As filed with the Securities and Exchange Commission on April 28, 1997
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. __ ( )
POST-EFFECTIVE AMENDMENT NO. 1 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Post-Effective Amendment No. 46 (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 333770
(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 Associate General Counsel
Western Reserve Life Assurance Co. of Ohio
201 Highland Avenue
Largo, Florida 33770
(Name and Address of Agent for Service)
Copy to:
Stephen E. Roth, Esq.
Sutherland, Asbill & Brennan, L.L.P.
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
--------------------------------------------------
It is proposed that this filing will become effective (check appropriate space)
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on May 1, 1997, pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a) of Rule 485
[ ] on , pursuant to paragraph (a) of Rule 485
The Registrant has chosen to register an indefinite number of securities in
accordance with Rule 24f-2. The Rule 24f-2 Notice for Registrant's most recent
fiscal year was filed on February 21, 1997
<PAGE>
WRL SERIES ANNUITY ACCOUNT
POST-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
FORM N-4 ITEM PROSPECTUS CAPTION
- ------------- -------------------
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
Contracts
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
(i)
<PAGE>
FORM N-4 ITEM PROSPECTUS CAPTION
- ------------- ------------------
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
STATEMENT OF ADDITIONAL
FORM N-4 ITEM INFORMATION CAPTION
- ------------- -----------------------
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
(ii)
<PAGE>
PART A
INFORMATION REQUIRED IN A PROSPECTUS
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
MERIDIAN/
INVESCO 201 HIGHLAND AVENUE
SECTOR LARGO, FLORIDA 34640
VARIABLE (800) 851-9777
ANNUITY (813) 585-6565
Flexible Payment This Prospectus describes the Meridian/INVESCO Sector
Variable Accumulation Variable Annuity (the Variable "Contract"), a tax
Deferred Annuity 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 US Sector Portfolio, Global Sector Portfolio and
Foreign Sector Portfolio (the "Portfolios").
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, 1997,
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
May 1, 1997 GUARANTEED OR ENDORSED BY, A BANK OR DEPOSITORY
INSTITUTION AND THE CONTRACT IS NOT FEDERALLY INSURED BY
THE FEDERAL DEPOST 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 A
CURRENT PROSPECTUS FOR THE PORTFOLIOS OF 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.
<PAGE>
TABLE OF CONTENTS
PAGE
-----
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
/bullet/ Western Reserve Life Assurance Co. of Ohio ............... 7
/bullet/ WRL Series Annuity Account ................................. 7
/bullet/ WRL Series Fund, Inc. ...................................... 8
CHARGES AND DEDUCTIONS ................................................ 8
/bullet/ Withdrawal Charge .......................................... 8
/bullet/ Transfer Charge .......................................... 9
/bullet/ Mortality and Expense Risk Charge ........................ 9
/bullet/ Annual Contract Charge .................................... 10
/bullet/ Administrative Charge .................................... 10
/bullet/ Premium Taxes ............................................. 10
/bullet/ Deductions for Other Taxes ................................. 10
/bullet/ Expenses of the Fund ....................................... 10
THE CONTRACT ......................................................... 10
ACCUMULATION PROVISIONS ............................................. 10
/bullet/ Purchase Payments .......................................... 10
/bullet/ Net Purchase Payments .................................... 11
/bullet/ Accumulation Unit Value .................................... 12
/bullet/ Computing Sub-Account Value .............................. 12
/bullet/ Transfers to and from, and among Allocation Options ...... 12
/bullet/ Dollar Cost Averaging .................................... 13
/bullet/ Partial Withdrawals and Surrenders ........................ 13
/bullet/ Contract Loans For 401 (a), 401 (k), and 403 (b) Contracts 14
/bullet/ Death Benefits during the Accumulation Period ............ 15
ANNUITY PROVISIONS ................................................ 17
/bullet/ Maturity Date and Selection of Annuity Options ............ 17
/bullet/ Fixed Account Annuity Options .............................. 18
/bullet/ Series Account Annuity Options ........................... 18
/bullet/ Death Benefits after the Maturity Date ..................... 18
/bullet/ Improved Annuity Rates .................................... 18
/bullet/ Proof of Age, Sex, and Survival ........................... 18
OTHER MATTERS RELATING TO THE CONTRACT .............................. 18
/bullet/ Changes in Purchase Payments .............................. 18
/bullet/ Right To Examine Contract ................................. 18
/bullet/ Contract Payments .......................................... 18
/bullet/ Ownership ................................................ 19
/bullet/ Annuitant ................................................ 19
/bullet/ Beneficiary ................................................ 19
/bullet/ Modification or Waiver .................................... 19
FEDERAL TAX MATTERS ................................................... 19
/bullet/ Introduction ............................................. 19
/bullet/ Company Tax Status ....................................... 20
/bullet/ Taxation of Annuities .................................... 20
/bullet/ Qualified Plans .......................................... 21
/bullet/ Additional Considerations ................................. 22
THE FIXED ACCOUNT ................................................... 23
/bullet/ Minimum Guaranteed and Current Interest Rates ............ 24
/bullet/ Fixed Account Value ....................................... 24
/bullet/ Allocations, Transfers and Partial Withdrawals ............ 24
DISTRIBUTION OF THE CONTRACTS ....................................... 24
VOTING RIGHTS ......................................................... 25
LEGAL PROCEEDINGS ................................................... 25
STATEMENT OF ADDITIONAL INFORMATION ................................. 25
<PAGE>
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 34618-9051. 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>
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 separtate 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>
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 US Sector Portfolio, Global Sector Portfolio
and 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 8.)
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:
NUMBER OF YEARS
FROM RECEIPT OF EACH
CHARGE PURCHASE PAYMENT
------ --------------------
8% 0-1
7% 2
6% 3
5% 4
4% 5
3% 6
2% 7
0% Over 7
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 19.)
3
<PAGE>
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
9.)
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 8 and
the Prospectus for the Portfolios.)TOTAL FUND ANNUAL EXPENSES FOR THE PORTFOLIOS
EXCEED 2.00%.
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.
OWNER TRANSACTION EXPENSES
Sales Load Imposed on Purchases ............... None
Maximum Withdrawal Charge
(as a % of each Purchase Payment
surrendered or partially withdrawn within 7
years of receipt) .......................... 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 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%
- ---------------------------------------------------------
FUND ANNUAL EXPENSES* (as a % of Fund average net assets)
<TABLE>
<CAPTION>
US SECTOR GLOBAL SECTOR FOREIGN SECOTOR
PORTFOLIO** PORTFOLIO** PORTFOLIO**
-------------- ---------------- -----------------
<S> <C> <C> <C>
Management Fees ........................... 1.10% 1.10% 1.10%
Other Expenses (after reimbursement) ...... 3.66% 1.27% 3.58%
Total Fund Annual Expenses ............... 4.76% 2.37% 4.68%
</TABLE>
- ----------------
* Effective January 1, 1997, the Fund adopted a Plan of Distribution pursuant
to Rule 12b-1 under the 1940 Act ("Distribution Plan") and pursuant to the
Plan, has entered into a Distribution Agreement with InterSecurities, Inc.
("ISI"), principal underwriter for the Fund. Under the Distribution Plan,
the Fund, on behalf of the Portfolios, is authorized to pay to various
service providers, and direct payment for expenses incurred in connection
with the distribution of a Portfolio's shares, amounts equal to actual
expenses associated with distributing a Portfolio's shares, up to a maximum
rate of 0.15% (fifteen one-hundreths of one percent) on an annualized basis
of the average daily net assets. This fee is measured and accrued daily and
paid monthly. ISI has determined that it will not seek payment by the Fund
of distribution expenses with respect to any Portfolio during the fiscal
year ending December 31, 1997. Prior to ISI's seeking reimbursement,
Policyowners will be notified in advance.
** Because these Portfolios commenced operations on May 1, 1996, the
percentages set forth as "Other Expenses" and "Total Fund Annual Expenses"
are annualized.
