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STATEMENT OF ADDITIONAL INFORMATION
JANUARY 26, 1996
PAINEWEBBER LIFE VARIABLE ANNUITY ACCOUNT
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MILESTONES
An Individual Deferred Variable Annuity Contract
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PAINEWEBBER LIFE INSURANCE COMPANY
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This Statement of Additional Information is not a prospectus. It should be read
only in conjunction with the PaineWebber Life Variable Annuity Account
prospectus dated January 26, 1996, a copy of which may be obtained without
charge by writing to PaineWebber Life Insurance Company Administrative Office at
601 6th Avenue, Des Moines, Iowa 50309.
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TABLE OF CONTENTS
TOPIC PAGE
PAINEWEBBER LIFE INSURANCE COMPANY...................................... 3
THE SEPARATE ACCOUNT.................................................... 3
THE FUND................................................................ 3
THE CONTRACT............................................................ 5
PURCHASE PAYMENTS.................................................. 6
ACCUMULATION PROVISIONS............................................ 6
ANNUITY PAYMENTS................................................... 7
DISTRIBUTION OF CONTRACTS.......................................... 8
ADDITIONAL FEDERAL INCOME TAX INFORMATION............................... 9
THE COMPANY AND THE SEPARATE ACCOUNT............................... 9
NON-QUALIFIED PLANS................................................ 9
QUALIFIED PLANS.................................................... 10
WITHHOLDING........................................................ 11
DIVERSIFICATION REQUIREMENTS....................................... 11
OTHER INFORMATION....................................................... 11
REPORTS TO CONTRACT OWNERS......................................... 11
ADMINISTRATIVE SERVICES............................................ 12
SAFEKEEPING OF ASSETS.............................................. 12
INDEPENDENT AUDITORS............................................... 12
REGISTRATION STATEMENT............................................. 12
SEPARATE ACCOUNT PERFORMANCE............................................ 12
FINANCIAL STATEMENTS.................................................... 15
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PAINEWEBBER LIFE INSURANCE COMPANY
PaineWebber Life Insurance Company ("Company") is a stock life insurance company
organized under the laws of the State of California as Pacific Fidelity Life
Insurance Company. The Company was acquired by PaineWebber Life Holdings, Inc.
on December 31, 1992. The administrative offices of the Company are at 601 6th
Avenue, Des Moines, Iowa 50309. The executive offices are located at 1200 Harbor
Boulevard, Weehawken, New Jersey 07087.
The Company is engaged in the issuance and sale of life insurance and annuity
contracts on a non-participating basis. It is presently licensed to do business
in the District of Columbia and all states, except New York and Connecticut. The
Company intends to market the individual variable annuity contracts described in
this Statement of Additional Information in all jurisdictions in which it is
admitted to conduct life insurance business.
The employees of the Company are covered under a life insurance company blanket
bond covering the Company and its affiliates in the aggregate amount of $100
million.
THE SEPARATE ACCOUNT
PaineWebber Life Variable Annuity Account ("Separate Account") was established
by the Company in December 1992 pursuant to the provisions of California law, as
a segregated investment account of the Company. The Separate Account currently
has nine available Divisions, each of which invests in shares of a designated
Portfolio of PaineWebber Series Trust ("Fund"). The Separate Account and each
Division therein is administered as a part of the general business of the
Company; but the income, gains and losses of each Division are credited to or
charged against the assets held for that Division in accordance with the terms
of the Contract, without regard to other income, gains or losses of any other
Divisions or arising out of any other business the Company may conduct. The
assets within each Division are not chargeable with liabilities arising out of
the business conducted by any other Divisions, nor will the Separate Account as
a whole be chargeable with liabilities arising out of any other business the
Company may conduct.
The Separate Account is registered with the Securities and Exchange Commission
as a unit investment trust under the Investment Company Act of 1940 ("1940
Act"). Such registration does not involve supervision of the management of the
Separate Account or the Company by the Securities and Exchange Commission.
THE FUND
The Fund is organized as a Massachusetts business trust and is registered as an
open-end management investment company under the 1940 Act. The Fund, which was
organized in 1986, currently consists of nine available Portfolios: the Money
Market Portfolio, the Strategic Fixed Income Portfolio, the High Grade Fixed
Income Portfolio, the Global Income Portfolio, the Balanced Portfolio (formerly,
the Asset Allocation Portfolio), the Growth and Income Portfolio, the Growth
Portfolio, the Aggressive Growth Portfolio and the Global Growth Portfolio. The
Trustees of the Fund may establish additional Portfolios at any time. Portfolio
assets are segregated and a Contract Owner's interest is limited to the
Portfolio(s) in which the Contract Owner's Purchase Payments are invested.
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Each Portfolio has, and is subject to, certain investment objectives and
restrictions which may not be changed without a majority vote of shareholders in
that Portfolio.
The Fund will offer its shares to insurance company separate accounts only.
Mitchell Hutchins Asset Management Inc. ("Mitchell Hutchins") acts as the
investment adviser and administrator for each of the current Portfolios and the
Fund, and as such provides a continuous investment program for the Portfolios
and supervision of all matters relating to the operations of the Fund. Mitchell
Hutchins is a Delaware corporation and a wholly-owned subsidiary of PaineWebber
Incorporated, which is in turn a wholly-owned subsidiary of PaineWebber Group
Inc., a publicly held financial services holding company. As compensation for
its services, Mitchell Hutchins receives a fee from the Fund, accrued daily and
paid monthly, based on the average daily net assets of each Portfolio. Certain
Portfolios have subadvisers to Mitchell Hutchins who provide day-to-day
management services for those Portfolios.
A summary of the investment objective of, and the investment advisory fees
charged, each Portfolio of the Fund available for purchase is described below.
MORE DETAILED INFORMATION IS CONTAINED IN THE CURRENT PROSPECTUS OF THE FUND
WHICH ACCOMPANIES THE SEPARATE ACCOUNT PROSPECTUS.
The MONEY MARKET PORTFOLIO seeks maximum current income consistent with
liquidity and conservation of capital. To achieve its objective, this Portfolio
invests primarily in high grade money market instruments and repurchase
agreements secured by such instruments. As compensation for its services, the
Money Market Portfolio pays the investment adviser a fee at the annual rate of
.50% of average daily net assets.
The STRATEGIC FIXED INCOME PORTFOLIO seeks total return consisting of capital
appreciation and income. To achieve this objective, this Portfolio invests
primarily in fixed income securities of varying maturities with a dollar-
weighted average portfolio duration between three and eight years. As
compensation for its services, the Strategic Fixed Income Portfolio pays the
investment adviser a fee at the annual rate of .50% of average daily net assets.
The HIGH GRADE FIXED INCOME PORTFOLIO primarily seeks high current income
consistent with the preservation of capital and secondarily seeks capital
appreciation. This Portfolio invest primarily in debt securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities and high
quality corporate debt securities and mortgage-backed securities of private
issuers. As compensation for its services, the High Grade Fixed Income Portfolio
pays the investment adviser a fee at the annual rate of .50% of average daily
net assets.
The GLOBAL INCOME PORTFOLIO primarily seeks high current income and secondarily
seeks capital appreciation. To achieve its objectives, this Portfolio invests
principally in high quality debt securities of foreign and U.S. issuers. As
compensation for its services, the Global Income Portfolio pays the investment
adviser a fee at the annual rate of .75% of average daily net assets.
The BALANCED PORTFOLIO (FORMERLY, THE ASSET ALLOCATION PORTFOLIO) seeks to
provide a high total return with low volatility. To achieve its objectives, this
Portfolio allocates investments among equity securities, investment grade debt
securities and money market instruments. As compensation for its services, the
Balanced Portfolio pays the investment adviser a fee at the annual rate of .75%
of the average daily net assets.
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The GROWTH AND INCOME PORTFOLIO seeks current income and capital growth. This
Portfolio invests primarily in dividend-paying equity securities believed by
Mitchell Hutchins to have potential for rapid earnings growth. As compensation
for its services, the Growth and Income Portfolio pays the investment adviser a
fee at the annual rate of .70% of average daily net assets.
The GROWTH PORTFOLIO seeks to provide long-term capital appreciation. To achieve
its objective, this Portfolio invests primarily in equity securities of
companies that, in the judgment of Mitchell Hutchins, have substantial potential
for capital growth. As compensation for its services, the Growth Portfolio pays
the investment adviser a fee at the annual rate of .75% of average daily net
assets.
The AGGRESSIVE GROWTH PORTFOLIO seeks to maximize long-term capital
appreciation. This Portfolio invests primarily in the common stocks of U.S.
companies. As compensation for its services, the Aggressive Growth Portfolio
pays the investment adviser a fee at the annual rate of .80% of average daily
net assets.
The GLOBAL GROWTH PORTFOLIO seeks to provide long-term capital appreciation. To
achieve its objective, this Portfolio invests primarily in common stocks of
companies based in the U.S., Europe, Japan and the Pacific Basin. As
compensation for its services, the Global Growth Portfolio pays the investment
adviser a fee at the annual rate of .75% of average daily net assets.
THE CONTRACT
The variable Allocation Options are funded by investments in the various
Divisions of the Separate Account. All obligations arising under a Contract,
including the guarantee to make Annuity payments, are general obligations of the
Company, and all of the Company's assets are available to meet its expenses and
obligations under the Contract. While the Company is obligated to make the
Variable Annuity payments under the Contract, the amount of such payments is not
guaranteed. The Contract Value in the Divisions of the Separate Account and the
amount of Variable Annuity payments will vary with the investment experience of
the Division(s) in which the Contract Owner's account is invested.
