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File Nos. 33-12000 and 811-5013
As filed with the Securities and Exchange Commission on April 28, 1999
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. __ [ ]
Post-Effective Amendment No. 16 [x]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 17 [x]
___________________________________
United Investors Annuity Variable Account
(Exact Name of Registrant)
United Investors Life Insurance Company
(Name of Depositor)
2001 Third Avenue South
Birmingham, Alabama 35233
(Address of Depositor's Principal Executive Office)
Depositor's Telephone Number, including Area Code: (205) 325-4300
John H. Livingston, Esquire
United Investors Life Insurance Company
2001 Third Avenue South
Birmingham, Alabama 35233
(Name and Address of Agent for Service)
Copy to:
Frederick R. Bellamy, Esquire
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2415
____________________________________________
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[x] on April 30, 1999 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(l) of Rule 485
[ ] on pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following box:
[ ] this Post-Effective Amendment designates a new effective date for a
previously filed Post-Effective Amendment.
Title of Securities Being Registered: Variable Annuity Policies
<PAGE>
Prospectus
May 1, 1999
Please read this prospectus carefully before investing, and keep it for
future reference. It contains important information about the Advantage II SM
variable annuity policy.
To learn more about the policy, you may want to look at the Statement of
Additional Information dated May 1, 1999 (known as the "SAI"). For a free copy
of the SAI, contact us at:
United Investors Life Insurance Co.
Variable Products Division
P. O. Box 156
Birmingham, Alabama 35201-0156
Telephone: (205) 325-4300
United Investors has filed the SAI with the U.S. Securities and Exchange
Commission (the "SEC") and has incorporated it by reference into this
prospectus. The SAI's table of contents appears on page 28 of this prospectus.
The SEC maintains an Internet website (http://www.sec.gov) that contains the
SAI, material incorporated by reference, and other information.
ADVANTAGE II SM
VARIABLE ANNUITY
DEFERRED VARIABLE ANNUITY POLICY
issued by
United Investors Life Insurance Company
through
United Investors Annuity Variable Account
The policy has 12 funding choices--one fixed account (paying a guaranteed
minimum fixed rate of interest) and eleven variable investment divisions which
invest in the following mutual fund portfolios of Target/United Funds, Inc.:
. Asset Strategy Portfolio
. Balanced Portfolio
. Bond Portfolio
. Growth Portfolio
. High Income Portfolio
. Income Portfolio
. International Portfolio
. Limited-Term Bond Portfolio
. Money Market Portfolio
. Science and Technology Portfolio
. Small Cap Portfolio
Variable annuity policies involve certain risks, and you may lose some or
all of your investment.
. We do not guarantee how any of the investment divisions will perform.
. The policy is not a deposit or obligation of any bank, and no bank endorses
or guarantees the policy.
. Neither the U.S. Government nor any Federal agency insures your investment in
the policy.
Neither the SEC nor any state securities commission has approved or disapproved
these securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
U-1053, Ed. 5-99
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Table of Contents
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<TABLE>
<S> <C>
Glossary.................................................................... iv
Summary..................................................................... 1
The Policy................................................................ 1
Annuity Payments.......................................................... 1
Purchasing the Policy..................................................... 1
Funding Choices........................................................... 2
Charges and Deductions.................................................... 2
Taxes..................................................................... 4
Surrender and Partial Withdrawals......................................... 4
Death Benefit............................................................. 4
Other Information......................................................... 5
Inquiries................................................................. 5
United Investors Life Insurance Company..................................... 6
Preparing for Year 2000................................................... 6
Published Ratings......................................................... 7
United Investors Annuity Variable Account................................... 7
Target/United Funds, Inc.................................................. 7
Fund Management and Fees.................................................. 9
Fixed Account............................................................... 10
The Policy.................................................................. 10
Issuance of a Policy...................................................... 10
Purchase Payments......................................................... 10
Allocation of Purchase Payments........................................... 11
Policy Value.............................................................. 11
Variable Account Value.................................................. 11
Fixed Account Value..................................................... 12
Surrender and Partial Withdrawals......................................... 12
Withdrawals............................................................. 12
Automatic Partial Withdrawals........................................... 13
Surrender............................................................... 13
Restrictions Under the Texas ORP and Section 403(b) Plans............... 13
Restrictions Under Other Qualified Policies............................. 14
Transfers................................................................. 14
Dollar Cost Averaging..................................................... 14
Death Benefit............................................................. 15
Required Distributions.................................................... 15
"Free Look" Period........................................................ 16
Charges and Deductions...................................................... 16
Annual Deduction.......................................................... 17
Sales Charge............................................................ 17
Annual Policy Fee....................................................... 17
Withdrawal Charge......................................................... 17
Waiver of Withdrawal Charges Rider........................................ 18
Mortality and Expense Risk Charge......................................... 18
Transaction Charge........................................................ 19
Premium Taxes............................................................. 19
Federal Taxes............................................................. 19
</TABLE>
ii
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<TABLE>
<S> <C>
Fund Expenses............................................................. 19
Older Policies............................................................ 19
Reduction in Charges for Certain Groups................................... 19
Annuity Payments............................................................ 20
Election of Annuity Payment Method........................................ 20
Retirement Date........................................................... 20
Annuity Payment Methods................................................... 20
Distribution of the Policies................................................ 21
Federal Tax Matters......................................................... 22
Historical Performance Data................................................. 25
Voting Rights............................................................... 26
Legal Proceedings........................................................... 26
Financial Statements........................................................ 26
Condensed Financial Information............................................. 27
Statement of Additional Information......................................... 28
</TABLE>
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Glossary
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<TABLE>
<S> <C>
Annuitant The annuitant is the individual whose life expectancy
determines the size of annuity payments and whose actual
lifetime may determine the duration of annuity payments.
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Beneficiary The beneficiary is the individual or individuals to whom the
death benefit is paid if the annuitant dies before the
retirement date.
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Business Day A business day is Monday through Friday, except for any
customary U.S. business holiday when the New York Stock
Exchange is not open for trading. Those holidays currently are
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.
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Joint Annuitant The joint annuitant, if any, is a second individual whose
joint life expectancy with the annuitant determines the size
of annuity payments and whose actual lifetime with the
annuitant may determine the duration of annuity payments.
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Owner's Designated The owner's designated beneficiary (a joint owner, if any, or
Beneficiary the beneficiary named in the policy) is the individual who
becomes owner of the policy upon the death of an owner.
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Policy Year A policy year is a year that starts on the policy's effective
date or on a policy anniversary.
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Retirement Date The retirement date is the date on which annuity payments are
to start.
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We, Us, Our We are United Investors Life Insurance Company.
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You, Your You are the policy owner.
</TABLE>
iv
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Summary
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This is a summary of some of the more important points that you should know
and consider before purchasing the Advantage II variable annuity policy.
The Policy
The Advantage II variable annuity policy lets you invest on a tax-deferred
basis for your retirement or other long-term purposes. Tax deferral allows the
entire amount you have invested to remain in the policy where it can continue
to produce an investment return. Therefore, your money could grow faster than
in a comparable taxable investment where current income taxes would be due each
year.
You may divide your Advantage II policy value among the fixed account and
eleven variable investment divisions which invest in portfolios of
Target/United Funds, Inc. We guarantee the principal and a minimum interest
rate you will receive from the fixed account. However, the value of what you
allocate to the eleven variable investment divisions is not guaranteed.
Instead, your investment in the variable investment divisions will go up or
down with the performance of the particular Target/United Funds portfolios you
select. You may lose money on investments in the variable investment divisions.
Like most annuity policies, different rules apply to the Advantage II policy
before and after the retirement date you select for your policy. Before the
retirement date, you may invest more money in your policy. After the retirement
date, you will receive one or more annuity payments. The amount of money you
accumulate in your policy before the retirement date has a major effect on the
size of the payments you receive after the retirement date.
Annuity Payments
On the retirement date, you may apply your policy value to receive fixed
annuity payments, variable annuity payments or a combination. We guarantee that
fixed annuity payments will remain constant throughout the payment period.
However, the amount of each variable annuity payment will go up or down with
the performance of the particular investment divisions you select.
You may choose among the following ways of receiving your annuity payments:
1. Payments for the lifetime of an individual you select (the annuitant).
2. Payments for the lifetime of the survivor of two individuals you select (the
annuitant and joint annuitant).
3. Payments for the lifetime of an individual (the annuitant), but guaranteed
to continue for at least 10 or 20 years.
Other annuity payment methods are available with our written consent.
Purchasing the Policy
You can purchase a "qualified" policy (one that qualifies for favorable
Federal income tax treatment), or you can purchase a policy on a non-qualified
tax basis. For a non-qualified policy, the minimum initial investment is
$5,000. For a qualified policy, the initial investment must be at least $1,200,
although we will accept installments of at least $100 per month through a bank
draft authorization or a pre-approved group payment method. You can make more
investments of at least $100 each before the retirement date.
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Funding Choices
You may allocate each new investment (and your existing policy value) among
variable investment divisions which invest in the following eleven portfolios
of Target/United Funds, Inc.:
.Asset Strategy Portfolio
.Balanced Portfolio
.Bond Portfolio
.Growth Portfolio
.High Income Portfolio
.Income Portfolio
.International Portfolio
.Limited-Term Bond Portfolio
.Money Market Portfolio
.Science and Technology Portfolio
.Small Cap Portfolio
In most states, you may also allocate purchase payments and your policy
value to the fixed account. We guarantee your fixed account allocation will
earn at least 4% interest per year.
Charges and Deductions
We do not deduct any charges from your purchase payments when received,
except for any premium taxes charged in your location.
We deduct a sales charge of 8.5% of each purchase payment (taken from your
policy value in ten annual installments of 0.85% each). We also deduct $50 a
year from your policy value for certain administrative expenses. These amounts
are deducted on your policy anniversary.
If you surrender your policy or make a cash withdrawal, we may deduct a
withdrawal charge. This withdrawal charge is 8% of purchase payments withdrawn
that are less than one year old. It decreases by 1% for each additional year
since we received the purchase payment deemed to be withdrawn. There is no
withdrawal charge on purchase payments eight or more years old. We also do not
deduct a withdrawal charge on the free withdrawal amount, which is the greater
of:
(a) 10% of the total purchase payments you have invested in the policy; or
(b) 10% of your policy value at the time the withdrawal is made.
The withdrawal charge also applies at the retirement date. In addition, we
deduct a $20 transaction charge for each withdrawal in excess of four in any
one policy year.
We also deduct a daily charge from the variable investment divisions to
compensate us for certain mortality and expense risks.
This charge is at an effective annual rate of 0.90% of assets. In addition,
investment management fees, 12b-1 fees, and other expenses are deducted from
each portfolio of Target/United Funds, Inc.
See the tables below and on the following page for a summary of these
charges and deductions. (We may also deduct premium tax charges.)
Policy Owner Transaction Expenses:
<TABLE>
<S> <C>
Deferred Sales Charge (% of each
purchase payment, deducted at
0.85% per year)................ 8.50%
Transaction Charge (for each
withdrawal in excess of 4 per
policy year)................... $20.00
</TABLE>
Withdrawal Charge (% of purchase payment being withdrawn):
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Years <1 1 2 3 4 5 6 7 8+
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% 8 7 6 5 4 3 2 1 0
</TABLE>
<TABLE>
<S> <C>
Annual Policy Fee................ $50.00
Variable Account Annual Expenses:
Mortality and Expense Risk Fee... 0.90%
</TABLE>
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Target/United Funds, Inc. Annual Expenses(/1/)
(% of average daily net assets)
<TABLE>
<CAPTION>
Management 12b-1 Other Total Portfolio
Portfolio Fee Fees(/2/) Expenses(/3/) Expenses
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<S> <C> <C> <C> <C>
Asset Strategy 0.79% 0.25% 0.19% 1.23%
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Balanced 0.59% 0.25% 0.06% 0.90%
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Bond 0.52% 0.25% 0.06% 0.83%
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Growth 0.69% 0.25% 0.02% 0.96%
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High Income 0.64% 0.25% 0.05% 0.94%
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Income 0.69% 0.25% 0.03% 0.97%
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International 0.79% 0.25% 0.15% 1.19%
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Limited-Term Bond 0.54% 0.25% 0.17% 0.96%
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Money Market 0.49% 0.25% 0.09% 0.83%
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Science and Technology 0.69% 0.25% 0.12% 1.06%
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Small Cap 0.84% 0.25% 0.04% 1.13%
</TABLE>
(/1/) These expenses are deducted directly from the assets of the Target/United
Funds, Inc. portfolios and therefore reduce their net asset value. Waddell &
Reed, Inc., the investment adviser of Target/United Funds, Inc., supplied the
above information, and we have not independently verified it. See the
Target/United Funds, Inc. prospectus for more complete information.
(/2/) Each portfolio pays a service fee to Waddell & Reed, Inc., the principal
underwriter of Target/United Funds, Inc. and the policy, of no more than 0.25%
of the portfolio's average annual net assets. The fee reimburses Waddell &
Reed, Inc. for arranging to provide personal services to policy owners and to
maintain their policies. This is a Service Plan as permitted by Rule 12b-1
under the Investment Company Act of 1940.
(/3/) Other Expenses are those incurred for the year ended December 31, 1998.
Examples. The following tables give examples of expenses you might pay, on a
$1,000 investment, assuming 5% annual return on assets.
- - If you surrender or annuitize your policy at the end of the applicable time
period, you would pay the following expenses:
<TABLE>
<CAPTION>
Investment Division 1 year 3 years 5 years 10 years
------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Asset Strategy $91 $134 $178 $318
Balanced $88 $124 $162 $285
Bond $87 $122 $158 $278
Growth $89 $126 $165 $291
High Income $88 $125 $164 $289
Income $89 $126 $165 $292
International $91 $133 $176 $314
Limited-Term Bond $89 $126 $165 $291
Money Market $87 $122 $158 $278
Science and Technology $90 $129 $170 $301
Small Cap $90 $131 $173 $308
</TABLE>
3
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- - If you do not surrender or annuitize your policy at the end of the applicable
time period, you would pay the following expenses:
<TABLE>
<CAPTION>
Investment Division 1 year 3 years 5 years 10 years
------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Asset Strategy $21 $84 $148 $318
Balanced $18 $74 $132 $285
Bond $17 $72 $128 $278
Growth $19 $76 $135 $291
High Income $18 $75 $134 $289
Income $19 $76 $135 $292
International $21 $83 $146 $314
Limited-Term Bond $19 $76 $135 $291
Money Market $17 $72 $128 $278
Science and Technology $20 $79 $140 $301
Small Cap $20 $81 $143 $308
</TABLE>
These examples reflect the $50 annual policy fee as a charge of 0.84% of
assets in the variable investment divisions. These examples do not reflect any
premium tax charges.
These examples are not intended to represent past or future expenses. Actual
expenses may be greater or less than those shown. The assumed 5% return is
purely hypothetical. Actual returns (investment performance) will vary, and may
be more or less than 5%.
Taxes
You are generally required to pay taxes on amounts earned in a non-qualified
policy only when they are withdrawn. When you take distributions or withdrawals
from your policy, taxable earnings are considered to be paid out first,
followed by your investment in the policy.
You are generally required to pay taxes on all amounts withdrawn from a
qualified policy because purchase payments were made with before-tax dollars.
Distributions from the policy are taxed as ordinary income. You may owe a
10% Federal tax penalty for distributions or withdrawals taken before age 59
1/2.
Surrender and Partial Withdrawals
You may surrender the policy before the retirement date for its policy value
less any withdrawal charge and any premium tax charge.
You may make a partial withdrawal of cash from your policy value. The
withdrawal must be at least $250, and the policy value remaining after the
withdrawal must be at least $2,000.
You cannot surrender the policy or make a withdrawal after the retirement
date.
Death Benefit
The policy provides a death benefit if the annuitant dies before the
retirement date. We will pay the death benefit in a lump sum or as a series of
annuity payments.
The death benefit will always be at least the greater of:
(a) the total purchase payments you have invested in the policy (less any
withdrawals you have made and withdrawal charges and transaction charges);
or
(b) your policy value at the time the death benefit is paid.
In some states, if the annuitant dies before age 75, we will enhance the
death benefit to be the greatest of (a) above, (b) above, or:
(c) the greater of your policy value on its eighth or sixteenth anniversary
date, plus any purchase payments made since then, less any withdrawals you
have made, and withdrawal charges and transaction charges you have incurred
since then.
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Other Information
Free Look: You may cancel the policy by returning it within 10 days after
you receive it. When we receive the returned policy, we will cancel it and
refund the greater of your policy value or your purchase payments. During this
"free look" period, purchase payments that were allocated to any variable
investment division are held in the money market investment division. (The
"free look" period may be longer in some states.)
Automatic Partial Withdrawals: You may arrange for automatic partial
withdrawals of the same dollar amount to be made every month, three months, six
months, or twelve months. Automatic partial withdrawals cannot exceed the free
withdrawal amount in any one policy year. Automatic partial withdrawals are not
subject to the $250 minimum amount, or to the transaction charge for more than
four withdrawals in any one policy year. These withdrawals may be taxable, and
you may also incur a 10% Federal tax penalty before age 59 1/2.
Waiver of Withdrawal Charges Rider: If your policy includes the waiver of
withdrawal charges rider, we will waive withdrawal charges under certain
conditions if the annuitant becomes confined in a qualified nursing home or
qualified hospital.
Transfers: Before the retirement date, you may transfer all or part of your
policy value among the 12 funding choices. However, you may transfer out of the
fixed account only once each policy year. Other restrictions apply, especially
to fixed account transfers.
After the retirement date, the annuitant may reallocate his or her annuity
interest among the variable investment divisions or from the variable
investment divisions to the fixed account once each policy year. However, after
the retirement date, transfers from the fixed account to the variable
investment divisions are not permitted.
Dollar Cost Averaging: Before the retirement date, you may have automatic
monthly transfers made from the money market investment division to as many as
four of the other variable investment divisions. Certain minimums and other
restrictions apply.
Financial Information: Condensed financial information for the variable
investment divisions begins at page 27 of this prospectus. Our financial
statements, and full financial statements for the variable investment
divisions, are in the Statement of Additional Information.
Inquiries
If you have questions about your policy or need to make changes, contact
your financial representative who sold you the policy, or contact us at:
United Investors Life Insurance Company
Variable Products Division
P. O. Box 156
Birmingham, Alabama 35201-0156
Telephone: (205) 325-4300
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The policy is not available in all states. This prospectus does not offer to
sell securities in any jurisdiction where they cannot be lawfully sold. You
should rely only on the information contained in this prospectus or that we
have referred you to. We have not authorized anyone to provide you with
information that is different.
NOTE: Because this is a summary, it does not contain all the information
that may be important to you. You should read this entire prospectus and the
Target/United Funds, Inc. prospectus carefully before investing. For qualified
policies, the requirements of a particular retirement plan, an endorsement to
the policy, or limitations or penalties imposed by the Internal Revenue Code
may impose limits or restrictions on purchase payments, surrenders,
distributions or benefits, or on other provisions of the policy. This
prospectus does not describe these limitations or restrictions. (See "Federal
Tax Matters.")
5
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United Investors Life Insurance Company
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We were incorporated in the State of Missouri on August 17, 1981, as the
successor to a company of the same name established in Missouri on September
27, 1961. We are a stock life insurance company, indirectly owned by Torchmark
Corporation. Our principal business is selling life insurance and annuity
contracts. We are admitted to do business in the District of Columbia and all
states except New York.
Preparing for Year 2000
The new millennium poses a significant concern to all businesses which use
computer systems or electronic data in their operations. This concern arises
because these organizations have existing computer systems and programs that
cannot always identify a proper date. For many years, programs were written
using a two digit code to represent a year. At the beginning of the year 2000,
more digits are needed to accurately determine the date in these programs.
Without addressing this issue, many computer programs could fail or produce
erroneous results. Additionally, companies which communicate electronically
with other businesses or which rely on other businesses for services are
exposed to risk of failure by the electronic devices and computer systems of
those other entities to the extent they are not Year 2000 compliant. The
potential failure of these systems creates considerable uncertainty and could
potentially adversely affect the ongoing operations and stability of a
business.
We are exposed to these risks should our computer systems fail due to date-
related problems. We also rely on a number of third party businesses and
governmental agencies that we either communicate electronically with or depend
on for services in conducting our business. These institutions include but are
not limited to banks, financial institutions, telecommunication companies,
utilities, mail delivery organizations, and a variety of governmental agencies.
If our computer systems or the systems of our third-party business partners are
not compliant, we may be exposed to considerable risks, including business
interruption, loss of revenue, increased expense, loss of policyholders, and
litigation.
To reduce our business risk to an acceptable level, we have established a
project plan to insure that our business-critical computer systems will be Year
2000 compliant. This plan also addresses third-party compliance issues. Under
the direction of executive management, objectives and timetables have been set
forth to achieve compliance. Progress toward achieving those objectives is
constantly monitored. We expect the entire project, including all Year 2000
testing activities, to be completed during 1999.
We remain on schedule to meet all of our Year 2000 compliance requirements.
All known required software changes were completed in 1998, and the related
testing is in process with plans for completion in 1999. With regard to third
party concerns, we are:
1. confirming with our software vendors the Year 2000 readiness of
purchased software packages;
2. verifying the Year 2000 compliance status of our financial business
partners' computer and data communications systems to insure readiness,
including data interface testing with third parties; and
3. evaluating all of our electronic operational systems (telephones,
security, utility, environmental) for Year 2000 compliance.
While we are making every effort to verify the compliance of third parties, no
assurances as to the compliance of their computer systems can be given.
We have primarily used our internal staff to complete our Year 2000 project.
Other than completion of software testing, all significant Year 2000 project
milestones for internal computer systems have been completed. Confirmation of
third party compliance and electronic data interface testing with third parties
is continuing with completion expected during 1999. We have spent $130,000 on
our Year 2000 project activities
6
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to date, including internal programming costs, outside contractors, and
replacement costs. These costs have been expensed as incurred. Total project
cost is expected to be approximately $150,000.
Year 2000 contingency plans are being developed for critical risk areas.
Management is establishing and documenting contingency plans for most critical
systems and interfaces with business partners within each individual's
responsibility. Such contingency plans include possible manual operation
efforts, staff adjustments, outside services, and alternative procedures. These
contingency plans will be maintained well into 2000.
Published Ratings
We may publish (in advertisements, sales literature, and reports to policy
owners) the ratings and other information assigned to us by one or more
independent insurance industry analysts or rating organizations such as A. M.
Best Company, Standard & Poor's Corporation, and Weiss Research, Inc. These
ratings reflect the organization's current opinion of an insurance company's
financial strength and operating performance in comparison to the norms for the
insurance industry; they do not reflect the strength, performance, risk, or
safety (or lack thereof) of the variable investment divisions. The claims-
paying ability rating as measured by Standard & Poor's is an opinion of an
operating insurance company's financial capacity to meet its obligations under
its outstanding insurance and annuity policies.
United Investors Annuity Variable Account
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The variable investment divisions are "sub-accounts" or divisions of the
United Investors Annuity Variable Account (the "Variable Account"). We
established the Variable Account as a segregated asset account on December 8,
1981 and modified it on January 5, 1987. The Variable Account will receive and
invest the purchase payments allocated to the variable investment divisions.
Our Variable Account is currently divided into eleven investment divisions.
Each division invests exclusively in shares of a single portfolio of
Target/United Funds, Inc. Income, gains and losses arising from the assets of
each investment division are credited to or charged against that division
without regard to income, gains or losses from any other investment division of
the Variable Account or arising out of any other business we may conduct.
The assets in the Variable Account are our property. However, the assets
allocated to the variable investment divisions under the policy are not
chargeable with liabilities arising out of any other business that we may
conduct.
The Variable Account is registered with the SEC as a unit investment trust
under the Investment Company Act of 1940. It meets the definition of a
"separate account" under the Federal securities law. However, the SEC does not
supervise the management or investment practices or policies of the Variable
Account or us.
Target/United Funds, Inc.
The Variable Account invests in shares of Target/United Funds, Inc., a
mutual fund with the following separate investment portfolios:
1. Asset Strategy Portfolio;
2. Balanced Portfolio;
3. Bond Portfolio;
4. Growth Portfolio;
5. High Income Portfolio;
6. Income Portfolio;
7. International Portfolio;
8. Limited-Term Bond Portfolio;
9. Money Market Portfolio;
10. Science and Technology Portfolio; and
11. Small Cap Portfolio.
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The assets of each portfolio of Target/United Funds, Inc. are separate from
the assets of the other portfolios. Thus, each portfolio operates separately,
and the income, gains, or losses of one portfolio have no effect on the
investment performance of any other portfolio.
Target/United Funds, Inc. is designed to provide an investment vehicle for
variable annuity and variable life insurance contracts issued by various
insurance companies. For more information about the risks associated with the
use of the same funding vehicle for both variable annuity and variable life
insurance contracts of various insurance companies, see the Target/United
Funds, Inc. prospectus.
The investment objectives and policies of each portfolio are summarized
below. There is no assurance that any of the portfolios will achieve their
stated objectives. More detailed information, including a description of risks,
is in the Target/United Funds, Inc. prospectus, which accompanies this
prospectus.
<TABLE>
<CAPTION>
Portfolio Investment Objective and Certain Policies
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<C> <S>
Asset Strategy The Asset Strategy Portfolio seeks high total return over the
long-term. It seeks to achieve its goal by allocating its
assets among stocks, bonds and short-term instruments, both in
the United States and abroad.
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Balanced The Balanced Portfolio seeks as a primary goal, current
income, with a secondary goal of long-term appreciation of
capital. It invests primarily in a mix of stocks, fixed-income
securities and cash, depending on market conditions.
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Bond The Bond Portfolio seeks a reasonable return with more
emphasis on preservation of capital. It seeks to achieve its
goal by investing primarily in domestic debt securities,
usually of investment grade.
- -------------------------------------------------------------------------------
Growth The Growth Portfolio seeks capital growth, with a secondary
goal of current income. It seeks to achieve its goal by
investing primarily in common stocks, or securities
convertible into common stocks, of U.S. and foreign companies.
- -------------------------------------------------------------------------------
High Income The High Income Portfolio seeks as a primary goal, high
current income with a secondary goal of capital growth. It
seeks to achieve its goals by investing primarily in high-
yield, high-risk, fixed-income securities of U.S. and foreign
issuers, the risks of which are consistent with the
Portfolio's goals.
- -------------------------------------------------------------------------------
Income The Income Portfolio seeks maintenance of current income,
subject to market conditions, with a secondary goal of capital
growth. It seeks to achieve its goals by investing primarily
in common stocks of large U.S. and foreign companies that have
a record of paying regular dividends on common stock or have
the potential for capital appreciation, or are expected to
resist market decline.
- -------------------------------------------------------------------------------
International The International Portfolio seeks as a primary goal, long-term
appreciation of capital, with a secondary goal of current
income. It seeks to achieve its goals by investing primarily
in common stocks, or securities convertible into or
exchangeable for common stocks, of foreign companies that may
have the potential for long-term growth.
- -------------------------------------------------------------------------------
Limited-Term The Limited-Term Bond Portfolio seeks a high level of current
Bond income consistent with preservation of capital. It seeks to
achieve its goal by investing primarily in investment-grade
debt securities of U.S. issuers, including U.S. Government
securities.