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:
4
<PAGE>
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>
US Sector Sub-Account ............ $142 $244 $343 $587
Global Sector Sub-Account ...... 119 178 238 409
Foreign Sector Sub-Account ...... 141 242 340 582
</TABLE>
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>
US Sector Sub-Account ............ $62 $184 $303 $587
Global Sector Sub-Account ...... 39 118 198 409
Foreign Sector Sub-Account ...... 61 182 300 582
</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 $39,993, WHICH CONVERTS THAT CHARGE
TO AN ANNUAL RATE OF 0.09% 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 States of New Jersey and 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
<TABLE>
<CAPTION>
PERIOD FROM MAY 1, 1996* TO
DECEMBER 31, 1996
ACCUMULATION ACCUMULATION NUMBER OF
UNIT VALUE UNIT VALUE ACCUMULATION
AT BEGINNING AT END UNITS OUTSTANDING
SUB-ACCOUNT OF PERIOD OF PERIOD AT END OF PERIOD
- ----------- ------------- --------------------------- -----------------
<S> <C> <C> <C>
U.S. Sector $10.000 $10.344 203,036
Foreign Sector 10.000 10.263 143,918
Global Sector 10.000 10.509 100,032
</TABLE>
* Commencement of operation for these Sub-Accounts.
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
5
<PAGE>
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.
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 average annual total return of the Sub-Accounts shown below is based upon
the actual historical performance of the Sub-Accounts. The calculations
represent the performance of a hypothetical initial Purchase Payment of $1,000
over certain stated periods of time. Total return is calculated according to the
formula provided in the Statement of Additional Information.
THE STANDARD TOTAL RETURN CALCULATIONS IN THE TABLE BELOW HAVE BEEN REDUCED BY
ALL FEES AND CHARGES UNDER THE CONTRACT. Such fees and charges include the
Mortality and Expense Risk Charge of 1.25%, the Administrative Charge of 0.15%,
and the $35 Annual Contract Charge based on an average Series Account Value of
$39,993, which translates into an annual charge of 0.09%. The total return
calculations in the table below also assume a complete surrender of the Contract
at the end of the period, and therefore the Withdrawal Charge is deducted.
The standard average annual total returns of the Sub-Accounts since the
inception of each Sub-Account is:
<TABLE>
<CAPTION>
PERIOD FROM
SUB-ACCOUNT MAY 1, 1996* TO DECEMBER 31, 1996
- ----------- ---------------------------------
<S> <C>
U.S. Sector -4.62%
Foreign Sector -5.43%
Global Sector -2.97%
</TABLE>
- ----------------
* Commencement of operations 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.
Western Reserve may present hypothetical illustrations that present past
performance of one or more Sub-Accounts for a hypothetical Contract. Such a
hypothetical Contract illustration would present average total return
performance information for the hypothetical Contract, assuming allocation of
net premium payments to the Sub-Accounts, and reflects the performance of those
Sub-Accounts for the duration of the allocations under the hypothetical
Contract. The information presented may be compared to various indices.
NON-STANDARD PERFORMANCE DATA WILL ONLY BE DISCLOSED IF THE STANDARD PERFORMANCE
DATA FOR THE REQUIRED PERIODS IS ALSO DISCLOSED.
Western Reserve may also present non-standard total returns based on the actual
performance of the Portfolios, which were in existence prior to the
Sub-Account's inception. The table below shows the actual average annual total
return for the Portfolios reduced by all fees and charges of the Contract, as if
the Contract had been in existence, EXCEPT THAT THE WITHDRAWAL CHARGE IS NOT
DEDUCTED. Such fees and charges include the Mortality and Expense Risk Charge of
1.25%, the Administrative Charge of 0.15%, and the $35 Annual Contract Charge
based on an average Series Account Value of $39,993 which translates that charge
into an annual rate of 0.09%.
THE NON-STANDARD AVERAGE ANNUAL TOTAL RETURNS OF THE SUB-ACCOUNTS SINCE THE
INCEPTION OF EACH PORTFOLIO IS:
<TABLE>
<CAPTION>
PERIOD FROM
SUB-ACCOUNT MAY 1, 1996* TO DECEMBER 31, 1996
- ----------- ---------------------------------
<S> <C>
U.S. Sector 3.38%
Foreign Sector 2.57%
Global Sector 5.03%
</TABLE>
- ----------------
* Commencement of operations 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.
6
<PAGE>
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, Financial Times
(FT) World Index Ex-USA, 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 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
7
<PAGE>
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 US Sector Portfolio, Global Sector Portfolio and 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.
Meridian Investment Management Corporation serves as Sub-Adviser to the
Portfolios. THERE IS NO ASSURANCE THAT ANY PORTFOLIO WILL ACHIEVE ITS INVESTMENT
OBJECTIVE. More detailed information, including a description of risks and the
investment objective of each Portfolio, can be found in the Prospectus for the
Portfolios, which should be read carefully before investing.
WRL Investment Management, Inc. ("WRL Management"), a wholly-owned subsidiary of
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.
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 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 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
8
<PAGE>
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 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,
fulltime employees and registered representatives of Inter-Securities, Inc., an
affiliate of Western Reserve, and any broker-dealer which has a sales agreement
with Inter-Securities, 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 may, at any time, revoke
or modify this transfer privilege.
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
9
<PAGE>
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.
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 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.
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 Portfolios of the Fund, the
net assets of the Series Account will reflect the investment advisory fee and
other expenses incurred by the Portfolios, as described in the Portfolios'
Prospectus.
Effective January 1, 1997, the Fund adopted a Plan of Distribution pursuant to
Rule 12b-1 under the 1940 Act ("Distribution Plan") and pursuant to the Plan,
has entered into a Distribution Agreement with ISI, principal underwriter for
the Fund.
Under the Distribution Plan, the Fund, on behalf of the Portfolios, is
authorized to pay to various service providers, as direct payment for expenses
incurred in connection with the distribution of a Portfolio's shares, amounts
equal to actual expenses associated with distributing a Portfolio's shares, up
to a maximum rate of 0.15% (fifteen one-hundreths of one percent) on an
annualized basis of the average daily net assets. This fee is measured and
accrued daily and paid monthly. ISI has determined that it will not seek payment
by the Fund of distribution expenses with respect to any Portfolio during the
fiscal year ending December 31, 1997. Prior to ISI's seeking reimbursement,
Policyowners will be notified in advance.
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 Contracts other
than IRAs the minimum initial Purchase Payment is $50. For all Contracts,
subsequent Purchase Payments are not required but may be made at
10
<PAGE>
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 States of New Jersey and 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
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entire Purchase Payment. Once the application is complete, Western Reserve will
accept it and apply the initial Net Purchase Payment within two business days.
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 end of a Valuation Period is the result of:
1. The total value of the assets held in the Sub-Account. This value is
determined by multiplying the number of shares of the designated Fund
Portfolio owned by the Sub-Account times the Portfolio's net asset
value per share; minus
2. The accrued daily percentage for the Administrative Charge and
Mortality and Expense Risk Charge multiplied by the net assets of the
Sub-Account; minus
3. The accrued amount of reserve for any taxes that are determined by
Western Reserve to have resulted from the investment operations of the
Sub-Account; divided by
4. The number of outstanding units in the Sub-Account.
The Mortality and Expense Risk Charge is deducted at an annual rate of 1.25%
from the net assets during each day in the Valuation Period and compensates
Western Reserve for certain mortality and expense risks. The Administrative
Charge is deducted from an annual rate of 0.15% from net assets during each day
in the Valuation Period and compensates Western Reserve for certain
administrative expenses. (See "CHARGES AND DEDUCTIONS - Mortality and Expense
Risk Charge" on page 9 and "Administrative Charge" on page 10.) The Accumulation
Unit Value may increase, decrease, or remain the same from Valuation Period to
Valuation Period.
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 States of New Jersey and 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 the 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
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genuine. If Western Reserve does not employ such procedures, it may be liable
for losses due to unauthorized or fraudulent instructions. Such procedures may
include, among others, requiring forms of personal identification prior to
acting upon such telephone instructions, providing written confirmation of such
transactions to Owners and/or tape recording 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
requests for 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 bewithdrawn 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
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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 Systematic Partial Withdrawals upon 30 days' written notice to Owners.
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.)
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 Systematic Partial Withdrawals upon 30 days'
written notice to Owners. Western Reserve also reserves the right to assess a
processing fee for this service.
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 Annuity
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 Annuity
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Value is less than $20,000, the Owner may borrow against the Contract the lesser
of (1) 80% of the Annuity 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 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 Qualified Plan, this
distribution may be subject to income tax and a penalty tax, and may cause the
Contract to fail to qualify under 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.
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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 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 Departments of Missouri, New Jersey, South Carolina and Washington
have disapproved for Contracts issued in these States 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.
Therefore, for Contracts issued in these States, 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 spousal 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.
Under 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:
/bullet/ 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;
/bullet/ 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;
/bullet/ Not deduct the Annual Contract Charge during the duration of the
five-year period;
/bullet/ 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;
/bullet/ 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;
/bullet/ 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.
