by the Prospectus, a space that an applicant can
check to request a Statement of Additional Information, or
(2) a postcard or similar written communication affixed to
or included in the Prospectus that the applicant can remove
to send for a Statement of Additional Information; and
(c) Registrant hereby undertakes to deliver any
Statement of Additional Information and any financial
statement required to be made available under this Form
promptly upon written or oral request.
Item 33. Section 403(b)(11) Representation
Registrant represents that in connection with its offering of
Contracts as funding vehicles for retirement plans meeting the
requirements of Section 403(b) of the Internal Revenue Code of 1986,
Registrant is relying on the no-action letter issued by the Office of
Insurance Products and Legal Compliance, Division of Investment
Management, to the American Council of Life Insurance dated November
28, 1988 (Ref. No. IP-6-88), and that the provisions of paragraphs
(1) - (4) thereof have been complied with.
Texas ORP Representation
The Registrant intends to offer Contracts to participants in the
Texas Optional Retirement Program. In connection with that offering,
the Registrant is relying on Rule 6c-7 under the Investment Company
Act of 1940, as amended, and is complying with, or shall comply with,
paragraphs (a) - (d) of that Rule.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Pre-Effective Amendment No. 1 to its Registration Statement to be signed on its
behalf by the undersigned, thereunder duly authorized, in the City of Largo,
State of Florida, on this 23rd day of May, 1996.
WRL SERIES ANNUITY ACCOUNT
(Registrant)
By:/s/ John R. Kenney
---------------------------------------
John R. Kenney, Chairman of the Board,
Chief Executive Officer and President of
Western Reserve Life Assurance Co. of
Ohio
WESTERN RESERVE LIFE ASSURANCE
CO. OF OHIO
(Depositor)
By:/s/ John R. Kenney
---------------------------------------
John R. Kenney, Chairman of the Board,
Chief Executive Officer and President
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to this Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated:
<TABLE>
Signature Title Date
----------------------- --------------------------------- ------------
<S> <C> <C>
/s/ John R. Kenney Chairman of the Board, May 23, 1996
----------------------- Chief Executive Officer
John R. Kenney and President
(Principal Executive
Officer)
/s/ Richard B. Franz II Senior Vice President May 23, 1996
----------------------- and Treasurer
Richard B. Franz II
</TABLE>
<PAGE> 80
<TABLE>
<S> <C> <C>
/s/ Alan M. Yaeger Executive Vice President, May 23, 1996
-------------------- Actuary & Chief Financial Officer
Alan M. Yaeger
/s/ Allan J. Hamilton Vice President and May 23, 1996
--------------------- Controller
Allan J. Hamilton
/s/ Patrick S. Baird Director May 23, 1996
--------------------
Patrick S. Baird */
/s/ Lyman H. Treadway Director May 23, 1996
---------------------
Lyman H. Treadway */
/s/ Jack E. Zimmerman Director May 23, 1996
---------------------
Jack E. Zimmerman */
*/s/ Thomas E. Pierpan
---------------------------
Signed by Thomas E. Pierpan
As Attorney-in-fact
</TABLE>
<PAGE> 1
EXHIBIT 10(a)
Written Consent of Sutherland, Asbill & Brennan
<PAGE> 2
S.A.&B. letterhead
May 24, 1996
Board of Directors
Western Reserve Life Assurance Co. of Ohio
WRL Series Annuity Account
201 Highland Avenue
Largo, FL 34640
RE: WRL Series Annuity Account
File No. 333-00503
--------------------------
Gentlemen:
We hereby consent to the use of our name under the capiton "Legal Matters"
in the Statement of Additional Information contained in Pre-Effective Amendment
No. 1 to the Registration Statement on Form N-4 (File No. 333-00503) of the WRL
Series Annuity Account filed by Western Reserve Life Assurance Co. of Ohio with
the Securities and Exchange Commission. In giving this consent, we do not
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act of 1933.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN
By: /s/ Stephen E. Roth
-------------------
Stephen E. Roth
<PAGE> 1
EXHIBIT 10(b)
Written Consent of Ernst & Young LLP
<PAGE> 2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Independent
Accountants" and to the use of our report dated February 23, 1996, with respect
to the statutory-basis financial statements of Western Reserve Life Assurance
Co. of Ohio included in Amendment No. 1 to Registration Statement (Form N-4 No.
333-00503) and related Prospectus of WRL Series Annuity Account.
ERNST & YOUNG LLP
Des Moines, Iowa
May 24, 1996
<PAGE> 1
EXHIBIT 10(c)
Written Consent of Price Waterhouse LLP
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the reference to us under the heading "Independent
Accountants" in the Statement of Additional Information constituting part of
the Meridian/INVESCO Sector Variable Annuity Pre-Effective Amendment No. 1 to
the Registration Statement on Form N-4 of the WRL Series Annuity Account.
Price Waterhouse LLP
Kansas City, Missouri
May 24, 1996