- -------------------------------------------------------------------------------
Money Market The Money Market Portfolio seeks current income consistent
with stability of principal. It seeks to achieve its goal by
investing in U.S. dollar-denominated high quality money market
obligations and instruments.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Portfolio Investment Objective and Certain Policies
- -------------------------------------------------------------------------------
<C> <S>
Science and The Science and Technology Portfolio seeks long-term capital
Technology growth. It seeks to achieve its goals by concentrating its
investments primarily in the common stock of science and
technology securities of U.S. and foreign companies.
- -------------------------------------------------------------------------------
Small Cap The Small Cap Portfolio seeks capital growth. It seeks to achieve
its goal by investing primarily in common stocks, or securities
convertible into the common stocks, of companies that are
relatively new or unseasoned, companies in their early stages of
development, or smaller companies positioned in new or in
emerging industries where the opportunity for rapid growth is
above average.
</TABLE>
Fund Management and Fees
Waddell & Reed Investment Management Company, the manager of Target/United
Funds, Inc., provides investment advisory services to its portfolios. The
manager is a wholly-owned subsidiary of Waddell & Reed, Inc., which is a
wholly-owned subsidiary of Waddell & Reed Financial Services, Inc., a holding
company. Waddell & Reed Financial Services, Inc. is a wholly-owned subsidiary
of Waddell & Reed Financial, Inc., a publicly held company.
The manager provides investment advice to and supervises investments of a
number of mutual funds. The manager maintains a large staff of experienced
investment personnel and a full complement of related support facilities. Each
Target/United Funds portfolio pays the manager a fee for managing its
investments. The fee consists of two elements:
(i) a specific fee computed each day on the portfolio's net asset value at
the following annual rates; and
<TABLE>
<CAPTION>
Portfolio Specific Fee (%)
--------- ----------------
<S> <C>
Asset Strategy............................................. 0.30%
Balanced................................................... 0.10%
Bond....................................................... 0.03%
Growth..................................................... 0.20%
High Income................................................ 0.15%
Income..................................................... 0.20%
International.............................................. 0.30%
Limited-Term Bond.......................................... 0.05%
Money Market............................................... 0.00%
Science and Technology..................................... 0.20%
Small Cap.................................................. 0.35%
</TABLE>
(ii) the portfolio's proportionate share of a base fee computed each day on
the combined net asset values of all the portfolios at the following annual
rates:
<TABLE>
<CAPTION>
Group Net Asset
Level ($ millions) Base Fee (%)
------------------ ------------
<S> <C>
< $750.......................................................... 0.51%
$750-$1,500..................................................... 0.49%
$1,500-$2,250................................................... 0.47%
> $2,250........................................................ 0.45%
</TABLE>
The base fee is computed on the combined net asset value of all eleven
portfolios of Target/ United Funds, Inc. For 1998, the base fee rate was
0.49%.
A proposal is outstanding to change the investment management fees for each
portfolio. See the Target/United Funds, Inc. prospectus for complete details.
9
<PAGE>
Fixed Account
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The funding choice guaranteeing your principal and a minimum fixed rate of
interest is called the "fixed account." It is not registered under the
Securities Act of 1933, and it is not registered as an investment company under
the Investment Company Act of 1940. Accordingly, neither the fixed account nor
any interests therein are subject to the provisions or restrictions of these
Federal securities laws, and the disclosure regarding the fixed account has not
been reviewed by the staff of the SEC.
The fixed account is a part of our general account, which includes all of
our assets other than those in any separate account. We guarantee that we will
credit interest at a rate of not less than 4% per year to investment amounts
allocated to the fixed account. We may credit interest at a rate in excess of
4% per year, but any excess interest credited will be determined in our sole
discretion. The policy owner assumes the risk that interest credited to the
fixed account may not exceed 4% per year. The fixed account may not be
available in all states.
As the policy owner, you determine the allocation of policy value to the
fixed account. Before the retirement date, you may transfer all or part of the
values held in the fixed account to one or more of the variable investment
divisions once per policy year. After the retirement date, transfers out of the
fixed account are not allowed. After the retirement date, values in the
variable investment divisions may be transferred to the fixed account only once
per policy year. (See "Transfers.")
The Policy
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The policy is a deferred variable annuity. Your rights and benefits as owner
of the policy are described below and in the policy. However, we reserve the
right to modify the policy to comply with any law or regulation, or to give you
the benefit of any law or regulation, where permitted by state law.
Issuance of a Policy
If you wish to purchase a policy, you must complete an application and send
it to our home office. We will generally accept your application if it conforms
to our requirements, but we reserve the right to reject any application or
purchase payment. If the application can be accepted in the form received, the
initial purchase payments will be applied within two business days after the
latter of receipt of the application or receipt of the initial purchase
payment. If the initial purchase payment cannot be applied within five business
days after receipt because the application is incomplete, we will contact you
with an explanation for the delay. Your initial purchase payment will be
returned at that time unless you consent to our retaining and applying it as
soon as the remaining application requirements are met. Both you (the policy
owner) and the annuitant (if different) must be less than 85 1/2 years old when
you purchase a policy. The policy will only become effective when we accept
your application.
Purchase Payments
The initial purchase payment for non-qualified policies must be at least
$5,000. For qualified policies, the initial purchase payment must be at least
$1,200. Additional purchase payments may be in amounts of $100 or more. As an
exception for qualified policies, if purchase payments will be made by means of
a bank draft authorization or a group payment method approved in advance by us,
we will accept installments of $100 per month for the first year.
If you make no purchase payments during a 24-month period and your previous
purchase payments total less than $2,000, we have the right to cancel your
policy by paying you the policy value in a lump sum, after a 30-day notice,
unless during that time you make an additional purchase payment.
10
<PAGE>
Allocation of Purchase Payments
You determine in the application how the initial purchase payment will be
allocated among the variable investment divisions and the fixed account. You
may use any whole percentage to allocate your purchase payments, from 0% to
100%.
Between the date that we receive the initial purchase payment and your
policy's effective date, we will credit interest on the purchase payment as if
it were invested in the money market investment division. Then, for seventeen
days after your policy's effective date:
(a) the portion of the initial purchase payment to be allocated to any of
the variable investment divisions (plus any accrued interest) will be
allocated to the money market investment division; and
(b) the portion of the initial purchase payment to be allocated to the
fixed account (plus any accrued interest) will be credited with
interest as if it were invested in the money market investment
division.
Any additional purchase payments we receive prior to the seventeenth day
after your policy's effective date will be treated the same way. Upon the
expiration of this period, your policy value will be transferred to the
variable investment divisions and the fixed account in accordance with your
allocation instructions. If the seventeenth day is not a business day, then we
will make this transfer on the next business day thereafter. (The seventeen-day
period is intended to cover the 10-day "free look" period, plus 7 days for
processing and policy delivery.) This period may be longer than seventeen days
in some states.
If we receive an additional purchase payment on or after the seventeenth day
after your policy's effective date, we will allocate the purchase payment among
the funding choices according to your instructions. These will be the
allocations you specify in the application, or new instructions you provide.
Your policy value will vary with the investment performance of the variable
investment divisions you select. You bear the entire risk for amounts allocated
to the variable investment divisions. You should periodically review your
allocations of policy value in light of all relevant factors, including market
conditions and your overall financial planning requirements.
Policy Value
Your policy value prior to the retirement date is equal to:
(a) your variable account value; plus
(b) your fixed account value.
Variable Account Value. Your variable account value is not guaranteed. It
equals the sum of the values of the variable investment divisions under the
policy. The value of each variable investment division is calculated on each
business day. Business days generally are Monday through Friday, except
holidays when the New York Stock Exchange is closed.
On your policy's effective date, your variable account value is equal to the
portion of the initial purchase payment allocated to the variable investment
divisions (plus any accrued interest from the date we received the initial
purchase payment to the policy's effective date). On any business day
thereafter, the value of each variable investment division under your policy
equals:
(a) the value of the investment division on the previous business day,
increased or decreased by its investment experience and daily charge;
plus
(b) the amount of any purchase payments allocated to the investment
division since the previous business day; plus
11
<PAGE>
(c) the amount of any transfers into the investment division since the
previous business day; minus
(d) the amount of any withdrawals (including any withdrawal charge or
transaction charge) from the investment division since the previous
business day; minus
(e) the amount of any transfers out of the investment division since the
previous business day; minus
(f) the portion of any annual deduction allocated to the investment
division since the previous business day; minus
(g) the portion of any deduction for premium taxes allocated to the
investment division since the previous business day.
Deductions (f) and (g) will be made from each investment division in the
same proportion that the value of the investment division bears to your entire
policy value.
Fixed Account Value. At the end of any business day, your fixed account value
is equal to:
(a) the sum of all purchase payments allocated to the fixed account; plus
(b) any amounts transferred into the fixed account; plus
(c) total interest credited; less
(d) any amounts transferred out of the fixed account; less
(e) the portion of any withdrawals, withdrawal charges, and transaction
charges allocated to the fixed account; less
(f) the portion of the annual deduction and premium taxes which is
allocated to the fixed account.
Surrender and Partial Withdrawals
Withdrawals. You may make a partial withdrawal from your policy value prior
to the retirement date. You must send a written request to our home office in a
form acceptable to us. A partial withdrawal must be for at least $250 (except
for automatic partial withdrawals), and your remaining policy value must be at
least $2,000 after a partial withdrawal. If your policy value would be less
than $2,000, we will treat the request for a partial withdrawal as a request
for complete surrender of your policy. We will ordinarily pay a withdrawal
within seven days of receipt of your written request (unless the check for your
purchase payment has not yet cleared your bank). We may defer payment of any
amounts from the fixed account for up to six months. If we defer payment for
more than 30 days, we will pay interest on the amount deferred at a rate not
less than 4% per year.
You can specify that the partial withdrawal should be made from a particular
funding choice (or choices). If you do not specify this, then the partial
withdrawal will be made from the funding choices in the same proportions that
their values bear to your total policy value.
You may request up to four withdrawals per policy year without a transaction
charge. If you request more than these four withdrawals, there will be a $20
transaction charge for each additional withdrawal during that policy year
(except for automatic partial withdrawals). Also, withdrawal charges of up to
8% may apply to withdrawal amounts in a policy year that exceed the free
withdrawal amount. (See "Withdrawal Charge" and "Transaction Charge.") Any
transaction charge or withdrawal charge will be deducted from your remaining
policy value, or from the amount paid if your remaining policy value is
insufficient. No withdrawals may be made after the retirement date.
12
<PAGE>
Partial withdrawals may be subject to a 10% Federal tax penalty and to
income tax. (See "Federal Tax Matters.")
Automatic Partial Withdrawals. You may also establish automatic partial
withdrawals by submitting a one-time written request. These automatic partial
withdrawals of a fixed dollar amount may be requested on a monthly, quarterly,
semi-annual or annual basis. The maximum amount of automatic partial
withdrawals in any one policy year is the free withdrawal amount. Automatic
partial withdrawals are only available before the retirement date. They are not
subject to the $250 minimum, and the $20 transaction charge does not apply.
Automatic partial withdrawals are subject to all the other policy provisions
and terms. If an additional withdrawal is made from a policy participating in
automatic partial withdrawals, the automatic partial withdrawals will terminate
automatically and may be resumed only on or after the next policy anniversary.
Automatic partial withdrawals may be subject to a 10% Federal tax penalty
and to income tax. (See "Federal Tax Matters.")
Surrender. You may surrender your policy for its policy value, less any
withdrawal charge and premium taxes, by sending a written request to our home
office. (The withdrawal charge, described below, is only applicable if a
surrender or annuitization occurs in the first eight policy years following
receipt of a purchase payment.) A surrender will ordinarily be paid within
seven days of receipt of your written request (unless the check for a purchase
payment has not yet cleared your bank). Your policy will terminate as of the
date we receive your written request for surrender. Surrenders are generally
taxable transactions, and may be subject to a 10% Federal tax penalty. (See
"Federal Tax Matters.") No surrender may be made after the retirement date.
Restrictions Under the Texas ORP and Section 403(b) Plans. The Texas
Educational Code does not permit participants in the Texas Optional Retirement
Program ("ORP") to withdraw or surrender their interest in a variable annuity
contract issued under the ORP except upon:
(a) termination of employment in the Texas public institutions of higher
education;
(b) retirement; or
(c) death.
Accordingly, a participant in the ORP (or the participant's estate if the
participant has died) will be required to obtain a certificate of termination
from the employer or a certificate of death before the account can be redeemed.
Similar restrictions apply to variable annuity contracts used as funding
vehicles for Section 403(b) retirement plans. Section 403(b) of the Internal
Revenue Code provides for tax-deferred retirement savings plans for employees
of certain non-profit and educational organizations. As required by Section
403(b), any policy used for a Section 403(b) plan will prohibit distributions
of:
(a) elective contributions made in years beginning after December 31, 1988;
(b) earnings on those contributions; and
(c) earnings on amounts attributable to elective contributions held as of
the end of the last year beginning before January 1, 1989.
However, distributions of such amounts will be allowed upon:
(a) death of the employee;
(b) reaching age 59 1/2;
13
<PAGE>
(c) separation from service;
(d) disability; or
(e) financial hardship (except that income attributable to elective
contributions may not be distributed in the case of hardship).
Restrictions Under Other Qualified Policies. Other restrictions on
surrenders or with respect to the election, commencement, or distributions of
benefits may apply under qualified policies or under the terms of the plans for
which qualified policies are issued.
Transfers
You may transfer all or part of your variable account value out of a
variable investment division (to one or more of the other variable investment
divisions or to the fixed account) at any time before the retirement date,
except as described below. You may transfer all or a part of your fixed account
value to one or more of the variable investment divisions once per policy year
before the retirement date.
You may make 12 transfers in a policy year. Transferring from one variable
investment division into two or more other variable investment divisions counts
as one transfer request. However, transferring from two variable investment
divisions into one variable investment division counts as two transfer
requests. Transfers from the fixed account are counted in the same manner. If a
transfer is made out of the fixed account, then no transfer into the fixed
account may be made for six months from the transfer date.
Any amount transferred must be at least:
(a) $500; or
(b) the total value of the variable investment division or fixed account,
if less.
In addition, any amount transferred from the fixed account to a variable
investment division may not exceed the greater of:
(a) 25% of the prior policy anniversary's fixed account value; or
(b) the amount of the prior policy year's transfer.
Transfers may be made by a written request to our home office or by calling
us if a written authorization for telephone transfers is on file. We have the
authority to honor any telephone transfer request believed to be authentic. We
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. For example, you may be required to use a personal
identification number to initiate a telephone transfer. We will not be liable
for the consequences of a fraudulent telephone transfer request we believe to
be authentic when we have followed those procedures. As a result, you bear the
risk of loss arising from such a fraudulent request if you give us
authorization for telephone transfers.
We will make each transfer, without the imposition of any fee or charge, at
the end of the first business day during which or after which we receive a
valid, complete transfer request. We may suspend or modify this transfer
privilege at any time.
You are not allowed to transfer value from the fixed account to the variable
investment divisions after the retirement date. The annuitant may transfer
values among the variable investment divisions or from the variable investment
divisions to the fixed account once per policy year after the retirement date.
Dollar Cost Averaging
Before the retirement date, you may authorize automatic transfers of a fixed
dollar amount from the money market division to as many as four of the other
variable investment divisions. Automatic transfers will be made
14
<PAGE>
monthly on the day of the month you select. (If that day of the month does not
fall on a business day, then transfers will be made on the next following
business day.) Transfers will be made at the unit values determined on the date
of each transfer.
The minimum automatic transfer amount is $100. If the transfer is to be made
into more than one variable investment division, a minimum of $25 must be
transferred into each other variable investment division selected.
Participation in the automatic transfer program does not guarantee a greater
profit, nor does it protect against loss in declining markets. You should
consider your ability to continue the program through all market conditions.
Automatic dollar cost averaging transfers will not be counted as transfers for
purposes of the 12-transfer limit specified in "Transfers" above.
Death Benefit
The policy pays a death benefit to the beneficiary named in the policy if
the annuitant dies before the retirement date while the policy is in force
(unless the annuitant is also an owner; see below). The death benefit is the
greater of:
(a) the total purchase payments made, less any amounts withdrawn and any
withdrawal charges, and less any transaction charges; or
(b) the policy value.
In addition, in some states, we may provide an enhanced death benefit if the
annuitant dies before attained age 75. In this case, the death benefit will be
the greatest of (a) or (b), as described above, or:
(c) the greater of your policy value on its eighth or sixteenth anniversary
date, plus any purchase payments made since then, less any withdrawals
you have made, and withdrawal charges or transaction charges you have
incurred since then.
Upon receiving due proof of death, we will pay the death benefit proceeds to
the beneficiary in a lump sum or under one of the annuity payment methods. (See
"Annuity Payments.") However, we will not compute the amount of the death
benefit until the date it is paid, and we cannot pay the death benefit until we
receive both due proof of death and instructions on how to pay it (that is, as
a lump sum or applied under one of the annuity payment methods). If the
annuitant or the owner dies after the retirement date, the amount payable, if
any, will be as provided in the annuity payment method then in effect.
If the annuitant dies before the retirement date and the annuitant is also
the owner or a joint owner of the policy, then special rules (governing
distribution of death benefit proceeds in the event of the death of an owner)
shall apply. (See "Required Distributions" below.)
The beneficiary named in the policy will not always have a right to the
death benefits even if the annuitant or owner dies. If there is a surviving
joint owner at the annuitant's death, and the surviving joint owner continues
the policy in accordance with the required distributions rules, then the
beneficiary named in the policy will not receive the death benefit proceeds. If
upon death of any owner the owner's designated beneficiary elects to continue
the policy in accordance with the required distributions rules, then the
beneficiary named in the policy does not have a right to receive the death
benefit proceeds.
As far as permitted by law, the proceeds under the policy will not be
subject to any claim of the beneficiary's creditors.
Required Distributions
In order to be treated as an annuity contract for Federal income tax
purposes, the Internal Revenue Code requires any non-qualified policy to
provide that:
(a) if any owner dies before the retirement date, then the entire interest
in the policy will be distributed within five years after the date of
that owner's death; and
15
<PAGE>
(b) if any owner dies on or after the retirement date but before the time
the entire interest in the policy has been distributed, then the
remaining portion of such interest will be distributed at least as
rapidly as under the method of distribution being used as of the date
of that owner's death.
These requirements will be considered satisfied as to any portion of the
owner's interest that is payable as annuity payments, beginning within one year
of that owner's death, that will be made over the life of the owner's
designated beneficiary or over a period not extending beyond his life
expectancy.
If any owner dies before the retirement date, then ownership of the policy
passes to the owner's designated beneficiary, who then has the right to the
death benefit. If the policy has joint owners and one owner dies, then the
owner's designated beneficiary is the joint owner. If there is no joint owner
and the owner dies, then the owner's designated beneficiary is the beneficiary
named in the policy.
If the owner's designated beneficiary is the surviving spouse of the owner,
then the policy may be continued with the surviving spouse as the new owner and
no distributions will be required.
If an annuitant is an owner or joint owner and that annuitant dies before
the retirement date, and if the owner's designated beneficiary does not elect
to receive the death benefit in a lump sum at that time, then we will increase
the policy value so that it equals the death benefit amount, if that is higher
than the policy value. This would occur if the owner's designated beneficiary:
(a) elects to delay receipt of the proceeds for up to five years;
(b) is the deceased owner's spouse and elects to continue the policy;
or
(c) elects to receive the proceeds as annuity payments, as described
above.
Any such increase in the policy value would be paid by us. We will allocate it
to the variable investment divisions and the fixed account in proportion to the
pre-existing policy value, unless instructed otherwise.
The non-qualified policies contain provisions which are intended to comply
with the requirements of the Internal Revenue Code. However, no regulations
interpreting these requirements have been issued. We intend to review such
provisions and modify them if necessary to assure that they comply with the
applicable requirements when clarified by regulation or otherwise.
Other rules may apply to qualified policies.
"Free Look" Period
If for any reason you are not satisfied with the policy, you may return it
to us within 10 days after you receive it. If you cancel the policy within this
10-day "free look" period, we will refund the greater of the policy value or
the purchase payment that was paid, and the policy will be void from its
effective date. To cancel the policy, you must mail or deliver it either to our
home office or to the registered agent who sold it within 10 days after you
receive it. (See "Allocation of Purchase Payments.") The "free look" period may
be longer than 10 days where required by state law.
Charges and Deductions
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
We do not deduct any charges from a purchase payment (except for a charge
for any premium taxes). However, there is a sales charge of 8.5% of each
purchase payment, deducted in 10 equal installments from the policy value over
the first ten policy anniversaries following the date the purchase payment is
received. In addition, certain other charges are deducted to compensate us for
providing the insurance benefits set forth in the policy, for administering and
distributing the policy, for any applicable taxes, and for assuming certain
risks in connection with the policy. These charges are described below.
16
<PAGE>
Annual Deduction
On each policy anniversary, we deduct two charges from your policy value.
One is for sales expenses and one is an annual policy fee for administrative
expenses. These deductions will be made from the variable investment divisions
and the fixed account in the same proportion that their values bear to the
total policy value.
Sales Charge. We deduct a sales charge of 0.85% of each purchase payment on
each of the first ten policy anniversaries following the receipt of the
purchase payment. (As noted above, this would result in a sales charge of 8.5%
of each purchase payment.) The sales charge partially compensates us for
certain sales and other distribution expenses, including agent sales
commissions, the cost of printing prospectuses and sales literature,
advertising and other marketing and sales promotional activities.
Annual Policy Fee. We deduct an annual policy fee of $50 from each policy,
for administering the policy. These expenses include costs of maintaining
records, processing death benefit claims, surrenders, transfers and policy
changes, providing reports to policy owners, and overhead costs. We guarantee
not to increase this charge during the life of the policy. Before the
retirement date, this charge is deducted on each policy anniversary. After the
retirement date, this charge is deducted pro rata from each annuity payment.
Withdrawal Charge
We may deduct a withdrawal charge if you:
(a) make partial withdrawals under the policy;
(b) surrender the policy; or
(c) annuitize the policy.
The withdrawal charge is a percent of the purchase payments deemed to be
included in the withdrawal (in the case of a partial withdrawal) or the total
purchase payments (in the case of a surrender or annuitizing), as specified in
the following table of withdrawal charge rates:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Number of Policy Anniversaries
since receipt of Purchase Payment: 0 1 2 3 4 5 6 7 8+
- --------------------------------------------------------------------------
Withdrawal Charge
(% of Purchase Payment): 8% 7% 6% 5% 4% 3% 2% 1% none
</TABLE>
There is a "free withdrawal amount" that can be withdrawn each policy year
without a withdrawal charge. The free withdrawal amount in a policy year is the
greater of (a) or (b) below, less any free withdrawals already made during that
policy year, where:
(a) is 10% of cumulative purchase payments; and
(b) is 10% of policy value at the time of withdrawal.
Amounts withdrawn in excess of the free withdrawal amount may be subject to the
withdrawal charge.
The withdrawal charge is determined by multiplying each purchase payment
deemed included in the withdrawal by the applicable withdrawal charge rate
specified in the table above.
For purposes of calculating the withdrawal charge:
(a) the oldest purchase payments will be treated as the first withdrawn,
newer purchase payments next, and appreciation last;
(b) amounts withdrawn up to the free withdrawal amount will not be
considered a withdrawal of purchase payments; and
17
<PAGE>
(c) if the surrender value is withdrawn or applied under an annuity payment
method, the withdrawal charge will apply to all purchase payments not
previously assessed with a withdrawal charge.
As shown above, the withdrawal charge percentage varies, depending on the
"age" of the purchase payments included in the withdrawal--that is, the number
of policy years since the purchase payment was paid. A withdrawal charge of 8%
applies to purchase payments withdrawn that are less than 1 year old.
Thereafter the withdrawal charge rate decreases by one percentage point each
year. Amounts representing purchase payments that are at least 8 years old may
be withdrawn without charge.
We will deduct the withdrawal charge from the remaining policy value, or
from the amount paid if there is not enough value remaining. The withdrawal
charge partially compensates us for sales expenses, including agent sales
commissions, the cost of printing prospectuses and sales literature,
advertising, and other marketing and sales promotional activities.
The amounts we receive from the withdrawal charge, along with the sales
charge, may not be sufficient to cover distribution expenses. We expect to
recover any deficiency from our general assets (which include amounts derived
from the mortality and expense risk charge, as described below).
Waiver of Withdrawal Charges Rider
We waive the withdrawal charges described above if the annuitant becomes
confined to a nursing home or hospital, provided that certain conditions are
met. These conditions include:
(a) the waiver of withdrawal charges rider is attached to your policy;
(b) the annuitant is confined to a "Qualified Nursing Home" or "Qualified
Hospital" for at least 60 days;
(c) the annuitant was age 75 or younger on the policy's effective date;
(d) the policy was in force at least one year at the time confinement
began;
(e) written notice and satisfactory proof of confinement are received no
later than 90 days after confinement ends; and
(f) confinement was recommended by a "Physician" due to injury, sickness or
disease.
We will waive only the withdrawal charges which are applicable to purchase
payments received before the first confinement began. Waiver of withdrawal
charges is subject to all of the conditions and provisions of the rider. (See
your policy.) The rider is not available in all states.
Mortality and Expense Risk Charge
We deduct a daily charge from the variable investment divisions at an
effective annual rate of 0.90% of their average daily net assets. This charge
compensates us for assuming certain mortality and expense risks. No mortality
and expense risk charge is deducted from the fixed account. We may realize a
profit from this charge. However, the level of this charge is guaranteed for
the life of the policy and may not be increased. We will continue to deduct
this charge after the retirement date.
The mortality risk we bear arises in part from our obligation to make
monthly annuity payments regardless of how long all annuitants or any
individual may live. These payments are guaranteed in accordance with the
annuity tables and other provisions contained in the policy. This assures you
that neither the longevity of the annuitant, nor an unanticipated improvement
in general life expectancy, will have any adverse effect on the monthly annuity
payments the annuitant will receive under the policy. Our obligation therefore
relieves the
18
<PAGE>
annuitant from the risk that he or she will outlive the funds accumulated for
retirement. The mortality risk also arises in part because of the risk that the
death benefit may be greater than the policy value. We also assume the risk
that other expense charges may be insufficient to cover the actual expenses we
incur.
Transaction Charge
You may make up to four withdrawals per policy year without a transaction
charge. After the fourth withdrawal in a policy year, a $20 transaction charge
will apply to each additional withdrawal. We will deduct this charge from the
remaining policy value, or from the amount paid if there is not enough value
remaining. The $20 transaction charge does not apply to automatic partial
withdrawals.
Premium Taxes
We will deduct a charge for any premium taxes we incur. Depending on state
and local law, premium taxes can be incurred when you make a purchase payment,
when policy value is withdrawn or surrendered, or when annuity payments start.
(The state premium tax rates currently range from 0% to 3.50%. Some local
governments charge additional premium taxes.)
Federal Taxes
Currently no charge is made for Federal income taxes that may be
attributable to the Variable Account. We may, however, make such a charge in
the future. Charges for other taxes, if any, attributable to the Variable
Account may also be made. (See "Federal Tax Matters.")
Fund Expenses
The value of the assets of the variable investment divisions will reflect
the investment management fee and other expenses incurred by the corresponding
portfolios of Target/United Funds, Inc. (See "Summary--Charges and
Deductions.")