Under 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
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(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.
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
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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 new investment
experience for that 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
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a result of which valuation or disposal of securities is not reasonably
practicable. Transfers may also be postponed under these circumstances.
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 15.)
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 any assignment may be subject to restrictions, penalties, or even
prohibition under the Code, and must also be permitted under 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. 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 understanding of the Federal income tax laws as
they are currently interpreted. Western Reserve makes no representations
regarding the likelihood of continuation of
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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
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equal installments as a life annuity. Other tax penalties may 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. For these purposes, the investment in the Contract is not affected by the
Owner's or Annuitant's death. That is, the investment in the Contract remains
the amount of any Purchase Payments paid which were not excluded from gross
income.
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, the selection of certain Maturity Dates, 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, selection 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.
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2. INDIVIDUAL RETIREMENT ANNUITIES. Sections 219 and 408 of the Code permit
individuals or their employers to contribute 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 taxdeferred 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. Such plans may permit a participant to specify the form of investment in
which his or her participation will be made. In general, for non-governmental
plans, 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, a non-governmental 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 the later of April 1 of the calendar year following the calendar
year in which the Owner (or plan participant) (i) reaches age 70-1/2, or (ii)
retires, and must be made in a specified form and manner. If the plan
participant is a "five percent owner" (as defined in the Code), distributions
generallly must begin no later than the date described in (i). 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.
6. 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.
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
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issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular sub-accounts 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 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 States of New Jersey and 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.
23
<PAGE>
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.
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 ISI 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. ISI
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 ISI 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
24
<PAGE>
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.
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. ISI, 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.
WRL00102-05/97
25
<PAGE>
PART B
INFORMATION REQUIRED IN A STATEMENT OF
ADDITIONAL INFORMATION
<PAGE>
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, 1997, 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, 1997
WRL00103-05/97
<PAGE>
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>
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. WRL Investment Services, Inc. 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 $12 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,
1996. 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, 1996. The principal business address of Ernst & Young LLP is
801 Grand Avenue, Suite 3400, Des Moines, Iowa 50309-2764.
LEGAL MATTERS
Sutherland, Asbill & Brennan, L.L.P., 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 Associate General Counsel and Assistant Secretary of Western
Reserve.
CALCULATION OF PERFORMANCE RELATED INFORMATION
A. TOTAL RETURN AND YIELD QUOTATIONS FOR THE GLOBAL SECTOR, US SECTOR, AND
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, three, 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, three, 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>
<S> <C> <C>
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>
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 $39,993, which
3
<PAGE>
converts that charge to an annual rate of 0.09% 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 [ (--- + 1)6 - 1]
cd
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.
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
$39,993, which converts that charge to an annual rate of 0.09% 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 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
4
<PAGE>
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 lbbotson 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
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
5
<PAGE>
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 determinedby Western Reserve.
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.
6
<PAGE>
FINANCIAL STATEMENTS
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,
1996, 1995 and 1994 have been prepared on the basis of statutory accounting
principles, rather than generally accepted accounting principles ("GAAP").
INDEX TO FINANCIAL STATEMENTS
WRL SERIES ANNUITY ACCOUNT (MERIDIAN/INVESCO SECTOR VARIABLE ANNUITY):
Report of Independent Accountants dated January 31, 1997
Statements of assets, liabilities and equity accounts and statements of
operations for the year ended December 31, 1996
Statements of changes in equity accounts for the year ended December 31,
1996
Selected per unit data and ratios for the year ended December 31, 1996
Notes to financial statements
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO:
Report of Independent Auditors dated February 21, 1997
Statutory-Basis balance sheets at December 31, 1996 and 1995
Statutory-Basis statements of operations for the years ended December 31,
1996, 1995 and 1994
Statutory-Basis statements of changes in capital and surplus for the years
ended December 31, 1996, 1995 and 1994
Statutory-Basis statements of cash flows for the years ended December 31,
1996, 1995 and 1994
Notes to Statutory-Basis financial statements
Statutory-Basis financial statement schedules
7
<PAGE>
WRL SERIES ANNUITY ACCOUNT
MERIDIAN/INVESCO SECTOR VARIABLE ANNUITY
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Western Reserve Life Assurance Co. of Ohio and
Contract Owners of the WRL Series Annuity Account - Meridian/INVESCO Sector
Variable Annuity Contracts
In our opinion, the accompanying statements of assets, liabilities and equity
accounts and the related statements of operations and of changes in equity
accounts and the selected per unit data and ratios present fairly, in all
material respects, the financial position of each of the Sub-Accounts
constituting the Meridian/INVESCO Sector Variable Annuity Contracts of the WRL
Series Annuity Account (a separate account of Western Reserve Life Assurance Co.
of Ohio, hereafter referred to as the "Annuity Account") at December 31, 1996,
and the results of each of their operations, the changes in each of their equity
accounts and the selected per unit data and ratios for the period May 1, 1996
(commencement of operations) through December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements and
selected per unit data and ratios (hereafter referred to as "financial
statements") are the responsibility of the Annuity Account's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Kansas City, Missouri
January 31, 1997
8
<PAGE>
WRL SERIES ANNUITY ACCOUNT
MERIDIAN/INVESCO SECTOR VARIABLE ANNUITY
STATEMENTS OF ASSETS, LIABILITIES AND EQUITY ACCOUNTS
At December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MERIDIAN/INVESCO MERIDIAN/INVESCO MERIDIAN/INVESCO
GLOBAL SECTOR US SECTOR FOREIGN SECTOR
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
<S> <C> <C> <C>
ASSETS:
Investments:
Investment in WRL Series Fund, Inc.:
Shares .................................... 99,620.331 201,453.499 145,618.400
============== ============== ===============
Cost ...................................... $ 1,009,498 $ 2,020,033 $ 1,463,899
============== ============== ===============
Investments, at net asset value ............ $ 1,051,224 $ 2,100,186 $ 1,477,074
Accrued transfers from (to) depositor - net. 0 0 0
-------------- -------------- ---------------
Total assets .............................. 1,051,224 2,100,186 1,477,074
-------------- -------------- ---------------
LIABILITIES: ................................ 0 0 0
-------------- -------------- ---------------
Total net assets .......................... $ 1,051,224 $ 2,100,186 $ 1,477,074
============== ============== ===============
EQUITY ACCOUNTS:
Contract Owners' equity:
Units .................................... 50,034.169959 153,036.458708 43,917.514952
============== ============== ===============
Unit value ............................... $ 10.508888 $ 10.343885 $ 10.263335
============== ============== ===============
Contract Owners' equity .................. $ 525,804 $ 1,582,992 $ 450,740
-------------- -------------- ---------------
Depositor's equity:
Units .................................... 49,997.705211 50,000.000000 100,000.000000
============== ============== ===============
Unit value ............................... $ 10.508888 $ 10.343885 $ 10.263335
============== ============== ===============
Depositor's equity ....................... $ 525,420 $ 517,194 $ 1,026,334
-------------- -------------- ---------------
Total equity ............................. $ 1,051,224 $ 2,100,186 $ 1,477,074
============== ============== ===============
</TABLE>
WRL SERIES ANNUITY ACCOUNT
MERIDIAN/INVESCO SECTOR VARIABLE ANNUITY
STATEMENTS OF OPERATIONS
For the period ended December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MERIDIAN/INVESCO MERIDIAN/INVESCO MERIDIAN/INVESCO
GLOBAL SECTOR US SECTOR FOREIGN SECTOR
SUB-ACCOUNT(A) SUB-ACCOUNT(A) SUB-ACCOUNT(A)
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividend income ....................................... $ 1,801 $ 0 $ 0
Capital gain distributions ............................ 3,682 0 28,366
------- ------- -------
5,483 0 28,366
EXPENSES:
Mortality and expense risk ............................ 6,106 7,460 9,046
------- ------- -------
Net investment income (loss) ......................... (623) (7,460) 19,320
------- ------- -------
Net realized and unrealized gain (loss) on investments:
Net realized gain (loss) from securities transactions 53 2 88
Change in unrealized appreciation (depreciation) ..... 41,726 80,152 13,174
------- ------- -------
Net gain (loss) on investments ....................... 41,779 80,154 13,262
------- ------- -------
Net increase (decrease) in equity accounts resulting
from operations ................................... $41,156 $72,694 $32,582
======= ======= =======
</TABLE>
(a) The inception date of this sub-account was May 1, 1996.
The notes to the financial statements are an integral part of this report.
