<PAGE>
As filed with the Securities and Exchange Commission on April 28, 1998.
Registration No. 33-63829
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
AMENDMENT NO. 5
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FORTIS BENEFITS INSURANCE COMPANY
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(Exact name of registrant as specified in its charter)
Minnesota
------------------------------------------------
(State or other jurisdiction of incorporation or organization)
63
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(Primary Standard Industrial Classification Code Number)
81-0170040
------------------------------------
(I.R.S. Employer Identification No.)
500 Bielenberg Drive
Woodbury, Minnesota 55125
612-738-5000
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(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Rhonda J. Schwartz, Esquire
500 Bielenberg Drive
Woodbury, Minnesota 55125
612-738-5000
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(Name, address including zip code, and telephone number, including
area code, of agent for service)
<PAGE>
Approximate Date of Commencement of Proposed Sale to Public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box:
/x/
------------------------------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Title of each Proposed Proposed maximum
class of securities Amount to be maximum offering aggregate Amount of
to be registered registered price per unit offering price registration fee
Interests under flexible * * [None registered herewith]
premium deferred
fixed annuity
contracts
</TABLE>
- ------------------
* The maximum aggregate offering price is estimated solely for the purpose of
determining the registration fee. The amount being registered and the proposed
maximum offering price per unit are not applicable in that these securities are
not issued in predetermined amounts or units.
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
Cross-Reference Sheet
Pursuant to Regulation S-K
Item 501(b)
<TABLE>
FORM S-1 ITEM NUMBER PROSPECTUS CAPTION
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<S> <C>
1. Forepart of the Registration Statement Cover Page; Table of Contents;
and Outside Front Distribution and Servicing
Cover Page of Prospectus
2. Inside Front and Back Other Information; Reports
Cover Pages of Prospectus
3. Summary Information, Risk Summary of Contract Features or, as
Factors and Ratio of to ratio of earningsto fixed
Earnings to Fixed Charges charges, Not Applicable
4. Use of Proceeds The Variable Account; The
Portfolios; The Fixed Account
5. Determination of Offering Not Applicable
Price
6. Dilution Not Applicable
7. Selling Security Holders None
8. Plan of Distribution Distribution and Servicing
9. Description of Securities Cover Page; The Variable Account;
to be Registered Series Fund; The Fixed Account;
Accumulation Period; Charges and
Deductions; General Provisions
10. Interests of Named Legal Matters
Experts and Counsel
11. Information with Respect Fortis Benefits/Fortis Financial
to the Registrant Group Member; Further Information
About Fortis Benefits; Financial
Statements; Distribution and
Servicing
12. Disclosure of Commission Not Applicable
Position on Indemnification
for Securities Act
Liabilities
</TABLE>
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
MAILING ADDRESS: STREET ADDRESS: PHONE: 1-800-827-5877
P.O. BOX 64295 500 BIELENBERG DRIVE
ST. PAUL WOODBURY
MINNESOTA 55164 MINNESOTA 55125
This Prospectus describes interests under flexible premium deferred combination
variable and fixed annuity contracts issued either on a group basis or as
individual contracts by Fortis Benefits Insurance Company ("Fortis Benefits").
Participation in a group contract will be accounted for by the issuance of a
certificate showing your interest under the group contract. Participation in an
individual contract is shown by the issuance of an individual annuity contract.
The certificate and the individual contract are hereafter both referred to as
the "Certificate". The minimum under a Certificate is generally $5,000 for the
initial and $500 for each subsequent purchase payment.