Older Policies
For some older policies--issued before May 1, 1992 (or later in some
states)--a sales charge of 6% is deducted from any purchase payment after the
initial purchase payment. However, for such additional purchase payments, the
8.5% sales charge (otherwise deducted in ten annual installments) does not
apply and there is no withdrawal charge for such payments.
Certain of these older policies may be amended to eliminate the 6% sales
charge deducted from additional purchase payments, replacing it with a sales
charge of 8.5% spread over ten annual installments. These changes might be made
by restating the entire policy with its original effective date and other data.
(See your policy.)
Reduction in Charges for Certain Groups
We may reduce or eliminate the sales, administrative, or withdrawal charges
on policies that have been sold to:
(a) our employees and sales representatives, or those of our affiliates or
distributors of the policy;
(b) our customers or distributors of the policies who are transferring
existing policy values to a policy;
(c) individuals or groups when sales of the policy result in savings of
sales or administrative expenses; or
(d) individuals or groups where purchase payments are paid through an
approved group payment method and where the size and type of the group
results in savings of administrative expenses.
We will not reduce or eliminate the sales, administrative, or withdrawal
charges where such reduction or elimination will unfairly discriminate against
any person.
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Annuity Payments
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Election of Annuity Payment Method
As the policy owner, you have the sole right to elect an annuity payment
method in the application. You can also change that election, during the
lifetime of the annuitant and before the retirement date, by written request
any time at least 30 days before the retirement date. We may require the
exchange of the policy for a contract covering the method selected.
Retirement Date
The first annuity payment will be made as of the retirement date. You select
the retirement date in the application for the policy. You may change the
retirement date by giving us written notice at least 30 days before the old
retirement date (and at least 30 days before the new retirement date).
A retirement date must be the first day of any calendar month. It must also
be at least 30 days after the policy's effective date.
If the retirement date occurs during the first eight policy years after
receipt of a purchase payment, a withdrawal charge will apply. (See "Withdrawal
Charge.")
Annuity Payment Methods
The policy value as of 14 days before the retirement date (less any premium
taxes and withdrawal charges) may be applied to annuity payments. They can be
fixed annuity payments, variable annuity payments, or a combination of both.
Fixed annuity payments provide guaranteed annuity payments which remain
fixed in amount throughout the payment period. Variable annuity payments vary
with the investment experience of the variable investment divisions. The dollar
amount of variable annuity payments after the first is not fixed.
Annuity payment methods currently include:
<TABLE>
<S> <C>
Life Annuity with No This method provides monthly annuity payments during the
Guaranteed Period lifetime of the annuitant. No payment will be made after the
death of the annuitant. Only one payment will be made under
this method if the annuitant dies before the second payment is
due; only two payments will be made if the annuitant dies
before the third payment is due; and so forth.
- ------------------------------------------------------------------------------------------
Joint Life Annuity This method provides monthly annuity payments during the
Continuing to lifetime of the annuitant and a joint annuitant. Payments will
the Survivor continue to the survivor for the survivor's remaining
lifetime. Only one payment or very few payments will be made
under this method if the annuitant and joint annuitant both
die before or shortly after payments begin.
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Life Annuity with 120 or This method provides monthly annuity payments during the
240 Monthly Payments lifetime of the annuitant. A guaranteed period of 120 or 240
Guaranteed months (10 or 20 years) may be chosen. If the annuitant dies
prior to the end of this guaranteed period, monthly annuity
payments will be made to the beneficiary until the end of the
guaranteed period.
</TABLE>
Other annuity payment methods are currently available with our written consent.
If you have not selected an annuity payment method on the retirement date,
we will make monthly annuity payments during the lifetime of the annuitant with
120 monthly payments guaranteed. Unless you instruct us otherwise before the
retirement date, we will use your variable account value to make variable
annuity payments (in accordance with the allocation of your account value among
the investment divisions) and we will use your fixed account value to make
fixed annuity payments.
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<PAGE>
The amount of each annuity payment under the methods described above will
depend on the sex and age of the annuitant (or annuitants) at the time the
first payment is due. The annuity payments may be more or less than the total
purchase payments, and more or less than the policy value, because:
(a) variable annuity payments vary with the investment experience of the
underlying portfolios of Target/United Funds, Inc. and you therefore
bear the investment risk under variable annuity payments; and
(b) annuitants may die before the actuarially predicted date of death.
Therefore, the dollar amount of annuity payments cannot be predicted. The
method of computing the annuity payments is described in more detail in the
Statement of Additional Information.
The duration of the annuity payment guarantee will affect the dollar amount
of each payment. For example, payments guaranteed for 20 years will be less
than payments guaranteed for 10 years.
Whether variable annuity payments decrease, increase, or remain level
depends on whether the net investment performance is worse than the "assumed
investment rate," better than that rate, or equal to that rate. The assumed
investment rate is 4.0% per year. The dollar amount of the variable annuity
payments will decrease if the actual net investment experience of the variable
investment division(s) you select is less than the assumed investment rate. The
dollar amount of the variable annuity payments will increase if the actual net
investment experience exceeds the assumed investment rate. The dollar amount of
the variable annuity payments will stay the same if the actual net investment
experience equals the assumed investment rate.
Fixed annuity payment amounts will be based on our fixed annuity payment
rates in effect on the retirement date. These rates are guaranteed not to be
less than payments based on the 1971 Individual Annuity Mortality Table (set
back two years) with interest at 4.0%. The two-year setback results in lower
annuity payments than if no setback is used.
If the net amount to be applied to an annuity payment method is less than
$3,000, we have the right to pay such amount in one sum. Also, if any payment
would be less than $50, we have the right to reduce the frequency of payment to
an interval that will result in payments of at least $50.
After the retirement date, the policy value may not be withdrawn, nor may
the policy be surrendered. The annuitant will be entitled to exercise any
voting rights and to reallocate the value of his or her interest in the
variable investment divisions. (See "Voting Rights" and "Transfers.")
The policies offered by this prospectus contain life annuity tables that
provide for different benefit payments to men and women of the same age,
although they provide for unisex tables where requested and required by law.
Nevertheless, in accordance with the U.S. Supreme Court's decision in Arizona
Governing Committee v. Norris, in certain employment-related situations,
annuity tables that do not vary on the basis of sex must be used. Accordingly,
if the policy will be used in connection with an employment-related retirement
or benefit plan, you should give consideration, in consultation with your legal
counsel, to the impact of Norris on any such plan before making any
contributions under these policies.
Distribution of the Policies
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Waddell & Reed, Inc. of 6300 Lamar, Overland Park, Kansas, is the principal
underwriter of the policies. Waddell & Reed, Inc. may enter into written sales
agreements with various broker-dealers to aid in the distribution of the
policies. A commission plus bonus compensation may be paid to broker-dealers or
agents in connection with sales of the policies. Bonus compensation will be
based on the amount of purchase payments received.
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<PAGE>
Federal Tax Matters
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The following discussion is general and is not intended as tax advice.
We do not intend to address the tax consequences resulting from all
situations in which a person may be entitled to or may receive a distribution
under a policy. Any person concerned about these tax implications should
consult a competent tax advisor before initiating any transaction. This
discussion is based upon our understanding of the present Federal income tax
laws as they are currently interpreted by the Internal Revenue Service. We have
not assessed the likelihood of the continuation of the present Federal income
tax laws or of their current interpretation by the Internal Revenue Service.
Moreover, we have not attempted to consider any applicable state or other tax
laws.
The policy may be purchased on a non-tax-qualified basis ("non-qualified
policy") or as a qualified policy. Qualified policies are designed for use with
retirement plans entitled to special income tax treatment under the Internal
Revenue Code of 1986, as amended (the "Code").
Possible Changes in Taxation. Although the likelihood of legislative change
is uncertain, there is always the possibility that the tax treatment of the
policy could change by legislation or other means (such as U.S. Treasury
Department regulations, Internal Revenue Service revenue rulings, and judicial
decisions). It is possible that any change could be retroactive (that is,
effective prior to the date of the change). You should consult a tax advisor
regarding such developments and their effect on the policy.
Taxation of Annuities in General. The following discussion assumes that the
policy will qualify as an annuity contract for Federal income tax purposes. The
Statement of Additional Information and "Required Distributions" (at page 15 of
this prospectus) describe the requirements necessary to qualify.
Section 72 of the Code governs taxation of annuities in general.
An annuity owner who is a natural person generally is not taxed on increases
in the value of a policy until distribution occurs. Distribution could be
either in the form of a lump sum received by withdrawing all or part of the
cash value (i.e., surrender or partial withdrawal) or in the form of annuity
payments under the annuity payment method elected. For this purpose, the
assignment, pledge, or agreement to assign or pledge any portion of the policy
value generally will be treated as a distribution. The taxable portion of a
distribution (in the form of a lump sum payment or annuity payments) is taxed
as ordinary income.
An owner of any deferred annuity contract who is not a natural person
generally must include in income any increase in the excess of the policy value
over the owner's "investment in the contract" during the taxable year. However,
there are some exceptions to this rule, and you may wish to discuss these with
your tax advisor.
The following discussion applies to policies owned by natural persons.
Withdrawals. In the case of a withdrawal under a qualified policy, a ratable
portion of the amount received is taxable, generally based on the ratio of the
"investment in the contract" to the total policy value. The "investment in the
contract" generally equals the portion, if any, of purchase payments paid with
after-tax dollars (that is, purchase payments that were not excluded from the
individual's gross income). For qualified policies, the "investment in the
contract" can be zero. Special rules may apply to a withdrawal from a qualified
policy.
Generally, in the case of a partial withdrawal under a non-qualified policy
before the retirement date, amounts received are first treated as taxable
income to the extent that the policy value immediately before the withdrawal
exceeds the "investment in the contract" at that time. Any additional amount
withdrawn is not taxable.
In the case of a full surrender under a non-qualified policy, the amount
received generally will be taxable to the extent it exceeds the "investment in
the contract."
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<PAGE>
Annuity Payments. Although the tax consequences may vary depending on the
annuity payment method elected under the policy, generally only the portion of
the annuity payment that represents the amount by which the policy value
exceeds the "investment in the contract" will be taxed.
. For variable annuity payments, in general the taxable portion of each
annuity payment (prior to recovery of the "investment in the contract")
is determined by a formula which establishes a specific non-taxable
dollar amount of each annuity payment. This dollar amount is determined
by dividing the "investment in the contract" by the total number of
expected annuity payments.
. For fixed annuity payments, in general there is no tax on the portion of
each annuity payment which reflects the ratio that the "investment in
the contract" bears to the total expected value of annuity payments for
the term of the payments; however, the remainder of each annuity payment
is taxable.
In all cases, after the "investment in the contract" is recovered, the full
amount of any additional annuity payments is taxable.
Penalty Tax. In the case of a distribution from a non-qualified policy,
there may be imposed a Federal penalty tax equal to 10% of the amount treated
as taxable income. In general, however, there is no penalty tax on
distributions:
(a) made on or after the taxpayer attains age 59 1/2;
(b) made as a result of an owner's death or attributable to the taxpayer's
disability; or
(c) received in substantially equal periodic payments as a life annuity.
Other tax penalties may apply to distributions from a qualified policy.
Aggregation of Contracts. All non-qualified deferred annuities entered into
after October 21, 1988 that we (or our affiliates) issued to the same owner
during any calendar year are treated as one annuity contract for purposes of
determining the amount includable in gross income under Section 72(e) of the
Code. In addition, there may be other situations in which the U.S. Treasury
Department may (under its authority to issue regulations or otherwise) conclude
that it would be appropriate to aggregate two or more annuity contracts
purchased by the same owner. Accordingly, you should consult a competent tax
advisor before purchasing more than one annuity contract.
Transfers and Assignments. A transfer or assignment of ownership of a
policy, or designation of an annuitant or other beneficiary who is not also the
owner, may result in certain tax consequences to the policy owner that are not
discussed herein. If you are contemplating any such transfer, assignment or
designation, you should contact a competent tax advisor with respect to the
potential tax effects of such transaction.
Death Benefits. Amounts may be distributed from a policy because of the
death of a policy owner or an annuitant. Generally, such amounts are includable
in the income of the recipient as follows:
(a) if distributed in a lump sum, they are taxed in the same manner as a
full surrender of the policy, as described above; or
(b) if distributed under an annuity payment method, they are taxed in the
same manner as annuity payments, as described above.
Qualified Policies. The tax rules applicable to a qualified policy vary
according to the type of plan and the terms and conditions of the plan. The
following events may cause adverse tax consequences:
(a) contributions in excess of specified limits;
(b) distributions prior to age 59 1/2 (subject to certain exceptions);
23
<PAGE>
(c) distributions that do not conform to specified commencement and
minimum distribution rules; and
(d) other circumstances specified in the Code.
We make no attempt to provide more than general information about the use
of the policy with the various types of retirement plans. The terms and
conditions of the retirement plans may limit the rights otherwise available to
you under a qualified policy. You are responsible for determining that
contributions, distributions and other transactions with respect to the
qualified policy comply with applicable law. If you are purchasing an annuity
contract for use with any qualified retirement plan, you should consult your
legal counsel and tax advisor regarding the suitability of the annuity
contract.
Required Distributions. For qualified plans under Sections 401(a), 403(a),
403(b), and 457, the Code requires that distributions generally must begin by
the later of April 1 of the calendar year following the calendar year in which
the policy owner (or plan participant): (a) reaches age 70 1/2; or (b)
retires. Distributions must be made in a specified form and manner. If the
participant is a "5 percent owner" (as defined in the Code), distributions
generally must begin no later than April 1 of the calendar year following the
calendar year in which the policy owner (or plan participant) reaches age 70
1/2. For Individual Retirement Annuities (IRAs) described in Section 408 of
the Code, distributions generally must begin no later than April 1 of the
calendar year following the calendar year in which the policy owner (or plan
participant) reaches age 70 1/2.
Corporate Pension and Profit-Sharing Plans. Section 401(a) of the Code
permits employers to establish various types of retirement plans for
employees, and permits self-employed individuals to establish retirement plans
for themselves and their employees. Adverse tax or other legal consequences to
the plan, to the participant or to both may result if this policy is purchased
by a Section 401(a) plan and later assigned or transferred to any individual.
The policy includes a death benefit that in some cases may exceed the greater
of purchase payments or policy value. The death benefit could be characterized
as an incidental benefit, the amount of which is limited in any pension or
profit-sharing plan. Because the death benefit may exceed this limitation,
employers using the policy in connection with such plans should consult their
tax advisor.
Section 403(b) Plans. Under Code Section 403(b), public school systems and
certain tax-exempt organizations may purchase annuity contracts for their
employees. Generally, payments to Section 403(b) annuity contracts will be
excluded from the gross income of the employee, subject to certain
limitations. However, these payments may be subject to FICA (Social Security)
taxes. The policy includes a death benefit that in some cases may exceed the
greater of purchase payments or policy value. The death benefit could be
characterized as an incidental benefit, the amount of which is limited in any
tax-sheltered annuity under Section 403(b). Because the death benefit may
exceed this limitation, employers using the policy in connection with such
plans should consult their tax advisor. Under Section 403(b) annuity
contracts, the following amounts may only be distributed upon death of the
employee, attainment of age 59 1/2, separation from service, disability, or
financial hardship:
(a) elective contributions made in years beginning after December 31,
1988;
(b) earnings on those contributions; and
(c) earnings in such years on amounts held as of the last year beginning
before January 1, 1989.
In addition, income attributable to elective contributions may not be
distributed in the case of hardship.
Individual Retirement Annuities. Section 408 of the Code limits the amount
which may be contributed to an IRA each year to the lesser of $2,000 or 100%
of the policy owner's adjusted gross income. These contributions may be
deductible in whole or in part depending on the individual's income. The limit
on the amount contributed to an IRA does not apply to distributions from
certain other types of qualified plans that are "rolled over" on a tax-
deferred basis into an IRA. Amounts in the IRA (other than non-deductible
contributions) are taxed when distributed from the IRA. Distributions prior to
age 59 1/2 (unless certain
24
<PAGE>
exceptions apply) are subject to a 10% penalty tax. The Internal Revenue
Service has not addressed in a ruling of general applicability whether a death
benefit provision such as the provision in the policy meets IRA qualification
requirements.
Roth IRAs. Section 408A of the Code permits certain eligible individuals to
contribute to a Roth IRA. Contributions to a Roth IRA, which are subject to
certain limitations, are not deductible and must be made in cash or as a
rollover or transfer from another Roth IRA or other IRA. A rollover from or
conversion of an IRA to a Roth IRA may be subject to tax, and other special
rules may apply. You should consult a tax advisor before combining any
converted amounts with any other Roth IRA contributions, including any other
conversion amounts from other tax years. Distributions from a Roth IRA
generally are not taxed, except that--once aggregate distributions exceed
contributions to the Roth IRA--income tax and a 10% penalty tax may apply to
distributions made:
(a) before age 59 1/2 (subject to certain exceptions); or
(b) during the five taxable years starting with the year in which the first
contribution is made to any Roth IRA.
No distribution from a Roth IRA is required at any time before the policy
owner's death.
Deferred Compensation Plans. Section 457 of the Code provides for certain
deferred compensation plans available with respect to service for state
governments, local governments, political subdivisions, agencies,
instrumentalities and certain affiliates of such entities, and tax-exempt
organizations. These plans are subject to various restrictions on contributions
and distributions. Under non-governmental plans, all amounts are subject to the
claims of general creditors of the employer, and depending on the terms of the
particular plan, the employer may be entitled to draw on deferred amounts for
purposes unrelated to its Section 457 plan obligations.
All Policies. As noted above, the foregoing comments about the Federal tax
consequences under the policy are not exhaustive, and special rules apply to
other tax situations not discussed in this prospectus. Further, the Federal tax
consequences discussed herein reflect our understanding of current law, and the
law may change. Federal estate tax and state and local estate, inheritance and
other tax consequences of ownership or receipt of distributions under a policy
depend on the individual circumstances of each policy owner or recipient of a
distribution. A competent tax advisor should be consulted for further
information.
Historical Performance Data
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We may advertise yields and total returns for the investment divisions of
the Variable Account. In addition, we may advertise the effective yield of the
money market investment division. These figures are historical and are not
intended to indicate future performance.
The yield of the money market investment division is the annualized income
generated by an amount invested in that option over a specified seven-day
period. We assume that the income generated for that seven-day period is
generated each seven-day period over a 52-week period. We show the result as a
percentage of the amount invested. We calculate the effective yield similarly
but assume that the income earned is reinvested every seven days. The
compounding effect of this assumed reinvestment causes the effective yield to
be slightly higher than the yield.
We calculate the total return of investment divisions for portfolios other
than the money market portfolio for various periods of time, including:
(a) one year;
(b) five years;
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(c) ten years; and
(d) the period starting when the investment division commenced operations.
The average annual total return is the annual compounded rate of return at
which an initial investment of $1,000 would have grown to reach to the
redeemable value of that investment at the end of each of the various
measurement periods. We may also disclose cumulative total returns and returns
for various time periods.
We may disclose performance figures that reflect the withdrawal charge, and
also figures that assume the policy is not surrendered and therefore do not
reflect any withdrawal charge.
The Statement of Additional Information has more information about
performance data calculations.
Voting Rights
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To the extent required by law, we will vote shares of Target/United Funds,
Inc. held by the Variable Account according to instructions received from
persons having voting interests in those variable investment divisions. If,
however, the 1940 Act or any regulation thereunder should be amended or if the
present interpretation thereof should change, or if we determine that we are
allowed to vote the Target/United Funds, Inc. shares in our own right, we may
elect to do so. Target/United Funds, Inc. does not hold regular annual
shareholder meetings.
The number of votes that you may direct to us to cast will be calculated
separately for each variable investment division. We will determine that number
by applying your percentage interest, if any, in a particular variable
investment division to the total number of votes attributable to that variable
investment division. Before the retirement date, you hold a voting interest in
each variable investment division to which policy value is allocated. After the
retirement date, the person receiving variable annuity payments has the voting
interest. After the retirement date, the votes attributable to a policy
decrease as the value of the variable investment divisions under your policy
decrease with each variable annuity payment. In determining the number of
votes, fractional shares will be recognized.
The number of votes for a portfolio which are available will be determined
as of the record date established by Target/United Funds, Inc. Voting
instructions will be solicited by written communication prior to such meeting
in accordance with procedures established by Target/United Funds, Inc.
Portfolio shares attributable to the policies for which no timely
instructions are received will be voted in proportion to the voting
instructions which are received with respect to all Advantage II policies
participating in the variable investment division. Voting instructions to
abstain on any item to be voted upon will be applied on a pro rata basis to
reduce the votes eligible to be cast.
Each person having a voting interest in a variable investment division will
receive proxy material, reports and other materials relating to the appropriate
portfolio of Target/United Funds, Inc.
Legal Proceedings
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There are no legal proceedings to which the Variable Account is a party to
or to which the assets of the Variable Account are subject. We are not involved
in any litigation that is of material importance in relation to its total
assets or that relates to the Variable Account.
Financial Statements
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Our financial statements and those for the Variable Account (as well as the
Auditors' Reports thereon) are in the Statement of Additional Information.
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Condensed Financial Information
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The following table gives "per unit" information about the financial history
of each variable investment division for the last ten years. This information
should be read in conjunction with the Variable Account's financial statements
(including the notes thereto) included in the Statement of Additional
Information.
ACCUMULATION UNIT VALUES
<TABLE>
<CAPTION>
Money High Inter- Small
Investment Market Bond Income Growth Income national Cap Balanced
Division: ---------- ---------- ---------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 1,
1989........... 1.088 1.097 1.131 1.084 -- -- -- --
December 31,
1989........... 1.174 1.216 1.074 1.371 -- -- -- --
January 1,
1990........... 1.174 1.216 1.074 1.371 -- -- -- --
December 31,
1990........... 1.254 1.287 0.987 1.286 -- -- -- --
January 1,
1991........... 1.254 1.287 0.987 1.286 -- -- -- --
December 31,
1991........... 1.312 1.482 1.312 1.735 1.072(a) -- -- --
January 1,
1992........... 1.312 1.482 1.312 1.735 1.072 -- -- --
December 31,
1992........... 1.342 1.582 1.505 2.078 1.209 -- -- --
January 1,
1993........... 1.342 1.582 1.505 2.078 1.209 -- -- --
December 31,
1993........... 1.365 1.762 1.758 2.348 1.406 -- -- --
January 1,
1994........... 1.365 1.762 1.758 2.348 1.406 -- -- --
December 31,
1994........... 1.403 1.643 1.698 2.383 1.378 0.997(b) 1.202(b) 0.991(b)
January 1,
1995........... 1.403 1.643 1.698 2.383 1.378 0.997 1.202 0.991
December 31,
1995........... 1.468 1.963 1.989 3.272 1.796 1.060 1.577 1.219
January 1,
1996........... 1.468 1.963 1.989 3.272 1.796 1.060 1.577 1.219
December 31,
1996........... 1.528 2.012 2.217 3.645 2.132 1.209 1.696 1.344
January 1,
1997........... 1.528 2.012 2.217 3.645 2.132 1.209 1.696 1.344
December 31,
1997........... 1.592 2.189 2.506 4.388 2.666 1.399 2.211 1.578
January 1,
1998........... 1.592 2.189 2.506 4.388 2.666 1.399 2.211 1.578
December 31,
1998........... 1.658 2.329 2.532 5.537 3.201 1.856 2.429 1.700
<CAPTION>
Limited- Science
Term Asset and
Investment Bond Strategy Technology
Division: ------------ ------------- -------------
<S> <C> <C> <C>
January 1,
1989........... -- -- --
December 31,
1989........... -- -- --
January 1,
1990........... -- -- --
December 31,
1990........... -- -- --
January 1,
1991........... -- -- --
December 31,
1991........... -- -- --
January 1,
1992........... -- -- --
December 31,
1992........... -- -- --
January 1,
1993........... -- -- --
December 31,
1993........... -- -- --
January 1,
1994........... -- -- --
December 31,
1994........... 0.997(b) -- --
January 1,
1995........... 0.997 -- --
December 31,
1995........... 1.129 1.012(c) --
January 1,
1996........... 1.129 1.012 --
December 31,
1996........... 1.161 1.064 --
January 1,
1997........... 1.161 1.064 --
December 31,
1997........... 1.230 1.202 1.155(d)
January 1,
1998........... 1.230 1.202 1.155
December 31,
1998........... 1.300 1.310 1.672
ACCUMULATION UNITS OUTSTANDING
<CAPTION>
Money High Inter- Small
Investment Market Bond Income Growth Income national Cap Balanced
Division: ---------- ---------- ---------- ----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31,
1989........... 7,833,120 7,035,149 11,565,436 17,401,327 -- -- -- --
December 31,
1990........... 10,673,859 10,260,056 11,430,492 25,663,814 -- -- -- --
December 31,
1991........... 13,818,073 17,155,802 15,904,632 36,185,081 13,434,291 -- -- --
December 31,
1992........... 16,837,063 29,787,569 25,935,498 55,229,057 52,063,508 -- -- --
December 31,
1993........... 17,897,447 44,792,360 38,757,852 89,948,476 108,139,963 -- -- --
December 31,
1994........... 20,471,850 43,111,140 40,825,454 111,492,038 154,850,855 25,149,046 12,901,165 8,285,256
December 31,
1995........... 24,201,405 43,067,978 41,566,061 122,901,754 179,416,052 45,528,402 34,060,411 18,645,118
December 31,
1996........... 23,280,737 43,901,442 41,973,073 135,309,921 210,826,563 63,389,043 55,504,706 30,524,995
December 31,
1997........... 26,450,888 43,769,678 45,793,587 140,325,438 232,342,721 78,779,114 64,836,083 41,697,180
December 31,
1998........... 31,698,628 47,362,351 48,355,147 143,565,102 246,348,082 87,048,577 71,391,390 52,558,411
<CAPTION>
Limited- Science
Term Asset and
Investment Bond Strategy Technology
Division: ------------ ------------- -------------
<S> <C> <C> <C>
December 31,
1989........... -- -- --
December 31,
1990........... -- -- --
December 31,
1991........... -- -- --
December 31,
1992........... -- -- --
December 31,
1993........... -- -- --
December 31,
1994........... 1,129,780 -- --
December 31,
1995........... 2,002,578 4,228,164 --
December 31,
1996........... 2,631,935 7,517,085 --
December 31,
1997........... 2,888,746 7,707,088 8,213,309
December 31,
1998........... 3,396,477 10,190,875 19,514,662
</TABLE>
- ---------
(a) Commencement of operations on July 16, 1991 at 1.000.
(b) Commencement of operations on May 3, 1994 at 1.000.
(c) Commencement of operations on May 1, 1995 at 1.000.
(d) Commencement of operations on April 4, 1997 at 1.000.