9
<PAGE>
WRL SERIES ANNUITY ACCOUNT
MERIDIAN/INVESCO SECTOR VARIABLE ANNUITY
STATEMENTS OF CHANGES IN EQUITY ACCOUNTS
For the period ended
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MERIDIAN/INVESCO MERIDIAN/INVESCO MERIDIAN/INVESCO
GLOBAL SECTOR US SECTOR FOREIGN SECTOR
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
DECEMBER 31 DECEMBER 31 DECEMBER 31
----------------- ---------------- ----------------
1996(a) 1996(a) 1996(a)
------ ------- -------
<S> <C> <C> <C>
OPERATIONS:
Net investment income (loss) ............... $ (623) $ (7,460) $ 19,320
Net gain (loss) on investments ............. 41,779 80,154 13,262
---------- ---------- ----------
Net increase (decrease) in equity accounts
resulting
from operations .......................... 41,156 72,694 32,582
---------- ---------- ----------
EQUITY TRANSACTIONS:
Proceeds from units sold (redeemed) ........ 510,068 1,527,492 444,492
---------- ---------- ----------
Less cost of units redeemed:
Administrative charges .................... 0 0 0
Policy loans .............................. 0 0 0
Surrender benefits ........................ 0 0 0
Death benefits ............................ 0 0 0
---------- ---------- ----------
0 0 0
---------- ---------- ----------
Increase (decrease) in equity accounts from
capital
unit transactions ....................... 510,068 1,527,492 444,492
---------- ---------- ----------
Net increase (decrease) in equity accounts 551,224 1,600,186 477,074
Depositors' equity contribution (redemption) 500,000 500,000 1,000,000
EQUITY ACCOUNTS:
Beginning of period ........................ 0 0 0
---------- ---------- ----------
End of period .............................. $1,051,224 $2,100,186 $1,477,074
========== ========== ==========
</TABLE>
(a) The inception date of this sub-account was May 1, 1996.
The notes to the financial statements are an integral part of this report.
10
<PAGE>
WRL SERIES ANNUITY ACCOUNT
MERIDIAN/INVESCO SECTOR VARIABLE ANNUITY
SELECTED PER UNIT DATA AND RATIOS*
For the period ended
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MERIDIAN/INVESCO MERIDIAN/INVESCO MERIDIAN/INVESCO
GLOBAL SECTOR US SECTOR FOREIGN SECTOR
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
DECEMBER 31 DECEMBER 31 DECEMBER 31
---------------- ---------------- ----------------
1996(c) 1996(c) 1996(c)
------- ------- -------
<S> <C> <C> <C>
Accumulation unit value, beginning of period ..................... $10.00 $10.00 $10.00
------ ------ ------
Income from operations:
Net investment income (loss) .................................... (0.01) (0.08) 0.17
Net realized and unrealized gain (loss) on investments .......... 0.52 0.42 0.09
------ ------ ------
Total income (loss) from operations ............................ 0.51 0.34 0.26
------ ------ ------
Accumulation unit value, end of period ........................... $10.51 $10.34 $10.26
====== ====== ======
Total return (a) ................................................. 5.09% 3.44% 2.63%
Ratios and supplemental data:
Net assets at end of period (in thousands) ...................... $1,051 $2,100 $1,477
Ratio of net investment income (loss) to average net assets (b).. (0.14%) (1.26%) 2.55%
</TABLE>
* The above table illustrates the change for a unit outstanding computed
using average units outstanding throughout each period.
(a) For periods less than one year the total return is not annualized.
(b) For periods less than one year the ratio of net investment income to
average net assets is annualized.
(c) The inception date of this sub-account was May 1, 1996.
The notes to the financial statements are an integral part of this report.
11
<PAGE>
WRL SERIES ANNUITY ACCOUNT
MERIDIAN/INVESCO SECTOR VARIABLE ANNUITY
NOTES TO THE FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
DECEMBER 31, 1996
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The WRL Series Annuity Account (the "Annuity Account") was established as a
variable accumulation deferred annuity separate account of Western Reserve Life
Assurance Co. of Ohio ("WRL") and is registered as a unit investment trust
("Trust") under the Investment Company Act of 1940, as amended.
The Annuity Account holds assets that support the benefits under flexible
payment variable accumulation deferred annuity contracts (the "Contracts")
issued by WRL, including the Meridian/INVESCO Sector Variable Annuity. The
Annuity Account equity transactions are accounted for using the appropriate
effective date at the corresponding accumulation unit value.
The Meridian/INVESCO Sector Variable Annuity investment options, referred
to as sub-accounts, are the Meridian/INVESCO Global Sector Sub-Account, the
Meridian/INVESCO US Sector Sub-Account and the Meridian/INVESCO Foreign
Sector Sub-Account. Each sub-account invests in the corresponding portfolio
of the WRL Series Fund, Inc. (the "Fund"), a registered management investment
company under the Investment Company Act of 1940, as amended. The investment
managers for these three portfolios are Meridian Investment Management
Corporation and INVESCO Global Asset Management Limited.
On May 1, 1996, WRL made an initial contribution to each of the
Meridian/INVESCO Sub-Accounts. The amount of the contribution and the units
received from the corresponding sub-accounts are as follows:
SUB-ACCOUNT CONTRIBUTION UNITS
----------- ------------ -----
Meridian/INVESCO
Global Sector $ 500,000 49,997.705211
Meridian/INVESCO
US Sector $ 500,000 50,000.000000
Meridian/INVESCO
Foreign Sector $1,000,000 100,000.000000
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
The following significant accounting policies, which are in conformity
with generally accepted accounting principles for unit investment trusts,
have been consistently used in preparation of the Trust's financial
statements.
A. VALUATION OF INVESTMENTS
The investments in the Fund's shares are stated at the closing net asset
value ("NAV") per share as determined by the Fund on December 31, 1996.
Investment transactions are accounted for on the trade date, using the
Fund NAV next determined after receipt of a sale or redemption order
without sales charges. Dividend income, and capital gain distributions are
recorded on the ex-dividend date. The cost of investments sold is
determined on a first-in, first-out basis.
B. FEDERAL INCOME TAXES
The operations of the Annuity Account are a part of and are taxed with the
total operations of WRL, which is taxed as a life insurance company under
the Internal Revenue Code. Under current law, the investment income of the
Annuity Account, including realized and unrealized capital gains, is not
taxable to WRL. Accordingly, no provision for federal income taxes has
been made.
NOTE 2--CHARGES AND DEDUCTIONS
Charges are assessed by WRL in connection with issuance and administration
of the Contracts.
A. CONTRACT CHARGES
No deduction for sales expenses are made from the purchase payments. A
contingent deferred sales charge may, however, be assessed against
contract values when withdrawn or surrendered.
On each anniversary through maturity date, WRL will deduct an annual
contract charge as partial compensation for providing administrative
services under the Contracts.
B. SUB-ACCOUNT CHARGES
A daily charge equal to an annual rate of 1.40% of average daily net
assets is assessed to compensate WRL for assumption of mortality and
expense
12
<PAGE>
WRL SERIES ANNUITY ACCOUNT
MERIDIAN/INVESCO SECTOR VARIABLE ANNUITY
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 2 (CONTINUED)
risks and administrative services in connection with issuance and
administration of the Contracts. This charge (not assessed at the
individual contract level) effectively reduces the value of a unit
outstanding during the year.
NOTE 3--DIVIDENDS AND DISTRIBUTIONS
Dividends of the Portfolios are typically declared and reinvested
semiannually, while capital gain distributions are typically declared and
reinvested annually. Dividends and distributions of the Fund are generally
paid to and reinvested by the Annuity Account the next business day after
declaration.
NOTE 4--OTHER MATTERS
As of December 31, 1996 the equity accounts include net unrealized
appreciation (depreciation) on investments as follows:
SUB-ACCOUNT
- -----------
Meridian/INVESCO Global Sector $41,726
Meridian/INVESCO US Sector 80,153
Meridian/INVESCO Foreign Sector 13,175
13
<PAGE>
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, 1996 and 1995, 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, 1996. 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.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Department of the State of Ohio, which practices
differ from generally accepted accounting principles. The variances between such
practices and generally accepted accounting principles are also described in
Note 1. The effects on the financial statements of these variances are not
reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matters described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with generally accepted accounting principles, the financial position
of Western Reserve Life Assurance Co. of Ohio at December 31, 1996 and 1995, or
the results of its operations or its cash flows for each of the three years in
the period ended December 31, 1996.