No initial sales charge is deducted from Purchase Payments. However, an early
withdrawal charge is deducted in the event of withdrawal of the Contract Value
or upon annuitization. The early withdrawal charge is 5% of the amount withdrawn
which represents Net Purchase Payments made during the first five years
preceding the withdrawal. There are no withdrawal charges imposed on Net
Purchase Payments made more than five years before withdrawal. There is no early
withdrawal charge applied on any amount which represents the greater of: (a)
gain in Contract Value (the excess of the Contract value over Net Purchase
Payments not already withdrawn) on the first Valuation Day of the Contract Year;
or (b) 10% of the Contract Value as of the first Valuation Day of the Contract
Year (available only after the first Contract Year except for withdrawals
through a systematic withdrawal service described herein.) The Company also
deducts a daily distribution expense charge from each Division at an annual rate
of 0.15% of the total net assets of each Division. The amount of any sales
charge imposed (which includes both any early withdrawal charge and the
distribution expense risk charge), when added to any previous sales charge, will
not exceed 9% of all Net Purchase Payments. A withdrawal transaction charge of
the lesser of $25 or 2% of the amount withdrawn will be imposed on all
withdrawals in excess of two per Contract year. For more information regarding
the withdrawal charges, see "Contract Charges and Deductions" in the prospectus.
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PURCHASE PAYMENTS
The minimum Purchase Payment for a Contract which is not a part of a plan
qualified for special tax treatment under the Internal Revenue Code ("Qualified
Plan") is $5,000 for the initial payment and $500 for subsequent payments. For
Qualified Plan Contracts, the minimum Purchase Payment is $1,000 and the minimum
additional payment is $100. The Company reserves the right to waive the minimum
Purchase Payment amounts on certain Qualified Plans, certain automatic purchase
plans, and for Contracts issued to officers, directors, agents, or full-time
employees of the Company, the investment adviser or subadviser to the Fund, the
distributor or third party administrators. Total cumulative purchase payments
will not be permitted to exceed $1,500,000 unless approved in advance by an
appropriate officer of the Company before they are accepted.
In the event that an application fails to recite all of the information
necessary to record the account properly, the Company will promptly request that
the Contract Owner furnish further instructions and will hold the initial
Purchase Payment in a suspense account, without interest, for a period not
exceeding 5 business days after receipt of the application by the Company. If
the necessary information is not received within 5 business days, the Company
will return the initial Purchase Payment to the prospective Contract Owner,
unless the prospective Contract Owner, after being informed of the reasons for
the delay, specifically consents to the Company retaining the initial Purchase
Payment until the application is made complete.
Purchase Payments will be allocated to the Divisions of the Separate Account as
directed by the Contract Owner. If no allocation is indicated or allocations are
not properly completed, the application is considered not to be complete. If the
Contract Owner forwards a subsequent Purchase Payment and does not specifically
indicate into which Allocation Option(s) the Purchase Payment is to be invested,
the Company will credit the Purchase Payment based upon the last existing
allocation made by the Contract Owner. Subsequent Purchase Payments may be made
at any time without prior notice. The Contract will not be in default if no
subsequent Purchase Payments are made. The Company reserves the right to reject
any applications or Purchase Payments.
ACCUMULATION PROVISIONS
ACCUMULATION UNITS - The number of a Division's Accumulation Units purchased by
a Contract Owner with respect to his or her initial Purchase Payment is
determined by dividing the amount credited to the Division by the Accumulation
Unit value for that Division next computed following acceptance of the
application (generally the next business day after receipt of the Purchase
Payment by the Company). The number of Accumulation Units purchased with respect
to subsequent Purchase Payments is determined by dividing the amount credited to
the Division by the applicable Accumulation Unit value for the Valuation Period
next determined following receipt of the Purchase Payment by the Company. The
Accumulation Unit value of each Division varies in accordance with the
investment experience of that Division.
VALUE OF AN ACCUMULATION UNIT - The value of an Accumulation Unit of each
Division was set at $10 when the Division was established. The value may
increase or decrease from one Valuation Period to the next. The value of an
Accumulation Unit is determined by multiplying the value of an Accumulation Unit
for the last Valuation Period by the net investment factor for that Division for
the current Valuation Period. The Contract Owner bears the investment risk that
the Contract Value may at any time be less than, equal to, or more than the
amounts invested in the Separate Account.
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ANNUITY PAYMENTS
ANNUITY PAYMENTS - The Contract Owner's value in the Allocation Options may be
applied to provide either a Variable Annuity or a Fixed Annuity as selected by
the Contract Owner. The dollar amount of Variable Annuity payments will reflect
the investment experience of the Separate Account Division(s) in which the
Contract Owner is invested but will not be affected by adverse mortality
experience which may exceed the mortality risk charge provided for under the
Contract.
1. FIRST ANNUITY PAYMENT: The amount used to establish the first monthly
payment consists of the Contract Owner's values in the Allocation Options
as of the first Valuation Day on or after the Annuity Date adjusted for
charges and deductions. The Contract contains tables showing monthly
payment factors and annuity premium rates per $1,000 of the amount applied.
At the time the first monthly Variable Annuity payment is determined, a
number of Annuity Units for each Division is established for the Owner by
dividing the monthly payment derived from the tables by the Annuity Unit
value for the Division as of the date the first Annuity payment is due. The
number of Annuity Units forming the basis of an Annuity payment will not
change during the Annuity period unless Annuity Units are transferred to or
from another Division. The value of the Annuity Units, however, will change
based upon investment results.
2. SUBSEQUENT VARIABLE ANNUITY PAYMENTS: The amount of monthly payments after
the first for any Division will be determined by multiplying the number of
Annuity Units for that Division determined for the first payment (adjusted
for transfers, if any) by the Annuity Unit value for that Division for the
Valuation Period immediately preceding the Valuation Period in which the
subsequent payment is made. It will be the Company's practice to mail
Variable Annuity payments no later than 7 days after the last day of the
Valuation Period upon which they are based or the monthly anniversary
thereof.
ASSUMED INVESTMENT RATE - The tables set forth in the Contract are based upon
the 1983 Table "a" for Individual Annuity Valuation, with an assumed investment
rate of 4%. Variable Annuity payments will vary from payments based on the
assumed investment rate depending on whether the investment experience of the
Division(s) in which the Contract Owner is invested is better or worse than the
assumed investment rate. Over a period of time, if the Division(s) achieved a
net investment result equal to the assumed investment rate, the Annuity Units
would not change in value, and the amount of the Annuity payments would be
level. However, if the Division(s) achieved a net investment result greater than
the assumed investment rate, the Annuity Units would increase in value and the
amount of the Annuity payments would increase. Similarly, if the Division(s)
achieved a net investment result smaller than the assumed investment rate, the
Annuity Units would decrease in value and the amount of the Annuity payments
would decrease.
ELECTION OF ANNUITY DATE AND FORM OF ANNUITY - The Annuity Date and the form of
Annuity payment are elected by the Contract Owner. Unless a different Annuity
Date is elected, Annuity payments will begin on the first day of the month
following the Annuitant's 85th birthday. Contracts issued under Qualified Plans
may require an earlier Annuity Date. To the extent not prohibited by any
Qualified Plan requirements, an optional Annuity Date may be elected; such date
may be the first day of any month prior to the normal Annuity Date. The election
must be made at least 30 days before the optional Annuity Date elected.
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ANNUITY OPTIONS - Subject to the provisions of the Internal Revenue Code
("Code") and the retirement plan under which a Contract is purchased, the
Contract Owner may elect any one of the Annuity Options listed below. If the
Owner does not elect otherwise, Annuity payments will be made on a variable
basis under Option 3, a life Annuity with 10 years' payments certain. Changes in
the optional form of Annuity payment may be made at any time up to 30 days prior
to the date on which Annuity payments are to begin. All Options are available as
fixed or variable payment annuities. The Annuity payments described below are
determined on the basis of (i) the mortality table specified in the Contract,
(ii) the age and, where permitted, the sex of the Annuitant, (iii) the type of
Annuity payment option(s) selected, and (iv) the assumed investment rate.
OPTION 1-PAYMENTS FOR A GUARANTEED FIXED PERIOD: An Annuity payable for a
specified period of time. The period must be at least 5 years. If this
option is taken as a Variable Annuity, the Contract Owner may at any time
choose to receive the present value of the remaining payments in a lump sum
computed at the assumed investment rate.
OPTION 2-LIFE ANNUITY: Payments will be made for the life of the Annuitant.
Payments will cease with the last payment due prior to the Annuitant's
death.
OPTION 3-LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 OR 20 YEARS: An
Annuity payable during the lifetime of the individual (no matter how long
he or she might live) with a guaranteed minimum number of payments. If the
Annuitant dies before the guaranteed number of payments have been made, the
remaining payments for the guaranteed period chosen (10 or 20 years) will
continue to the Owner.
OPTION 4-JOINT AND SURVIVOR ANNUITY: An Annuity will be paid during the
lifetimes of the Annuitant and the Annuitant's spouse. The amount of such
payments will not change by reason of the first death. Payments will end
with the last payment due prior to the second death.
FREQUENCY OF PAYMENT - Payments under all options will be made on a monthly
basis, unless a different arrangement has been requested by the Contract Owner
and agreed to by the Company. If at any time any payments to be made to any
Annuitant are less than $100 each, the Company shall have the right to decrease
the frequency of payments to such interval as will result in a payment of at
least $100.
ANNUITY UNIT VALUES - The value of an Annuity Unit of each Division was set at
$10 when the Division was established. The value may increase or decrease from
one Valuation Period to the next. For any Valuation Period, the value of an
Annuity Unit of a particular Division is the value of that Annuity Unit during
the last Valuation Period, multiplied by the net investment factor for that
Division for the current Valuation Period. The result is then multiplied by a
factor that offsets the effect of the assumed investment rate.
DISTRIBUTION OF CONTRACTS
Contracts are offered on a continuous basis through licensed insurance agents of
the Company (who are also either broker-dealers or persons associated with
broker-dealers), either individually or through an insurance agency. Sales
commissions will be paid by the Company. The commissions paid by the Company
will range from 1% to 6%.