27
<PAGE>
Statement of Additional Information
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A Statement of Additional Information is available which contains more
details concerning the subjects discussed in this prospectus. The following is
the table of contents for the Statement of Additional Information:
Table of Contents
<TABLE>
<S> <C>
The Policy.................................................................. 3
Accumulation Units........................................................ 3
Annuity Units............................................................. 3
Net Investment Factor..................................................... 4
Determination of Annuity Payments......................................... 4
Fixed Annuity Payments.................................................. 4
Variable Annuity Payments............................................... 5
The Contract.............................................................. 5
Misstatement of Age or Sex................................................ 6
Annual Report............................................................. 6
Non-Participation......................................................... 6
Delay or Suspension of Payments........................................... 6
Ownership................................................................. 6
Beneficiary............................................................... 7
Change of Owner or Beneficiary............................................ 7
Assignment................................................................ 7
Incontestability.......................................................... 7
Evidence of Survival...................................................... 7
Performance Data Calculations............................................... 7
Money Market Investment Division Yield Calculation........................ 7
Average Annual Total Return Calculations.................................. 8
Federal Tax Matters......................................................... 10
Taxation of United Investors.............................................. 10
Tax Status of the Policies................................................ 11
Required Distributions.................................................... 12
Withholding............................................................... 12
Addition, Deletion or Substitution of Investments........................... 12
Distribution of the Policy.................................................. 13
Safekeeping of Variable Account Assets...................................... 14
State Regulation............................................................ 14
Records and Reports......................................................... 14
Legal Matters............................................................... 14
Experts..................................................................... 15
Other Information........................................................... 15
Financial Statements........................................................ 15
</TABLE>
28
<PAGE>
United Investors Annuity Variable Account
Statement of Additional Information
-----------------------------------
for the
ADVANTAGE II(SM)
VARIABLE ANNUITY
Offered by
United Investors Life Insurance Company
This Statement of Additional Information expands upon subjects discussed in the
current Prospectus for the Advantage II(SM) Deferred Variable Annuity Policy
(the "Policy") offered by United Investors Life Insurance Company. You may
obtain a copy of the Prospectus dated May 1, 1999, by writing to United
Investors Life Insurance Company, Variable Products Division, P.O. Box 156,
Birmingham, Alabama 35201-0156. Terms used in the current Prospectus for the
Policy are incorporated in this Statement.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ
ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE POLICY.
Dated: May 1, 1999
<PAGE>
TABLE OF CONTENTS
Corresponding
Page in
Page Prospectus
---- -------------
THE POLICY .............................................. 3 10
Accumulation Units .................................... 3
Annuity Units ......................................... 3
Net Investment Factor ................................. 4
Determination of Annuity Payments ..................... 4
Fixed Annuity Payments ............................. 4
Variable Annuity Payments .......................... 5
The Contract .......................................... 5
Misstatement of Age or Sex ............................ 6
Annual Report ......................................... 6
Non-Participation ..................................... 6
Delay or Suspension of Payments ....................... 6
Ownership ............................................. 6
Beneficiary ........................................... 7
Change of Ownership or Beneficiary .................... 7
Assignment ............................................ 7
Incontestability ...................................... 7
Evidence of Survival .................................. 7
PERFORMANCE DATA CALCULATIONS ........................... 7 25
Money Market Investment Division Yield Calculation .... 7
Average Annual Total Return Calculations .............. 8
FEDERAL TAX MATTERS ..................................... 10 22
Taxation of United Investors .......................... 10
Tax Status of the Policies ............................ 11
Required Distributions ................................ 12
Withholding ........................................... 12
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS ....... 12
DISTRIBUTION OF THE POLICY .............................. 13 21
SAFEKEEPING OF VARIABLE ACCOUNT ASSETS .................. 14
STATE REGULATION ........................................ 14
RECORDS AND REPORTS ..................................... 14
LEGAL MATTERS ........................................... 14 26
EXPERTS ................................................. 15
OTHER INFORMATION ....................................... 15
FINANCIAL STATEMENTS .................................... 15 26
- 2 -
<PAGE>
THE POLICY
----------
As a supplement to the description in the Prospectus, the following
provides additional information about the Policy.
Accumulation Units
- ------------------
An Accumulation Unit is an accounting unit used prior to the Retirement
Date to calculate the Variable Account Value. The portion of a Net Purchase
Payment that you allocate to an Investment Division of the Variable Account is
credited as Accumulation Units in that Investment Division. Similarly, the
value that you transfer to an Investment Division of the Variable Account is
credited as Accumulation Units in that Investment Division. The number of
Accumulation Units to credit is found by dividing (1) the dollar amount
allocated to the Investment Division by (2) the Investment Division's
appropriate Accumulation Unit Value for the Valuation Period in which we
received the Purchase Payment or transfer request. In the case of the initial
Purchase Payment, we will credit Accumulation Units for that Purchase Payment at
the end of the Valuation Period during which the portion of the Net Purchase
Payment to be allocated to the Investment Divisions of the Variable Account is
allocated to the Money Market Investment Division. In the case of an additional
Purchase Payment or transfer, we will credit Accumulation Units for the portion
of the Net Purchase Payment or transfer to be allocated to the Investment
Divisions of the Variable Account at the end of the Valuation Period during
which the Purchase Payment or transfer request is received.
The value of an Accumulation Unit for each Investment Division was
initially arbitrarily set at $1 when the first investments were bought. The
value for any later Valuation Period is found by multiplying the Accumulation
Unit Value for an Investment Division for the last prior Valuation Period by
such Investment Division's Net Investment Factor for the following Valuation
Period. Like the Policy Value, the value of an Accumulation Unit may increase
or decrease from one Valuation Period to the next.
Annuity Units
- -------------
An Annuity Unit is an accounting unit used after the Retirement Date to
calculate the value of Variable Annuity Payments. The value of an Annuity Unit
in each Investment Division was arbitrarily set at $1 when the first investments
were bought. The value for any later Valuation Period is found by (a)
multiplying the Annuity Unit Value for an Investment Division for the last prior
Valuation Period for such Investment Division's Net Investment Factor for the
following Valuation Period, and then (b) adjusting the result to compensate for
the interest rate assumed in the annuity tables used to determine the amount of
the first Variable Annuity Payment. The value of an Annuity Unit for each
Investment Division changes to reflect the investment performance of the
Portfolio underlying that Investment Division.
- 3 -
<PAGE>
Net Investment Factor
- ---------------------
The Net Investment Factor is an index applied to measure the investment
performance of an Investment Division of the Variable Account from one Valuation
Period to the next. The Net Investment Factor may be greater or less than one,
so the value of an Investment Division may increase or decrease.
The Net Investment Factor of an Investment Division for any Valuation
Period is determined by dividing (1) by (2) and subtracting (3) from the result,
where:
(1) is the result of:
(a) the net asset value per share of the Portfolio shares held in the
Investment Division determined at the end of the current
Valuation Period; plus
(b) the per share amount of any dividend or capital gain
distributions on the Portfolio shares held in the Investment
Division, if the "ex-dividend" date occurs during the current
Valuation Period; plus or minus
(c) a charge or credit for any taxes reserved for the current
Valuation Period which we determine to have resulted from the
investment operations of the Investment Division;
(2) is the result of:
(a) the net asset value per share of the Portfolio shares held in the
Investment Division, determined at the end of the previous
Valuation Period; plus or minus
(b) the charge or credit for any taxes reserved for the previous
Valuation Period; and
(3) is a deduction for certain mortality and expense risks that we assume.
Determination of Annuity Payments
- ---------------------------------
At the Retirement Date, the Policy Value as of 14 days prior to the
Retirement Date, less any premium taxes and less any withdrawal charges, may be
applied to make Fixed Annuity Payments, Variable Annuity Payments, or a
combination thereof.
Fixed Annuity Payments. Fixed Annuity Payments provide guaranteed annuity
----------------------
payments which remain fixed in amount throughout the payment period. Fixed
Annuity Payments do not vary with the investment experience of the Investment
Divisions. The payment amount will be based on our Fixed Annuity Payment rates
in effect on the settlement date. These rates are guaranteed not to be less than
payments based on the 1971 Individual Annuity Mortality Table (set back two
years) with interest at 4.0%. The two year setback results in lower Annuity
Payments than if no setback is used. Where requested
- 4 -
<PAGE>
and required by law unisex tables will be used.
Variable Annuity Payments. The dollar amount of the first Variable Annuity
-------------------------
Payment is determined by multiplying the net value applied by purchase rates
based on the 1971 Individual Annuity Mortality Table (set back two years) with
interest at 4.0%. The two year setback results in lower Annuity Payments than if
no setback is used. Where requested and required by law unisex tables will be
used.
The portion of the first Variable Annuity Payment attributed to each
Investment Division is divided by the Annuity Unit Value for the Investment
Division (as of the same date that the amount of the first Variable Annuity
Payment is determined) to determine the number of Annuity Units upon which later
Variable Annuity Payments will be made. This number of Annuity Units will not
change unless subsequently changed by reallocation. The dollar amount of each
monthly Variable Annuity Payment after the first Annuity Payment will equal the
sum of the number of Annuity Units credited to each Investment Division
multiplied by the Annuity Unit Value for each respective Investment Division for
the Valuation Period as of 14 days prior to the Variable Annuity Payment, less a
pro rata portion of the charge for administrative expenses.
After the Retirement Date, the Annuitant may reallocate the value of the
Annuitant's interest in the Investment Divisions, no more than once each Policy
Year, by sending a Written Request to United Investors. A reallocation will be
effected during the Valuation Period as of 14 days prior to the next Variable
Annuity Payment, by converting Annuity Units for the value transferred from an
Investment Division into Annuity Units in the Investment Division to which the
value is transferred. Reallocations may cause the number of Annuity Units to
change, but will not change the dollar amount of the Variable Annuity Payment as
of the date of reallocation.
United Investors guarantees that the dollar amount of monthly Variable
Annuity Payments after the first payment will not be affected by variations in
expenses or mortality experience.
The Contract
- ------------
The entire contract is made up of the Policy and the written application.
All statements made in the application, in the absence of fraud, are considered
representations and not warranties. Only the statements made in the written
application can be used by us to defend a claim or void the Policy.
Changes to the Policy are not valid unless we make them in writing. They
must be signed by one of our executive officers. No agent has authority to
change the Policy or to waive any of its provisions.
- 5 -
<PAGE>
Misstatement of Age or Sex
- --------------------------
If the Annuitant's age or sex is misstated, we will adjust each benefit and
any amount to be paid to reflect the correct age and sex.
Annual Report
- -------------
At least once each Policy Year prior to the Retirement Date we will send
you a report on your Policy. It will show the current Policy Value, the current
Fixed Account Value, the current value of the Investment Divisions of the
Variable Account, the Purchase Payments paid, all charges and partial
withdrawals since the last report, the current Surrender Value and the current
Death Benefit. We will also include in the report any other information
required by state law or regulation. Further, we will send you the reports
required by the Investment Company Act of 1940. You may request additional
reports during the year but we may charge a fee for any additional reports.
Non-Participation
- -----------------
The Policy is non-participating. This means that no dividends will be paid
on your Policy. It will not share in our profits or surplus earnings.
Delay or Suspension of Payments
- -------------------------------
We will normally pay a surrender or any withdrawal within seven days after
we receive your Written Request in our home office. However, payment of any
amount from the Investment Divisions of the Variable Account may be delayed or
suspended whenever:
a) the New York Stock Exchange is closed other than customary weekend and
holiday closing, or trading on the New York Exchange is restricted as
determined by the U.S. Securities and Exchange Commission;
b) the U.S. Securities and Exchange Commission by order permits
postponement for the protection of Policyholders; or
c) an emergency exists, as determined by the Commission, as a result of
which disposal of the securities held in the Investment Divisions is
not reasonably practicable or it is not reasonably practicable to
determine the value of the Variable Account's net assets.
Payment of any amounts from the Fixed Account may be deferred for up to six
months from the date of the request to surrender. If payment is deferred for
more than 30 days, we will pay interest on the amount deferred at a rate not
less the Guaranteed Minimum Interest Rate.
Payments under the Policy of any amounts derived from Purchase Payments
paid by check may be delayed until such time as the check has cleared your bank.
Ownership
- ---------
The Policy belongs to you, the Policyowner. Unless you provide
- 6 -
<PAGE>
otherwise, you may receive all benefits and exercise all rights of the Policy
prior to the Retirement Date. These rights and the rights of any Beneficiary are
subject to the rights of any assignee. If there is more than one Owner at a
given time, all must exercise the rights of ownership by joint action. If you
die, the Owner's Designated Beneficiary will become the Owner; if there is no
Owner's Designated Beneficiary living, the rights of ownership will vest in the
executors, administrators or assigns of the Owner.
Beneficiary
- -----------
The Beneficiary is named in the application. More than one Beneficiary may
be named. The rights of any Beneficiary who dies before the Annuitant will pass
to the surviving Beneficiary or Beneficiaries unless you provide otherwise. If
no Beneficiary is living at the Annuitant's death, we will pay the Death
Benefit, if any, to the Policyowner, if living; otherwise, it will be paid to
the Policyowner's estate.
Change of Ownership or Beneficiary
- ----------------------------------
Unless you provide otherwise in writing to us, you may change the Owner or
the Beneficiary during the lifetime of the Annuitant. Any changes must be made
by Written Request filed with us. The change takes effect on the date the
request was signed, but it will not apply to payments made by us before we
accept your Written Request. We may require you to submit the Policy to us
before making a change. A change of ownership may be a taxable event.
Assignment
- ----------
You may assign the Policy, but we will not be responsible for the validity
of any assignment and no assignment will bind us until it is filed in writing at
our home office. When it is filed, your rights and the rights of any
Beneficiary will be subject to it. An assignment of the Policy may be a taxable
event. Your ability to assign a Qualified Policy may be restricted.
Incontestability
- ----------------
United Investors will not contest the Policy.
Evidence of Survival
- --------------------
Where any payments under the Policy depend on the payee being alive, we may
require proof of survival prior to making the payments.
PERFORMANCE DATA CALCULATIONS
-----------------------------
We may advertise the yield and effective yield of the Money Market
Investment Division. In addition, we may advertise the total returns for other
Investment Divisions of the Variable Account. All performance data calculations
for the Variable Account will be in accordance with uniformly imposed SEC
regulations.
Money Market Investment Division Yield Calculation
- --------------------------------------------------
In accordance with regulations adopted by the SEC, if we disclose the
- 7 -
<PAGE>
current annualized yield of the Money Market Investment Division for a seven-day
period, it is required to be in a manner which does not take into consideration
any realized or unrealized gains or losses of the Money Market Portfolio or on
its portfolio securities. The current annualized yield is computed by
determining the net change (exclusive of realized gains and losses on the sale
of securities and unrealized appreciation and depreciation and income other than
investment income) in the value of a hypothetical account having a balance of
one unit of the Money Market Investment Division at the beginning of the seven-
day period, dividing the net change in account value by the value of the account
at the beginning of the period to determine the base period return, and
annualizing this quotient on a 365-day basis. The net change in account value
reflects the deduction for the Mortality and Expense Risk Charge and the
Administration Fee as well as reflecting income and expenses accrued during the
period. Because of these deductions, the yield for the Money Market Investment
Division will be lower than the yield for the Money Market Portfolio of the
Fund.
The SEC also permits us to disclose the effective yield of the Money Market
Investment Division for the same seven-day period, determined on a compounded
basis. The effective yield is calculated by compounding the annualized base
period return by adding one to the base period return, raising the sum to a
power equal to 365 divided by 7, and subtracting one from the result according
to the following formula:
Effective Yield = [(Base period return +1) * 365/7] - l
For the seven-day period ending December 31, 1998, the Money Market
Investment Division annualized yield was 3.31%. For the same period, the
effective yield was 3.37%.
The actual yield of the Money Market Investment Division is affected by:
(l) changes in interest rates on money market securities; (2) the average
portfolio maturity of the Money Market Portfolio; (3) the types and quality of
securities held by the Money Market Portfolio; and (4) its operating expenses.
The yield on amounts held in the Money Market Investment Division normally will
fluctuate on a daily basis. Therefore, the disclosed yields for any given past
period is not an indication or representation of future yields or rates of
return.
Average Annual Total Return Calculations
- ----------------------------------------
For each Investment Division of the Variable Account other than the Money
Market Investment Division an average annual total return may be calculated for
a given period. It is computed by finding the average annual compounded rate of
return over one, five and ten year periods (or, where an Investment Division has
been in existence for a period less than one, five or ten years, for such lesser
period) that would equate the initial amount
- 8 -
<PAGE>
invested to the ending redeemable value, according to the following formula:
P(1 + T) * n = ERV
Where
P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years in the period
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one, five or ten year periods (or fractional
portion thereof) at the end of such period.
All recurring fees that are charged to all Policy Owner accounts are
recognized in the ending redeemable value. The average annual total return
calculation will also reflect the effect of Withdrawal Charges that may be
applicable due to surrender of the Policy at the end of a particular period.
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
Investment 1 Year to 5 Years to 10 Years to Inception to Inception
Division 12/31/98 12/31/98 12/31/98 12/31/98 Date
- ---------- --------- ---------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Asset Strategy 1.43% N/A N/A 5.86% 5/01/95
Balanced 0.16% N/A N/A 10.83% 5/03/94
Bond -1.15% 4.61% 7.21% 7.08% 7/13/87
Growth 18.65% 17.78% 17.10% 15.52% 7/13/87
High Income -6.50% 6.47% 7.78% 7.86% 7/13/87
Income 12.52% 16.93% N/A 16.21% 7/16/91
International 25.16% N/A N/A 13.00% 5/03/94
Limited-Term Bond -1.83% N/A N/A 4.44% 5/03/94
Science and Technology 37.23% N/A N/A 30.46% 4/04/97
Small Cap 2.34% N/A N/A 19.88% 5/03/94
</TABLE>
From time to time we may also disclose average annual total returns in
conjunction with the standard format described above. The only difference
between the two methods is that the non-standard format assumes a Withdrawal
Charge of 0%.
- 9 -
<PAGE>
NON-STANDARD AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
Investment 1 Year to 5 Years to 10 Years to Inception to Inception
Division 12/31/98 12/31/98 12/31/98 12/31/98 Date
- ---------- --------- ---------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Asset Strategy 8.43% N/A N/A 7.02% 5/01/95
Balanced 7.16% N/A N/A 11.41% 5/03/94
Bond 5.85% 5.11% 7.21% 7.08% 7/13/87
Growth 25.65% 18.09% 17.10% 15.52% 7/13/87
High Income 0.50% 6.93% 7.78% 7.86% 7/13/87
Income 19.52% 17.25% N/A 16.26% 7/16/91
International 32.16% N/A N/A 13.54% 5/03/94
Limited-Term Bond 5.17% N/A N/A 5.16% 5/03/94
Science and Technology 44.23% N/A N/A 33.72% 4/04/97
Small Cap 9.34% N/A N/A 20.32% 5/03/94
</TABLE>
The performance information provided above reflects only the performance of
a hypothetical $1,000 payment which is allocated to the stated Investment
Division during the time period on which the calculations are based.
Performance information provided for any given past period is not an indication
or representation of future yields or rates of return.
The figures shown above do not reflect the "12b-l" service fee for periods
prior to the August 31, 1998 effective date of the Service Plan. If the Service
Plan had been in effect during the periods shown, returns would have been lower.
FEDERAL TAX MATTERS
-------------------
Taxation of United Investors
- ----------------------------
United Investors is taxed as a life insurance company under Part 1 of
Subchapter L of the Internal Revenue Code of 1986 (the "Code"). Since the
Variable Account is not an entity separate from United Investors and its
operations form a part of United Investors, it will not be taxed separately as a
"regulated investment company" under Subchapter M of the Code. Investment
income and realized net capital gains on the assets of the Variable Account are
reinvested and taken into account in determining the Policy Value. As a result,
such investment income and realized net capital gains are automatically retained
as part of the reserves under the Policy. Under existing Federal income tax
law, United Investors believes that Variable Account investment income and
realized net capital gains should not be taxed
- 10 -
<PAGE>
to the extent that such income and gains are retained as part of the reserves
under the Policy.
Tax Status of the Policies
- --------------------------
Section 817(h) of the Code provides that the investments of the Variable
Account must be "adequately diversified" in accordance with Treasury regulations
in order for the Policies to qualify as annuity contracts under Section 72 of
the Code. The Variable Account, through each Portfolio of the Fund, intends to
comply with the diversification requirements prescribed by the Treasury in
Treas. Reg. Section 1.817-5, which affect how the Portfolios' assets may be
invested. United Investors does not control the Fund or the Portfolios'
investments. However, it has entered into an agreement regarding participation
in the Fund, which requires each Portfolio of the Fund to be operated in
compliance with the diversification requirements prescribed by the Treasury.
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for Federal income tax purposes, of the assets of the
separate account used to support their contracts. In those circumstances,
income and gains from the separate account assets would be includible in the
variable contract owner's gross income. The IRS has stated in published rulings
that a variable contract owner will be considered the owner of separate account
assets if the contract owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. The
Treasury Department also announced, in connection with the issuance of
regulations concerning diversification, that those regulations "do not provide
guidance concerning the circumstances in which investor control of the
investments of a segregated asset account may cause the investor (i.e., the
Policyowner), rather than the insurance company, to be treated as the owner of
the assets in the account." This announcement also stated that guidance would
be issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular subaccounts without being treated as
owners of the underlying assets."
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the Policyowner has additional flexibility in allocating premium
payments and Policy Values. These differences could result in a Policyowner
being treated as the owner of a pro rata portion of the assets of the Separate
Account. In addition, the Company does not know what standards will be set
forth, if any, in the regulations or rulings which the Treasury Department has
stated it expects to issue. The Company therefore reserves the right to modify
the Policy as necessary to attempt to prevent a Policyowner from being
- 11 -
<PAGE>
considered the owner of a pro rata share of the assets of the Separate Account.
Required Distributions
- ----------------------
In order to be treated as an annuity contract for Federal income tax
purposes, Section 72(s) of the Code requires any nonqualified Policy to provide
that (a) if any Owner dies on or after the annuity starting date but prior to
the time the entire interest in the Policy has been distributed, the remaining
portion of such interest will be distributed at least as rapidly as under the
method of distribution being used as of the date of that Owner's death; and (b)
if any Owner dies prior to the annuity starting date, the entire interest in the
Policy will be distributed within five years after the date of that Owner's
death.
These requirements will be considered satisfied as to any portion of the
Owner's interest that is payable as annuity payments which will begin within one
year of that Owner's death and which will be made over the life of the Owner's
designated Beneficiary or over a period not extending beyond his life
expectancy.
If the Owner's designated Beneficiary is the surviving spouse of the Owner,
the Policy may be continued with the surviving spouse as the new Owner and no
distributions will be required.
Withholding
- -----------
Distributions from the Policy generally are subject to withholding for the
Owner's Federal income tax liability. The withholding rate varies according to
the type of distribution and the Owner's tax status. The Owner will be provided
the opportunity to elect to not have tax withheld from distributions.
"Eligible rollover distributions" from section 401(a) plans and section
403(b) tax-sheltered annuities are subject to a mandatory Federal income tax
withholding of 20%. An eligible rollover distribution is the taxable portion of
any distribution from such a plan, except certain distributions such as
distributions required by the Code or distributions in a specified annuity form.
The 20% withholding does not apply, however, if the Owner chooses a "direct
rollover" from the plan to another tax-qualified plan or IRA.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
-------------------------------------------------
United Investors reserves the right, subject to compliance with applicable
law, to make additions to, deletions from, or substitutions for, the shares of
the Fund that are held by the Variable Account (or any Investment Division) or
that the Variable Account (or any Investment Division) may purchase. United
Investors reserves the right to eliminate the shares of any of the Portfolios of
the Fund and to substitute shares of another
- 12 -
<PAGE>
Portfolio of the Fund or any other investment vehicle or of another open-end,
registered investment company if laws or regulations are changed, if the shares
of the Fund or a Portfolio are no longer available for investment, or if in our
judgment further investment in any Portfolio should become inappropriate in view
of the purposes of the Investment Division. United Investors will not substitute
any shares attributable to a Policyowner's interest in an Investment Division of
the Variable Account without notice and prior approval of the U.S. Securities
and Exchange Commission and the insurance regulator of the state where the
Policy was delivered, where required. Nothing contained herein shall prevent the
Variable Account from purchasing other securities for other series or classes of
policies, or from permitting a conversion between series or classes of policies
on the basis of requests made by Policyowners.
United Investors also reserves the right to establish additional Investment
Divisions of the Variable Account, each of which would invest in a new Portfolio
of the Fund, or in shares of another investment company or suitable investment,
with a specified investment objective. New Investment Divisions may be
established when, in the sole discretion of United Investors, marketing needs or
investment conditions warrant, and any new Investment Divisions will be made
available to existing Policyowners on a basis to be determined by United
Investors. United Investors may also eliminate one or more Investment Divisions
if, in its sole discretion, marketing, tax, or investment conditions warrant.
In the event of any such substitution or change, United Investors may, by
appropriate endorsement, make such changes in the Policies as may be necessary
or appropriate to reflect such substitution or change. If deemed by United
Investors to be in the best interests of persons having voting rights under the
Policies, the Variable Account may be operated as a management company under the
Investment Company Act of 1940, it may be deregistered under that Act in the
event such registration is no longer required, or it may be combined with other
United Investors separate accounts.
DISTRIBUTION OF THE POLICY
--------------------------
The Policies will be sold by individuals who, in addition to being licensed
as life insurance agents for United Investors, are also registered
representatives of Waddell & Reed, Inc. ("W&R"), the principal underwriter of
the Policies, or of broker-dealers who have entered into written sales
agreements with W&R. W&R is registered with the U.S. Securities and Exchange
Commission under the Securities Exchange Act of 1934 as a broker-dealer and is a
member of the National Association of Securities Dealers. The total commissions
paid by United Investors for the sale of the Policy were
- 13 -
<PAGE>
$17,967,189 during 1996, $17,930,576 during 1997, and $21,171,511 during 1998.
The Policies are offered to the public through brokers licensed under the
Federal securities laws and state insurance laws that have entered into
agreements with W&R. The offering of the Policies is continuous, and W&R does
not anticipate discontinuing the offering of the Policies. However, W&R reserves
the right to discontinue the offering of the Policies.
SAFEKEEPING OF VARIABLE ACCOUNT ASSETS
--------------------------------------
United Investors holds the assets of the Variable Account. The assets are
kept physically segregated and held separate and apart from United Investors'
general account. United Investors maintains records of all purchases and
redemptions of Fund shares by each of the Investment Divisions.
STATE REGULATION
----------------
United Investors is subject to regulation by the Missouri Department of
Insurance. An annual statement is filed with the Missouri Department of
Insurance on or before March 1 of each year covering the operations and
reporting on the financial condition of United Investors as of December 31 of
the preceding year. Periodically, the Missouri Department of Insurance or other
authorities examine the liabilities and reserves of United Investors and the
Variable Account, and a full examination of United Investors' operations is
conducted periodically by the National Association of Insurance Commissioners.
In addition, United Investors is subject to the insurance laws and
regulations of other states within which it is licensed or may become licensed
to operate. Generally, the insurance department of any other state applies the
laws of the state of domicile in determining permissible investments. A Policy
is governed by the law of the state in which it is delivered. The values and
benefits of each Policy are at least equal to those required by such state.
RECORDS AND REPORTS
-------------------
All records and accounts relating to the Variable Account will be
maintained by United Investors. As presently required by the Investment Company
Act of 1940 and regulations promulgated thereunder, reports containing such
information as may be required under that Act or by any other applicable law or
regulation will be sent to Owners at their last known address of record.