14
<PAGE>
Also, 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, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996 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
February 21, 1997
15
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
BALANCE SHEETS - STATUTORY BASIS
(DOLLARS IN THOUSANDS)
DECEMBER 31
1996 1995
---------- ----------
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments $ 2,480 $ 4,999
Bonds 359,579 452,474
Common stocks at market (cost:
$302 in 1996 and $473 in 1995) 597 834
Mortgage loans on real estate 6,049 6,181
Home office properties, at cost
less accumulated depreciation
($0 in 1996 and $1,505 in 1995) 7,962 5,121
Policy loans 52,604 37,125
---------- ----------
Total cash and invested assets 429,271 506,734
Premiums deferred and uncollected 1,943 1,787
Accrued investment income 5,940 7,565
Receivable from affiliates 1,165 4,337
Transfers from separate accounts 204,181 --
Other assets 3,962 4,264
Separate account assets 3,527,145 2,419,205
---------- ----------
Total admitted assets $4,173,607 $2,943,892
========== ==========
SEE ACCOMPANYING NOTES.
16
<PAGE>
DECEMBER 31
1996 1995
---------- ----------
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life $ 155,166 $ 72,032
Annuity 332,230 319,353
Policy and contract claim reserves 8,584 6,612
Other policyholders' funds 3,104 2,633
Remittances and items not allocated 9,107 5,136
Federal income taxes payable 1,266 1,417
Asset valuation reserve 5,710 5,590
Interest maintenance reserve 7,451 6,392
Payable to affiliate 20,463 --
Other liabilities 13,082 10,984
Separate account liabilities 3,521,888 2,415,804
---------- ----------
Total liabilities 4,078,051 2,845,953
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 26,041 28,424
---------- ----------
Total capital and surplus 95,556 97,939
---------- ----------
Total liabilities and capital and surplus $4,173,607 $2,943,892
========== ==========
SEE ACCOMPANYING NOTES.
17
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENTS OF OPERATIONS - STATUTORY BASIS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations,
net of reinsurance:
Life $ 293,590 $191,508 $150,991
Annuity 740,125 378,390 449,141
Net investment income 36,067 40,891 40,139
Amortization of interest maintenance reserve 1,335 882 726
Commissions and expense allowances on
reinsurance ceded
11 11 12
Other income 13,398 8,237 6,354
---------- -------- --------
1,084,526 619,919 647,363
Benefits and expenses:
Benefits paid or provided for:
Life 21,256 17,844 15,921
Surrender benefits 286,406 206,250 196,169
Other benefits 23,270 19,530 18,403
Increase (decrease) in aggregate reserves for
policies and contracts:
Life 80,139 (15,132) (11,618)
Annuity 12,877 5,229 (78,590)
Other 422 109 286
---------- -------- --------
424,370 233,830 140,571
Insurance expenses:
Commissions 140,261 82,903 78,168
General insurance expenses 47,406 37,246 33,100
Taxes, licenses and fees 10,848 8,919 5,931
Transfer to separate accounts 452,471 242,427 386,174
Other expenses 60 34 18
---------- -------- --------
651,046 371,529 503,391
---------- -------- --------
1,075,416 605,359 643,962
---------- -------- --------
Gain from operations before federal
income taxes and realized capital
losses on investments 9,110 14,560 3,401
Federal income tax expense 9,297 8,917 3,406
---------- -------- --------
Gain (loss) from operations before
realized capital losses on investments (187) 5,643 (5)
Netrealized capital losses on investments
(net of related federal income taxes
and amounts transferred to interest
maintenance reserve) (811) (1,678) (1,133)
---------- -------- --------
Net income (loss) $ (998) $ 3,965 $ (1,138)
========== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES.
18
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS - STATUTORY BASIS
(DOLLARS IN THOUSANDS)
TOTAL
COMMON PAID-IN UNASSIGNED CAPITAL AND
STOCK SURPLUS SURPLUS SURPLUS
------ ------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1994 $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
Increase 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
Net loss for 1996 -- -- (998) (998)
Net unrealized capital gains -- -- 1,294 1,294
Decrease in non-admitted assets -- -- 199 199
Increase in asset valuation reserve -- -- (120) (120)
Increase in surplus in separate accounts
-- -- 237 237
Change in reserve valuation -- -- (2,995) (2,995)
------ ------- ------- -------
Balance at December 31, 1996 $1,500 $68,015 $26,041 $95,556
====== ======= ======= =======
</TABLE>
SEE ACCOMPANYING NOTES.
19
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
STATEMENTS OF CASH FLOWS - STATUTORY BASIS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31
1996 1995 1994
---------- -------- ---------
<S> <C> <C> <C>
SOURCES OF CASH
Premiums and other considerations,
net of reinsurance $1,033,565 $569,934 $ 600,405
Net investment income 38,666 42,359 41,977
Other income 12,983 8,052 6,311
---------- -------- ---------
1,085,214 620,345 648,693
Life claims (20,655) (16,759) (14,660)
Surrender benefits and other
fund withdrawals (286,406) (206,250) (196,169)
Other benefits to policyholders (22,129) (19,041) (18,251)
Commissions, other expenses and taxes (196,329) (128,314) (119,755)
Net transfers to separate accounts (658,326) (242,427) (386,174)
Dividends to policyholders (44) (26) (22)
Federal income taxes (9,449) (7,531) (3,378)
---------- -------- ---------
Net cash used in operations (108,124) (3) (89,716)
Proceeds from investments sold,
matured or repaid:
Bonds and redeemable preferred stock 122,820 108,554 99,241
Common stocks 175 2,108 80,066
Mortgage loans on real estate 132 1,954 132
Real estate 4,304 -- --
Miscellaneous proceeds -- -- (28)
---------- -------- ---------
Total cash from investments 127,431 112,616 179,411
Capital contribution -- -- 45,000
Other sources 31,546 2,830 6,135
---------- -------- ---------
Total sources of cash 50,853 115,443 140,830
APPLICATIONS OF CASH
Cost of investments acquired:
Bonds and redeemable preferred stock 26,826 139,402 47,214
Common stocks 4 589 65,911
Mortgage loans on real estate -- 6 1,004
Real estate 7,837 449 37
Net increase in policy loans 15,479 9,605 4,496
Miscellaneous applications 5 -- --
---------- -------- ---------
Total investments acquired 50,151 150,051 118,662
Other applications, net 3,221 7,115 6,086
---------- -------- ---------
Total applications of cash 53,372 157,166 124,748
---------- -------- ---------
Net change in cash and
short-term investments (2,519) (41,723) 16,082
Cash and short-term investments
at beginning of year 4,999 46,722 30,640
---------- -------- ---------
Cash and short-term investments
at end of year $ 2,480 $ 4,999 $ 46,722
========== ======== =========
</TABLE>
SEE ACCOMPANYING NOTES.
20
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
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 in conformity with
accounting practices prescribed or permitted by the Insurance Department of the
State of Ohio, which practices differ from generally accepted accounting
principles. The 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 expensed as incurred rather than
deferred and amortized over the life of the policies; (c) policy reserves on
traditional life products are based on statutory mortality rates and interest
which may differ from reserves based on reasonable assumptions of expected
mortality, interest, and withdrawals which include a provision for possible
unfavorable deviation from such assumptions; (d) policy reserves on certain
investment products use discounting methodologies utilizing statutory interest
rates rather than full account values; (e) reinsurance amounts are netted
against the corresponding 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 amounts and income tax bases of
assets and liabilities; (g) net realized gains or losses attributed to
21
<PAGE>
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)
changes in the level of interest rates in the market are deferred and amortized
over the remaining life of the bond or mortgage loan, rather than recognized as
gains or losses in the statement of operations when the sale is completed; (h)
declines in the estimated realizable value of investments are provided for
through the establishment of a formula-determined statutory investment reserve
(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 the entire premiums received rather than policy charges for
the cost of insurance, policy administration charges, amortization of policy
initiation fees and surrender charges assessed; and (k) pension expense is
recorded as amounts are paid rather than accrued and expensed during the periods
in which the employers provide service. 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 1997,
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. The impact of any such changes
on the Company's statutory surplus cannot be determined at this time and could
be material.
Other significant statutory accounting practices are as follows:
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid investments with remaining maturities of one year or less when purchased
to be cash equivalents. This amount included $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
22
<PAGE>
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)
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), and the related
unrealized capital gains/(losses) are reported in unassigned surplus without any
adjustment for federal income taxes. 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.