PaineWebber Inc. ("PWI"), located at 1285 Avenue of the Americas, New York, New
York 10019, serves as the principal underwriter of the Contracts pursuant to an
underwriting (distribution) agreement ("Underwriting Agreement"). PWI is
registered as a broker-dealer under the Securities Exchange Act of 1934, and is
a member of the National Association of Securities
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Dealers, Inc. ("NASD"). PWL may accomplish the retail distribution of Contracts
itself or enter into Dealer Agreements with other registered broker-dealers to
do so. The Contracts will be offered for sale by PWI and its correspondent
firms.
The Underwriting Agreement may be terminated by the Company on behalf of the
Separate Account at any time on 60 days' written notice without payment of any
penalty. The Underwriting Agreement may be terminated at any time by PWI without
payment of any penalty on 60 days' written notice to the Separate Account and
the Company. The Underwriting Agreement automatically terminates in the event of
its assignment. PWI has received no underwriting compensation from PaineWebber
Life since the Contracts were not yet available for sale on the date of this
Statement of Additional Information.
ADDITIONAL FEDERAL INCOME TAX INFORMATION
THE COMPANY AND THE SEPARATE ACCOUNT
The Company is taxed as a life insurance company under Subchapter L of the Code.
The operations of the Separate Account form, and are taxed as, a part of the
total operations of the Company. The Contracts are formulated to meet the
definition of a "variable contract" under section 817(d) of the Code. The Code
provides that if the Separate Account meets certain diversification
requirements, set forth in Treasury Regulations under section 817(h) of the
Code, the income from the assets of the Separate Account used to fund the
annuities will not be subject to current federal income tax. See
"Diversification Requirements". There is no short-term or long-term capital gain
or loss recognized with respect to the assets of the Separate Account.
NON-QUALIFIED PLANS
ACCUMULATION PERIOD - The Contract may be issued to individuals in connection
with personal retirement plans which do not qualify for the tax benefits which
are available to Qualified Plans. A non-Qualified Plan may be established by an
individual seeking to accumulate funds for retirement or by an employer for one
or more employees. With certain exceptions, a Contract held by a non-natural
person will not be treated as an Annuity contract. The tax consequences of
participation in a non-Qualified Plan will vary from plan to plan. Income
credited to a non-Qualified Contract is not includable in the gross income of
the Contract Owner. Amounts received before the Annuity Date are includable as
ordinary income to the extent Contract Value exceeds the Contract Owner's
Purchase Payments.
WITHDRAWALS - A partial or complete withdrawal of a non-Qualified Contract
before commencement of Annuity payments will be treated first as a withdrawal of
income earned on investments to the extent of such income, then as a tax-free
return of capital. Moreover, amounts received upon assignment or pledge of the
Contract will be treated as amounts withdrawn under the Contract and therefore
subject to income taxes. Taxable amounts included in a withdrawal before the
Contract Owner attains age 59 1/2 will be subject to an additional income tax of
10% of the income withdrawn. This penalty would not apply where the withdrawal
is made on account of the Contract Owner's death or disability or where
substantially equal Annuity payments are received over the life of the Contract
Owner or the lives of the Contract Owner and a designated beneficiary. After the
Annuity Date, the Owner is allowed to recover tax-free any portion of each
Annuity payment which represents Purchase Payments.
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QUALIFIED PLANS
TAX ADVANTAGES - Certain tax advantages are available under a Qualified Plan (a
retirement plan which satisfies the requirements of sections 401(a), 403(b),
408(b) or 457 of the Code). The tax advantages available under a Qualified Plan
include: the deductibility of employer or Contract Owner contributions; the
inclusion of contributions and their earnings in the participant's gross income
only when received or made available to the participant and, within certain
limits, the exclusion from the decedent's gross estate and from the
beneficiary's gross income of distributions to the beneficiary of a deceased
employee. A general information outline with respect to each type is provided
below. If the contract is to be used to fund a Qualified Plan, however,
competent tax advice should be sought.
1. PLANS FOR CORPORATIONS AND SELF-EMPLOYED INDIVIDUALS: Under section 401(a)
of the Code, contributions may be made on behalf of employees up to the
limits provided by section 415 and the payments will be deductible as
provided by section 404. Plan participants are also permitted to make non-
deductible voluntary contributions subject to certain non-discrimination
rules.
A plan established by an organization which primarily benefits "key
employees" (known as a "top-heavy" plan) will be subject to special rules
on: vesting, minimum contributions and benefits for non-key employees,
compensation which may be taken into account to determine contributions or
benefits for key employees, the aggregate limit on contributions and
benefits, and rollovers.
The tax treatment of plans established by self-employed individuals (known
as "Keogh" or "H.R. 10" plans) is essentially the same as corporate plans.
Some special restrictions apply to self-employed individuals who are
"owner-employees."
2. TAX-SHELTERED ANNUITIES: Contributions made by public school systems,
churches and certain tax-exempt organizations made to purchase contracts on
behalf of their employees are excludible from the employees' gross income,
within certain limits, if the requirements of section 403(b) of the Code
are met.
3. DEFERRED COMPENSATION PLANS FOR STATE AND LOCAL GOVERNMENT EMPLOYEES:
Section 457 of the Code provides special tax treatment for certain deferred
compensation plans for employees of state and local governments, their
political subdivisions, agencies, instrumentalities and affiliates, and
certain tax-exempt rural electric cooperatives. Such plans permit the
employees to specify the form of investment for their deferred
compensation, which can include investment in the Contract. However, the
investments will be owned by, and subject to, the claims of the general
creditors of the employer.
4. INDIVIDUAL RETIREMENT ANNUITIES: Section 408(b) of the Code permits
individuals to establish an Individual Retirement Annuity ("IRA"). No more
than $2,000 or 100% of compensation may be contributed to an IRA. Under
section 219 of the Code the entire amount is deductible if the individual
is not a participant in an employer's Qualified Plan. If the individual
participates in an employer's Qualified Plan, all, a portion, or none of
the contribution may be deductible, depending on adjusted gross income. An
IRA is subject to penalty and excise taxes on excess contributions and
insufficient distributions, as well as early distributions (see below).
DISTRIBUTIONS - A participant who has attained age 50 before January 1, 1986,
may elect favorable tax treatment for a lump-sum distribution from a section
401(a) plan. This may include capital gains treatment on the pre-1974 portion
and 5-year or 10-year forward averaging. A distribution
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before age 59 1/2 from a Qualified Plan (except a section 457 plan) will be
subject to a 10% additional income tax on the amount of the distribution. The
penalty does not apply to a distribution: of an Annuity for life or life
expectancy; on early retirement under the plan at age 55; used to pay medical
expenses; and after death. Distributions from Tax-Sheltered Annuities are
subject to special restrictions imposed by section 403(b)(11) of the Code. See
"Withdrawals" in the prospectus. A participant who receives a lump sum
distribution from a Qualified Plan (except a section 457 plan) can make a "tax-
free rollover" of the distribution into another employer's Qualified Plan, in
certain circumstances, or into an IRA and continue to defer taxation of the
amount rolled over. Except for the recovery of nondeductible contributions, the
entire amount of the Annuity payments will be included in the participant's
gross income. The participant is entitled to recover tax-free any portion of
each Annuity payment representing nondeductible contributions. Distributions not
made directly to the other Qualified Plan will be subject to a mandatory 20%
withholding.
WITHHOLDING
With certain exceptions, withholding on Annuity payments and other distributions
(such as lump sum distributions or partial withdrawals) is required. However,
recipients of Annuity payments or other distributions are allowed to make an
election not to have federal income tax withheld. After such election is made
with respect to Annuity payments, a payee may revoke the election at any time,
and thereafter, commence withholding. In such a case, the Company will notify
the payee at least annually of his or her right to change such election.
The withholding rate followed by the Company will be applied only against the
taxable portion of Annuity payments or other distributions. This rate will be
determined based upon the nature of the distribution(s). Federal income tax will
be withheld from Annuity payments pursuant to the recipient's withholding
certificate. If no withholding certificate is filed with the Company, federal
income tax will be withheld from Annuity payments on the basis that the payee is
married with three withholding exemptions. If the balance to the credit of a
participant in a Qualified Plan is distributed within one taxable year to the
recipient, the amount of withholding will approximate the federal income tax on
a lump sum distribution. If a qualified total distribution is made from a
Qualified Plan, there is a mandatory withholding unless the amount is rolled
over to another qualified plan on a Trustee to Trustee basis.
DIVERSIFICATION REQUIREMENTS
Non-Qualified variable contracts funded through segregated asset accounts, such
as the Separate Account, will not be treated as annuities under the Code unless
they are "adequately diversified." Whether the Separate Account is adequately
diversified is presently determined from the temporary regulations issued by the
Treasury Department in September 1986. It is intended that the Fund and the
Separate Account will be operated in such a manner as to satisfy the
requirements of the temporary regulations, and any final regulations which
follow, so that the Contracts qualify as annuities under the Code.
OTHER INFORMATION
REPORTS TO CONTRACT OWNERS
The Company will maintain all records which relate to the Contract. At least
once a year, a report which will set forth information regarding the Contract
Value will be sent to the Contract Owners. The Contract Owner will also be
furnished notices, proxies and solicitation materials which relate to the Fund.
-11-
<PAGE>
ADMINISTRATIVE SERVICES
PaineWebber Life has entered into a contract with American Republic Insurance
Company under which the latter has agreed to perform certain of the
administrative services relating to the Contract. Such administrative services
include: issuing Contracts, maintaining Contract Owner records (accounting,
valuation and reporting services) and issuing reports. The address of the
administrative office is 601 6th Avenue, Des Moines, Iowa 50309.
SAFEKEEPING OF ASSETS
The Company maintains custody of the assets of the Separate Account. The Fund
shares owned by the Separate Account will be held in "book" form. That is,
actual certificates will not be issued by the Fund, rather, the record of shares
issued to the Separate Account will be recorded on the books of the Fund by the
Fund's transfer agent. The Company also maintains the records of portfolio
transactions of the Separate Account.
INDEPENDENT AUDITORS
Ernst & Young, LLP serves as independent auditors for the Separate Account and
the Company and performs audit and accounting services for the Separate Account
and the Company.