LEGAL MATTERS
-------------
Legal advice regarding certain matters relating to Federal securities
- 14 -
<PAGE>
laws applicable to the issuance of the Policy described in the Prospectus have
been provided by Sutherland Asbill & Brennan LLP of Washington, D.C.
EXPERTS
-------
The balance sheets of United Investors Life Insurance Company as of
December 31, 1998 and 1997, and the related statements of operations,
comprehensive income shareholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1998 and the balance sheet of United
Investors Annuity Variable Account as of December 31, 1998 and the related
statements of operations and changes in net assets for each of the years in the
two-year period ended December 31, 1998 have been included herein in reliance
upon the report of KPMG Peat Marwick LLP independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
OTHER INFORMATION
-----------------
A Registration Statement has been filed with the U.S. Securities and
Exchange Commission under the Securities Act of 1933 as amended, with respect to
the Policies discussed in this Statement of Additional Information. Not all of
the information set forth in the Registration Statement, amendments and exhibits
thereto has been included in this Statement of Additional Information.
Statements contained in this Statement of Additional Information concerning the
content of the Policies and other legal instruments are intended to be
summaries. For a complete statement of the terms of these documents, reference
should be made to the instruments filed with the U.S. Securities and Exchange
Commission.
FINANCIAL STATEMENTS
--------------------
The financial statements of United Investors, which are included herein,
should be considered only as bearing on the ability of United Investors to meet
its obligations under the Policies. They should not be considered as bearing on
the investment performance of the assets held in the Variable Account.
- 15 -
<PAGE>
Appendix E:
Financial Statements
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors
United Investors Life Insurance Company
Birmingham, Alabama
We have audited the accompanying balance sheets of United Investors Life
Insurance Company as of December 31, 1998 and 1997 and the related statements
of operations, comprehensive income, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1998. 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 United Investors Life
Insurance Company at December 31, 1998 and 1997 and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Birmingham, Alabama
January 29, 1999
F-1
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
At December 31,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities-available for sale, at fair value
(cost: 1998--$612,586; 1997--$612,600)................. $ 643,151 $ 635,643
Preferred stock of affiliate (cost: 1998--$188,212:
1997--$0).............................................. 188,212 0
Policy Loans............................................ 18,009 15,817
Other long term investments............................. 0 22,488
Short term investments.................................. 12,680 13,423
---------- ----------
Total investments.................................... 862,052 687,371
Cash..................................................... 11,426 5,288
Accrued investment income (includes amounts from
affiliates: 1998--$582; 1997--$473)..................... 11,747 11,270
Receivables.............................................. 3,113 2,826
Due from affiliate (includes funds withheld on
reinsurance: 1998--$229,194; 1997--$190,235)............ 278,458 225,235
Deferred acquisition cost................................ 183,033 176,897
Value of business purchased.............................. 30,600 33,754
Goodwill................................................. 29,465 6,771
Property and equipment................................... 96 141
Other assets............................................. 1,786 1,149
Separate account assets.................................. 2,425,262 1,876,439
---------- ----------
Total assets......................................... $3,837,038 $3,027,141
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits (includes reserves assumed from
affiliates: 1998--$241,357; 1997--$210,276)............ $ 776,461 $ 736,975
Unearned and advance premiums........................... 2,822 2,975
Other policy benefits................................... 6,973 8,713
---------- ----------
Total policy liabilities............................. 786,256 748,663
Accrued income taxes.................................... 55,498 58,270
Other liabilities....................................... 2,174 2,825
Due to affiliates....................................... 8,268 9,374
Separate account liabilities............................ 2,425,262 1,876,439
---------- ----------
Total liabilities.................................... 3,277,458 2,695,571
Shareholders' equity:
Common stock, par value $6 per share authorized, issued
and outstanding: 500,000 shares........................ 3,000 3,000
Additional paid in capital.............................. 350,388 138,469
Unrealized investment gains, net of applicable taxes.... 15,654 14,700
Retained earnings....................................... 190,538 175,401
---------- ----------
Total shareholder's equity........................... 559,580 331,570
---------- ----------
Total liabilities and shareholder's equity........... $3,837,038 $3,027,141
========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
F-2
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Premium income.................................... $ 69,987 $ 68,723 $ 65,114
Policy charges and fees........................... 45,113 36,582 29,403
Net investment income (includes amounts from af-
filiates 1998--$13,082;
1997--$2,863; 1996--$2,847)...................... 61,373 51,514 51,128
Realized investment gains (losses)................ 9,401 (5,365) 925
Other income from affiliates...................... 13,665 11,876 0
-------- -------- --------
Total revenue................................... 199,539 163,330 146,570
Benefits and expenses:
Policy benefits:
Individual life.................................. 63,689 57,954 47,355
Annuity.......................................... 13,633 15,165 15,807
-------- -------- --------
Total policy benefits........................... 77,322 73,119 63,162
Amortization of deferred acquisition costs........ 27,874 24,898 19,850
Commissions and premium taxes (includes amounts to
affiliates:
1998--$1,013; 1997--$4,928; 1996--$4,723)........ 5,580 6,251 5,248
Other operating expenses (includes amounts to af-
filiates: 1998--$3,252;
1997--$3,217; 1996--$2,181)...................... 6,579 5,470 3,966
-------- -------- --------
Total benefits and expenses..................... 117,355 109,738 92,226
Net operating income before income taxes........... 82,184 53,592 54,344
Income taxes....................................... 25,567 18,843 19,078
-------- -------- --------
Net income...................................... $ 56,617 $ 34,749 $ 35,266
======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
F-3
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
STATEMENTS OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
<TABLE>
<S> <C> <C> <C>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Net income......................................... $56,617 $34,749 $ 35,266
Other comprehensive income (loss):
Unrealized investment gains (losses):
Unrealized investment gains (losses) on
securities:
Unrealized holding gains arising during period.. 7,021 13,362 (21,413)
Less: reclassification adjustment for (gains)
losses
on securities included in net income .......... (1) 5,235 (924)
Less: reclassification adjustment for
amortization of
(discount) and premium......................... 502 744 570
------- ------- --------
7,522 19,341 (21,767)
Unrealized gains (losses) on other investments.. (6,330) 1,798 861
Unrealized gains (losses) on deferred
acquisition costs............................. 276 (5,387) 8,857
------- ------- --------
Total unrealized gains (losses) ................ 1,468 15,752 (12,049)
Applicable tax.................................. (514) (5,512) 4,217
------- ------- --------
Other comprehensive income (loss).................. 954 10,240 (7,832)
Comprehensive income............................ $57,571 $44,989 $ 27,434
======= ======= ========
</TABLE>
See accompanying Notes to Financial Statements.
F-4
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Additional Unrealized Total
Common Paid-in Gains Retained Shareholders'
Stock Capital (Losses) Earnings Equity
------ ---------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Year Ended at December
31, 1996
Balance at January 1,
1996.................... $3,000 $137,950 $12,292 $159,886 $313,128
Comprehensive income..... (7,832) 35,266 27,434
Dividends................ (28,500) (28,500)
------ -------- ------- -------- --------
Balance at December 31,
1996................... 3,000 137,950 4,460 166,652 312,062
Year Ended at December
31, 1997
Comprehensive income..... 10,240 34,749 44,989
Dividends................ (26,000) (26,000)
Exercise of stock op-
tions................... 519 519
------ -------- ------- -------- --------
Balance at December 31,
1997................... 3,000 138,469 14,700 175,401 331,570
Year Ended at December
31, 1998
Comprehensive income..... 954 56,617 57,571
Dividends................ (33,500) (33,500)
Impact from reorganiza-
tion of Waddell & Reed.. -- 211,851 (7,980) 203,871
Exercise of stock op-
tions................... 68 68
------ -------- ------- -------- --------
Balance at December 31,
1998................... $3,000 $350,388 $15,654 $190,538 $559,580
====== ======== ======= ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
F-5
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net income.................................... $ 56,617 $ 34,749 $ 35,266
Adjustment to reconcile net income to cash
provided from operations:
Increase in future policy benefits.......... 13,871 17,878 20,692
Increase (decrease) in other policy liabili-
ties....................................... (1,892) 749 2,154
Deferral of policy acquisition costs........ (42,857) (33,485) (33,744)
Value of business acquired.................. 0 (10,000) 0
Amortization of deferred acquisition costs.. 27,874 24,898 19,850
Change in accrued income taxes.............. 1,079 10,212 (3,033)
Depreciation................................ 39 42 44
Realized (gains) losses on sale of invest-
ments and properties....................... (9,401) 5,365 (925)
Other accruals and adjustments.............. (3,240) 1,817 (997)
-------- -------- --------
Cash provided from operations................. 42,090 52,225 39,307
-------- -------- --------
Cash used for investment activities:
Investments sold or matured:
Fixed maturities available for sale-sold..... 46,039 113,035 15,246
Fixed maturities available for sale-matured,
called and repaid........................... 76,583 66,469 44,523
Other long-term investments.................. 25,596 2,199 482
-------- -------- --------
Total investments sold or matured.......... 148,218 181,703 60,251
Acquisition of investments:
Fixed maturities available for sale.......... (123,111) (176,905) (68,214)
Net increase in policy loans................. (2,192) (1,485) (2,033)
Other long-term investments.................. (36) (1,517) (1,183)
-------- -------- --------
Total acquisition of investments........... (125,339) (179,907) (71,430)
Net (increase) decrease in short-term
investments.................................. 747 (11,589) 2,389
Funds loaned to affiliates.................... (13,026) (24,080) (3,500)
Funds repaid from affiliates.................. 2,400 24,080 3,500
Funds borrowed from affiliates................ 14,800 0 0
Funds repaid to affiliates.................... (14,800) 0 0
Disposition of properties..................... 5 0 34
Additions of properties....................... (37) (27) (117)
-------- -------- --------
Cash provided from (used for) investment
activities................................... 12,968 (9,820) (8,873)
-------- -------- --------
Cash used for financing activities:
Cash dividends paid to shareholders......... (33,500) (27,000) (27,500)
Net receipts from deposit product opera-
tions...................................... (15,420) (12,521) (6,572)
-------- -------- --------
Cash used for financing activities............ (48,920) (39,521) (34,072)
Increase (decrease) in cash................... 6,138 2,884 (3,638)
Cash at beginning of year..................... 5,288 2,404 6,042
-------- -------- --------
Cash at end of year........................... $ 11,426 $ 5,288 $ 2,404
======== ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
F-6
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
(Dollar amounts in thousands)
Note 1--Summary of Significant Accounting Policies
Organization: United Investors Life Insurance Company ("UILIC") was a wholly
owned subsidiary of Waddell & Reed Financial, Inc. ("WDR") (formerly known as
United Investors Management Company), a subsidiary of Torchmark Corporation. On
March 3, 1998, to facilitate the initial public offering ("IPO") by Torchmark
Corporation ("TMK") of 36% of the common stock of WDR, several transactions
were completed to reorganize the assets held by WDR. The following transactions
directly affected UILIC:
(i) WDR contributed 188,212 shares of TMK 6 1/2% Cumulative Preferred Stock,
Series A to UILIC.
(ii) WDR dividended the common stock of its subsidiary UILIC pro rata to
Liberty National Life Insurance Company ("LNL"), an 81.18% owner, and
TMK, an 18.82% owner. LNL is a wholly owned subsidiary of TMK.
(iii) Upon reorganization, UILIC recorded additional goodwill in the amount of
$23,639. This goodwill represented UILIC's portion of United Investors
Management Company's goodwill which was allocated between Waddell & Reed
and UILIC upon dividend of UILIC to TMK and LNL.
(iv) TMK transferred to UILIC a deferred commission credit of $7,980, net of
applicable tax of $4,297. This credit is being amortized over
approximately 10 years.
Description of Business: The Company is a life insurer licensed in 49
states. The Company offers a full range of life, annuity and variable products
through its agents and is subject to competition from other insurers throughout
the United States. The Company is subject to regulation by the insurance
department of states in which it is licensed, and undergoes periodic
examinations by those departments.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and revenues and expenses for the reporting period.
Actual results could differ significantly from those estimates.
The estimates susceptible to significant change are those used in
determining the liability for policy reserves, losses and claims. Although some
variability is inherent in these estimates, management believes the amounts
provided are adequate.
Basis of Presentation: The accompanying financial statements include the
accounts of United Investors Life Insurance Company ("United Investors") an
indirectly wholly-owned subsidiary of TMK, is owned by Liberty National Life
Insurance Company (81.18%) and Torchmark Corporation (18.82%). The financial
statements have been prepared on the basis of generally accepted accounting
principles ("GAAP").
Investments: United Investors classifies all of its fixed maturity
investments, which includes bonds and redeemable preferred stocks, as available
for sale. Investments classified as available for sale are carried at fair
value with unrealized gains and losses, net of deferred taxes, reflected
directly in shareholder's equity. Investments in equity securities, which
include common and nonredeemable preferred stocks, are reported at fair value
with unrealized gains and losses, net of deferred taxes, reflected directly in
shareholder's equity. Policy loans are carried at unpaid principal balances.
Short-term investments include investments in certificates of deposit and other
interest-bearing time deposits with original maturities within three months.
Other long-term investments consist of investments in mutual funds which are
carried at fair value. If an investment becomes permanently impaired, such
impairment is treated as a realized loss and the investment is adjusted to net
realizable value.
F-7
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands)
Note 1--Summary of Significant Accounting Policies (continued)
Gains and losses realized on the disposition of investments are recognized
as revenues and are determined on a specific identification basis.
Realized investment gains and losses and investment income attributable to
separate accounts are credited to the separate accounts and have no effect on
United Investor's net income. Investment income attributable to policyholders
is included in United Investor's net investment income. Net investment income
for the years ended December 31, 1998, 1997 and 1996 included approximately
$37,000, $37,800, and $37,600, respectively, which was allocable to
policyholder reserves or accounts. Realized investment gains and losses are not
allocable to policyholders.
Determination of Fair Values of Financial Instruments: Fair value for cash,
short-term investments, receivables and payables approximates carrying value.
Fair values for investment securities are based on quoted market prices, where
available. Otherwise, fair values are based on quoted market prices of
comparable instruments. Fair value of future benefits for universal life and
current interest products and annuity products are based on the fund value.
Cash: Cash consists of balances on hand and on deposit in banks and
financial institutions.
Recognition of Revenue and Related Expenses: Premiums for insurance
contracts which are not defined as universal life-type according to the
Financial Accounting Standards Board's Statement of Accounting Standards (SFAS)
97 are recognized as revenue over the premium-paying period of the policy.
Premiums for limited-payment life insurance contracts as defined by SFAS 97 are
recognized over the contract period. Premiums for universal life-type and
annuity contracts are added to the policy account value, and revenues from such
products are recognized as charges to the policy account value for mortality,
administration, and surrenders (retrospective deposit method). The related
benefits and expenses are matched with revenues by means of the provision for
future policy benefits and the amortization of deferred acquisition costs in a
manner which recognizes profits as they are earned over the same period.
Future Policy Benefits: The liability for future policy benefits for
universal life-type products according to SFAS 97 is represented by policy
account value. Annuity Contracts are accounted for as deposit contracts. The
liability for future policy benefits for other products is provided on the net
level premium method based on estimated investment yields, mortality,
persistency and other assumptions which were appropriate at the time the
policies were issued. Assumptions used are based on United Investor's
experience as adjusted to provide for possible adverse deviation. These
estimates are periodically reviewed and compared with actual experience. If it
is determined that future expected experience differs significantly from that
assumed, the estimates are revised.
Deferred acquisition costs: The costs of acquiring new insurance business
are deferred. Such costs consist of sales commissions, underwriting expenses,
and certain other selling expenses. The costs of acquiring new business through
the purchase of other companies and blocks of insurance business are also
deferred.
Deferred acquisition costs, including the value of insurance purchased, for
policies other than universal life-type policies according to SFAS 97, are
amortized with interest over an estimate of the premium-paying period of the
policies in a manner which charges each year's operations in proportion to the
receipt of premium income. For limited-payment contracts, acquisition costs are
amortized over the contract period. For universal life-type policies,
acquisition costs are amortized with interest in proportion to estimated gross
profits. The assumptions used as to interest, withdrawals and mortality are
consistent with those used in computing the liability for future policy
benefits and expenses. If it is determined that future experience differs
significantly
F-8
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands)
Note 1--Summary of Significant Accounting Policies (continued)
from that previously assumed, the estimates are revised. Deferred acquisition
costs are adjusted to reflect the amounts associated with unrealized investment
gains and losses pertaining to universal life-type products.
Income Taxes: Income taxes are accounted for under the asset and liability
method in accordance with SFAS 109. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement book
values and tax bases of assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Interest Expense: Interest expense includes interest on borrowed funds not
used in the production of investment income. Interest expense relating to the
production of investment income is deducted from investment income.
Property and Equipment: Property and equipment is reported at cost less
allowances for depreciation. Depreciation is provided on the straight-line
method over the estimated useful lives of these assets which range from three
to ten years.
Goodwill: Goodwill represents the excess cost over the fair value of the net
assets acquired when United Investors was purchased by Torchmark Corporation
(Torchmark) in 1981 and is being amortized on a straight-line basis over forty
years. In 1998 United Investors recorded an additional goodwill of $23,639 upon
the reorganization of the company as outlined in Note 1--"Organization." This
additional goodwill is being amortized on a straight-line basis over thirty-
five years, which is the period United Investors Management Company had
remaining out of the original forty year estimated benefit period.
Reclassification: Certain amounts in the financial statements presented have
been reclassified from amounts previously reported in order to be comparable
between years. These reclassifications have no effect on previously reported
shareholders' equity or net income during the periods involved.
Comprehensive Income: United Investors adopted SFAS 130, "Reporting
Comprehensive Income," effective January 1, 1998. This standard defines
comprehensive income as the change in equity of a business enterprise during a
period from transactions from all nonowner sources. It requires the company to
display comprehensive income for the period, consisting of net income and other
comprehensive income. In compliance with SFAS 130, a Statement of Comprehensive
Income is included as an integral part of the financial statements.
Year 2000 Compliance: The new millennium poses a significant concern to all
businesses which use computer systems or electronic data in their operations.
The concern arises because these organizations have computer systems and
programs that cannot always identify a proper date. For many years, programs
were written using a two digit code to represent a year. At the beginning of
the year 2000, more digits are needed to accurately determine the date in these
programs. Without addressing this issue, many computer programs could fail or
produce erroneous results. Additionally, companies which are electronically
engaged with other businesses or which rely on other businesses for services
are exposed to risk of failure by the electronic devices and computer systems
of those other entities to the extent they are not Year 2000 compliant. The
potential of failure of these systems creates considerable uncertainty and
could potentially adversely affect the ongoing operations and stability of a
business.
United Investors relies on computer systems which are supported and
maintained by Torchmark, its ultimate parent, and its various affiliates.
Torchmark is exposed to these risks should its computer systems fail
F-9
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands)
Note 1--Summary of Significant Accounting Policies (continued)
due to date-related problems. Torchmark is also reliant on a number of third
party businesses and governmental agencies with which it either interacts
electronically or depends upon for services in the conduct of its business.
These institutions include but are not limited to banks, financial
institutions, telecommunication companies, utilities, mail delivery
organizations, and a variety of governmental agencies. Should Torchmark's
computer systems or the systems of its third-party business partners not be
compliant the Company and Torchmark may be exposed to considerable risks,
including business interruption, loss of revenue, increased expense, loss of
policyholders, and litigation.
To reduce its business risk to an acceptable level, Torchmark has
established a project plan to insure that the company's business-critical
computer systems will be Year 2000 compliant. This plan also addresses third-
party compliance issues. Under the direction of executive management,
objectives and timetables have been set forth to achieve compliance in each
geographic location where Torchmark operates. Progress toward achieving those
objectives is constantly monitored. Torchmark currently expects the entire
project, including all Year 2000 testing activities, to be completed during
1999.
As of December 31, 1998, Torchmark remains on schedule to meet all of its
Year 2000 compliance requirements. All known required software changes have
been completed, and the related testing is in process with plans for completion
in 1999. With regard to third party concerns, Torchmark has in process the
following procedures:
1) Torchmark is confirming, with its software vendors, the Year 2000
readiness of its purchased software packages because Torchmark has purchased
software packages on all of its computer platforms;
2) Torchmark is verifying the Year 2000 compliance status of its financial
business partners computer and data communications systems to insure readiness,
including data interface testing with third parties; and
3) All of Torchmark's electronic operational systems (telephones, security,
utility, environmental) are being evaluated for Year 2000 compliance.
As an example of Torchmark's interface testing with selected third parties,
Torchmark is utilizing electronic data from selected third parties in
processing Medicare Supplement benefit data using Year 2000 test data.
Torchmark is also arranging similar testing with a selected number of banks.
While Torchmark is making every effort to verify the compliance of third
parties, no assurances as to the compliance of their computer systems can be
given.
Torchmark has used primarily its own employees to complete its Year 2000
project. Other than completion of software testing, all significant Year 2000
project milestones for internal computer systems have been completed.
Confirmation of third party compliance and electronic data interface testing
with third parties is continuing with completion expected during 1999.
Torchmark has spent $5 million on its Year 2000 project activities to date,
including internal programming costs, outside contractors, and replacement
costs. These costs have been expensed as incurred. Total project cost is
expected to be approximately $6 million.
Year 2000 contingency plans are being developed for critical risk areas.
Management throughout the organization has established and documented a
contingency plan for Torchmark's most critical systems and interfaces with
business partners within each individual's responsibility. Such contingency
plans include possible manual operation efforts, staff adjustments, outside
services, and alternative procedures. These contingency plans will be
maintained well into 2000.
F-10
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands)
Note 2--Statutory Accounting
United Investors is required to file statutory financial statements with
state insurance regulatory authorities. Accounting principles used to prepare
these statutory financial statements differ from GAAP. Net income and
shareholders' equity on a statutory basis for United Investors were as follows:
<TABLE>
<CAPTION>
Net Income Shareholders' Equity
Year Ended December 31, At December 31,
---------------------------------------- ---------------------------------
1998 1997 1996 1998 1997
-------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C>
$47,294 $34,537 $26,640 $169,757 $156,676
</TABLE>
The excess of shareholders' equity on a GAAP basis over that determined on a
statutory basis is not available for distribution to shareholders without
regulatory approval.
A reconciliation of United Investors' statutory net income to GAAP net
income is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Statutory net income........................... $ 47,294 $ 34,537 $ 26,640
Deferral of acquisition costs.................. 42,857 33,485 33,744
Amortization of acquisition costs.............. (27,874) (24,898) (19,850)
Differences in policy liabilities.............. 1,417 (2,113) (4,361)
Deferred income taxes.......................... (6,422) (6,053) (773)
Other.......................................... (655) (209) (134)
-------- -------- --------
GAAP net income................................ $ 56,617 $ 34,749 $ 35,266
======== ======== ========
</TABLE>
A reconciliation of United Investors' statutory shareholders' equity to GAAP
shareholders' equity is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Statutory shareholders' equity................... $ 169,757 $ 156,676
Differences in policy liabilities................ 9,208 9,540
Deferred acquisition cost and value of insurance
purchased....................................... 213,633 210,651
Deferred income taxes............................ (59,575) (52,639)
Asset valuation reserve.......................... 4,781 9,513
Nonadmitted assets............................... 3,348 1,850
Fair value adjustment on fixed maturities
available for sale.............................. 30,565 23,043
Fair value adjustment on preferred stock of
affiliate....................................... 188,212 0
Goodwill......................................... 29,465 6,771
Due and deferred premiums........................ (30,317) (30,334)
Other............................................ 503 (3,501)
----------- -----------
GAAP shareholders' equity........................ $559,580 $331,570
=========== ===========
</TABLE>
The NAIC requires that a risk based capital formula be applied to all life
and health insurers. The risk based capital formula is a threshold formula
rather than a target capital formula. It is designed only to identify companies
that require regulatory attention and is not to be used to rate or rank
companies that are adequately capitalized. United Investors is adequately
capitalized under the risk based capital formula.
F-11
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands)
Note 3--Investment Operations
Investment income is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Fixed maturities.................................. $45,889 $46,000 $ 46,366
Policy loans...................................... 1,186 1,107 1,001
Other long-term investments....................... 84 1,614 1,211
Short-term investments............................ 743 436 287
Other income...................................... 954 0 0
Interest and dividends from affiliates............ 13,082 2,863 2,847
------- ------- --------
61,938 52,020 51,712
Less investment expense........................... (565) (506) (584)
------- ------- --------
Net investment income............................. $61,373 $51,514 $ 51,128
======= ======= ========
Analysis of gains (losses) from investments:
Realized investments gains (losses)
Fixed maturities................................ $ 1 $(5,235) $ 925
Mutual funds.................................... 9,400 (130) 0
------- ------- --------
$ 9,401 $(5,365) $ 925
======= ======= ========
Analysis of change in unrealized gains (losses):
Net change in unrealized investments gains
(losses) on fixed maturities available for sale
before tax....................................... 7,522 19,340 (21,767)
Net change in unrealized investments gains
(losses) on short-term investments before tax.... (2) 0 0
Other (includes $(5,946) related to sale of mutual
fund shares in 1998)............................. (6,328) 1,799 861
Adjustment for deferred acquisition cost.......... 276 (5,387) 8,857
Applicable tax.................................... (514) (5,512) 4,217
------- ------- --------
Net change in unrealized gains (losses) on short-
term investments and fixed maturities securities
available for sale............................... $ 954 $10,240 $ (7,832)
======= ======= ========
</TABLE>
F-12
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands)
Note 3--Investment Operations (continued)
A summary of fixed maturities available for sale by amortized cost and
estimated fair value at December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Gross Gross Amount per
Amortized Unrealized Unrealized Fair the Balance
1998: Cost Gains Losses Value Sheet
- ----- --------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Fixed maturities avail-
able for sale:
Bonds:
U.S. Government direct
obligations and
agencies............... $ 21,441 $ 1,959 $ 0 $ 23,400 $ 23,400
GNMA's.................. 89,674 4,022 (18) 93,678 93,678
Mortgage-backed
securities, GNMA
collateral............. 7,488 71 (1) 7,558 7,558
Other mortgage-backed
securities............. 20,961 1,368 0 22,329 22,329
States, municipalities
and political
subdivisions........... 28,610 1,236 0 29,846 29,846
Public utilities........ 31,454 2,287 0 33,741 33,741
Industrial and
miscellaneous.......... 412,958 21,971 (2,330) 432,599 432,599
-------- ------- ------- -------- --------
Total fixed maturities.. $612,586 $32,914 $(2,349) $643,151 $643,151
======== ======= ======= ======== ========
<CAPTION>
1997:
- -----
<S> <C> <C> <C> <C> <C>
Fixed maturities avail-
able for sale:
Bonds:
U.S. Government direct
obligations and
agencies............... $ 22,035 $ 857 $ 0 $ 22,892 $ 22,892
GNMA's.................. 124,549 5,992 (146) 130,395 130,395
Mortgage-backed
securities, GNMA
collateral............. 23,125 591 (3) 23,713 23,713
Other mortgage-backed
securities............. 20,980 916 0 21,896 21,896
States, municipalities
and political
subdivisions........... 28,603 517 0 29,120 29,120
Foreign governments..... 3,298 135 0 3,433 3,433
Public utilities........ 37,189 1,504 (39) 38,654 38,654
Industrial and
miscellaneous.......... 352,821 12,986 (267) 365,540 365,540
-------- ------- ------- -------- --------
Total fixed maturities.. $612,600 $23,498 $ (455) $635,643 $635,643
======== ======= ======= ======== ========
</TABLE>
F-13
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands)
Note 3--Investment Operations (continued)
A schedule of fixed maturities by contractual maturity at December 31, 1998
is shown below on an amortized cost basis and on a fair value basis. Actual
maturities could differ from contractual maturities due to call or prepayment
provisions.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- --------
<S> <C> <C>
Fixed maturities available for sale;
Due in one year or less................................. $ 13,218 $ 13,359
Due after one year through five years................... 115,995 120,078
Due after five years through ten years.................. 202,843 213,213
Due after ten years..................................... 153,602 164,940
-------- --------
485,658 511,590
Mortgage- and asset-backed securities.................... 126,928 131,561
-------- --------
$612,586 $643,151
======== ========
</TABLE>
Proceeds from sales of fixed maturities available for sale were $46,039 in
1998, $113,035 in 1997, and $15,246 in 1996. Gross gains realized on these
sales were $928 in 1998, $112 in 1997, and $749 in 1996. Gross losses on these
sales were $927 in 1998, $5,716 in 1997, and $0 in 1996.