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 1996, 1995 and 1994, net realized capital gains of $2,394, $554 and $436,
respectively, were credited to the IMR rather than being immediately recognized
in the statements of operations. Amortization of these net gains aggregated
$1,335, $882 and $726 for the years ended December 31, 1996, 1995 and 1994,
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, 1996, 1995 and 1994, the
Company excluded investment income due and accrued of $0, $1 and $237,
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 the laws of the State of Ohio.
23
<PAGE>
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)
The aggregate policy reserves for life insurance policies are based principally
upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary Mortality and
American Experience Mortality Tables. The reserves are calculated using interest
rates ranging from 2.25 to 5.50 percent and are computed principally on the Net
Level Premium Valuation and the Commissioners' Reserve Valuation Methods.
Reserves for universal life policies are based on account balances adjusted for
the Commissioners' Reserve Valuation Method.
Deferred annuity reserves are calculated according to the Commissioners' Annuity
Reserve Valuation Method including excess interest reserves to cover situations
where the future interest guarantees plus the decrease in surrender charges are
in excess of the maximum valuation rates of interest. Reserves for immediate
annuities and supplementary contracts with and without life contingencies are
equal to the present value of future payments assuming interest rates ranging
from 5.75 to 9.25 percent and mortality rates, where appropriate, from a variety
of tables.
POLICY AND CONTRACT CLAIM RESERVES
Claim reserves represent the estimated accrued liability for claims reported to
the Company and claims incurred but not yet reported through the statement date.
These reserves are estimated using either individual case-basis valuations or
statistical analysis techniques. 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 ACCOUNTS
Assets held in trust for purchases of variable universal life and variable
annuity contracts and the Company's corresponding obligation to the contract
owners are shown separately in the balance sheets. The assets in the separate
accounts are valued at market. Income and gains and losses with respect to the
assets in the separate accounts accrue to the benefit of the policyholders. The
Company received variable contract premiums of $997,513, $466,822 and $534,372
in 1996, 1995 and 1994, respectively. All variable account contracts are subject
to discretionary withdrawal by the policyholder at the market value of the
underlying assets less the current surrender charge. Separate account
contractholders have no claim against the assets of the general account.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation.
24
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statutory-basis
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparisons to independent markets and, in many
cases, could not be realized in immediate settlement of the instrument.
Statement of Financial Accounting Standards No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements
and allows companies to forego the disclosures when those estimates can only be
made at excessive cost. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
CASH AND SHORT-TERM INVESTMENTS: The carrying amounts reported in the
statutory-basis balance sheet for these instruments approximate their fair
values.
INVESTMENT SECURITIES: Fair values for fixed maturity securities (including
redeemable preferred stocks) are based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair values are
estimated using values obtained from independent pricing services or (in the
case of private placements) are estimated by discounting expected future cash
flows using a current market rate applicable to the yield, credit quality,
and maturity of the investments. The fair values for equity securities are
based on quoted market prices.
MORTGAGE LOANS AND POLICY LOANS: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans are assumed to equal their carrying
value.
INVESTMENT CONTRACTS: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with maturities consistent with those remaining for the contracts
being valued.
25
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The following sets forth a comparison of the fair values and carrying values of
the Company's financial instruments subject to the provisions of Statement of
Financial Accounting Standards No. 107:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
-------------------------- ---------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds $ 359,579 $ 372,319 $ 452,474 $ 479,656
Common stocks 597 597 834 834
Mortgage loans on real estate 6,049 6,134 6,181 6,536
Policy loans 52,604 52,604 37,125 37,125
Cash and short-term investments 2,480 2,480 4,999 4,999
Separate account assets 3,527,145 3,527,145 2,419,205 2,419,205
LIABILITIES
Investment contract liabilities 321,293 314,748 309,556 279,347
Separate account annuities 2,692,614 2,647,266 1,930,590 1,930,590
</TABLE>
3. INVESTMENTS
The carrying value and estimated fair value of investments in debt securities
are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Bonds:
United States Government and
agencies $ 11,422 $ 13 $ 292 $ 11,143
State, municipal and other
government 5,504 274 -- 5,778
Public utilities 14,808 848 80 15,576
Industrial and miscellaneous 173,097 8,889 910 181,076
Mortgage-backed securities 154,748 4,617 619 158,746
-------- ------- ------ --------
Total bonds $359,579 $14,641 $1,901 $372,319
======== ======= ====== ========
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS (CONTINUED)
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
Public utilities 15,079 940 - 16,019
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>
The carrying value and fair value of bonds at December 31, 1996 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.
ESTIMATED
CARRYING FAIR
VALUE VALUE
-------- ---------
Due in one year or less $ 25,420 $ 25,667
Due one through five years 91,070 94,377
Due five through ten years 53,798 57,060
Due after ten years 34,543 36,468
-------- --------
204,831 213,572
Mortgage and other asset backed securities 154,748 158,747
-------- --------
$359,579 $372,319
========= ========
27
<PAGE>
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:
YEAR ENDED DECEMBER 31
1996 1995 1994
------- ------- -------
Interest on bonds $33,969 $38,624 $37,495
Dividends on equity investments - 30 700
Interest on mortgage loans 559 573 616
Rental income on real estate 919 1,014 1,014
Interest on policy loans 3,339 2,353 1,830
Other investment income 9 328 611
------- ------- -------
Gross investment income 38,795 42,922 42,266
Investment expenses (2,728) (2,031) (2,127)
------- ------- --------
Net investment income $36,067 $40,891 $40,139
======= ======== =======
Proceeds from sales and maturities of debt securities and related gross realized
gains and losses were as follows:
YEAR ENDED DECEMBER 31
1996 1995 1994
------- -------- -------
Proceeds $122,820 $108,554 $99,241
======= ======== =======
Gross realized gains $ 2,984 $ 1,631 $ 2,019
Gross realized losses 791 1,346 1,362
------- -------- -------
Net realized gains $ 2,193 $ 285 $ 657
======= ======== =======
At December 31, 1996, bonds with an aggregate carrying value of $5,409 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.
28
<PAGE>
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:
REALIZED
--------------------------------
YEAR ENDED DECEMBER 31
1996 1995 1994
------- ------- -------
Debt securities $ 2,193 $ 285 $ 657
Equity securities -- -- (1,579)
Mortgage loans -- (1,409) --
Real estate (606) -- --
Other invested assets (4) -- --
------- ------- -------
1,583 (1,124) (922)
Tax effect -- -- 225
Transfer to interest maintenance
reserve (2,394) (554) (436)
------- ------- -------
Net realized losses $ (811) $(1,678) $(1,133)
======= ======= =======
UNREALIZED
---------------------------------
YEAR ENDED DECEMBER 31
1996 1995 1994
-------- -------- --------
Debt securities $(14,442) $ 36,399 $ 43,354
Common stock (66) (236) 1,009
-------- -------- --------
Change in unrealized appreciation
(depreciation) $(14,508) $ 36,163 $(42,345)
======== ======== ========
Gross unrealized gains (losses) on common stocks were as follows:
UNREALIZED
------------------------------
YEAR ENDED DECEMBER 31
1996 1995 1994
---- ---- ----
Unrealized gains $295 $361 $597
Unrealized losses -- -- --
---- ---- ----
Net unrealized gains $295 $361 $597
==== ==== ====
The Company issued no mortgage loans during 1996. 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.
29
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS (CONTINUED)
During 1996, 1995 and 1994, 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, 1996, 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.
1996 1995 1994
----------- ----------- -----------
Direct premiums $ 1,034,757 $ 570,413 $ 600,608
Reinsurance assumed 2,063 1,569 1,232
Reinsurance ceded (3,105) (2,084) (1,708)
----------- ----------- -----------
Net premiums earned $ 1,033,715 $ 569,898 $ 600,132
=========== =========== ===========
The Company received reinsurance recoveries in the amount of $2,156, $512 and
$1,146 during 1996, 1995 and 1994, respectively. At December 31, 1996 and 1995,
estimated amounts recoverable from reinsurers that have been deducted from
policy and contract claim reserves totaled $974 and $601, respectively. The
aggregate reserves for policies and contracts were reduced for reserve credits
for reinsurance ceded at December 31, 1996 and 1995 of $1,140 and $848,
respectively.
30
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. INCOME TAXES
The Company files a separate federal income tax return.
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:
1996 1995 1994
------- ------- -------
Computed tax at federal statutory rate (35%) $ 3,189 $ 5,096 $ 1,190
Deferred acquisition costs - tax basis 7,172 4,241 4,043
Tax reserve valuation (696) (34) (1,353)
Excess tax depreciation (65) (49) (258)
Amortization of IMR (467) (309) (254)
Other, net 164 (28) 38
------- ------- -------
Federal income tax expense $ 9,297 $ 8,917 $ 3,406
======= ======= =======
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, 1996). 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. An examination is currently underway for years 1994 through 1995.