A Certificate allows you to accumulate funds on a tax-deferred basis. You may
elect a guaranteed interest accumulation option through the Fixed Account or a
variable return accumulation option through Variable Account D (the "Variable
Account") of Fortis Benefits, or a combination of these two options. Under the
variable rate accumulation option, you can choose among the following
Portfolios:
Alliance Money Market Portfolio Lexington Natural Resources Trust
Alliance International Portfolio Lexington Emerging Markets Fund
Alliance Premier Growth Portfolio MFS Emerging Growth Series
American Century VP Balanced Fund MFS High Income Series
American Century VP Capital Appreciation MFS World Governments Series
Fund Montgomery Emerging Markets Fund
Federated High Income Bond Fund II Montgomery Growth Fund
Federated Utility Fund II Neuberger & Berman Limited Maturity
Federated American Leaders Fund II Bond Portfolio
Federated Fund for U.S. Government Neuberger & Berman Partners Portfolio
Securities II SAFECO Equity Portfolio
Fortis S&P 500 Index Series SAFECO Growth Portfolio
INVESCO Industrial Income Portfolio Strong Discovery Fund II
INVESCO Health Sciences Portfolio Strong International Stock Fund II
INVESCO Technology Portfolio Van Eck Worldwide Bond Fund
Van Eck Worldwide Hard Assets Fund
The accompanying Prospectus for these Portfolios describes the investment
objectives, policies and risks of each of the Portfolios. In the states where
Guarantee Periods Fixed Accounts are offered (see "FIXED ACCOUNTS"), you can
choose among 10 different guarantee periods under the guaranteed interest
accumulation option, each of which has its own interest rate. In states where
Guarantee Periods Fixed Accounts are not offered, you can choose an interest in
the General Account Fixed Account with guaranteed interest.
You have the right to examine a Certificate during a "free look" period after
you receive the Certificate and return it for a refund of the amount of the then
current Certificate Value. However, in certain states where required by state
law the refund will be in the amount of all purchase payments that have been
made, without interest or appreciation or depreciation.
The "free look" period is generally 10 days unless a longer time is specified on
the face page of your Certificate.
For Certificates requiring a refund of all purchase payments, Fortis Benefits
will allocate all Net Purchase Payments made as a part of the purchase of the
Certificate to the Alliance Money Market Portfolio until the following number of
days after Fortis Benefits mails the Certificate to you: (1) the number of days
in the "free look" period, plus (2) five days. After the expiration of such
period, the Certificate Value will be allocated to the Fixed Account and the
Portfolios as directed by you.
The Certificate provides several different types of retirement and death
benefits, including fixed and variable annuity income options. You may make
partial surrenders of the Certificate Value or may totally surrender the
Certificate for its Cash Surrender Value.
This Prospectus gives prospective investors information about the Certificates
that they should know before investing. This Prospectus must be accompanied by a
current Prospectus of the Portfolios. These Prospectuses should be read
carefully and kept for future reference.
A Statement of Additional Information, dated May 1, 1998, about certain aspects
of the Certificates has been filed with the Securities and Exchange Commission
and is available without charge, from Fortis Benefits at the address and phone
number printed above. The Table of Contents for the Statement of Additional
Information appears on page 26 of this Prospectus.
THESE POLICIES ARE NOT OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK,
CREDIT UNION, BROKER-DEALER OR OTHER FINANCIAL INSTITUTION. THEY ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER AGENCY; AND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
FORTIS
VALUE
ADVANTAGE
PLUS
VARIABLE
ANNUITY
Certificates Under Flexible
Premium Deferred
Combination Variable and
Fixed Annuity Contracts
[LOGO]
PROSPECTUS DATED
May 1, 1998
[LOGO]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Special Terms Used in this Prospectus................................. 3
Information Concerning Fees and Charges............................... 4
Summary of Certificate Features....................................... 6
Fortis Benefits/Fortis Financial Group Member......................... 8
The Variable Account.................................................. 9
The Portfolios........................................................ 9
The Fixed Account..................................................... 9
- Guarantee Periods Fixed Account................................. 9
- Market Value Adjustment......................................... 10
- General Account Fixed Account................................... 10
- General Account Fixed Account Transfers......................... 11
- Investments by Fortis Benefits.................................. 11
Fixed Account Value................................................... 11
Accumulation Period................................................... 11
- Issuance of a Certificate and Purchase Payments................. 11
- Certificate Value............................................... 12
- Allocation of Purchase Payments and Certificate Value........... 12
- Total and Partial Surrenders.................................... 13
- Benefit Payable on Death of Annuitant or Participant............ 13
The Annuity Period.................................................... 14