Note 4--Deferred Acquisition Costs
An analysis of deferred acquisition costs and the value of insurance
purchased is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
Deferred Value of Deferred Value of Deferred Value of
Acquisition Insurance Acquisition Insurance Acquisition Insurance
Cost Purchased Cost Purchased Cost Purchased
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year................... $176,897 $33,754 $169,986 $16,160 $144,716 $18,679
Additions:
Deferred during peri-
od:
Commissions........... 36,328 0 27,664 0 28,492 0
Other expenses........ 6,529 0 5,821 0 5,252 0
-------- ------- -------- ------- -------- -------
Total deferred....... 42,857 0 33,485 0 33,744 0
Value of insurance
purchased............ 0 0 0 21,305 0 0
Adjustment attributable
to unrealized invest-
ment loss (1)......... 276 0 0 0 8,857 0
-------- ------- -------- ------- -------- -------
Total additions...... 43,133 0 33,485 21,305 42,601 0
Deductions:
Amortized during peri-
od................... (24,720) (3,154) (21,019) (3,711) (16,894) (2,519)
Adjustment
attributable to
unrealized investment
gains (1)............ 0 0 (5,387) 0 0 0
Adjustment attribut-
able to realized
investment gains
(1).................. 0 0 (168) 0 (437) 0
Adjustment to deferred
commissions due to
reorganization....... (12,277) 0 0 0 0 0
-------- ------- -------- ------- -------- -------
Total deductions..... (36,997) (3,154) (26,574) (3,711) (17,331) (2,519)
-------- ------- -------- ------- -------- -------
Balance at end of year.. $183,033 $30,600 $176,897 $33,754 $169,986 $16,160
======== ======= ======== ======= ======== =======
</TABLE>
F-14
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands)
- --------
(1) Represents amounts pertaining to investments relating to universal life-
type products.
The amount of interest accrued on the unamortized balance of value of
insurance purchased was approximately $755, $938, and $1,100 for the years
ended December 31, 1998, 1997 and 1996, respectively. The average interest
accrual rates used were 6.15%, 6.29% and 6.44%, respectively. The estimated
amount of the unamortized value of business purchased balance at December 31,
1998 to be amortized during each of the next five years is: 1999, $2,452;
2000, $2,137; 2001, $1,876; 2002, $1,659; 2003, $1,479.
In the event of lapses or early withdrawals in excess of those assumed,
deferred acquisition costs and the value of insurance purchased may not be
recoverable.
Note 5--Property and Equipment
A summary of property and equipment used in the business is as follows:
<TABLE>
<CAPTION>
At December 31, At December 31,
1998 1997
------------------- -------------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
------ ------------ ------ ------------
<S> <C> <C> <C> <C>
Data processing equipment.............. $ 227 $ 178 $ 216 $ 161
Transportation equipment............... 72 36 132 55
Furniture and office equipment ........ 928 917 922 913
------ ------ ------ ------
Total................................ $1,227 $1,131 $1,270 $1,129
====== ====== ====== ======
</TABLE>
Depreciation expense on property and equipment used in the business was $39,
$42 and $44 in each of the years 1998, 1997, and 1996, respectively.
Note 6--Future Policy Benefit Reserves
A summary of the assumptions used in determining the liability for future
policy benefits at December 31, 1998 is as follows:
Individual Life Insurance
Interest Assumptions:
<TABLE>
<CAPTION>
Percent of
Years of Issue Interest Rates Liability
-------------- -------------------------- ----------
<S> <C> <C>
1962-1998 3.00% level to 6.00% level 12%
1986-1992 7.00% graded to 6.00% 22%
1962-1985 8.50% graded to 6.00% 4%
1981-1985 8.50% graded to 7.00% 4%
1984-1998 Interest Sensitive 58%
----
100%
====
</TABLE>
Mortality assumptions:
The mortality tables used are various statutory mortality tables and
modifications of:
1965-70 Select and Ultimate Table
1975-80 Select and Ultimate Table
Withdrawal assumptions:
Withdrawal assumptions are based on United Investors' experience.
F-15
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands)
Note 7--Income Taxes
United Investors is included in the life-nonlife consolidated federal income
tax return filed by Torchmark. Under the tax allocation agreement with
Torchmark, a company with taxable income pays tax equal to the amount it would
pay if it filed a separate tax return. A company with a loss is paid a tax
benefit currently to the extent that affiliated companies with taxable income
utilize that loss.
Total income taxes were allocated as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net operating income before income taxes......... $25,567 $18,843 $19,078
Shareholders' equity:
Unrealized gains (losses)....................... 514 5,512 (4,217)
Tax basis compensation expense in excess of
amounts recognized for financial reporting
purposes from the exercise of stock options.... (68) (519) 0
Tax benefit received on deferred commission
credit due to reorganization................... (4,297) 0 0
Other........................................... 300 1 (152)
------- ------- -------
$22,016 $23,837 $14,709
======= ======= =======
</TABLE>
Income tax expense before the adjustments to shareholder's equity is
summarized below:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current income tax expense......................... $19,145 $12,790 $18,305
Deferred income tax expense........................ 6,422 6,053 773
------- ------- -------
$25,567 $18,843 $19,078
======= ======= =======
</TABLE>
In 1998, 1997, and 1996, deferred income tax expense was incurred because of
the difference between net operating income before income taxes as reported on
the statements of operations and taxable income as reported on United
Investor's income tax returns. As explained in Note 1, this difference caused
the financial statement book values of some assets and liabilities to be
different from their respective tax bases.
The effective income tax rate differed from the expected 35% rate in 1998,
1997 and 1996 as shown below:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 % 1997 % 1996 %
------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Expected income taxes............... $28,764 35% $18,757 35% $19,020 35%
Increase (reduction) in income taxes
resulting from:
Tax-exempt investment income....... (3,532) (4) (18) 0 (38) 0
Purchase accounting differences.... 331 0 99 0 99 0
Other.............................. 4 0 5 0 (3) 0
------- --- ------- --- ------- ---
Income taxes........................ $25,567 31% $18,843 35% $19,078 35%
======= === ======= === ======= ===
</TABLE>
F-16
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands)
Note 7--Income Taxes (continued)
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Future policy benefits and unearned and advance
premiums.......................................... $ 0 $ 4,777
Present value of future policy surrender charges... 20,153 13,925
Other liabilities, principally due to the current
nondeductibilty for tax purposes of certain
accrued expenses.................................. 132 203
----------- -----------
Total gross deferred tax assets.................... 20,285 18,905
Deferred tax liability:
Future policy benefits and unearned and advance
premiums.......................................... 2,022 0
Deferred acquisition costs......................... 61,881 62,863
Unrealized investment gains........................ 8,428 7,914
Other.............................................. 7,529 767
----------- -----------
Total gross deferred tax liabilities............... 79,860 71,544
----------- -----------
Net deferred tax liability......................... $ 59,575 $ 52,639
=========== ===========
</TABLE>
In United Investor's opinion, all deferred tax assets will be recoverable.
United Investors has not recognized a deferred tax liability of
approximately $2,200 that arose prior to 1984 on temporary differences related
to its policyholders' surplus account. A current tax expense will be recognized
in the future if and when this tax becomes payable.
Note 8--Postretirement Benefits
Pension Plans: United Investors has retirement benefit plans and savings
plans which cover substantially all employees. There is also a nonqualified
excess benefit plan which covers certain employees. The plans cover primarily
employees of United Investors, Liberty National and Torchmark. The total cost
of these retirement plans charged to UILIC's operations was as follows:
<TABLE>
<CAPTION>
Defined
Defined Benefit
Year Ended Contribution Pension
December 31, Plans Plans
------------ ------------ -------
<S> <C> <C>
1998.................................................. $42 $114
1997.................................................. 44 118
1996.................................................. 41 115
</TABLE>
United Investors accrues expense for the defined contribution plans based on
a percentage of the employees contributions. The plans are funded by the
employee contributions and a United Investors contribution equal to the amount
of accrued expense.
F-17
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands)
Note 8--Postretirement Benefits (continued)
Cost for the defined benefit pension plans has been calculated on the
projected unit credit actuarial cost method. Contributions are made to the
pension plans subject to minimums required by regulation and maximums allowed
for tax purposes. Accrued pension expense in excess of amounts contributed has
been recorded as a liability in UILIC's financial statements and was $55
thousand and $55 thousand at December 31, 1998 and 1997, respectively. The
total unfunded plan liability recorded at December 31, 1998 was $459. The plans
covering the majority of employees are organized as trust funds whose assets
consist primarily of investments in marketable long-term fixed maturities and
equity securities which are valued at market.
The excess benefit pension plan provides the benefits that an employee would
have otherwise received from a defined benefit pension plan in the absence of
the Internal Revenue Codes limitation on benefits payable under a qualified
plan. Although this plan is unfunded, pension cost is determined in a similar
manner as for the funded plans. UILIC's liability for the excess benefit plan
was $19 thousand and $19 thousand as of December 31, 1998 and 1997,
respectively.
Net periodic pension cost for the defined benefit plans by expense component
was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Service cost--benefits earned during period..... $ 679 $ 638 $ 638
Interest cost on projected benefit obligation... 1,657 1,575 1,478
Actual return on assets......................... (3,118) (2,335) (1,940)
Net amortization and deferral................... 1,942 1,351 1,032
------- ------- -------
Total net periodic cost........................ 1,160 1,229 1,208
Periodic cost allocated to other participating
employers..................................... 1,046 1,111 1,093
------- ------- -------
UILIC's net periodic cost....................... $ 114 $ 118 $ 115
======= ======= =======
</TABLE>
F-18
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands)
Note 8--Postretirement Benefits (continued)
United Investors adopted FASB Statement No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits, effective for year-end 1998 with
comparative periods restated. In accordance with this Standard, the following
table presents a reconciliation from the beginning to the end of the year of
the benefit obligation and plan assets. This table also presents a
reconciliation of the plans funded status with the.amounts recognized on United
Investors's and Liberty National's balance sheet.
<TABLE>
<CAPTION>
Pension
Benefits For
the year ended
December 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Changes in benefit obligation:
Obligation at the beginning of year...................... $21,841 $19,706
Service cost............................................. 679 638
Interest cost............................................ 1,657 1,575
Actuarial gain (loss).................................... 1,061 775
Benefits paid............................................ (2,008) (853)
------- -------
Obligation at the end of year............................ 23,230 21,841
Changes in plan assets:
Fair value at the beginning of year...................... 16,054 13,811
Return on assets......................................... 3,118 2,335
Contributions............................................ 976 761
Benefits paid............................................ (2,008) (853)
------- -------
Fair value at the end of year............................ 18,140 16,054
------- -------
Funded status at year end............................ (5,090) (5,787)
Unrecognized amounts at year end:
Unrecognized actuarial loss (gain)....................... (775) 12
Unrecognized prior service cost.......................... 1,044 1,137
Unrecognized transition obligation....................... 0 0
------- -------
Net amount recognized at year end...................... $(4,821) $(4,638)
======= =======
Amounts recognized consist of:
Prepaid benefit cost..................................... $ (459) $ (459)
Accrued benefit liability................................ (4,707) (5,415)
Intangible asset......................................... 345 1,236
------- -------
Net amount recognized at year end....................... (4,821) (4,638)
Net amount recognized allocated to other participating
employers.............................................. (4,747) (4,564)
------- -------
UILIC's net amount recognized at year end................ $ (74) $ (74)
======= =======
</TABLE>
The weighted average assumed discount rates used in determining the
actuarial benefit obligations was 7.0% in 1998 and 7.5% in 1997. The rate of
assumed compensation increase was 4.0% in 1998 and 4.5% in 1997 while the
expected long-term rate of return on plan assets was 9.25% in 1998 and 9.25% in
1997.
Postretirement Benefit Plans Other Than Pensions: United Investors provides
postretirement life insurance benefits for most retired employees, and also
provides additional postretirement life insurance benefits for certain key
employees. The majority of the life insurance benefits are accrued over the
working lives of active employees.
F-19
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands)
Note 8--Postretirement Benefits (continued)
For retired employees over age sixty-five, United Investors does not provide
postretirement benefits other than pensions. United Investors does provide a
portion of the cost for health insurance benefits for employees who retired
before February 1, 1993 and before age sixty-five, covering them until they
reach age sixty-five. Eligibility for this benefit was generally achieved at
age fifty-five with at least fifteen years of service. This subsidy is minimal
to retired employees who did not retire before February 1,1993. This plan is
unfunded.
The components of net periodic postretirement benefit cost other than
pensions is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Service cost ................................... $ 112 $ 86 $ 76
Interest on accumulated postretirement. benefit
obligation..................................... 377 357 403
Actual return on assets......................... 0 0 0
Net amortization and deferral................... (251) (374) (242)
------- ------- -------
Total net periodic postretirement cost......... 238 69 237
Periodic cost allocated to other participating
employers..................................... 233 68 232
------- ------- -------
UILIC's net periodic postretirement cost........ $ 5 $ 1 $ 5
======= ======= =======
</TABLE>
The following table presents a reconciliation of the benefit obligation and
plan assets from the beginning to the end of the year, also reconciling the
funded status to the accrued benefit liability.
<TABLE>
<CAPTION>
Benefits Other than Pension
For the year ended
December 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Changes in benefit obligation:
Obligation at the beginning of year.......... $ 4,775 $ 5,010
Service cost................................. 112 86
Interest cost................................ 377 357
Actuarial gain (loss)........................ 559 0
Benefits paid................................ (561) (678)
------------- -------------
Obligation at the end of year................ 5,262 4,775
Changes in plan assets:
Fair value at the beginning of year.......... 0 0
Return on assets............................. 0 0
Contributions................................ 561 678
Benefits paid................................ (561) (678)
------------- -------------
Fair value at the end of year................ 0 0
------------- -------------
Funded status at year end.................. (5,262) ( 4,775)
Unrecognized amounts at year end:
Unrecognized actuarial loss (gain)........... (553) (1,157)
Unrecognized prior service cost.............. (357) (563)
------------- -------------
Net amount recognized at year end as accrued
benefit liability.......................... (6,172) (6,495)
Net amount recognized allocated to other
participating employers.................... (6,070) (6,386)
------------- -------------
UILIC's net amount recognized at year end as
accrued benefit liability................... $ (102) $ (109)
============= =============
</TABLE>
F-20
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands)
Note 8--Postretirement Benefits (continued)
For measurement purposes, a 7.0% to 8.0% annual rate of increase in per
capita cost of covered healthcare benefits was assumed for 1998. These rates
grade to ranges of 4.5% to 5.5% by the year 2007. The health care cost trend
rate assumption has a significant effect on the amounts reported, as
illustrated in the following table which presents the effect of a one-
percentage-point increase and decrease on the service and interest cost
components and the benefit obligation:
Effect on:
<TABLE>
<CAPTION>
Change in Trend
Rate
-----------------
1% 1%
Increase Decrease
-------- --------
<S> <C> <C>
Service and interest cost components....................... $ 35 $ (31)
Benefit obligation......................................... 326 (300)
</TABLE>
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.00% in 1998 and 7.50% in 1997.
Note 9--Related Party Transactions
United Investors was charged for space, equipment and services provided by
an affiliate amounting to $1,840 in 1998, $1,852 in 1997 and $1,797 in 1996.
Torchmark performed certain administrative services for United Investors for
which it was charged $612 in 1998, $468 in 1997 and $384 in 1996.
In November 1994, United Investors loaned Torchmark $35,000 at an interest
rate of 8.110%, and in October 1998, United Investors loaned Torchmark an
additional $10,626 at an interest rate of 7.875%. Interest income related to
the Torchmark loans totaling $2,989, $2,838 and $2,838 for 1998, 1997 and 1996,
respectively, is included in the accompanying financial statements. In January
1996, United Investors loaned Liberty National $3,500 at an interest rate of
5.75%. This loan was paid in full in February 1996. Interest income related to
this loan totaling $9 at December 31, 1996 is included in the accompanying
financial statements. In 1997, United Investors loaned Torchmark, Liberty
National and United American $8,060, $10,520 and $5,500 respectively at an
interest rate of 5.5% all of which were repaid prior to December 31, 1997.
Interest income related to these loans totaling $1, $2 and $22 respectively is
included in the accompanying financial statements. In 1998, United Investors
loaned Liberty National and United American $1,400 and $1,000 respectively at
an interest rate of 5.5% all of which were repaid prior to December 31, 1998.
Interest income related to these loans totaling $2 and $2 respectively is
included in the accompanying financial statements. During 1998, TMK loaned
United Investors $14,800 in a series of six separate loans at an interest rate
of 5.5% all of which were repaid prior to December 31, 1998. Interest expenses
related to these loans totaling $34 is included in the accompanying financial
statements.
Effective January 1, 1997 United Investors assumed a block of annuity
products totaling $200,321 from United American Insurance Company (United
American), an affiliated company, on 100% funds withheld coinsurance basis. In
connection with this transaction, United Investors paid a ceding fee totaling
$21,305, $10,000 of which was paid in cash, and recorded a due from affiliates
totaling $189,016 at the end of 1997. The funds withheld totaled $229,194 and
$190,235 at December, 1998 and 1997, respectively. Interest income totaled
$13,665 and $11,876 in 1998 and 1997, respectively, and is included in other
income. The reserve for annuity balances assumed in connection with this
business totaled $241,357 and $210,276 as of December 31, 1998 and 1997,
respectively. United Investors reimbursed United American for administrative
expenses in the amount of $800 in 1998 and $897 in 1997.
F-21
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands)
United Investors serves as sponsor to four separate accounts. During 1997,
United Investors was also a investor in two of the separate accounts. These
investments were sold during 1998 for $18.4 million and United Investors is no
longer a depositor to any of its separate accounts.
On March 3, 1998, Waddell & Reed Financial, Inc. contributed 188,212 shares
of TMK 6 1/2% Cumulative Preferred Stock, Series A to UILIC due the
reorganization discussed in Note 1--Summary of Significant Accounting Policies.
Dividend income, on these shares, in the amount of $10,093 is included in the
accompanying financial statements.
Note 10--Commitments and Contingencies
Reinsurance: United Investors reinsures that portion of insurance risk which
is in excess of its retention limit. The maximum net retention limit for
ordinary life insurance is $500 per life. Life insurance ceded represented 2%
of total life insurance in force at December 31, 1998 and 3% of premium income
for 1998. United Investors would be liable for the reinsured risks ceded to
other companies to the extent that such reinsuring companies are unable to meet
their obligation. Except as disclosed in Note 9, United Investors does not
assume insurance risks of other companies.
Restrictions on the transfer of funds: Regulatory restrictions exist on the
transfer of funds from insurance companies. These restrictions generally limit
the payment of dividends to the statutory net gain from operations of the prior
year in the absence of special approval. Additionally, insurance companies are
not permitted to distribute the excess of shareholder's equity as determined on
a GAAP basis over that determined on a statutory basis. Restricted net assets
at December 31, 1998 in compliance with all regulations were $392,823.
Litigation: United Investors is engaged in routine litigation arising from
the normal course of business. In management's opinion, this litigation will
not materially affect United Investors' financial position or results of
operations.
Concentration of credit risk: United Investors maintains a highly
diversified investment portfolio with limited concentration in any given
region, industry, or economic characteristic. The investment consists of
investment grade corporate bonds (55.7%), securities of the U.S. government or
U.S. government-backed securities (18.2%), non investment grade securities
(12.3%), municipal governments (4.4%), non government guaranteed mortgage
backed securities (3.3%), and policy loans (2.6%) which are secured by the
underlying policy value. The balance of the portfolio is invested in short-term
investments (3.5%).
Investments in municipal governments and corporations are made throughout
the U.S. with no concentration in any given state. Corporate debt investments
are made in a wide range of industries. At December 31, 1998, 1% or more of the
portfolio was invested in the following industries: financial services (19.8%);
chemicals and allied products (6.2%); manufacturing (5.8%); consumer goods
(5.5%); public utilities (4.9%); media and communications (4.6%);
transportation (4.2%); services (4.1%); retailing (3.9%); machinery and
equipment (3.3%); petroleum (2.7%); asset-backed securities (1.2%); paper and
allied products (1.1%). At the end of 1998, 12.3% of the carrying value of
fixed securities was rated below investment grade. Par value of these
investments was $84.249, amortized cost was $83.731, and market value was
$84.588. While these investments could be subject to additional credit risk,
such risk should generally be reflected in market value.
Collateral requirements: United Investors requires collateral for
investments in instruments where collateral is available and typically required
because of the nature of the investment. Since the majority of United
Investor's investments are in government, government-secured, or corporate
securities, the requirement for collateral is rare.
F-22
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands)
Note 11--Supplemental Disclosures for Cash Flow Statement
The following table summarizes United Investors' noncash transactions, which
are not reflected on the statement of cash flow as required by GAAP:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Due from affiliates........................... $229,194 $189,016 $ 0
Value of business purchased................... 0 11,305 0
Future policy benefits........................ 241,357 200,321 0
Impact from reorganization of
Waddell & Reed .............................. 203,871 0 0
The following table summarizes certain amounts paid during the period:
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Taxes paid.................................... $26,054 $8,631 $22,111
</TABLE>
Note 12--Business Segments
United Investors' segments are based on the insurance product lines it
markets and administers, life insurance and annuities. These major product
lines are set out as segments because of the common characteristics of products
within these categories, comparability of margins, and the similarity in
regulatory environment and management techniques. There is also an investment
segment which manages the investment portfolio, debt, and cash flow for the
insurance segments and the corporate function.
Life insurance products include traditional and interest-sensitive whole
life insurance as well as term life insurance. Annuities include both fixed-
benefit and variable contracts. Variable contracts allow policyholders to
choose from a variety of mutual funds in which to direct their deposits.
United Investors markets its insurance products through a number of
distribution channels, each of which sells the products of one or more of
United Investors's insurance segments. The tables below present segment premium
revenue by each of United Investors's marketing groups.
<TABLE>
<CAPTION>
For the Year 1998
------------------------------------------
Life Annuity Total
------------- ------------ -------------
% of % of % of
Distribution Channel Amount Total Amount Total Amount Total
- -------------------- ------- ----- ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Independent Producers............... $ 8,004 11.5% $ $ 8,004 11.4%
Waddell & Reed...................... 61,511 88.4% 61,511 87.9%
United American .................... 415 100.0% 415 0.6%
Globe Direct Response............... 57 0.1% 57 0.1%
------- ----- ---- ----- ------- -----
$69,572 100.0% $415 100.0% $69,987 100.0%
======= ===== ==== ===== ======= =====
</TABLE>
F-23
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands)
Note 12--Business Segments (continued)
<TABLE>
<CAPTION>
For the Year 1997
------------------------------------------
Life Annuity Total
------------- ------------ -------------
% of % of % of
Distribution Channel Amount Total Amount Total Amount Total
- -------------------- ------- ----- ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Independent Producers............... $ 7,264 10.6% $ $ 7,264 10.6%
Waddell & Reed...................... 61,149 89.4% 61,149 89.0%
United American .................... 310 100.0% 310 0.4%
------- ----- ---- ----- ------- -----
$68,413 100.0% $310 100.0% $68,723 100.0%
======= ===== ==== ===== ======= =====
<CAPTION>
For the Year 1996
------------------------------------------
Life Annuity Total
------------- ------------ -------------
% of % of % of
Distribution Channel Amount Total Amount Total Amount Total
- -------------------- ------- ----- ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Independent Producers............... $ 6,795 10.4% $ $ 6,795 10.4%
Waddell & Reed...................... 58,319 89.6% 58,319 89.6%
------- ----- ---- ----- ------- -----
$65,114 100.0% $ 0.0% $65,114 100.0%
======= ===== ==== ===== ======= =====
</TABLE>
Because of the nature of the insurance industry, United Investors has no
individual or group which would be considered a major customer. Substantially
all of United Investors's business is conducted in the United States, primarily
in the Southeastern and Southwestern regions.
The measure of profitability for insurance segments is underwriting income
before other income and administrative expenses, in accordance with the manner
the segments are managed. It essentially represents gross profit margin on
insurance products before insurance administrative expenses and consists of
premium, less net policy obligations, acquisition expenses, and commissions. It
differs from GAAP pretax operating income before other income and
administrative expense for two primary reasons. First, there is a reduction to
policy obligations for interest credited by contract to policyholders because
this interest is earned and credited by the investment segment. Second,
interest is also added to acquisition expense which represents the implied
interest cost of deferred acquisition costs, which is funded by and is
attributed to the investment segment.
F-24
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands)
Note 12--Business Segments (continued)
The measure of profitability for the investment segment is excess investment
income, which represents the income earned on the investment portfolio in
excess of net policy requirements. The investment segment is measured on a tax-
equivalent basis, equating the return on tax-exempt investments to the pretax
return on taxable investments. Other than the above-mentioned interest
allocations, there are no other intersegment revenues or expenses. All other
unallocated revenues and expenses on a pretax basis, including insurance
administrative expense, are included in the "Other" segment category. The table
below sets forth a reconciliation of United Investors's revenues and operations
by segment to its major income statement line items.
<TABLE>
<CAPTION>
For the Year 1998
-----------------------------------------------------------
Life Annuity Investment Other Adjustments Total
-------- -------- ---------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Premium................ $ 69,572 $ 415 $ $ $ $69,987
Policy Charges and
fees.................. 12,048 33,065 45,113
Net Investment income.. 61,373 61,373
Other income........... 13,665 13,665
-------- -------- -------- ------- --- -------
Total Revenues........ 81,620 47,145 61,373 190,138
Benefits and Expenses
Policy Benefits........ 51,430 25,892 77,322
Required reserve
interest.............. (18,832) (18,162) 36,994 0
Amortization of
acquisition costs..... 16,306 11,568 27,874
Commissions and premium
taxes................. 5,182 398 5,580
Required interest on
acquisition costs..... 7,958 4,814 (12,772) 0
-------- -------- -------- ------- --- -------
Total Expenses........ 62,044 24,510 24,222 110,776
-------- -------- -------- ------- --- -------
Underwriting income
before other income
and administrative
expense............... 19,576 22,635 37,151 79,362
Administrative
Expense............... 5,633 5,633
Goodwill amortization.. 946 946
Deferred acquisition
cost adjustment.......