REGISTRATION STATEMENT
A registration statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, with respect to the Contract. The
Prospectus and this Statement of Additional Information do not contain all
information set forth in the registration statement, its amendments and
exhibits, reference to which is made for further information concerning the
Separate Account, the Company and the Contract. Statements contained in this
Statement of Additional Information and the related Prospectus as to the content
of the Contract and other legal instruments are summaries. For a complete
statement of the terms thereof, reference is made to such instruments as filed.
SEPARATE ACCOUNT PERFORMANCE
From time to time the Separate Account may advertise the individual Division
"yields," "effective yields," or "average total return." These figures will be
based on historical earnings and are not intended to indicate future
performance.
(a) YIELD - The yield quotation is based on a seven-day period. If the seven-
day period falls on a non-valuation day, a calculation will be made as if
the seventh day were a valuation day for this purpose only. The yield is
computed by determining the net change, exclusive of capital changes, in
the value of a hypothetical pre-existing account having a balance of one
accumulation unit of the Division at the beginning of the period,
subtracting a hypothetical charge reflecting deductions from contract owner
accounts, and dividing the difference by the value of the Division at the
beginning of the base period to obtain the base period return, and then
multiplying the base period return by 365/7 with the resulting yield figure
carried to at least the nearest hundredth of one percent. Recurring charges
are prorated among the Divisions by multiplying the flat fee by a fraction,
the numerator of which is the average number of contract owner accounts
that have money allocated to the
-12-
<PAGE>
Division and the denominator of which is the sum of the average number of
contract owner accounts that have money allocated to each of the Divisions.
A Division's prorated flat fee is divided by the average number of
accumulation units per contract owner in that Division in order to equate
the flat fee to a one-unit basis.
(b) EFFECTIVE YIELD - The effective yield quotation is based on a seven-day
period. If the seven-day period falls on a non-valuation day, a calculation
will be made as if the seventh day were a valuation day for this purpose
only. The effective yield is computed by determining the net change,
exclusive of capital changes, in the value of a hypothetical pre-existing
account having a balance of one accumulation unit of the Division at the
beginning of the period, subtracting a hypothetical charge reflecting
deductions from contract owner accounts, and dividing the difference by the
value of the Division at the beginning of the base period to obtain the
base period return, and then compounding the base period return by adding
1, raising the sum to a power equal to 365 divided by 7, and subtracting 1
from the result.
(c) TOTAL RETURN - The total return quotation is based on annual periods or
from inception to the end of the Division's first fiscal year. In general,
the total return is computed by finding the average annual compounded rates
of return over the 1-, 5-, and 10-year periods or from the effective date
if the Division has been in effect less than the stated periods, that would
equate the initial amount invested to the ending redeemable value.
Recurring charges are prorated among the Divisions by multiplying the flat
fee by a fraction, the numerator of which is the average number of Contract
Owner accounts that have money allocated to the Division and the
denominator of which is the sum of the average number of Contract Owner
accounts that have money allocated to each of the Divisions. A Division's
prorated flat fee is divided by the average account value per $1,000 per
Contract Owner in that Division in order to equate the flat fee to a $1,000
account size basis.
(d) TOTAL RETURN NOT INCLUDING EARLY WITHDRAWAL CHARGES - The total return not
including early withdrawal charges quotation is based on the periods from
inception to the end of its first fiscal year and each full year
thereafter. In general, the total return is computed by finding the average
annual compounded rates of return over the 1-, 5- and 10-year periods or
from the effective date if the account has been in effect less than the
stated periods, that would equate the initial amount invested to an ending
value.
Recurring charges are prorated among the Divisions by multiplying the flat fee
by a fraction, the numerator of which is the average number of contract owner
accounts that have money allocated to the Division and the denominator of which
is the sum of the average number of Contract Owner accounts that have money
allocated to each of the Divisions. A Division's prorated flat fee is divided by
the average account value per $1,000 per Contract Owner in that Division in
order to equate the flat fee to a $1,000 account size basis.
Performance information for a Division may be compared, in reports and
promotional literature, to: (i) the Standard & Poor's 500 Stock Index ("S&P
500"), Dow Jones Industrial Average ("DJIA"), Donoghue Money Market
Institutional Averages, or other indices measuring performance of a pertinent
group of securities so that investors may compare a Division's results with
those of a group of securities widely regarded by investors as representative of
the securities markets in general; (ii) other variable annuity separate accounts
or other investment products tracked by Lipper Analytical Services, a widely
used independent research firm which ranks mutual funds and other investment
companies by overall performance, investment objectives, and assets, or tracked
by other ratings services, companies, publications, or persons such as
-13-
<PAGE>
Variable Annuity Research and Data Service ("VARDS") and Morningstar who rank
separate accounts or other investment products on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) to assess
the real rate of return from an investment in the Contract. Unmanaged indices
may assume the reinvestment of dividends but generally do not reflect deductions
for administrative and management costs and expenses.
From time to time the Separate Account may seek to illustrate performance of
MAAP. Because MAAP is a new program without an operating history, such
illustration may take the form of a comparative investment in the S&P 500, 10-
year Government Bonds and 13-week Treasury bills indices simultaneously in the
proportions recommended by the PaineWebber Asset Allocator Programs since 1973,
the date of its inception.
Any such illustration will disclose that MAAP does not involve investments in a
specific index but rather in the three Milestones portfolios and that the
performance of the indices does not necessarily correspond to the three
Milestones portfolios. In addition, it will be noted that certain fees, charges
and transaction costs are assessed with the Milestones annuity contract, which
are not reflected in the illustration.
PERFORMANCE
Money Market Division Yield and Effective Yield for the seven-day period ended
March 31, 1995 were: 3.88% and 3.95%, respectively.
The average total return for all the Divisions, except the Money Market, of the
Separate Account from inception to March 31, 1995 are as follows.
-14-
<PAGE>
AVERAGE ANNUAL TOTAL RETURN
PERIOD ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
Since
Division Inception Date (1) 1 Year 5 Years Inception (1)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Strategic Fixed Income 11/15/93
With Surrender Charge -3.53% 5.38% 5.42%
Without Surrender Charge 1.46% 6.18% 5.42%
- --------------------------------------------------------------------------------------------------------
High Grade Fixed Income 11/5/93
With Surrender Charge -4.64% N/A -9.89%
Without Surrender Charge 0.35% N/A -6.21%
- --------------------------------------------------------------------------------------------------------
Global Income 9/15/93
With Surrender Charge -3.45% 5.51% 6.12%
Without Surrender Charge 1.54% 6.31% 6.12%
- --------------------------------------------------------------------------------------------------------
Balanced (formerly Asset Allocation) 10/29/93
With Surrender Charge -5.02% 5.11% 6.11%
Without Surrender Charge -0.02% 5.91% 6.11%
- --------------------------------------------------------------------------------------------------------
Growth and Income 9/15/93
With Surrender Charge -0.86% N/A -2.51%
Without Surrender Charge 4.13% N/A -0.91%
- --------------------------------------------------------------------------------------------------------
Growth 10/29/93
With Surrender Charge -4.34% 7.07% 9.77%
Without Surrender Charge 0.65% 7.82% 9.77%
- --------------------------------------------------------------------------------------------------------
Aggressive Growth 11/1/93
With Surrender Charge -1.29% N/A -3.36%
Without Surrender Charge 3.70% N/A 0.19%
- --------------------------------------------------------------------------------------------------------
Global Growth 9/15/93
With Surrender Charge -17.13% 0.85% 3.56%
Without Surrender Charge -12.13% 1.80% 3.56%
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) The various Divisions of the Separate Account first became operational
beginning in September 1993. Except for the High Grade Fixed Income and
Aggressive Growth Portfolios, the PaineWebber Series Trust which funds the
contracts became operational on earlier dates. Thus, the performance shown for
periods prior to the inception date of a particular Division is the performance
of the various Portfolios of PaineWebber Series Trust for those periods less the
charges at the contract level.
FINANCIAL STATEMENTS
The financial statements of PaineWebber Life Insurance Company contained herein
should be considered only for the purposes of informing investors as to its
ability to carry out contractual obligations as a sponsor under the Contracts as
described elsewhere herein and in the Prospectus. The financial statements of
the Separate Account are also included in this Statement of Additional
Information.
-15-
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Report of Independent Auditors
The Board of Directors
PaineWebber Life Insurance Company
We have audited the accompanying statement of net assets of PaineWebber Life
Variable Annuity Account (comprising, respectively, the Money Market,
Government, Fixed Income, Global Income, Balanced, Asset Allocation, Dividend
Growth, Growth, Aggressive Growth and Global Growth Divisions) as of December
31, 1994, the related statements of operations and changes in net assets for the
year then ended, and the related statement of changes in net assets for the
period from September 1, 1993 (inception date) to December 31, 1993. These
financial statements are the responsibility of the Account's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of December 31, 1994, by
correspondence with the transfer agent. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
divisions constituting the PaineWebber Life Variable Annuity Account at December
31, 1994, and the results of their operations and the changes in their net
assets for the periods indicated in the first paragraph, in conformity with
generally accepted accounting principles.