- Annuity Commencement Date....................................... 14
- Commencement of Annuity Payments................................ 14
- Relationship Between Subaccount Investment Performance and
Amount of Variable Annuity Payments............................ 15
- Annuity Forms................................................... 15
- Death of Annuitant or Other Payee............................... 15
Charges and Deductions................................................ 15
- Premium Taxes................................................... 15
- Charges Against the Variable Account............................ 16
- Annual Administrative Charge.................................... 16
- Tax Charge...................................................... 16
- Miscellaneous................................................... 16
General Provisions.................................................... 16
- The Certificates................................................ 16
- Postponement of Payments........................................ 16
- Misstatement of Age or Sex and Other Errors..................... 16
- Assignment...................................................... 16
- Beneficiary..................................................... 17
- Reports......................................................... 17
Rights Reserved By Fortis Benefits.................................... 17
Distribution.......................................................... 17
Federal Tax Matters................................................... 17
Further Information about Fortis Benefits............................. 20
- General......................................................... 20
- Selected Financial Data......................................... 20
- Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 20
- Cash Flow and Liquidity......................................... 21
- Competition..................................................... 22
- Regulation and Reserves......................................... 22
- Employees and Facilities........................................ 22
Directors and Executive Officers...................................... 23
- Executive Compensation.......................................... 24
- Ownership of Securities......................................... 25
Voting Privileges..................................................... 25
Legal Matters......................................................... 25
Other Information..................................................... 26
Contents of Statement of Additional Information....................... 26
Fortis Benefits Financial Statements.................................. 26
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Appendix A--Sample Market Value Adjustment Calculations............... A-1
Appendix B--Explanation of Expense Calculations....................... B-1
Appendix C--Participating Portfolios.................................. C-1
</TABLE>
THE CERTIFICATES ARE NOT AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE. FORTIS BENEFITS DOES NOT AUTHORIZE ANY INFORMATION OR
REPRESENTATION REGARDING THE OFFERING DESCRIBED IN THIS PROSPECTUS WHICH IS NOT
INCLUDED IN THIS PROSPECTUS, THE RELATED STATEMENT OF ADDITIONAL INFORMATION, OR
ANY SUPPLEMENTS THERETO OR IN ANY SUPPLEMENTAL SALES MATERIAL AUTHORIZED BY
FORTIS BENEFITS.
<PAGE>
SPECIAL TERMS USED IN THIS PROSPECTUS
<TABLE>
<S> <C>
ACCUMULATION The time period under a Certificate between the Certificate Issue Date and the Annuity
PERIOD Commencement Date.
ACCUMULATION A unit of measure used to calculate the Participants' interest in the Variable Account during
UNIT the Accumulation Period.
ANNUITANT A person during whose life annuity payments are to be made by Fortis Benefits under the
Certificate.
ANNUITY The date on which the Annuity Period commences.
COMMENCEMENT
DATE
ANNUITY PERIOD The time period following the Accumulation Period, during which annuity payments are made by
Fortis Benefits.
ANNUITY UNIT A unit of measurement used to calculate variable annuity payments.
BENEFICIARY The person entitled to receive benefits under the terms of the Certificate.
CASH SURRENDER The amount payable to the Participant on surrender of the Certificate after all applicable
VALUE adjustments and deduction of all applicable charges.
CERTIFICATE The date on which the Certificate becomes effective as shown on the Certificate Data Page.
ISSUE DATE
CERTIFICATE The sum of the Fixed Account Value and the Variable Account Value.
VALUE
FIXED ACCOUNT The Guarantee Periods Fixed Account or the General Account Fixed Account.
FIXED ACCOUNT The amount of your Certificate Value which is in the Fixed Account.
VALUE
FIXED ANNUITY An annuity option under which Fortis Benefits promises to pay the Annuitant or any other payee
OPTION that you designate one or more fixed payments.
GENERAL ACCOUNT All assets of Fortis Benefits other than those in the Variable Account, and other than those
in any other legally segregated separate account established by Fortis Benefits.
GENERAL The name of the alternative under which purchase payments are allocated to Fortis Benefits
ACCOUNT FIXED General Account.
ACCOUNT
GUARANTEED The rate of interest we credit during any Guarantee Period, on an effective annual basis.
INTEREST RATE
GUARANTEE The period for which a Guaranteed Interest Rate is credited.
PERIOD
GUARANTEE The non-unitized separate account that Fortis Benefits uses to account for amounts allocated
PERIODS FIXED to Guarantee Periods.
ACCOUNT
HOME OFFICE Our office at 500 Bielenberg Drive, Woodbury, Minnesota 55125; 1-800-827-5877; Mailing
address: P.O. Box 64295, St. Paul, MN 55164.