-------- -------- -------- ------- --- -------
Pretax operating
income................ $ 19,576 $ 22,635 $ 37,151 $(6,579) $ 0 72,783
======== ======== ======== ======= ===
Realized investment gains/losses and deferred acquisition cost
adjustment............................................................. 9,401
-------
Pretax income.......................................................... $82,184
=======
</TABLE>
F-25
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands)
Note 12--Business Segments (continued)
<TABLE>
<CAPTION>
For the Year 1997
----------------------------------------------------------
Life Annuity Investment Other Adjustments Total
------- ------- ---------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Premium................ $68,413 $ 310 $ $ $ $ 68,723
Policy Charges and
fees.................. 9,573 27,009 36,582
Net Investment income.. 51,514 51,514
Other income........... 11,876 11,876
------- ------- ------- ------- ----- --------
Total Revenues........ 77,986 39,195 51,514 168,695
Benefits and Expenses
Policy Benefits........ 47,930 25,189 73,119
Required reserve
interest.............. (18,067) (19,735) 37,802 0
Amortization of
acquisition costs..... 14,671 10,227 24,898
Commissions and premium
taxes................. 5,647 604 6,251
Required interest on
acquisition costs..... 8,044 4,287 (12,331) 0
------- ------- ------- ------- ----- --------
Total Expenses........ 58,225 20,572 25,471 104,268
------- ------- ------- ------- ----- --------
Underwriting income
before other income
and administrative
expense............... 19,761 18,623 26,043 64,427
Administrative
Expense............... 5,186 5,186
Goodwill amortization.. 284 284
Deferred acquisition
cost adjustment....... 168 168
------- ------- ------- ------- ----- --------
Pretax operating
income................ $19,761 $18,623 $26,043 $(5,470) $(168) 58,789
======= ======= ======= ======= =====
Realized investment gains/losses and deferred acquisition cost
adjustment........................................................... (5,197)
--------
Pretax income........................................................ $ 53,592
========
</TABLE>
F-26
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands)
Note 12--Business Segments (continued)
<TABLE>
<CAPTION>
For the Year 1996
------------------------------------------------------------
Life Annuity Investment Other Adjustments Total
-------- -------- ---------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Premium................ $ 65,114 $ $ $ $ $ 65,114
Policy Charges and
fees.................. 8,722 20,681 29,403
Net Investment income.. 51,128 51,128
Other income........... 0
-------- -------- -------- ------- ----- --------
Total Revenues........ 73,836 20,681 51,128 145,645
Benefits and Expenses
Policy Benefits........ 47,355 15,807 63,162
Required reserve inter-
est................... (17,021) (20,599) 37,620 0
Amortization of acqui-
sition costs.......... 12,817 7,033 19,850
Commissions and premium
taxes................. 4,995 253 5,248
Required interest on
acquisition costs..... 8,045 3,712 (11,757) 0
-------- -------- -------- ------- ----- --------
Total Expenses........ 56,191 6,206 25,863 88,260
-------- -------- -------- ------- ----- --------
Underwriting income be-
fore other income and
administrative ex-
pense................. 17,645 14,475 25,265 57,385
Administrative Ex-
pense................. 3,682 3,682
Goodwill amortization.. 284 284
Deferred acquisition
cost adjustment....... 437 437
-------- -------- -------- ------- ----- --------
Pretax operating in-
come.................. $ 17,645 $ 14,475 $ 25,265 $(3,966) $(437) 52,982
======== ======== ======== ======= =====
Realized investment gains/losses and deferred acquisition cost
adjustment............................................................. 1,362
--------
Pretax income.......................................................... $ 54,344
========
</TABLE>
Assets for each segment are reported based on a specific identification
basis. The insurance segments' assets contain deferred acquisition costs, value
of insurance purchased, and separate account assets. The investment segment
includes the investment portfolio, cash, and accrued investment income.
Goodwill is assigned to corporate operations. All other assets, representing
less than 2% of total assets, are included in the other category. The table
below reconciles segment assets to total assets as reported in the financial
statements.
<TABLE>
<CAPTION>
At December 31, 1998
--------------------------------------------------------------
Life Annuity Investment Other Adjustments Total
-------- ---------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash and invested
assets................. $ $ $873,478 $ $ $ 873,478
Accrued investment
income................. 11,747 11,747
Deferred acquisition
costs.................. 113,057 100,576 213,633
Goodwill................ 29,465 29,465
Separate account
assets................. 2,425,262 2,425,262
Other Assets............ 283,453 283,453
-------- ---------- -------- -------- --- ----------
Total Assets............ $113,057 $2,525,838 $885,225 $312,918 $ 0 $3,837,038
======== ========== ======== ======== === ==========
</TABLE>
F-27
<PAGE>
UNITED INVESTORS LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands)
Note 12--Business Segments (continued)
<TABLE>
<CAPTION>
At December 31, 1997
--------------------------------------------------------------
Life Annuity Investment Other Adjustments Total
-------- ---------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash and invested
assets................. $ $ $692,659 $ $ $ 692,659
Accrued investment
income................. 11,270 11,270
Deferred acquisition
costs.................. 117,410 93,241 210,651
Goodwill................ 6,771 6,771
Separate account
assets................. 1,876,439 1,876,439
Other Assets............ 229,351 229,351
-------- ---------- -------- -------- ----- ----------
Total Assets............ $117,410 $1,969,680 $703,929 $236,122 $ 0 $3,027,141
======== ========== ======== ======== ===== ==========
<CAPTION>
At December 31, 1996
--------------------------------------------------------------
Life Annuity Investment Other Adjustments Total
-------- ---------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash and invested
assets................. $ $ $664,861 $ $ $ 664,861
Accrued investment
income................. 10,781 10,781
Deferred acquisition
costs.................. 120,083 66,063 186,146
Goodwill................ 7,055 7,055
Separate account
assets................. 1,420,025 1,420,025
Other Assets............ 39,748 39,748
-------- ---------- -------- -------- ----- ----------
Total Assets............ $120,083 $1,486,088 $675,642 $ 46,803 $ 0 $2,328,616
======== ========== ======== ======== ===== ==========
</TABLE>
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
United Investors Life Insurance Company
And the Contract Owners of the
United Investors Annuity Variable Account
Birmingham, Alabama
We have audited the accompanying balance sheet of United Investors Annuity
Variable Account as of December 31, 1998 and the related statements of
operations and changes in net assets for each of the years in the two-year
period ended December 31, 1998. These financial statements are the
responsibility of the United Investors Life Insurance 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 United Investors Annuity
Variable Account at December 31, 1998 and the results of its operations and
changes in its net assets for each of the years in the two-year period ended
December 31, 1998 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Birmingham, Alabama
April 9, 1999
F-29
<PAGE>
UNITED INVESTORS ANNUITY VARIABLE ACCOUNT
BALANCE SHEET
At December 31, 1998
<TABLE>
<CAPTION>
Money High Small
Market Bond Income Growth Income International Cap Balanced
----------- ------------ ------------ ------------ ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Investments in Mutual
Funds (Note B).. $52,559,707 $110,336,638 $122,470,438 $795,243,342 $788,796,382 $161,638,667 $173,477,046 $89,366,589
----------- ------------ ------------ ------------ ------------ ------------ ------------ -----------
Total assets.... 52,559,707 110,336,638 122,470,438 795,243,342 788,796,382 161,638,667 173,477,046 89,366,589
----------- ------------ ------------ ------------ ------------ ------------ ------------ -----------
Liabilities:
Mortality and
expense risk
charge payable
to Sponsor
(Note D)........ 18,460 37,527 41,839 267,255 265,553 54,503 57,090 30,146
----------- ------------ ------------ ------------ ------------ ------------ ------------ -----------
Total
liabilities..... 18,460 37,527 41,839 267,255 265,553 54,503 57,090 30,146
----------- ------------ ------------ ------------ ------------ ------------ ------------ -----------
Net assets (Note
C).............. $52,541,247 $110,299,111 $122,428,599 $794,976,087 $788,530,829 $161,584,164 $173,419,956 $89,336,443
=========== ============ ============ ============ ============ ============ ============ ===========
Equity:
Equity of
Sponsor
(Note E)........ $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Equity of
contract
owners.......... 52,541,247 110,299,111 122,428,599 794,976,087 788,530,829 161,584,164 173,419,956 89,336,443
----------- ------------ ------------ ------------ ------------ ------------ ------------ -----------
Total equity.... $52,541,247 $110,299,111 $122,428,599 $794,976,087 $788,530,829 $161,584,164 $173,419,956 $89,336,443
=========== ============ ============ ============ ============ ============ ============ ===========
Accumulation
units
outstanding..... 31,698,628 47,362,351 48,355,147 143,565,102 246,348,082 87,048,577 71,391,390 52,558,410
=========== ============ ============ ============ ============ ============ ============ ===========
Net asset value
per unit........ $ 1.657524 $ 2.328835 $ 2.531863 $ 5.537391 $ 3.200881 $ 1.856253 $ 2.429144 $ 1.699755
=========== ============ ============ ============ ============ ============ ============ ===========
<CAPTION>
Limited
Term Asset Science and
Bond Strategy Technology Total
----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Assets:
Investments in Mutual
Funds (Note B).. $ 4,417,370 $13,352,828 $32,640,246 $2,344,299,253
----------- ----------- ----------- --------------
Total assets.... 4,417,370 13,352,828 32,640,246 2,344,299,253
----------- ----------- ----------- --------------
Liabilities:
Mortality and
expense risk
charge payable
to Sponsor
(Note D)........ 1,501 4,408 10,518 788,800
----------- ----------- ----------- --------------
Total
liabilities..... 1,501 4,408 10,518 788,800
----------- ----------- ----------- --------------
Net assets (Note
C).............. $ 4,415,869 $13,348,420 $32,629,728 $2,343,510,453
=========== =========== =========== ==============
Equity:
Equity of
Sponsor
(Note E)........ $ 0 $ 0 $ 0 $ 0
Equity of
contract
owners.......... 4,415,869 13,348,420 32,629,728 2,343,510,453
----------- ----------- ----------- --------------
Total equity.... $ 4,415,869 $13,348,420 $32,629,728 $2,343,510,453
=========== =========== =========== ==============
Accumulation
units
outstanding..... 3,396,477 10,190,875 19,514,662 761,429,701
=========== =========== =========== ==============
Net asset value
per unit........ $ 1.300132 $ 1.309840 $ 1.672062
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-30
<PAGE>
UNITED INVESTORS ANNUITY VARIABLE ACCOUNT
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Money High Small
Market Bond Income Growth Income International Cap
----------- ------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dividend income
(Note B, D)....... $ 2,170,430 $ 6,081,528 $ 10,607,524 $ 27,728,216 $117,171,287 $ 13,800,756 $ 25,054,673
Expenses paid to
sponsor (Note D):
Mortality and expense
risk charge...... 395,167 906,323 1,077,779 6,105,720 6,304,449 1,266,484 1,429,653
Contract
maintenance
charges:
Sales expense.... 162,790 484,381 560,325 2,989,702 3,347,607 745,505 837,515
Administrative
expense.......... 19,530 78,116 95,224 602,496 593,417 124,682 146,776
----------- ------------ ------------ ------------ ------------ ------------ ------------
Total expenses.. 577,487 1,468,820 1,733,328 9,697,918 10,245,473 2,136,671 2,413,944
Net investment income.. 1,592,943 4,612,708 8,874,196 18,030,298 106,925,814 11,664,085 22,640,729
Realized
investment gains
(losses)
distributed to
accounts.......... 0 672,051 983,805 13,361,191 28,101,833 3,510,229 1,698,985
Unrealized
investment
gains (losses).... 0 439,756 (9,326,396) 128,216,934 (11,713,445) 20,641,442 (10,808,622)
----------- ------------ ------------ ------------ ------------ ------------ ------------
Net gain (loss) on
investments....... 0 1,111,807 (8,342,591) 141,578,125 16,388,388 24,151,671 (9,109,637)
----------- ------------ ------------ ------------ ------------ ------------ ------------
Net increase
(decrease) in net
assets from
operations........ 1,592,943 5,724,515 531,605 159,608,423 123,314,202 35,815,756 13,531,092
Premium deposits
and net
transfers*........ 16,944,145 17,250,256 18,030,747 63,301,340 92,850,508 22,739,897 24,106,986
Equity of sponsor
withdrawn (Note
E)................ 0 (562,447) (1,303,948) (2,477,187) (3,037,136) (121,367) (159,114)
Transfer to
sponsor for
benefits and
terminations...... (8,105,754) (7,916,063) (9,570,682) (41,166,257) (43,973,726) (7,036,752) (7,383,449)
----------- ------------ ------------ ------------ ------------ ------------ ------------
Total increase
(decrease)........ 10,431,334 14,496,261 7,687,722 179,266,319 169,153,848 51,397,534 30,095,515
Net assets at
beginning of
period............ 42,109,913 95,802,850 114,740,877 615,709,768 619,376,981 110,186,630 143,324,441
----------- ------------ ------------ ------------ ------------ ------------ ------------
Net assets at end
of period (Note
C)................ $52,541,247 $110,299,111 $122,428,599 $794,976,087 $788,530,829 $161,584,164 $173,419,956
=========== ============ ============ ============ ============ ============ ============
<CAPTION>
Limited
Term Asset Science and
Balanced Bond Strategy Technology Total
------------ ----------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Dividend income
(Note B, D)....... $ 2,999,542 $ 243,115 $ 762,106 $ 600,537 $ 207,219,714
Expenses paid to
sponsor (Note D):
Mortality and expense
risk charge...... 691,426 34,489 97,217 154,545 18,463,252
Contract
maintenance
charges:
Sales expense.... 428,387 19,922 60,517 84,700 9,721,351
Administrative
expense.......... 59,753 2,346 8,603 12,682 1,743,625
------------ ----------- ------------ ------------ ---------------
Total expenses.. 1,179,566 56,757 166,337 251,927 29,928,228
Net investment income.. 1,819,976 186,358 595,769 348,610 177,291,486
Realized
investment gains
(losses)
distributed to
accounts.......... 806,023 33,108 74,154 236,689 49,478,068
Unrealized
investment
gains (losses).... 2,526,908 (32,758) 137,207 7,250,055 127,331,081
------------ ----------- ------------ ------------ ---------------
Net gain (loss) on
investments....... 3,332,931 350 211,361 7,486,744 176,809,149
------------ ----------- ------------ ------------ ---------------
Net increase
(decrease) in net
assets from
operations........ 5,152,907 186,708 807,130 7,835,354 354,100,635
Premium deposits
and net
transfers*........ 21,827,290 1,545,335 3,745,107 16,304,506 298,646,117
Equity of sponsor
withdrawn (Note
E)................ (105,150) (630,003) (13,073) (687,297) (9,096,722)
Transfer to
sponsor for
benefits and
terminations...... (3,339,938) (238,755) (454,178) (308,122) (129,493,676)
------------ ----------- ------------ ------------ ---------------
Total increase
(decrease)........ 23,535,109 863,285 4,084,986 23,144,441 514,156,354
Net assets at
beginning of
period............ 65,801,334 3,552,584 9,263,434 9,485,287 1,829,354,099
------------ ----------- ------------ ------------ ---------------
Net assets at end
of period (Note
C)................ $89,336,443 $4,415,869 $13,348,420 $32,629,728 $2,343,510,453
============ =========== ============ ============ ===============
</TABLE>
- -----
*Includes transfer activity from (to) other portfolios.
See Notes to Financial Statements.
F-31
<PAGE>
UNITED INVESTORS ANNUITY VARIABLE ACCOUNT
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Money High Small
Market Bond Income Growth Income International Cap Balanced
----------- ----------- ------------ ------------ ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dividend income
(Note B, D)...... $ 1,886,614 $ 5,708,192 $ 10,489,055 $ 51,204,373 $ 40,069,729 $ 9,707,992 $ 30,039,596 $ 5,139,580
Expenses paid to
Sponsor (Note D):
Mortality and
expense risk
charge.......... 336,002 805,234 918,316 5,147,095 4,955,851 865,988 1,044,070 473,631
Contract
maintenance
charges:
Sales expense... 138,232 465,629 488,076 2,688,555 2,781,398 527,293 660,187 298,569
Administrative
expense........ 17,645 80,644 90,547 567,407 511,955 93,109 121,574 42,440
----------- ----------- ------------ ------------ ------------ ------------ ------------ -----------
Total............ 491,899 1,351,507 1,496,939 8,403,057 8,249,204 1,486,390 1,825,831 814,640
Net investment
income.......... 1,394,715 4,356,685 8,992,116 42,801,316 31,820,525 8,221,602 28,213,765 4,324,940
Realized
investment gains
distributed to
accounts......... 0 202,021 935,254 8,039,331 16,327,757 1,529,463 1,961,165 604,986
Unrealized
investment gains
(losses)......... 0 2,506,728 2,048,376 47,741,139 65,419,359 2,966,361 710,012 3,143,504
----------- ----------- ------------ ------------ ------------ ------------ ------------ -----------
Net gain on
investments...... 0 2,708,749 2,983,630 55,780,470 81,747,116 4,495,824 2,671,177 3,748,490
----------- ----------- ------------ ------------ ------------ ------------ ------------ -----------
Net increase in
net assets from
operations....... 1,394,715 7,065,434 11,975,746 98,581,786 113,567,641 12,717,426 30,884,942 8,073,430
Premium deposits
and net
transfers*....... 13,026,483 6,671,443 16,030,703 53,678,827 81,055,696 25,015,704 22,929,684 18,721,153
Investment by
sponsor (Note
E)............... 0 (500,000) 0 0 0 0 0 0
Transfer to
Sponsor for
benefits and
terminations..... (7,873,082) (5,756,198) (6,315,467) (29,769,554) (24,709,595) (4,199,101) (4,604,334) (2,011,335)
----------- ----------- ------------ ------------ ------------ ------------ ------------ -----------
Total increase .. 6,548,116 7,480,679 21,690,982 122,491,059 169,913,742 33,534,029 49,210,292 24,783,248
Net assets at
beginning of
period........... 35,561,797 88,322,171 93,049,895 493,218,709 449,463,239 76,652,601 94,114,149 41,018,086
----------- ----------- ------------ ------------ ------------ ------------ ------------ -----------
Net assets at end
of period (Note
C)............... $42,109,913 $95,802,850 $114,740,877 $615,709,768 $619,376,981 $110,186,630 $143,324,441 $65,801,334
=========== =========== ============ ============ ============ ============ ============ ===========
<CAPTION>
Limited Science
Term Asset and
Bond Strategy Technology Total
----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C>
Dividend income
(Note B, D)...... $ 211,939 $1,039,074 $ 63,630 $ 155,559,774
Expenses paid to
Sponsor (Note D):
Mortality and
expense risk
charge.......... 29,971 76,508 31,655 14,684,351
Contract
maintenance
charges:
Sales expense... 17,554 55,539 11,799 8,132,831
Administrative
expense........ 1,978 8,084 1,441 1,536,824
----------- ----------- ----------- ---------------
Total............ 49,503 140,131 44,905 24,354,006
Net investment
income.......... 162,436 898,943 18,725 131,205,768
Realized
investment gains
distributed to
accounts......... 17,061 49,351 14,375 26,680,764
Unrealized
investment gains
(losses)......... (2,633) 22,267 145,238 124,700,351
----------- ----------- ----------- ---------------
Net gain on
investments...... 14,428 71,618 159,613 154,381,115
----------- ----------- ----------- ---------------
Net increase in
net assets from
operations....... 176,864 970,561 178,338 285,586,883
Premium deposits
and net
transfers*....... 404,235 608,002 8,827,654 246,969,584
Investment by
sponsor (Note
E)............... 0 0 500,000 0
Transfer to
Sponsor for
benefits and
terminations..... (85,021) (311,197) (20,705) (85,655,589)
----------- ----------- ----------- ---------------
Total increase .. 496,078 1,267,366 9,485,287 446,900,878
Net assets at
beginning of
period........... 3,056,506 7,996,068 0 1,382,453,221
----------- ----------- ----------- ---------------
Net assets at end
of period (Note
C)............... $3,552,584 $9,263,434 $9,485,287 $1,829,354,099
=========== =========== =========== ===============
</TABLE>
- -----
*Includes transfer activity from (to) other portfolios.
See Notes to Financial Statements.
F-32
<PAGE>
UNITED INVESTORS ANNUITY VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS
Note A--Summary of Significant Accounting Policies
Organization--The United Investors Annuity Variable Account ("the Annuity
Variable Account") was established on December 8, 1981 and modified on January
5, 1987 as a segregated account of United Investors Life Insurance Company
("the Sponsor") and has been registered as a unit investment trust under the
Investment Company Act of 1940. The Annuity Variable Account invests in shares
of Target/United Funds, Inc. ("the Fund"), a mutual fund with eleven separate
investment portfolios including a money market portfolio, a bond portfolio, a
high income portfolio, a growth portfolio, an income portfolio, an
international portfolio, a small cap portfolio, a balanced portfolio, a limited
term bond portfolio, an asset strategy portfolio and a science and technology
portfolio(established during 1997). The assets of each portfolio of the Fund
are held separate from the assets of the other portfolios. Thus, each portfolio
operates as a separate investment portfolio, and the investment performance of
one portfolio has no effect on any other portfolio.
Basis of Presentation--The financial statements of the Annuity Variable
Account have been prepared on an accrual basis in accordance with generally
accepted accounting principles.
Federal Taxes--Currently no charge is made to the Annuity Variable Account
for federal income taxes because no federal income tax is imposed on the
Sponsor for the Annuity Variable Account investment income under current tax
law.
Note B--Investments
Stocks and convertible bonds of the Fund are valued at the latest sale price
on the last business day of the fiscal period as reported by the principal
securities exchange on which the issue is traded or, if no sale is reported for
a stock, the average of the latest bid and asked prices. Bonds, other than
convertible bonds, are valued using a matrix pricing system provided by a major
dealer in bonds. Convertible bonds are valued using this pricing system only on
days when there is no sale reported. Stocks which are traded over-the-counter
are priced using NASDAQ (National Association of Securities Dealers Automated
Quotations) which provides information on bid and asked prices quoted by major
dealers in such stock. Short-term debt securities are valued at amortized cost,
which approximates market.
Security transactions are accounted for by the Fund on the trade date (date
the order to buy or sell is executed). Securities gains and losses are
calculated on the specific identification method. Dividend income is recorded
on the ex-dividend date. Interest income is recorded on the accrual basis.
Investments in shares of the separate investment portfolios are stated at
market value which is the net asset value per share as determined by the
respective portfolios (see Note C--Net Assets). Dividends received from the
portfolios are reinvested daily in additional shares of the portfolios and are
recorded as dividend income on the record date.
F-33
<PAGE>
UNITED INVESTORS ANNUITY VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following is a summary of reinvested dividends by portfolio:
<TABLE>
<CAPTION>
1998
----
Investment Portfolio Shares Reinvested Dividend Income
-------------------- ----------------- ---------------
<S> <C> <C>
Money Market................................. 2,170,430 $ 2,170,430
Bond......................................... 1,116,881 6,081,528
High Income.................................. 2,402,991 10,607,524
Growth....................................... 2,981,881 27,728,216
Income....................................... 9,499,014 117,171,287
International................................ 1,765,344 13,800,756
Small Cap.................................... 3,170,715 25,054,673
Balanced..................................... 421,989 2,999,542
Limited Term Bond............................ 46,492 243,115
Asset Strategy............................... 141,477 762,106
Science and Technology....................... 72,572 600,537
</TABLE>
<TABLE>
<CAPTION>
1997
----
Investment Portfolio Shares Reinvested Dividend Income
-------------------- ----------------- ---------------
<S> <C> <C>
Money Market................................. 1,886,614 $ 1,886,614
Bond......................................... 1,063,255 5,708,192
High Income.................................. 2,212,787 10,489,055
Growth....................................... 6,765,995 51,204,373
Income....................................... 3,349,892 40,069,729
International................................ 1,520,628 9,707,992
Small Cap.................................... 3,605,501 30,039,596
Balanced..................................... 759,327 5,139,580
Limited Term Bond............................ 40,850 211,939
Asset Strategy............................... 199,941 1,039,074
Science and Technology....................... 11,023 63,630
</TABLE>
F-34
<PAGE>
UNITED INVESTORS ANNUITY VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note C--Net Assets
The following table illustrates by component parts the net asset value for
each portfolio.