During 1994, the Company settled tax years 1980 through 1986 with the Internal
Revenue Service, which resulted in a charge to surplus of $1.8 million as a
prior period adjustment.
At December 31, 1996, the Company had capital loss carryforwards of
approximately $11,101 which expire through 2001.
31
<PAGE>
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 .04% and 7.7% of life
insurance in force at December 31, 1996 and 1995, 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, primarily
separate accounts, that are not subject to significant mortality or morbidity
risk; however, there may be certain restrictions placed upon the amount of funds
that can be withdrawn without penalty. The amount of reserves on these products,
by withdrawal characteristics are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------------------- ------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal with
market value adjustment $ 14,881 1% $ 13,422 1%
Subject to discretionary withdrawal at
book value less surrender charge 63,619 2 60,970 3
Subject to discretionary withdrawal at
market value 2,692,614 89 1,930,590 85
Subject to discretionary withdrawal at
book value (minimal or no charges or
adjustments) 239,204 7 227,549 10
Not subject to discretionary withdrawal
provision 17,603 1 20,034 1
----------- -------- ----------- --------
3,027,921 100% 2,252,565 100%
======== ========
Less reinsurance ceded - -
---------- ----------
Total policy reserves on annuities and
deposit fund liabilities $3,027,921 $2,252,565
========== ==========
</TABLE>
32
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
A reconciliation of the amounts transferred to and from the separate accounts is
presented below:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Transfers as reported in the summary of
operations of the separate accounts statement:
Transfers to separate accounts $ 997,513 $ 466,882 $ 534,372
Transfers from separate accounts 339,523 224,416 148,582
--------- --------- ---------
Net transfers to separate accounts 657,990 242,466 385,790
Reconciling adjustments - change in accruals for
investment management, administration fees
and contract guarantees (205,519) (39) 384
========= ========= =========
Transfers as reported in the summary of
operations of the life, accident and health
annual statement $ 452,471 $ 242,427 $ 386,174
========= ========= =========
</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, 1996 and 1995, these assets (which are reported as
premiums deferred and uncollected) and the amounts of the related gross premiums
and loadings, are as follows:
GROSS LOADING NET
------- ------- -------
DECEMBER 31, 1996
Ordinary direct first year business $ 40 $ 9 $ 31
Ordinary direct renewal business 1,431 225 1,206
Group life direct business 622 -- 622
Annuity renewal business 94 10 84
------- ------- -------
$ 2,187 $ 244 $ 1,943
======= ======= =======
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
======= ======= =======
33
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES (CONTINUED)
At December 31, 1996 and 1995, the Company had insurance in force aggregating
$1,904 and $2,374, 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 $27 and $32 to cover these deficiencies at December 31, 1996 and
1995, 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 $2,995 and $3,496
was made for the years ended December 31, 1996 and 1995, 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.
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 $581, $505 and $397 for the years ended
December 31, 1996, 1995 and 1994, 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 $184, $305 and $250 for the years ended
December 31, 1996, 1995 and 1994, respectively.
34
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
8. RETIREMENT AND COMPENSATION PLANS (CONTINUED)
AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Code. In addition, AEGON has established incentive deferred compensation
plans for certain key employees of the Company. AEGON also sponsors an employee
stock option plan for individuals employed at least three years and a stock
purchase plan for its producers, with the participating affiliated companies
establishing their own eligibility criteria, producer contribution limits and
company matching formula. These plans have been accrued or funded as deemed
appropriate by management of AEGON and the Company.
In addition to pension benefits, the Company participates in plans sponsored by
AEGON that provide postretirement medical, dental and life insurance benefits to
employees meeting certain eligibility requirements. Portions of the medical and
dental plans are contributory. The expenses of the postretirement plans
calculated on the pay-as-you-go basis are charged to affiliates in accordance
with an intercompany cost sharing arrangement. The Company expensed $98, $86 and
$70 for the years ended December 31, 1996, 1995 and 1994, respectively.
9. RELATED PARTY TRANSACTIONS
The Company shares certain officers, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1996, 1995
and 1994, the Company paid $10,038, $8,825 and $7,497, respectively, for such
services, which approximates their costs to the affiliates. The Company provides
office space, marketing and administrative services to certain affiliates.
During 1996, 1995 and 1994, the Company received $3,271, $4,545 and $3,261,
respectively, for such services, which approximates their cost. The Company had
a net receivable (payable) with affiliates of $(19,298) and $4,337 at December
31, 1996 and 1995, respectively.
Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rate of 5.48% at December 31, 1996. During 1996,
1995 and 1994, the Company paid (received) net interest of $138, $(294) and $49,
respectively, to affiliates.
35
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
NOTES TO FINANCIAL STATEMENTS - STATUTORY-BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company received capital contributions of $45,000 from its immediate parent,
First AUSA Life Insurance Company, in 1994.
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%.
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 $4,344 and $4,445 and an offsetting premium tax benefit of $1,218 and
$1,319 at December 31, 1996 and 1995, respectively, for its estimated share of
future guaranty fund assessments related to several major insurer insolvencies.
The guaranty fund expense was $212, $1,950 and $618 at December 31, 1996, 1995
and 1994, respectively.
36
<PAGE>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
SUMMARY OF INVESTMENTS OTHER THAN
INVESTMENTS IN RELATED PARTIES
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
SCHEDULE I
AMOUNT AT
WHICH SHOWN
MARKET IN THE
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET
------------------- --------- -------- -------------
FIXED MATURITIES
Bonds:
United States Government and government
agencies and authorities $ 91,807 $ 93,675 $ 91,581
State, municipalities and political
subdivisions 1,498 1,533 1,497
Foreign governments 4,006 4,245 4,006
Public utilities 14,852 15,576 14,808
All other corporate bonds 249,093 257,290 247,687
-------- -------- --------
Total fixed maturities 361,256 372,319 359,579
EQUITY SECURITIES
Common stocks:
Industrial, miscellaneous and all other 302 597 597
-------- -------- --------
Total equity securities 302 597 597
Mortgage loans on real estate 6,049 6,049
Real estate 7,962 7,962
Policy loans 52,604 52,604
Cash and short-term investments 2,480 2,480
-------- --------
Total investments $430,653 $429,271
======== ========
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments.
37
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)
SCHEDULE III
FUTURE POLICY POLICY AND NET BENEFITS OTHER
BENEFITS AND CONTRACT PREMIUM INVESTMENT AND CLAIMS OPERATING
EXPENSES LIABILITIES REVENUE INCOME* EXPENSES EXPENSES*
------------- ----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1996
Individual life $145,964 $7,017 $ 289,375 $ 8,228 $ 47,051 $124,181
Group life and 9,202 713 4,215 3,940 2,529 2,818
health
Annuity 332,230 854 740,125 23,899 281,352 71,576
----------- ------ ---------- ------- -------- --------
$487,396 $8,584 $1,033,715 $36,067 $330,932 $198,575
=========== ====== ========== ======= ======== ========
YEAR ENDED DECEMBER 31,
1995
Individual life $ 64,128 $5,811 $ 188,143 $ 9,470 $ 36,032 $ 83,709
Group life 7,904 701 3,365 1,054 2,217 946
Annuity 319,353 100 378,390 30,367 205,375 44,447
----------- ------ ---------- -------- -------- --------
$391,385 $6,612 $ 569,898 $40,891 $243,624 $129,102
=========== ======= ========== ======= ======== ========
YEAR ENDED DECEMBER 31,
1994
Individual life $ 76,345 $4,501 $ 147,282 $10,146 $ 29,254 $ 71,825
Group life 7,323 481 3,709 372 1,754 1,329
Annuity 314,124 137 449,141 29,621 199,485 44,063
----------- ------ ---------- ------- -------- --------
$397,792 $5,119 $ 600,132 $40,139 $230,493 $117,217
=========== ======= ========== ======= ======== ========
</TABLE>
* Allocations of net investment income and other operating expenses are based
on a number of assumptions and estimates, and the results would change if
different methods were applied.