MARKET VALUE Positive or negative adjustment in Fixed Account Value that we make if such value is paid out
ADJUSTMENT more than fifteen days before or after the end of a Guarantee Period in which it was being
held.
NET PURCHASE The gross amount of a purchase payment less any applicable premium taxes or similar
PAYMENT governmental assessments.
NON-QUALIFIED Certificates that do not qualify for the special federal income tax treatment applicable in
CERTIFICATES connection with certain retirement plans.
PARTICIPANT The person or company named in the application for a Certificate, who is entitled to exercise
all rights and privileges of ownership under the Certificate during the Accumulation Period.
PORTFOLIO Each separate investment portfolio eligible for investment by the Variable Account.
QUALIFIED Certificates that are qualified for the special federal income tax treatment applicable in
CERTIFICATES connection with certain retirement plans.
SUBACCOUNTS The several Subaccounts of the Variable Account, each of which invests its assets in a
different Portfolio.
VALUATION DATE All business days except, with respect to any Subaccount, days on which the related Portfolio
does not value its shares. Generally, the Portfolios value their shares on each day the New
York Stock Exchange is open.
VALUATION The period that starts at the close of regular trading on the New York Stock Exchange on a
PERIOD Valuation Date and ends at the close of regular trading on the exchange on the next succeeding
Valuation Date.
VARIABLE The segregated asset account referred to as Variable Account D of Fortis Benefits Insurance
ACCOUNT Company established to receive and invest purchase payments under Certificates.
VARIABLE The amount of your Certificate Value in the Subaccounts of the Variable Account.
ACCOUNT VALUE
VARIABLE An annuity option under which Fortis Benefits promises to pay the Annuitant or any other payee
ANNUITY OPTION chosen by you one or more payments which vary in amount in accordance with the net investment
experience of the Subaccounts selected by the Annuitant.
WRITTEN REQUEST A written, signed and dated request, in form and substance satisfactory to Fortis Benefits and
received at our Home Office.
</TABLE>
3
<PAGE>
INFORMATION CONCERNING FEES AND CHARGES
PARTICIPANT TRANSACTION CHARGES
<TABLE>
<S> <C>
Front-End Sales Charge Imposed on Purchases............... 0%
Maximum Surrender Charge for Sales Expenses............... 0%
Other Surrender Fees...................................... 0%
Exchange Fee.............................................. 0%
ANNUAL CERTIFICATE ADMINISTRATION CHARGE......................... $30
VARIABLE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE)
Mortality and Expense Risk Charge......................... .45%
Variable Account Administrative Charge.................... 0%
----
Total Variable Account Annual Expenses.................. .45%
</TABLE>
MARKET VALUE ADJUSTMENT WITH RESPECT TO GUARANTEE PERIODS FIXED ACCOUNT
Surrenders and other withdrawals from the Guarantee Periods Fixed Account more
than fifteen days from the end of a Guarantee Period are subject to a Market
Value Adjustment. The Market Value Adjustment may increase or reduce the Fixed
Account Value. It is computed pursuant to a formula that is described in more
detail under "Market Value Adjustment."