<TABLE>
<CAPTION>
Money High Small
1998 Market Bond Income Growth Income International Cap Balanced
- ---- ----------- ------------ ------------ ------------ ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cost to:
Contract
Owners......... $78,618,475 $108,068,068 $112,042,561 $460,244,446 $510,120,669 $118,147,945 $131,568,669 $76,935,125
Sponsor......... 0 500,000 500,000 500,000 1,000,000 65,000 65,000 62,717
Adjustment for
market
appreciation.... 11,996,423 42,215,272 52,768,848 496,374,696 415,687,653 62,657,086 62,823,569 21,741,285
Deductions:
Mortality and
expense risk
charge......... (2,230,769) (5,079,737) (5,260,000) (23,485,082) (20,122,333) (3,092,666) (3,514,792) (1,603,540)
Contract
maintenance
charges:
Sales expense... (922,505) (3,003,205) (2,944,462) (12,567,828) (11,540,016) (1,867,562) (2,110,015) (990,543)
Administrative
expense........ (149,980) (585,685) (620,112) (2,886,002) (2,246,985) (334,883) (382,642) (141,925)
Benefits &
terminations... (34,770,397) (31,253,155) (32,754,288) (120,726,956) (101,331,023) (13,869,389) (14,870,719) (6,561,526)
Equity of
sponsor
withdrawn (Note
E)............. 0 (562,447) (1,303,948) (2,477,187) (3,037,136) (121,367) (159,114) (105,150)
----------- ------------ ------------ ------------ ------------ ------------ ------------ -----------
Net assets....... $52,541,247 110,299,111 $122,428,599 $794,976,087 $788,530,829 $161,584,164 $173,419,956 $89,336,443
=========== ============ ============ ============ ============ ============ ============ ===========
<CAPTION>
1997
- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cost to:
Contract
Owners......... $61,674,330 $ 91,317,812 $ 94,011,814 $396,943,106 $417,270,161 $ 95,408,048 $107,461,683 $55,107,835
Sponsor......... 0 0 500,000 500,000 1,000,000 65,000 65,000 62,717
Adjustment for
market
appreciation and
reinvested
dividends........ 9,825,993 35,021,937 50,503,915 327,068,355 282,127,978 24,704,659 46,878,533 15,408,812
Deductions:
Mortality and
expense risk
charge......... (1,835,602) (4,173,414) (4,182,221) (17,379,362) (13,817,884) (1,826,182) (2,085,139) (912,114)
Contract
maintenance
charges:
Sales expense... (759,715) (2,518,824) (2,384,137) (9,578,126) (8,192,409) (1,122,057) (1,272,500) (562,156)
Administrative
expense........ (130,450) (507,569) (524,888) (2,283,506) (1,653,568) (210,201) (235,866) (82,172)
Benefits &
terminations... (26,664,643) (23,337,092) (23,183,606) (79,560,699) (57,357,297) (6,832,637) (7,487,270) (3,221,588)
----------- ------------ ------------ ------------ ------------ ------------ ------------ -----------
Net assets....... $42,109,913 $ 95,802,850 $114,740,877 $615,709,768 $619,376,981 $110,186,630 $143,324,441 $65,801,334
=========== ============ ============ ============ ============ ============ ============ ===========
<CAPTION>
Limited
Term Asset Science and
1998 Bond Strategy Technology
- ---- ----------- ------------ ------------
<S> <C> <C> <C>
Cost to:
Contract
Owners......... $4,438,810 $12,293,783 $25,132,160
Sponsor......... 500,000 10,000 500,000
Adjustment for
market
appreciation.... 795,375 2,525,717 8,310,524
Deductions:
Mortality and
expense risk
charge......... (108,553) (248,659) (186,210)
Contract
maintenance
charges:
Sales expense... (57,797) (155,096) (96,499)
Administrative
expense........ (6,754) (22,894) (14,123)
Benefits &
terminations... (515,209) (1,041,358) (328,827)
Equity of
sponsor
withdrawn (Note
E)............. (630,003) (13,073) (687,297)
----------- ------------ ------------
Net assets....... $4,415,869 $13,348,420 $32,629,728
=========== ============ ============
<CAPTION>
1997
- ----
<S> <C> <C> <C>
Cost to:
Contract
Owners......... $2,893,475 $ 8,548,676 $ 8,827,654
Sponsor......... 500,000 10,000 500,000
Adjustment for
market
appreciation and
reinvested
dividends........ 551,910 1,552,250 223,243
Deductions:
Mortality and
expense risk
charge......... (74,064) (151,442) (31,665)
Contract
maintenance
charges:
Sales expense... (37,875) (94,579) (11,799)
Administrative
expense........ (4,408) (14,291) (1,441)
Benefits &
terminations... (276,454) (587,180) (20,705)
----------- ------------ ------------
Net assets....... $3,552,584 $ 9,263,434 $ 9,485,287
=========== ============ ============
</TABLE>
F-35
<PAGE>
UNITED INVESTORS ANNUITY VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note D--Charges and Deductions
Fund Management and Fees
Waddell & Reed Investment Management Company ("the Manager"), is the manager
of the Fund and provides investment advisory services to the Fund. Each
portfolio will pay the manager a fee for managing its investments consisting of
two elements: (i) a specific fee computed on each portfolio's net asset value
at the close of business each day at the following annual rates: Money Market
Portfolio-none; Bond Portfolio--.03% of net assets; High Income Portfolio--.15%
of net assets; Growth Portfolio--.20% of net assets; Income Portfolio--.20% of
net assets; International Portfolio--.30% of net assets; Small Cap Portfolio--
.35% of net assets; Balanced Portfolio--.10% of net assets; Limited Term Bond
Portfolio--.05% of net assets; Asset Strategy Portfolio--.30% of net assets;
Science and Technology--.20% of net assets; and (ii) a pro rata participation
based on the relative net asset size of each portfolio in a "Group" fee
computed each day on the combined net asset values of all of the portfolios at
the following annual rates: Group Net Asset Level from $0 to $750 million--
Annual Group Fee Rate .51%; From $750 to $1,500 million--.49%; from $1,500 to
$2,250 million--.47%; over $2,250 million--.45%. Fees for these services are
deducted from dividend income. The amount of these fees have been:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Money Market.......................................... $ 217,237 $ 185,482
Bond.................................................. 528,090 471,851
High Income........................................... 772,899 661,953
Growth................................................ 4,725,174 3,994,284
Income................................................ 4,877,906 3,847,284
International......................................... 1,120,478 768,671
Small Cap............................................. 1,344,605 985,291
Balanced.............................................. 457,586 315,007
Limited Term Bond..................................... 20,844 18,187
Asset Strategy........................................ 86,172 67,893
Science and Technology................................ 118,874 25,902
</TABLE>
F-36
<PAGE>
UNITED INVESTORS ANNUITY VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS--(Continued)
Mortality and Expense Risk Charges
A daily charge is deducted at an effective annual rate of .90% of the
average daily net assets of each investment portfolio to compensate the Sponsor
for certain mortality and expense risks assumed. The mortality risk arises from
the Sponsor's obligation to make annuity payments (determined in accordance
with annuity tables) regardless of how long all annuitants may live. The
Sponsor also assumes the risk that other expense charges may be insufficient to
cover the actual expenses incurred in connection with policy obligations.
Premium Deposit Charges
The Sponsor does not impose an immediate charge against premium deposits
(except for premium taxes incurred).
Contract Maintenance Charges
On each of the first ten policy anniversaries following the receipt of a
premium deposit, there is an annual deduction of .85% of each premium deposit
which compensates the Sponsor for certain sales and other distribution expenses
incurred, including agent sales commissions, the cost of printing prospectuses
and sales literature, advertising, and other marketing and sales promotional
activities.
The Sponsor deducts a charge of $50 on each policy anniversary to compensate
it for administrative expenses. This charge is "cost-based" and the Sponsor
does not expect a profit from the charge.
Premium Taxes
The Sponsor deducts a charge for premium taxes incurred in accordance with
state and local law at the time the premium deposit is accepted, when the
policy value is withdrawn or surrendered, or when annuity payments begin.
Withdrawal Charges
For surrenders occurring during the first eight policy years following the
receipt of a premium deposit, a withdrawal charge is made, measured as a
percent of the total premium deposits as specified in the following table. The
withdrawal charge percentage varies depending on the "age" of the premium
deposits included in the withdrawal; in other words, the policy year in which
the premium deposit was made. Partial withdrawals may also be subject to a
charge measured as a percent of the premium deposits included in the
withdrawal. A $20 transaction charge is applied if more than four withdrawals
occur during a policy year.
<TABLE>
<CAPTION>
No. of Policy Years
Since Receipt 8 or
of Premium Deposit 0 1 2 3 4 5 6 7 More
- ------------------------------------------- --- --- --- --- --- --- --- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Withdrawal Charge %........................ 8% 7% 6% 5% 4% 3% 2% 1% 0
</TABLE>
Withdrawal charges are included in transfers to sponsors for benefits and
terminations.
Note E--Equity of Sponsor
The equity of the Sponsor may be withdrawn at the discretion of the Sponsor
without penalty.
F-37
<PAGE>
UNITED INVESTORS ANNUITY VARIABLE ACCOUNT
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note F--Selected Unit Data
Selected data for a weighted average unit of the Annuity Variable Separate
Account outstanding throughout each period follows.
<TABLE>
<CAPTION>
Limited Science
Money High Small Term Asset and
1998 Market Bond Income Growth Income International Cap Balanced Bond Strategy Technology
- ---- ------ ----- ------ ------ ------ ------------- ----- -------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dividend income......... $0.08 $0.14 $0.22 $0.20 $0.49 $0.17 $0.37 $0.06 $0.08 $0.09 $0.05
Expenses................ 0.02 0.03 0.04 0.07 0.04 0.03 0.04 0.03 0.02 0.02 0.02
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Investment income--net.. 0.06 0.11 0.18 0.13 0.45 0.14 0.33 0.03 0.06 0.07 0.03
Net realized and
unrealized investment
gains (losses)......... 0.00 0.02 (0.18) 1.00 0.07 0.29 (0.13) 0.07 0.00 0.02 0.59
Premium deposits and net
transfers.............. 0.62 0.38 0.38 0.45 0.39 0.28 0.36 0.47 0.51 0.44 1.28
Equity of sponsor
withdrawn (Note E)..... 0.00 (0.01) (0.03) (0.02) (0.01) 0.00 0.00 0.00 (0.21) 0.00 (0.05)
Transfer to Sponsor for
benefits and
terminations........... (0.30) (0.18) (0.20) (0.29) (0.19) (0.09) (0.11) (0.07) (0.08) (0.05) (0.02)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Increase in net asset
value.................. 0.38 0.32 0.15 1.27 0.71 0.62 0.45 0.50 0.28 0.48 1.83
Net asset value,
beginning of the
period................. 1.80 2.22 2.74 4.71 3.09 1.88 2.90 2.37 1.50 1.36 2.06
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end of
the period............. $2.18 $2.54 $2.89 $5.98 $3.80 $2.50 $3.35 $2.87 $1.78 $1.84 $3.89
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
<CAPTION>
1997
- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dividend income......... $0.08 $0.13 $0.24 $0.37 $0.18 $0.13 $0.50 $0.14 $0.08 $0.14 $0.01
Expenses................ 0.02 0.03 0.03 0.06 0.04 0.02 0.03 0.02 0.02 0.02 0.01
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Investment income--net.. 0.06 0.10 0.21 0.31 0.14 0.11 0.47 0.12 0.06 0.12 0.00
Net realized and
unrealized investment
gains.................. 0 0.06 0.07 0.41 0.37 0.06 0.04 0.10 0.01 0.01 0.04
Premium deposits and net
transfers.............. 0.55 0.15 0.37 0.39 0.37 0.35 0.38 0.52 0.14 0.08 2.02
Transfer to Sponsor for
benefits and
terminations........... (0.33) (0.13) (0.15) (0.22) (0.11) (0.06) (0.08) (0.06) (0.03) (0.04) 0.00
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Increase in net asset
value.................. 0.28 0.18 0.50 0.89 0.77 0.46 0.81 0.68 0.18 0.17 2.06
Net asset value,
beginning of the
period................. 1.52 2.04 2.24 3.82 2.32 1.42 2.09 1.69 1.32 1.19 0.00
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end of
the period............. $1.80 $2.22 $2.74 $4.71 $3.09 $1.88 $2.90 $2.37 $1.50 $1.36 $2.06
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
F-38
<PAGE>
PART C: OTHER INFORMATION
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements
--------------------
All required financial statements are included in Part B of this
Registration Statement.
(b) Exhibits
--------
(1) Resolution of the Board of Directors of United Investors Life
Insurance Company ("United Investors") authorizing establishment of
the United Investors Annuity Variable Account.\2\
(2) Custody Agreements: Not Applicable.
(3) (a) Principal Underwriting Agreement.\4\
(b) Broker-Dealer Sales Agreement.\5\
(c) Commission Schedule.\3\
(4) (a) Annuity Policy, Form VA92.\4\
(b) Annuity Policy, Form VA87.\10\
(c) Death Benefit Endorsement, Form DBEND.\6\
(d) Variable Annuity Endorsement, Form ENDVA.\6\
(e) Fixed Account Rider, Form FA95.\7\
(f) Death Benefit and Withdrawals Endorsement, Form VE98.\10\
(5) Application.\3\
(6) (a) Certificate of Incorporation of United Investors.\8\
(b) By-Laws of United Investors.\8\
(7) Reinsurance Contracts: Not Applicable.
(8) (a) Participation Agreement for TMK/United Funds, Inc.\9\
(b) Form of Administration Agreement: Not Applicable
(9) Opinion and Consent of John H. Livingston, Esquire.\1\
(10) (a) Consent of Sutherland Asbill & Brennan LLP.\1\
(b) Consent of KPMG Peat Marwick LLP.\1\
(11) Financial statements omitted from Item 23: Not Applicable.
(12) Agreements/understandings for providing initial capital:
Not Applicable.
(13) Performance Data Calculations.\7\
- ---------------------------------
\1\ Filed herewith.
\2\ Incorporated herein by reference to the Exhibit filed electronically with
Post-Effective Amendment No. 14 to Form N-4 Registration Statement, File
No. 33-12000, filed on April 29, 1998 (previously filed on February 13,
1987 as an Exhibit to initial Form N-4 Registration Statement, File
No. 33-12000).
\3\ Incorporated herein by reference to the Exhibit filed electronically with
Post-Effective Amendment No. 14 to Form N-4 Registration Statement, File
No. 33-12000, filed on April 29, 1998 (previously filed on May 27, 1987 as
an Exhibit to Pre-Effective Amendment No. 1 to Form N-4 Registration
Statement, File No. 33-12000).
\4\ Incorporated herein by reference to the Exhibit filed electronically with
Post-Effective Amendment No. 14 to Form N-4 Registration Statement, File
No. 33-12000, filed on April 29, 1998 (previously filed on April 15, 1992
as an Exhibit to Post-Effective Amendment No. 6 to Form N-4 Registration
Statement, File No. 33-12000).
\5\ Incorporated herein by reference to the Exhibit filed electronically with
Post-Effective Amendment No. 14 to Form N-4 Registration Statement, File
No. 33-12000, filed on April 29, 1998 (previously filed on April 28, 1993
as an Exhibit to Post-Effective Amendment No. 7 to Form N-4 Registration
C - 1
<PAGE>
Statement, File No. 33-12000).
\6\ Incorporated herein by reference to the Exhibit filed electronically with
Post-Effective Amendment No. 14 to Form N-4 Registration Statement, File
No. 33-12000, filed on April 29, 1998 (previously filed on April 26, 1994
as an Exhibit to Post-Effective Amendment No. 9 to Form N-4 Registration
Statement, File No. 33-12000).
\7\ Incorporated herein by reference to the Exhibit filed electronically with
Post-Effective Amendment No. 11 to Form N-4 Registration Statement, File
No. 33-12000, filed on February 27, 1996.
\8\ Incorporated herein by reference to the Exhibit filed electronically with
Post-Effective Amendment No. 12 to Form S-6 Registration Statement, File
No. 33-11465, filed on April 30, 1998 (previously filed on January 22, 1987
as an Exhibit to the Form S-6 Registration Statement, File No. 33-11465).
\9\ Incorporated herein by reference to the Exhibit filed electronically with
Post-Effective Amendment No. 12 to Form S-6 Registration Statement, File
No. 33-11465, filed on April 30, 1998 (previously filed on April 15, 1992
as an Exhibit to Post-Effective Amendment No. 6 to Form N-4 Registration
Statement, File No. 33-12000).
\10\ Incorporated herein by reference to the Exhibit filed electronically with
Post-Effective Amendment No. 15 to Form N-4 Registration Statement, File
No. 33-12000, filed on February 24, 1999.
Item 25. Directors and Officers of the Depositor
---------------------------------------
Name and Principal Position and Offices
Business Address* with Depositor
- ----------------- --------------
C. B. Hudson** Chairman of the Board of Directors and Chief
Executive Officer
Anthony L. McWhorter Director and President
W. Thomas Aycock Director, Vice President and Chief Actuary
Tony G. Brill** Director and Executive Vice President - Administration
Mark S. McAndrew** Senior Vice President - Marketing
Larry M. Hutchison** Director
Michael J. Klyce Vice President and Treasurer
John H. Livingston Director, Secretary and Counsel
James L. Mayton, Jr. Vice President and Controller
Carol A. McCoy Director and Assistant Secretary
Ross W. Stagner Director and Vice President
Terry W. Davis Director and Vice President - Administration
- -------------------------
* Unless otherwise noted, the principal business address of each person listed
is United Investors Life Insurance Company, P.O. Box 10207, Birmingham,
Alabama 35202-0207.
** Principal business address: Torchmark Corporation, 3700 South Stonebridge,
McKinney, Texas 75070.
C - 2
<PAGE>
Item 26. Persons Controlled by or Under Common Control with the Depositor or
-------------------------------------------------------------------
Registrant
----------
The Depositor, United Investors Life Insurance Company, Inc. ("United
Investors"), is indirectly owned by Torchmark Corporation. The following table
shows the persons controlled by or under common control with United Investors,
their Parent Company, and the State or Jurisdiction of Incorporation. All
companies are 100% owned by their Parent Company, unless otherwise indicated,
which is indirectly owned by Torchmark Corporation. The Registrant is a
segregated asset account of United Investors.
Parent State/Jurisdiction
Company Co. Code of Incorporation
- ------------------------------------------ -------- ------------------
American Income Life Insurance Co. A Indiana
American Life and Accident Insurance Co. A Texas
Brown-Service Funeral Homes Co., Inc. B Alabama
(Services burial insurance policies)
First United American Life Insurance Co. D New York
Globe Insurance Agency, Inc. A Arkansas
Globe Life And Accident Insurance Co. C Delaware
Globe Marketing Services Inc. A Oklahoma
Liberty National Auto Club, Inc. B Alabama
Liberty National GroupCare, Inc. B Alabama
Liberty National Life Insurance Co. C Alabama
Maxwell's Energy Company, Inc. C Alabama
Stonegate Management Company E Alabama
Stonegate Realty Company E Delaware
Torch Royalty Company B Delaware
Torchmark Corporation (holding company) Delaware
Torchmark Development Corporation C Alabama
United American Insurance Co. C Delaware
United Investors Life Insurance Co. B* Missouri
Waddell & Reed Asset Management Co. C Missouri
- -------------------------
* Parent company owns 81%; remaining 19% owned by Torchmark Corporation.
Parent Company Codes
- -----------------------------------------
A Globe Life And Accident Insurance Co.
B Liberty National Life Insurance Co.
C Torchmark Corporation
D United American Insurance Co.
E Torchmark Development Corporation
C-3
<PAGE>
Item 27. Number of Policy Owners
-----------------------
As of December 31, 1998, there were 40,251 owners of the Policies.
Item 28. Indemnification
---------------
Article XII of United Investors' By-Laws provides as follows:
"Each Director or officer, or former Director or officer, of this
Corporation, and his legal representatives, shall be indemnified by the
Corporation against liabilities, expenses, counsel fees and costs,
reasonably incurred by him or his estate in connection with, or arising out
of, any action, suit, proceeding or claim in which he is made a party by
reason of his being, or having been, such Director or officer; and any
person who, at the request of this Corporation, serves as Director or
officer of another corporation in which this Corporation owns corporate
stock, and his legal representatives, shall in like manner be indemnified by
this Corporation; provided that, in either case shall the Corporation
indemnify such Director or officer with respect to any matters as to which
he shall be finally adjudged in any such action, suit or proceeding to have
been liable for misconduct in the performance of his duties as such Director
or officer. The indemnification herein provided for shall apply also in
respect of any amount paid in compromise of any such action, suit,
proceeding or claim asserted against such Director or officer (including
expenses, counsel fees, and costs reasonably incurred in connection
therewith), provided that the Board of Directors shall have first approved
such proposed compromise settlement and determined that the officer or
Director involved is not guilty of misconduct, but in taking such action any
Director involved shall not be qualified to vote thereof, and if for this
reason a quorum of the Board cannot be obtained to vote on such matters, it
shall be determined by a committee of three (3) persons appointed by the
shareholders at a duly called special meeting or at a regular meeting. In
determining whether or not a Director or officer is guilty of misconduct in
relation to any such matter, the Board of Directors or committee appointed
by the shareholders, as the case shall be, may rely conclusively upon an
opinion of independent legal counsel selected by such Board or committee.
The rights to indemnification herein provided shall not be exclusive of any
other rights to which such Director or officer may be lawfully entitled."
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to Directors, officers and controlling provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a Director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such Director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
C-4
<PAGE>
Item 29. Principal Underwriters
----------------------
(a) Waddell & Reed, Inc. ("W&R") is the principal underwriter of the Policies
as defined in the Investment Company Act of 1940, and is also the principal
underwriter for certain flexible premium variable life insurance policies
issued through United Investors Life Variable Account, United Investors
Universal Life Variable Account, and Target/United Funds, Inc.
(b) The following table provides certain information with respect to each
Director, officer and partner of each principal underwriter.
Name and Principal Positions and Offices
Business Address* With Underwriter
- ------------------ ---------------------
Keith A. Tucker Chairman and Director
--------
Robert L. Hechler President, Chief Executive Officer, Principal
Financial Officer, Director and Treasurer
--------
Henry J. Herrmann Director
--------
Helge K. Lee Senior Vice President, Secretary and General Counsel
Robert J. Williams, Jr. Executive Vice President and National Sales Manager
Michael D. Strohm Senior Vice President and Controller
Michael G. Gerken Senior Vice President
David R. Burford Vice President
Steven E. Hermes Vice President
William D. Howey, Jr. Vice President
Terry M. Parker Vice President
- -------------------------
* The principal business address for the officers and Directors listed is
6300 Lamar Avenue, Overland Park, Kansas 66202-4200.
(c) Commissions Received By Principal Underwriter
---------------------------------------------
Net Underwriting
Name of Principal Discounts and Compensation
Underwriter Commissions on Redemption
- ------------------------ ---------------- -------------
Waddell & Reed, Inc. $21,171,510.98 -0-
Brokerage
Commissions Compensation
----------- ------------
-0- -0-
Item 30. Location of Accounts and Records
--------------------------------
All accounts and records required to be maintained by Section 31(a) of the
1940 Act and the rules under it are maintained by United Investors at its
administrative office.
C-5
<PAGE>
Item 31. Management Services
-------------------
All management contracts are discussed in Part A or Part B.
Item 32. Undertakings
------------
(a) Registrant undertakes that it will file a Post-Effective Amendment to
this Registration Statement as frequently as necessary to ensure that the
audited financial statements in the Registration Statement are never more than
16 months old for so long as payments under the variable annuity contracts may
be accepted.
(b) Registrant undertakes that it will include either (1) as part of any
application to purchase a contract offered by the Prospectus, a space that an
applicant can check to request a Statement of Additional Information, or (2) a
post card or similar written communication affixed to or included in the
Prospectus that the applicant can remove to send for a Statement of Additional
Information.
(c) Registrant undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available under
this Form promptly upon written or oral request to United Investors at the
address or phone number listed in the Prospectus.
(d) United Investors Life Insurance Company represents that the fees and
charges deducted under the annuity policy form are reasonable in relation to the
services rendered, the expenses expected to be incurred, and the risks assumed
by United Investors.
STATEMENT PURSUANT TO RULE 6c-7
-------------------------------
United Investors and the Variable Account rely on 17 C.F.R. Sections
270.6c-7 and represent that the provisions of that Rule have been or will be
complied with. Accordingly, United Investors and the Variable Account are exempt
from the provisions of Sections 22(e), 27(c)(1) and 27(d) of the Investment
Company Act of 1940 with respect to any variable annuity contract participating
in such account to the extent necessary to permit compliance with the Texas
Optional Retirement Program.
SECTION 403(b) REPRESENTATIONS
------------------------------
United Investors represents that it is relying on a no-action letter
dated November 28, 1988, to the American Council of Life Insurance (Ref. No. IP-
6-88) regarding Sections 22(e), 27(c)(1), and 27(d) of the Investment Company
Act of 1940, in connection with redeemability restrictions on Section 403(b)
policies, and that paragraphs numbered (1) through (4) of that letter will be
complied with.
C-6
<PAGE>
SIGNATURES
----------
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this Registration Statement and has caused this
Registration Statement to be signed on its behalf in the City of Birmingham and
the State of Alabama on the 28th day of April, 1999.
UNITED INVESTORS ANNUITY VARIABLE ACCOUNT
(REGISTRANT)
UNITED INVESTORS LIFE INSURANCE COMPANY
(DEPOSITOR)
By: /s/ Anthony L. McWhorter
------------------------------------
Anthony L. McWhorter
President
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Chairman of the Board of Directors
- ---------------------- and Chief Executive Officer ---------------
C. B. Hudson
/s/ Anthony L. McWhorter Director and President 4-27-99
- ------------------------ ---------------
Anthony L. McWhorter
/s/ W. Thomas Aycock Director, Vice President and 4-27-99
- ------------------------ Chief Actuary ---------------
W. Thomas Aycock
/s/ Tony G. Brill Director and Executive Vice 4-28-99
- ------------------------ President - Administration ---------------
Tony G. Brill
Senior Vice President - Marketing
- ------------------------ ---------------
Mark S. McAndrew
/s/ Larry M. Hutchison Director 4-28-99
- ------------------------ ---------------
Larry M. Hutchison
/s/ Michael J. Klyce Vice President and Treasurer 4-27-99
- ------------------------ ---------------
Michael J. Klyce
/s/ James L. Mayton, Jr. Vice President and Controller 4-27-99
- ------------------------ ---------------
James L. Mayton, Jr.
/s/ John H. Livingston Director, Secretary and Counsel 4-27-99
- ------------------------ ---------------
John H. Livingston
/s/ Carol A. McCoy Director and Assistant Secretary 4-27-99
- ------------------------ ---------------
Carol A. McCoy
/s/ Ross W. Stagner Director and Vice President 4-27-99
- ------------------------ ---------------
Ross W. Stagner
/s/ Terry W. Davis Director and Vice President - 4-27-99
- ------------------------ Administration ---------------
Terry W. Davis
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
B9 Opinion and Consent of John H. Livingston, Esq.
B10(A) Consent of Sutherland, Asbill & Brennan LLP
B10(B) Consent of KPMG Peat Marwick LLP
</TABLE>
<PAGE>
Exhibit B9 Opinion and Consent of Counsel
[United Investors Life Letterhead]
April 28, 1999
United Investors Life Insurance Company
2001 Third Avenue South
Birmingham, Alabama 35233
Gentlemen:
With reference to the Registration Statement on Form N-4 as amended, filed by
United Investors Life Insurance Company and United Investors Annuity Variable
Account with the Securities and Exchange Commission covering flexible premium
deferred variable annuity policies, I have examined such documents and such law
as I considered necessary and appropriate, and on the basis of such examination,
it is my opinion that:
1. United Investors Life Insurance Company is duly organized and
validly existing under the laws of the State of Missouri and has been
duly authorized to issue individual flexible premium deferred variable
annuity policies by the Division of Insurance of the State of Missouri.
2. United Investors Annuity Variable Account is a duly authorized
and existing separate account established pursuant to the provisions of
Section 376.309, of the Revised Statutes of Missouri.
3. The flexible premium deferred variable annuity policies, when
issued as contemplated by said Form N-4 Registration Statement, will
constitute legal, validly issued and binding obligations of United
Investors Life Insurance Company.
I hereby consent to the filing of this opinion as an exhibit to said N-4
Registration Statement.
Very truly yours,
/s/ John H. Livingston
- -----------------------
John H. Livingston, Esq.
Secretary and Counsel
JHL:dk
<PAGE>
Exhibit B10(A)
April 28, 1999
United Investors Life Insurance Company
2001 Third Avenue South
Birmingham, AL 35233
Re: United Investors Annuity Variable Account
File No. 33-12000
Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the Statement of Additional Information filed as part of the Post-
Effective Amendment No. 16 to the Form N-4 Registration Statement for the United
Investors Annuity Variable Account. In giving this consent, we do not admit
that we are in the category of the person whose consent is required under
Section 7 of the Securities Act of 1933.
Very truly yours,
SUTHERLAND ASBILL & BRENNAN LLP
By: /s/ Frederick R. Bellamy
-------------------------------
Frederick R. Bellamy
FRB:dk
<PAGE>
Exhibit B10(B)
The Board of Directors of
United Investors Life Insurance Company
and the Contract Owners of the United
Investors Annuity Variable Account
We consent to the use of our report dated January 29, 1999, relating to the
balance sheets of United Investors Life Insurance Company as of December 31,
1998 and 1997, and the related statements of operations, comprehensive income,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998, and also to the use of our report dated April 9,
1999, relating to the balance sheet of United Investors Annuity Variable Account
as of December 31, 1998, and the related statements of operations and changes in
net assets for each of the years in the two-year period ended December 31, 1998,
as contained in Post-Effective Amendment No. 16 to Form N-4 for United Investors
Annuity Variable Account. We also consent to the reference to our firm under
the heading "Experts" in the Statement of Additional Information.
/s/ KPMG PEAT MARWICK LLP
Birmingham, Alabama
April 28, 1999