/s/ERNST & YOUNG LLP
January 27, 1995
1
<PAGE>
PaineWebber Life Variable Annuity Account
Statement of Net Assets
December 31, 1994
<TABLE>
<CAPTION>
Money Fixed
Market Government Income
Combined Division Division Division
--------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Investments at net asset value:
PaineWebber Series Trust Money Market
Portfolio, 7,980,840 shares at $1.00
per share (cost - $7,980,840) $ 7,980,840 $7,980,840 $ $
PaineWebber Series Trust Government
Portfolio, 346,064 shares at $10.34
per share (cost - $4,015,364) 3,578,298 - 3,578,298 -
PaineWebber Series Trust Fixed Income
Portfolio, 876,487 shares at $8.71 per
share (cost - $8,079,191) 7,634,194 - - 7,634,194
PaineWebber Series Trust Global Income
Portfolio, 1,461,546 shares at $10.88
per share (cost - $17,059,993) 15,901,619 - - -
PaineWebber Series Trust Balanced
Portfolio, 1,272,399 shares at $9.47
per share (cost - $12,435,628) 12,049,608 - - -
PaineWebber Series Trust Asset
Allocation Portfolio, 607,126 shares
at $9.54 per share (cost - $7,031,761) 5,791,984 - - -
PaineWebber Series Trust Dividend
Growth Portfolio, 360,785 shares at
$9.16 per share (cost - $3,458,344) 3,304,791 - - -
PaineWebber Series Trust Growth
Portfolio, 900,638 shares at $14.56
per share (cost - $15,348,642) 13,113,289 - - -
PaineWebber Series Trust Aggressive
Growth Portfolio, 1,408,926 shares at
$9.65 per share (cost - $13,961,681) 13,596,122 - - -
PaineWebber Series Trust Global Growth
Portfolio, 1,595,025 shares at $12.44
per share (cost - $22,841,749) 19,842,112 - - -
--------------------------------------------------
Total investments (cost - $112,213,193) 102,792,857 7,980,840 3,578,298 7,634,194
Dividends receivable 3,882,700 32,086 329,549 220,084
Receivable from (payable to)
PaineWebber Life Insurance Company 36,063 1,790 163 (616)
--------------------------------------------------
Total net assets $106,711,620 $8,014,716 $3,908,010 $7,853,662
==================================================
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Global Asset Dividend Aggressive Global
Income Balanced Allocation Growth Growth Growth Growth
Division Division Division Division Division Division Division
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Investments at net asset value:
PaineWebber Series Trust Money Market
Portfolio, 7,980,840 shares at $1.00
per share (cost - $7,980,840) $ - $ - $ - $ - $ - $ - $ -
PaineWebber Series Trust Government
Portfolio, 346,064 shares at $10.34
per share (cost - $4,015,364) - - - - - - -
PaineWebber Series Trust Fixed Income
Portfolio, 876,487 shares at $8.71 per
share (cost - $8,079,191) - - - - - - -
PaineWebber Series Trust Global Income
Portfolio, 1,461,546 shares at $10.88
per share (cost - $17,059,993) 15,901,619 - - - - - -
PaineWebber Series Trust Balanced
Portfolio, 1,272,399 shares at $9.47
per share (cost - $12,435,628) - 12,049,608 - - - - -
PaineWebber Series Trust Asset
Allocation Portfolio, 607,126 shares
at $9.54 per share (cost - $7,031,761) - - 5,791,984 - - - -
PaineWebber Series Trust Dividend
Growth Portfolio, 360,785 shares at
$9.16 per share (cost - $3,458,344) - - - 3,304,791 - - -
PaineWebber Series Trust Growth
Portfolio, 900,638 shares at $14.56
per share (cost - $15,348,642) - - - - 13,113,289 - -
PaineWebber Series Trust Aggressive
Growth Portfolio, 1,408,926 shares at
$9.65 per share (cost - $13,961,681) - - - - - 13,596,122 -
PaineWebber Series Trust Global Growth
Portfolio, 1,595,025 shares at $12.44
per share (cost - $22,841,749) - - - - - - 19,842,112
------------------------------------------------------------------------------------------
Total investments (cost - $112,213,193) 15,901,619 12,049,608 5,791,984 3,304,791 13,113,289 13,596,122 19,842,112
Dividends receivable 272,044 105,106 744,213 35,577 987,855 7,556 1,148,630
Receivable from (payable to)
PaineWebber Life Insurance Company 3,690 4,889 1,179 433 598 8,828 15,109
------------------------------------------------------------------------------------------
Total net assets $16,177,353 $12,159,603 $6,537,376 $3,340,801 $14,101,742 $13,612,506 $21,005,851
==========================================================================================
</TABLE>
3
<PAGE>
PaineWebber Life Variable Annuity Account
Statement of Net Assets (continued)
<TABLE>
<CAPTION>
Net assets represented by:
Currently payable annuity contracts
<S> <C> <C> <C>
Global Income Division $ 4,737
Asset Allocation Division 2,286
Growth Division 4,534
Global Growth Division 14,192
------------
25,749
Contracts in accumulation period
<CAPTION>
Units Value
-------------------
Contracts sold subject to early
withdrawal charges <C> <C> <C>
Money Market Division 729,488 $10.20 7,440,622
Government Division 365,568 9.27 3,388,745
Fixed Income Division 788,821 8.83 6,966,201
Global Income Division 1,567,185 9.61 15,058,825
Balanced Division 1,091,748 9.40 10,259,341
Asset Allocation Division 646,381 9.18 5,931,965
Dividend Growth Division 308,172 9.29 2,862,278
Growth Division 1,561,429 8.72 13,616,611
Aggressive Growth Division 1,292,366 9.50 12,273,838
Global Growth Division 1,903,060 10.19 19,398,829
------------
97,197,255
Contracts sold not subject to early
withdrawal charges
Money Market Division 56,433 10.17 574,094
Government Division 56,044 9.27 519,265
Fixed Income Division 100,691 8.81 887,461
Global Income Division 117,924 9.44 1,113,791
Balanced Division 202,593 9.38 1,900,262
Asset Allocation Division 65,539 9.20 603,125
Dividend Growth Division 50,211 9.53 478,523
Growth Division 55,628 8.64 480,597
Aggressive Growth Division 141,235 9.48 1,338,668
Global Growth Division 171,114 9.31 1,592,830
------------
9,488,616
------------
$106,711,620
============
</TABLE>
See accompanying notes.
4
<PAGE>
PaineWebber Life Variable Annuity Account
Statement of Operations
Year ended December 31, 1994
<TABLE>
<CAPTION>
Money Govern-
Market ment
Combined Division Division
------------------------------------
<S> <C> <C> <C>
Investment income (loss)
Income:
Dividends $ 1,350,006 $179,414 $ 295,308
Capital gains distributions 2,875,787 - 34,241
Expenses (Note 2):
Administrative charges (67,630) (25,901) (1,293)
Mortality, distribution and expense
risk and enhanced death benefit fees (1,226,405) (76,719) (42,179)
------------------------------------
Net investment income (loss) 2,931,758 76,794 286,077
Realized and unrealized gain (loss) on
investments (Note 4)
Net realized loss on investments (355,956) - (24,543)
Net unrealized depreciation of (9,008,878) - (416,230)
investments
------------------------------------
Net increase (decrease) in net assets
resulting from operations $(6,433,076) $ 76,794 $(154,696)
====================================
</TABLE>
See accompanying notes.
5
<PAGE>
<TABLE>
<CAPTION>
Fixed Global Asset Dividend
Income Income Balanced Allocation Growth Growth
Division Division Division Division Division Division
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment income (loss)
Income:
Dividends $ 225,030 $ 297,880 $ 111,181 $ 178,804 $ 35,577 $ 7,327
Capital gains distributions - - - 575,720 - 1,117,196
Expenses (Note 2):
Administrative charges (2,971) (4,206) (4,258) (3,813) (595) (7,795)
Mortality, distribution and expense
risk and enhanced death benefit fees (78,855) (222,720) (133,726) (73,110) (35,987) (158,988)
--------------------------------------------------------------------------------
Net investment income (loss) 143,204 70,954 (26,803) 677,601 (1,005) 957,740
Realized and unrealized gain (loss) on
investments (Note 4)
Net realized loss on investments (26,731) (146,507) (12,254) (22,616) (4,897) (45,093)
Net unrealized depreciation of
investments (443,886) (870,107) (381,258) (1,163,839) (145,968) (2,207,272)
-------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations $(327,413) $(945,660) $(420,315) $ (508,854) $(151,870) $(1,294,625)
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
Aggressive Global
Growth Growth
Division Division
--------------------------
<S> <C> <C>
Investment income (loss)
Income:
Dividends $ 13,040 $ 6,445
Capital gains distributions - 1,148,630
Expenses (Note 2):
Administrative charges (6,719) (10,079)
Mortality, distribution and expense
risk and enhanced death benefit fees (152,090) (252,031)
-------------------------
Net investment income (loss) (145,769) 892,965
Realized and unrealized gain (loss) on
investments (Note 4)
Net realized loss on investments (19,887) (53,428)
Net unrealized depreciation of
investments (369,861) (3,010,457)
--------------------------
Net increase (decrease) in net assets
resulting from operations $(535,517) $(2,170,920)
==========================
</TABLE>
6
<PAGE>
PaineWebber Life Variable Annuity Account
Statements of Changes in Net Assets
Period from September 1, 1993 to December 31,
1993 and the Year ended December 31, 1994
<TABLE>
<CAPTION>
Money Govern-
Market ment
Combined Division Division
--------------------------------------------
<S> <C> <C> <C>
Net assets at September 1, 1993 $ - $ - $ -
Increase (decrease) in net assets
Operations:
Net investment income 628,944 514 19,889
Net realized gain on investments 353 - -
Net unrealized appreciation
(depreciation) of investments (411,458) - (20,836)
-----------------------------------------
Net increase (decrease) in net assets
resulting from operations 217,839 514 (947)
Changes from principal transactions:
Purchase payments 19,308,321 1,374,252 352,092
Contract distributions and terminations (54,750) (900) -
Transfer payments from (to) other
divisions - (158,101) (26,596)
-----------------------------------------
Increase in net assets derived from
principal transactions 19,253,571 1,215,251 325,496
-----------------------------------------
Total increase and net assets at
December 31, 1993 19,471,410 1,215,765 324,549
Increase (decrease) in net assets
Operations:
Net investment income (loss) 2,931,758 76,794 286,077
Net realized loss on investments (355,956) - (24,543)
Net unrealized depreciation of
investments (9,008,878) - (416,230)
-----------------------------------------
Net increase (decrease) in net assets
resulting from operations (6,433,076) 76,794 (154,696)
Changes from principal transactions:
Purchase payments 98,757,595 16,778,326 3,384,732
Contract distributions and terminations (5,110,803) (1,438,329) (168,128)
Transfer payments (to) from other
divisions - (8,617,840) 521,553
Annuity payments (2,543) - -
Actuarial adjustment in reserves for
currently payable annuity contracts 29,037 - -
-----------------------------------------
Increase in net assets derived from
principal transactions 93,673,286 6,722,157 3,738,157
-----------------------------------------
Total increase 87,240,210 6,798,951 3,583,461
-----------------------------------------
Net assets at end of period $106,711,620 $ 8,014,716 $3,908,010
=========================================
</TABLE>
See accompanying notes.