38
<PAGE>
<TABLE>
<CAPTION>
WESTERN RESERVE LIFE ASSURANCE CO. OF OHIO
REINSURANCE
(DOLLARS IN THOUSANDS)
SCHEDULE IV
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, 1996
Life insurance in force $28,168,880 $ 4,463,986 $ 2,210,601 $25,915,495 8.5%
=========== =========== =========== =========== ==========
Premiums:
Individual life $ 292,239 $ 2,863 $ -- $ 289,376 0.0%
Group life and health 2,393 242 2,063 4,214 49.0
Annuity 740,125 -- -- 740,125 0.0
----------- ----------- ----------- ----------- ----------
$ 1,034,757 $ 3,105 $ 2,063 $ 1,033,715 0.2%
=========== =========== =========== =========== ==========
YEAR ENDED DECEMBER 31, 1995
Life insurance in force $19,438,203 $ 1,365,119 $ 1,619,378 $19,692,462 8.2%
=========== =========== =========== =========== ==========
Premiums:
Individual life $ 189,870 $ 1,727 $ -- $ 188,143 0.0%
Group life 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%
=========== =========== =========== =========== ==========
</TABLE>
39
<PAGE>
WRL Series Annuity Account
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The financial statements for the WRL Series Annuity Account
and Western Reserve Life Assurance Co. of Ohio ("Western
Reserve") are included in Part B.
(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. 4/
(b) Form of Broker/Dealer Supervisory and Service
Agreement. 2/
(c) Form of Broker/Dealer Supervisory and Service
Agreement. 6/
(4) (a) Specimen Flexible Payment Variable Accumulation
Deferred Annuity Contract. 5/
(5) Application for Flexible Payment Variable Accumulation
Deferred Annuity Contract. 7/
(6) (a) Copy of Second Amended Articles of Incorporation
of Western Reserve. 3/
(b) Copy of Amended Code of Regulations of Western
Reserve. 4/
(7) Not Applicable.
(8) Not Applicable.
(9) Opinion and Consent of William H. Geiger, Esq. as to
Legality of Securities Being Registered. 6/
(10) (a) Written Consent of Sutherland, Asbill & Brennan,
L.L.P.
(b) Written Consent of Ernst & Young LLP.
(c) Written Consent of Price Waterhouse LLP.
(11) Not Applicable.
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(12) Not Applicable.
(13) Schedules for Computation of Performance Quotations 7/
(14) Not Applicable.
(15) (a) Power of Attorney. 8/
(b) Power of Attorney - James R. Walker 9/
- -------------------------------------
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. 3 to the
Form N-4 Registration Statement dated March 1, 1991 (File No. 33-24856)
and is incorporated herein by reference.
5/ 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.
6/ 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.
7/ 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.
8/ 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.
9/ This exhibit was previously filed on Post-Effective Amendment No. 7 to the
Form N-4 Registration Statement dated December 23, 1996 (File No.
33-49556) and is incorporated herein by reference.
Item 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
PRINCIPAL POSITION AND OFFICES
NAME BUSINESS ADDRESS WITH DEPOSITOR
---- ---------------- --------------------
John R. Kenney (1) Chairman of the Board,
Chief Executive Officer
and President
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<PAGE>
PRINCIPAL POSITION AND OFFICES
NAME BUSINESS ADDRESS WITH DEPOSITOR
---- ---------------- --------------------
Patrick S. Baird 4333 Edgewood Rd. N.E. Director
Cedar Rapids, Iowa 52499
Lyman H. Treadway 30195 Chagrin Blvd. Director
Suite 210N
Cleveland, Ohio 44124
Jack E. Zimmerman 507 St. Michel Circle Director
Kettering, Ohio 45429
James R. Walker 3320 Office Park Drive Director
Dayton, Ohio 45439
Alan M. Yaeger (1) Executive Vice President,
Actuary and Chief Financial
Officer
G. John Hurley (1) Executive Vice President
William H. Geiger (1) Senior Vice President,
Secretary and
General Counsel
Allan J. Hamilton (1) Vice President, Treasurer
and Controller
- ------------------------
(1) 201 Highland Avenue, Largo, Florida 33770
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT.
VERENGING AEGON Netherlands Membership Association
AEGON n.v. Netherlands Corporation (53.63%)
AEGON Netherland N.V. Netherlands Corporation (100%)
AEGON Nevark Holding B.V. Netherlands Corporation (100%)
Groninger Financieringen B.V. Netherlands Corporation (100%)
AEGON International N.V. Netherlands Corporation (100%)
Voting Trust - (Trustees - K.J. Storm, Donald J. Shepard, H.B. Van
Wijk, Dennis Hersch)
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%)
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<PAGE>
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%)
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%)
Idex Management, Inc. - Investment advisor (DE) (50%)
Idex Series Fund - 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%)
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<PAGE>
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%)
QUANTRA Corporation - (DE) (100%)
QUANTRA Software Corporation - (DE) (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)
Item 27. NUMBER OF CONTRACTOWNERS.
As of March 31, 1997, 63 non-qualified contracts and 37 qualified
contracts were In Force.
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
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.
C-5
<PAGE>
(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
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.
C-6
<PAGE>
(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 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
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<PAGE>
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 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
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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.
(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,
C-9
<PAGE>
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.
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
PRINCIPAL POSITION AND OFFICES
NAME BUSINESS ADDRESS WITH UNDERWRITER
---- ---------------- --------------------
John R. Kenney (1) Chairman of the Board
G. John Hurley (1) Director, President
and Chief Executive
Officer
C-10
<PAGE>
Thomas R. Moriarty (1) Senior Vice President
William H. Geiger (1) Secretary and Director
William G. Cummings (1) Vice President and
Treasurer
- -------------------------
(1) 201 Highland Avenue, Largo, Florida 33770
(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 33770.
Item 31. MANAGEMENT SERVICES
Not Applicable
Item 32. UNDERTAKINGS
Western Reserve Life Assurance Co. of Ohio ("Western Reserve")
hereby represents that the fees and charges deducted under the
Contracts, in the aggregate, are reasonable in relation to the
services rendered, the expenses expected to be incurred, and the
risks assumed by Western Reserve.
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.
C-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all the requirements for effectiveness of this Registration Statement
pursuant to Rule 485 (b) under the Securities Act of 1933 and has duly caused
this Post-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 26th day of April, 1997.
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
Post-Effective Amendment No. 1 to this Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ JOHN R. KENNEY Chairman of the Board, April 26, 1997
- ------------------------ Chief Executive Officer
John R. Kenney and President
(Principal Executive
Officer)
<PAGE>
/s/ ALAN M. YAEGER Executive Vice President, April 26, 1997
- ------------------------ Actuary & Chief Financial
Alan M. Yaeger Officer
/s/ ALLAN J. HAMILTON Vice President, Treasurer April 26, 1997
- ------------------------ and Controller
Allan J. Hamilton
/s/ PATRICK S. BAIRD Director April 26, 1997
- ------------------------
Patrick S. Baird */
/s/ LYMAN H. TREADWAY Director April 26, 1997
- ------------------------
Lyman H. Treadway */
/s/ JACK E. ZIMMERMAN Director April 26, 1997
- ------------------------
Jack E. Zimmerman */
/s/ JAMES R. WALKER Director April 26, 1997
- ------------------------
James R. Walker */
*/ /s/ THOMAS E. PIERPAN
---------------------
Signed by Thomas E. Pierpan
As Attorney-in-fact
EXHIBIT 10(a)
Written Consent of Sutherland, Asbill & Brennan, L.L.P.
<PAGE>
S.A.&B. letterhead
April 21, 1997
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 caption "Legal
Matters" in the Statement of Additional Information contained in Post-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, L.L.P.
By: /s/ STEPHEN E. ROTH
-------------------
Stephen E. Roth
EXHIBIT 10(b)
Written Consent of Ernst & Young LLP
<PAGE>
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 21, 1997, with respect
to the statutory-basis financial statements and schedules of Western Reserve
Life Assurance Co. of Ohio included in Post-Effective Amendment No. 1 to the
Registration Statement (Form N-4 No. 333-00503) and related Prospectus of WRL
Series Annuity Account.
ERNST & YOUNG LLP
Des Moines, Iowa
April 28, 1997
EXHIBIT 10(c)
Written Consent of Price Waterhouse LLP
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of the Meridian/INVESCO Sector Variable Annuity Post-Effective
Amendment No. 1 to the Registration Statement on Form N-4 of our report dated
January 31, 1997, relating to the financial statements and selected per unit
data and ratios of the sub-accounts comprising the WRL Series Annuity Account -
Meridian/INVESCO Sector Variable Annuity Contracts, which appears in such
Statement of Additional Information. We also consent to the reference to us
under the heading "Independent Accountants" in such Statement of Additional
Information.
PRICE WATERHOUSE LLP
Kansas City, Missouri
April 28, 1997