7
<PAGE>
<TABLE>
<CAPTION>
Fixed Global Asset
Income Income Balanced Allocation
Division Division Division Division
---------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets at September 1, 1993 $ - $ - $ - $ -
Increase (decrease) in net assets
Operations:
Net investment income 1,234 309,863 1,022 84,409
Net realized gain on investments - - - 332
Net unrealized appreciation
(depreciation) of investments (1,111) (288,267) (4,762) (75,938)
---------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 123 21,596 (3,740) 8,803
Changes from principal transactions:
Purchase payments 1,428,115 3,581,783 2,183,207 834,974
Contract distributions and terminations (2,781) (7,168) (2,750) (21,290)
Transfer payments from (to) other
divisions 57,090 29,635 87,762 (23,480)
---------------------------------------------------------
Increase in net assets derived from
principal transactions 1,482,424 3,604,250 2,268,219 790,204
---------------------------------------------------------
Total increase and net assets at
December 31, 1993 1,482,547 3,625,846 2,264,479 799,007
Increase (decrease) in net assets
Operations:
Net investment income (loss) 143,204 70,954 (26,803) 677,601
Net realized loss on investments (26,731) (146,507) (12,254) (22,616)
Net unrealized depreciation of
investments (443,886) (870,107) (381,258) (1,163,839)
-------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (327,413) (945,660) (420,315) (508,854)
Changes from principal transactions:
Purchase payments 6,411,815 14,370,056 9,126,818 5,837,235
Contract distributions and terminations (357,801) (745,020) (532,742) (294,074)
Transfer payments (to) from other
divisions 644,514 (132,456) 1,721,363 701,539
Annuity payments - (460) - (224)
Actuarial adjustment in reserves for
currently payable annuity contracts - 5,047 - 2,747
---------------------------------------------------------
Increase in net assets derived from
principal transactions 6,698,528 13,497,167 10,315,439 6,247,223
--------------------------------------------------------
Total increase 6,371,115 12,551,507 9,895,124 5,738,369
---------------------------------------------------------
Net assets at end of period $7,853,662 $16,177,353 $12,159,603 $ 6,537,376
==========================================================
</TABLE>
<TABLE>
<CAPTION>
Dividend Growth Aggressive Global
Division Growth Growth Growth
Division Division Division
---------------------------------------------------------
<S> <C> <C> <C> <C>
Net assets at September 1, 1993 $ - $ - $ - $ -
Increase (decrease) in net assets
Operations:
Net investment income 10,153 57,075 1,310 143,475
Net realized gain on investments - 21 - -
Net unrealized appreciation
(depreciation) of investments (7,585) (28,081) 4,302 10,820
----------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 2,568 29,015 5,612 154,295
Changes from principal transactions:
Purchase payments 680,858 1,786,472 2,952,654 4,133,914
Contract distributions and terminations - (3,611) (12,573) (3,677)
Transfer payments from (to) other
divisions - - (129,287) 162,977
-----------------------------------------------------
Increase in net assets derived from
principal transactions 680,858 1,782,861 2,810,794 4,293,214
-----------------------------------------------------
Total increase and net assets at
December 31, 1993 683,426 1,811,876 2,816,406 4,447,509
Increase (decrease) in net assets
Operations:
Net investment income (loss) (1,005) 957,740 (145,769) 892,965
Net realized loss on investments (4,897) (45,093) (19,887) (53,428)
Net unrealized depreciation of
investments (145,968) (2,207,272) (369,861) (3,010,457)
----------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (151,870) (1,294,625) (535,517) (2,170,920
Changes from principal transactions:
Purchase payments 2,692,033 12,316,174 10,684,571 17,155,835
Contract distributions and terminations (85,135) (519,241) (469,774) (500,559)
Transfer payments (to) from other
divisions 202,347 1,782,719 1,116,820 2,059,441
Annuity payments - (452) - (1,407)
Actuarial adjustment in reserves for
currently payable annuity contracts - 5,291 - 15,952
------------------------------------------------------
Increase in net assets derived from
principal transactions 2,809,245 13,584,491 11,331,617 18,729,262
------------------------------------------------------
Total increase 2,657,375 12,289,866 10,796,100 16,558,342
------------------------------------------------------
Net assets at end of period $3,340,801 $14,101,742 $13,612,506 $21,005,851
======================================================
</TABLE>
See accompanying notes.
8
<PAGE>
PaineWebber Life Variable Annuity Account
Notes to Financial Statements
December 31, 1994
1. Investment and Accounting Policies
PaineWebber Life Variable Annuity Account was organized by PaineWebber Life
Insurance Company (the Company) in accordance with the provisions of California
Insurance laws and is a part of the total operations of the Company. The assets
and liabilities of the PaineWebber Life Variable Annuity Account are clearly
identified and distinguished from the other assets and liabilities of the
Company. The PaineWebber Life Variable Annuity Account invests solely in
specified portfolios of PaineWebber Series Trust, an open-end management
investment company under the Investment Company Act of 1940, as directed by
eligible contract owners. All series of shares are diversified except Global
Income Portfolio. Investments are stated at the closing net asset values per
share on December 31, 1994.
The average cost method is used to determine realized gains and losses.
Dividends are taken into income on an accrual basis as of the ex-dividend date.
Currently payable annuity contract reserves are computed according to the
Individual Annuity Valuation 1983 Table using an assumed interest rate of 4.0%.
If the amount paid to the contractholder is less than originally estimated,
charges paid for mortality and expense risks are reimbursed to the Company. If
additional amounts are required, the Company reimburses the PaineWebber Life
Variable Annuity Account.
2. Expenses
The Company is compensated for mortality, distribution and expense risks and
enhanced death benefits by a charge equivalent to an annual rate of 1.60% of the
asset value of each contract sold subject to early withdrawal charges and 1.77%
of the asset value of each contract sold not subject to early withdrawal
charges. These charges amounted to $1,226,405 in 1994.
An annual contract administration charge of $30 is deducted on the first
valuation date on or after each contract anniversary prior to the annuity date.
A transfer charge of $10 will be imposed on each transfer between divisions
(portfolios) of the account in excess of twelve in any one contract year.
However, the Company has waived this charge until further notice. A withdrawal
transaction charge of the lesser of $25 or 2% of the amount withdrawn will be
imposed on each withdrawal in excess of two per contract year. Total
administrative charges amounted to $67,630 in 1994.
Contracts sold subject to early withdrawal charges are assessed a charge equal
to 5% of the amount withdrawn for purchase payments made within a five year
period following the date the payment was received.
9
<PAGE>
PaineWebber Life Variable Annuity Account
Notes to Financial Statements (continued)
3. Federal Income Taxes
Operations of the PaineWebber Life Variable Annuity Account forms a part of the
operations of the Company which is taxed as a life insurance company under the
Internal Revenue Code. Under current law, no federal income taxes are payable
with respect to the operations of PaineWebber Life Variable Annuity Account.
4. Purchases and Sales of Investment Securities
The aggregate cost of purchases and proceeds from sales of investments were as
follows:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1994 December 31, 1993
-------------------------------------------------
Purchases Sales Purchases Sales
-------------------------------------------------
<S> <C> <C> <C> <C>
Portfolio:
Money Market $ 15,899,666 $ 9,133,295 $ 1,214,469 $ -
Government 4,371,432 656,851 325,348 22
Fixed Income 7,338,995 714,448 1,481,375 -
Global Income 15,823,091 2,218,561 3,601,991 22
Balanced 10,680,140 498,837 2,266,579 -
Asset Allocation 6,638,099 373,793 821,148 31,409
Dividend Growth 3,010,575 227,758 680,490 65
Growth 14,746,301 1,134,296 1,785,159 3,450
Aggressive Growth 12,046,789 873,741 2,808,601 80
Global Growth 19,479,978 875,645 4,290,865 22
-------------------------------------------------
$110,035,066 $16,707,225 $19,276,025 $35,070
=================================================
</TABLE>
10
<PAGE>
PaineWebber Life Variable Annuity Account
Notes to Financial Statements (continued)
5. Summary of Changes from Unit Transactions
Transactions in units were as follows:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1994 December 31, 1993
--------------------------------------------
Purchased Redeemed Purchased Redeemed
--------------------------------------------
<S> <C> <C> <C> <C>
Contracts sold subject to early
withdrawal charge
Division:
Money Market 1,972,868 1,345,459 102,878 799
Government 401,999 58,883 23,736 1,284
Fixed Income 837,699 188,712 142,899 3,065
Global Income 1,578,700 323,231 312,413 697
Balanced 988,190 85,212 192,203 3,433
Asset Allocation 629,776 48,389 68,428 3,434
Dividend Growth 273,190 26,410 61,392 -
Growth 1,650,367 246,582 158,002 358
Aggressive Growth 1,159,849 108,333 268,295 27,445
Global Growth 1,740,093 153,753 318,268 1,548
--------------------------------------------
11,232,731 2,584,964 1,648,514 42,063
============================================
Contracts sold not subject to early
withdrawal charge
Division:
Money Market 209,584 172,458 34,396 15,089
Government 56,564 10,680 11,538 1,378
Fixed Income 136,677 50,540 14,828 274
Global Income 101,415 23,688 40,206 9
Balanced 186,832 24,775 40,536 -
Asset Allocation 57,878 4,844 13,527 1,022
Dividend Growth 50,832 7,003 6,382 -
Growth 61,681 29,156 23,112 9
Aggressive Growth 126,078 27,412 43,364 795
Global Growth 133,084 28,628 66,667 9
--------------------------------------------
1,120,625 379,184 294,556 18,585
============================================
</TABLE>
11
<PAGE>
PaineWebber Life Variable Annuity Account
Notes to Financial Statements (continued)
6. Net Assets
Net assets at December 31, 1994 consisted of the following:
<TABLE>
<CAPTION>
Money Fixed
Market Government Income
Combined Division Division Division
-------------------------------------------------------
<S> <C> <C> <C> <C>
Unit transactions $112,740,237 $ 7,980,727 $ 4,053,807 $8,160,663
Accumulated net investment income 3,391,719 33,989 291,269 137,996
Net unrealized depreciation of
investments (9,420,336) - (437,066) (444,997)
-------------------------------------------------------
$106,711,620 $ 8,014,716 $ 3,908,010 $7,853,662
=======================================================
<CAPTION>
Global Asset Dividend
Income Balanced Allocation Growth
Division Division Division Division
-------------------------------------------------------
<S> <C> <C> <C> <C>
Unit transactions $ 16,976,200 $12,570,325 $ 7,048,729 $3,485,436
Accumulated net investment income
(loss) 359,527 (24,702) 728,424 8,918
Net unrealized depreciation of
investments (1,158,374) (386,020) (1,239,777) (153,553)
-------------------------------------------------------
$ 16,177,353 $12,159,603 $ 6,537,376 $3,340,801
=======================================================
<CAPTION>
Aggressive Global
Growth Growth Growth
Division Division Division
------------------------------------------
<S> <C> <C> <C>
Unit transactions $ 15,356,091 $14,116,281 $22,991,978
Accumulated net investment income
(loss) 981,004 (138,216) 1,013,510
Net unrealized depreciation of
investments (2,235,353) (365,559) (2,999,637)
------------------------------------------
$ 14,101,742 $13,612,506 $21,005,851
==========================================
</TABLE>
12
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP]
Report of Independent Auditors
The Board of Directors
PaineWebber Life Insurance Company
We have audited the accompanying balance sheets of PaineWebber Life Insurance
Company as of December 31, 1994 and 1993, and the related statements of
operations, changes in stockholder's equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PaineWebber Life Insurance
Company at December 31, 1994 and 1993, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
As discussed in Note 3 to the financial statements, in 1994 the Company changed
its method of accounting for certain investments in debt and equity securities.
/s/ Ernst & Young LLP
March 10, 1995
1
<PAGE>
PaineWebber Life Insurance Company
Balance Sheets
<TABLE>
<CAPTION>
December 31
1994 1993
---------------------------------
<S> <C> <C>
Assets
Investments:
Fixed maturities:
Held to maturity, at amortized cost $ 2,609,146 $ 1,859,238
Available for sale, at market 90,900 -
Short-term investments 19,082,582 8,697,162
---------------------------------
Total investments 21,782,628 10,556,400
Cash and cash equivalents 2,000,327 2,647,481
Accrued investment income 165,146 61,948
Assets on deposit with ceding company
(Note 6) 153,408,245 -
Deferred policy acquisition costs 15,103,072 450,598
Goodwill, less accumulated amortization
(1994 - $240,000; 1993 - $120,000) 960,000 1,080,000
Other assets 553,201 202,147
Separate account assets 106,676,646 19,471,409
---------------------------------
Total assets $300,649,265 $34,469,983
=================================
Liabilities and stockholder's equity
Liabilities:
Policy and contract claims $ 121,210 $ -
Contract deposit payable 1,294,365 1,931,767
Funds held for reinsurers on reinsurance
assumed (Note 6) 161,863,182 -
Expense allowance payable on reinsurance
assumed (Note 6) 2,439,526 -
Accounts payable and other liabilities 204,726 217,513
Separate account liabilities 106,676,646 19,471,409
---------------------------------
Total liabilities 272,599,655 21,620,689
Commitments and contingencies (Note 8)
Stockholder's equity:
Common Stock, $100 par value - 25,000
shares authorized, issued and outstanding 2,500,000 2,500,000
Additional paid-in capital 26,757,295 11,757,295
Unrealized depreciation of fixed
maturities (2,750) -
Retained earnings (deficit) (1,204,935) (1,408,001)
---------------------------------
Total stockholder's equity 28,049,610 12,849,294
---------------------------------
Total liabilities and stockholder's
equity $300,649,265 $34,469,983
=================================
</TABLE>
See accompanying notes.
2
<PAGE>
PaineWebber Life Insurance Company
Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1994 1993
----------------------------
<S> <C> <C>
Revenues:
Annuity product charges $ 1,169,708 $ 4,017
Investment income, net of related expenses 889,061 185,290
Realized loss on investments (873) -
----------------------------
2,057,896 189,307
Expenses:
Commissions 11,596,074 461,472
General expenses 4,496,350 1,324,129
Insurance taxes 294,878 142,205
Policy acquisition costs deferred (15,067,961) (452,671)
Amortization of deferred policy 415,489 2,073
acquisition costs
Amortization of goodwill 120,000 120,000
----------------------------
1,854,830 1,597,308
----------------------------
Net income (loss) $ 203,066 $(1,408,001)
============================
</TABLE>
See accompanying notes.
3
<PAGE>
PaineWebber Life Insurance Company
Statements of Changes in Stockholder's Equity
<TABLE>
<CAPTION>
Unrealized
Additional Appreciation Retained
Common Paid-In (Depreciation) Earnings
Stock Capital of Fixed (Deficit) Total
Maturities
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 $2,500,000 $ 3,889,936 $ - $ - $ 6,389,936
Net loss - - - (1,408,001) (1,408,001)
Capital contribution - 7,867,359 - - 7,867,359
-------------------------------------------------------------------------------------
Balance at December 31, 1993 2,500,000 11,757,295 - (1,408,001) 12,849,294
Cumulative effect of change in
accounting principle regarding
fixed maturity securities - - 9,320 - 9,320
Net income - - - 203,066 203,066
Unrealized depreciation of
fixed maturities - - (12,070) - (12,070)
Capital contribution - 15,000,000 - - 15,000,000
-------------------------------------------------------------------------------------
Balance at December 31, 1994 $2,500,000 $26,757,295 $ (2,750) $(1,204,935) $28,049,610
=====================================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
PaineWebber Life Insurance Company
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1994 1993
----------------------------------------
<S> <C> <C>
Operating activities
Net income (loss) $ 203,066 $ (1,408,001)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Amortization of goodwill 120,000 120,000
Net amortization of fixed maturities 40,528 51,057
Deferral of policy acquisition costs (1,464,764) (452,671)
Amortization of deferred acquisition costs 415,489 2,073
Expense allowance payable on reinsurance assumed (608,794) -
Payments to ceding companies on reinsurance assumed (2,315,377) -
Realized loss on investments 873 -
Change in operating assets and liabilities net of
reinsurance assumed:
Increase in accrued investment income (103,198) (2,362)
Increase in other assets (14,409) (202,147)
Increase (decrease) in other liabilities (650,189) 2,149,280
----------------------------------------
Net cash provided by (used in) operating activities (4,376,775) 257,229
Investing activities
Proceeds from investments sold, matured or repaid:
Fixed maturities - held to maturity 195,000 1,425,000
Fixed maturity - available for sale 20,000 -
Equity securities 62,753,284 10,293,401
----------------------------------------
62,968,284 11,718,401
Cost of investments acquired:
Fixed maturities - held to maturity (1,099,959) (204,945)
Equity securities (62,753,284) (10,293,401)
Short-term investments (10,385,420) (8,697,162)
----------------------------------------
(74,238,663) (19,195,508)
----------------------------------------
Net cash used in investing activities (11,270,379) (7,477,107)
Financing activities
Cash contribution by parent 15,000,000 7,867,359
----------------------------------------
Net cash provided by financing activities 15,000,000 7,867,359
----------------------------------------
Increase (decrease) in cash and cash equivalents (647,154) 647,481
Cash and cash equivalents at beginning of year 2,647,481 2,000,000
----------------------------------------
Cash and cash equivalents at end of year $ 2,000,327 $ 2,647,481
========================================
</TABLE>
See accompanying notes.
5
<PAGE>
PaineWebber Life Insurance Company
Notes to Financial Statements
December 31, 1994
1. Organization and Summary of Significant Accounting Policies
Organization
PaineWebber Life Insurance Company (the Company) is a wholly-owned subsidiary of
PaineWebber Group, Inc. (collectively, PaineWebber). The Company operates in
the annuity area of the life insurance business.
Investments
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Pursuant to SFAS No. 115, fixed maturity securities that the
Company has the positive intent and ability to hold to maturity are designated
as "held to maturity". Held to maturity securities are reported at cost
adjusted for amortization of premiums and discounts. Changes in the market
value of these securities, except for declines that are other than temporary,
are not reflected in the Company's financial statements. Fixed maturity
securities which may be sold are designated as "available for sale". Available
for sale securities are reported at market value and unrealized gains and losses
on these securities are included directly in stockholders' equity. Securities
that are determined to have a decline in value that is other than temporary are
written down to estimated fair value which becomes the security's new cost basis
by a charge to realized losses in the Company's statement of income. Prior to
the adoption of SFAS No. 115, all of the Company's fixed maturities were
classified as held-to-maturity.
Premiums and discounts are amortized utilizing the scientific interest method
which results in a constant yield over the securities' expected life. Realized
gains and losses are determined on the basis of specific identification of
investments.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all demand
deposits and interest-bearing accounts not related to the investment function to
be cash equivalents.
Intangible Assets
Intangible assets include the value of various insurance licenses acquired in
conjunction with the purchase of the Company. These assets are being amortized
on a straight-line basis over 10 years.
6
<PAGE>
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Deferred Policy Acquisition Costs
Commissions and other costs of acquiring new business which vary with and are
primarily related to the production of new business have been deferred. The
deferred costs are being amortized in relation to the present value of expected
gross profits. This amortization is adjusted periodically to reflect
differences in accrual and assumed gross profits.
Deferred Income Taxes
The deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax basis of assets and liabilities
using the enacted marginal tax rate. Deferred income tax expense or credits are
based on the changes in the asset or liability from period to period.
Dividend Restrictions
Prior approval of insurance regulatory authorities is required for payment of
dividends to the Company's parent which exceed an annual limitation. During
1995, the Company will be able to pay dividends to its parent of approximately
$1,898,000 without prior approval of statutory authorities.
Separate Account
Separate account assets and liabilities represent funds held for the exclusive
benefit of variable annuity contractholders. Fees are received for
administrative expenses and for assuming mortality, distribution and expense
risks. Operations of the separate account are not included in these financial
statements.
2. Fair Values of Financial Instruments
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures About
Fair Value of Financial Instruments", requires disclosure of fair value
information about financial instruments, whether or not recognized in the
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.
SFAS 107 excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
7
<PAGE>
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
2. Fair Values of Financial Instruments (continued)
The following methods and assumptions were used by the Company in estimating the
"fair value" disclosures for "financial instruments":
Cash, cash equivalents and short-term investments: The carrying amounts
reported in the balance sheet for these financial instruments approximate
their fair values.
Fixed maturities: The fair values for fixed maturities are based on quoted
market prices, where available. For fixed maturities not actively traded,
fair values are estimated using values obtained from independent pricing
services.
Separate account liabilities: Fair values for the Company's liabilities
under investment-type insurance contracts are based on cash surrender value
of the underlying contracts.
The following sets forth a comparison of the carrying values and fair values
of the Company's financial instruments subject to provisions of SFAS No.
107:
<TABLE>
<CAPTION>
December 31
1994 1993
-------------------------------- -------------------------------
Carrying Market Carrying Market
Value Value Value Value
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 2,003,327 $ 2,003,327 $ 2,647,481 $ 2,647,481
Short-term investments 19,082,582 19,082,582 8,697,162 8,697,162
Fixed maturities:
Held to maturity 2,609,146 2,530,400 1,859,238 1,899,750
Available for sale 90,900 90,900 - -
------------------------------------------------------------------
2,700,046 2,621,300 1,859,238 1,899,750
Liabilities:
Separate account liabilities 106,676,646 102,485,045 19,471,409 18,906,398
</TABLE>
3. Basis of Presentation
The financial statements differ from related statutory financial statements
principally as follows: (a) premium income on universal life and investment
products is recognized as received rather than policy charges for the cost of
issuance, policy administration charges, amortization of policy initiation fees
and surrender charges assessed; (b) acquisition costs such as commissions and
other costs related to acquiring new business are charged to current operations
as incurred rather than being deferred and amortized over the life of the
policy; (c) policy reserves on investment products use discounted methodologies
8
<PAGE>
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
3. Basis of Presentation (continued)
utilizing statutory interest rates rather than full account value; (d) a portion
of fixed maturity investments is designated as "available for sale" and valued
at fair value with unrealized appreciation/depreciation credited/charged
directly to stockholder's equity rather than value at amortized cost; (e)
deferred federal income taxes are not provided for temporary differences between
the financial statements and the tax returns; (f) certain assets designated as
"non-admitted assets" have been excluded from the balance sheet by a charge to
surplus rather than being reported as assets; (g) the asset valuation reserve,
which is in the nature of a contingency reserve for possible losses on
investments, is recorded as a liability through a charge to surplus rather than
through reduction in the carrying value of the related investments, and
recognition of realized losses in the statement of operations; (h) net realized
capital gains (losses) attributable to changes in the level of market interest
rates are deferred and amortized over the remaining life of the bonds and
mortgage loans disposed of rather than being recognized in the statement of
operations in the year of disposition; (i) assets and liabilities retain their
historical value rather than being restated to fair values, with provision for
goodwill and other intangible assets, when a change in ownership occurs; and (j)
reinsurance reserve credits are recorded as a reduction to aggregate policy
reserves rather than being recorded as reinsurance recoverable assets.
Net loss for the Company as determined in accordance with statutory accounting
practices was $5,155,000 in 1994 and $1,702,000 in 1993. Total statutory
surplus was $18,978,000 at December 31, 1994 and $9,242,000 at December 31,
1993.
4. Investments Operations
At December 31, 1994 and 1993, the amortized cost, gross unrealized gains and
losses, and estimated market value of debt securities are as follows:
Held for Investment
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1994
Bonds:
United States Government and agencies $ 2,382,302 $ - $(76,902) $ 2,305,400
State, municipal and other government 226,844 - (1,844) 225,000
------------------------------------------------------------
2,609,146 - (78,746) 2,530,400
Short-term investments:
United States Government and agencies 19,082,582 - - 19,082,582
------------------------------------------------------------
$21,691,728 $ - $(78,746) $21,612,982
============================================================
</TABLE>
9
<PAGE>
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
4. Investments Operations (continued)
Held for Investment (continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Gains Value
---------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1993
Bonds:
United States Government and agencies $ 1,517,211 $32,171 $ (1,182) $ 1,548,200
State, municipal and other government 342,027 9,523 - 351,550
---------------------------------------------------------
1,859,238 41,694 (1,182) 1,899,750
Short-term investments:
United States Government and agencies 8,697,162 - - 8,697,162
---------------------------------------------------------
$10,556,400 $41,694 $ (1,182) $10,596,912
=========================================================
</TABLE>
Available for Sale
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Gains Value
---------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1994
Bonds:
State, municipal and other government $ 93,650 $ - $ (2,750) $ 90,900
=========================================================
</TABLE>
The amortized cost and estimated market value of debt securities by contractual
maturity at December 31, 1994 are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Held for Investment Available for Sale
------------------------------ ------------------------
Amortized Market Amortized Market
Cost Value Cost Value
------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $19,134,431 $19,133,082 $ - $ -
Due after one year through five years 2,081,802 2,014,900 - -
Due after five years through ten years 475,495 465,000 93,650 90,900
Due after ten years - - - -
------------------------------------------------------------
$21,691,728 $21,612,982 $93,650 $90,900
============================================================
</TABLE>
10
<PAGE>
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
4. Investments Operations (continued)
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The cumulative effect of
this change in accounting method was to increase stockholder's equity by $9,320
at January 1, 1994. The change in unrealized gain or loss included in
stockholder's equity from January 1, 1994 to December 31, 1994 amounted to
$12,070 of depreciation.
Major categories of net investment income are as follows:
<TABLE>
<CAPTION>
1994 1993
--------------------------
<S> <C> <C>
Fixed maturities:
Held for investment $ 131,107 $136,137
Available for sale 8,230 -
Equity securities 167,107 93,285
Short-term investments 680,210 28,998
Other 16,148 9,216
--------------------------
1,002,802 267,636
Less investment expenses 113,741 82,346
--------------------------
$ 889,061 $185,290
==========================
</TABLE>
At December 31, 1994, investments with an aggregate carrying value of $7,165,291
(1993 - $2,976,602) were on deposit with regulatory authorities or were
restrictively held in bank custodial accounts for the benefit of such regulatory
authorities as required by statute.
5. Federal Income Taxes
For federal income tax purposes, the Company files a separate federal income tax
return. At December 31, 1994, the Company has net operating loss carryforwards
for income tax purposes of approximately $9,700,000 which expire through 2010.
The difference between this operating loss and the loss recorded for financial
reporting purposes is due primarily to deferred policy acquisition costs,
separate account liabilities and reinsurance agreements. A valuation allowance
has been recognized to offset the net deferred tax asset.
11
<PAGE>
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
5. Federal Income Taxes (continued)
The tax effect of temporary differences giving rise to the Company's deferred
income taxes is as follows:
<TABLE>
<CAPTION>
December 31
1994 1993
------------------------
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs $4,782,755 $ 82,594
Fixed maturity discounts 26,442 43,510
Other 103,540 6,586
------------------------
4,912,737 132,690
Deferred tax assets:
Separate account liabilities - 197,754
Net operating loss carryover 3,384,647 349,671
Reinsurance 1,938,748 -
Other 457,787 -
5,781,182 547,425
------------------------
Valuation allowance (868,445) (414,735)
------------------------
Net deferred tax $ - $ -
========================
</TABLE>
6. Reinsurance
During 1994, the Company entered into reinsurance agreements with various
insurance companies to assume a specified percentage of their variable annuity
contracts. Under these agreements, the Company receives from the ceding company
and holds as a liability the account balance of the reinsured contracts. The
Company in return pays to the ceding companies an expense allowance for
commissions and other expenses associated with the reinsured contracts. In
addition, the Company pays or receives an amount equal to the change in the
statutory reserve held by the ceding companies on the reinsured contracts,
adjusted for investment earnings credits. For the year ended December 31, 1994,
the Company recorded annuity product charges of $682,484 related to contracts
assumed under these agreements.
During 1993, the Company entered into a reinsurance agreement with American
Republic Insurance Company (American Republic) (see Note 7) to cede a specified
percentage of the risks associated with the variable annuity contracts. Under
this agreement, the Company pays American Republic the reinsurance percentage of
charges and deductions collected on the reinsured policies. American Republic
in return pays the Company an expense allowance for certain developmental, new
business and maintenance costs on the reinsured contracts. The Company has also
entered into a separate reinsurance agreement to reinsure the enhanced death
benefit provision of the contracts. During 1994 and 1993, the Company incurred
reinsurance premiums of $839,346 and $513 and had benefit recoveries of $25,043
and $0, respectively, in connection with these agreements.
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<PAGE>
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
7. Service Agreements With Related Parties
The Company has a third-party and corporate administrative agreements with
American Republic to provide services for new business processing and account
maintenance of the variable annuity contracts. The Company paid American
Republic $724,000 and $570,000 for these services in 1994 and 1993,
respectively.
Commissions relating to the sale of variable annuity contacts are paid to an
affiliated company of PaineWebber.
8. Commitments and Contingencies
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. Potential obligations, if any, are not presently
determinable by the Company; accordingly, no accrual has been made on these
financial statements.
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