PORTFOLIO ANNUAL EXPENSES (A) (B)
<TABLE>
<CAPTION>
TOTAL PORTFOLIO
OPERATING
INVESTMENT EXPENSES
ADVISORY AND OTHER (*AFTER EXPENSE
MANAGEMENT FEE EXPENSES REIMBURSEMENT)
-------------- -------- -----------------
<S> <C> <C> <C>
Alliance Money Market Portfolio............................. 0.50% 0.14% 0.64%
Alliance International Portfolio............................ 0.53% 0.42% 0.95%
Alliance Premier Growth Portfolio........................... 0.85% 0.10% 0.95%
American Century VP Balanced Fund........................... 1.00% 0.00% 1.00%
American Century VP Capital Appreciation Fund............... 1.00% 0.00% 1.00%
Federated High Income Bond Fund II.......................... 0.51% 0.29% 0.80%
Federated Utility Fund II................................... 0.48% 0.37% 0.85%
Federated American Leaders Fund II.......................... 0.66% 0.19% 0.85%
Federated Fund for U.S. Gov't Securities Fund II............ 0.15% 0.65% 0.80%
Fortis S&P 500 Index........................................ 0.40% 0.11% 0.51%
INVESCO Health Sciences Portfolio........................... 0.66% 0.42% 1.08%
INVESCO Industrial Income Portfolio......................... 0.48% 0.47% 0.95%
INVESCO Technology Portfolio................................ 0.66% 0.39% 1.05%
Lexington Natural Resources Trust........................... 1.00% 0.25% 1.25%
Lexington Emerging Markets Fund............................. 0.85% 0.99% 1.84%
MFS Emerging Growth Series.................................. 0.75% 0.12% 0.87%
MFS High Income Series...................................... 0.75% 0.25% 1.00%
MFS World Governments Series................................ 0.75% 0.25% 1.00%
Montgomery Emerging Markets Fund............................ 1.24% 0.51% 1.75%
Montgomery Growth Fund...................................... 0.28% 0.97% 1.25%
Neuberger & Berman Partners Portfolio....................... 0.80% 0.06% 0.86%
Neuberger & Berman Maturity Bond Portfolio.................. 0.65% 0.12% 0.77%
SAFECO Growth Portfolio..................................... 0.74% 0.03% 0.77%
SAFECO Equity Portfolio..................................... 0.73% 0.02% 0.75%
Strong Discovery Fund....................................... 1.00% 0.18% 1.18%
Strong International Fund................................... 1.00% 0.51% 1.51%
Van Eck Worldwide Bond Fund................................. 1.00% 0.12% 1.12%
Van Eck Worldwide Hard Assets Fund.......................... 1.00% 0.11% 1.11%
</TABLE>
- ------------------------
(a) As a percentage of Portfolio average net assets based on historical data
for the fiscal year ended December 31, 1997. In the absence of expense and
fee waivers or expense reimbursements by the Portfolio investment adviser,
the total expenses of the following Portfolios would have been as hereafter
indicated rather than as listed above: Alliance International
Portfolio--1.42%; Alliance Premier Growth Portfolio--1.10%; Federated High
Income Bond Fund II--0.89%; Federated Utility Fund II--1.12%; Federated
American Leaders Fund II--0.94%; Federated Fund for U.S. Government
Securities Fund II--1.25%; Lexington Emerging Markets Fund--1.91%; MFS High
Income Series--1.15%; and MFS World Governments Series--1.15%; Montgomery
Emerging Markets Fund--1.76%; Montgomery Growth Fund--1.97%. The
information set forth in this table was provided to Fortis Benefits by the
Portfolio managers and Fortis Benefits has not independently verified such
information.
(b) Certain of the unaffiliated investment advisers of the Portfolios reimburse
Fortis Benefits for costs incurred in connection with administering the
Portfolios as variable funding options by payment of an amount based on
assets in the Portfolios attributable to the Certificates. These amounts
are not charged to the Portfolios or the holders of the Certificates.
4
<PAGE>
EXAMPLES*
If you COMMENCE AN ANNUITY payment option, or whether you DO or DO NOT surrender
your Certificate, you would pay the following cumulative expenses on a $1,000
investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
IF ALL AMOUNTS ARE INVESTED IN ONE PORTFOLIO: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------ ------- ------- ------- --------
<S> <C> <C> <C> <C>
Alliance Money Market Portfolio............................. 11 36 62 136
Alliance International Portfolio............................ 15 45 78 171
Alliance Premier Growth Portfolio........................... 15 45 78 171
American Century VP Balanced Fund........................... 15 47 81 176
American Century VP Capital Appreciation Fund............... 15 47 81 176
Federated High Income Bond Fund II.......................... 13 41 70 154
Federated Utility Fund II................................... 14 42 73 160
Federated American Leaders Fund II.......................... 14 42 73 160
Federated Fund for U.S. Gov't Securities Fund II............ 13 41 70 154
Fortis S&P 500 Index........................................ 10 32 55 121
INVESCO Health Sciences Portfolio........................... 16 49 85 185
INVESCO Industrial Income Portfolio......................... 15 45 78 171
INVESCO Technology Portfolio................................ 16 48 83 182
Lexington Natural Resources Trust........................... 18 54 93 203
Lexington Emerging Markets Fund............................. 23 72 123 264
MFS Emerging Growth Series.................................. 14 43 74 162
MFS High Income Series...................................... 15 47 81 176
MFS World Governments Series................................ 15 47 81 176
Montgomery Emerging Markets Fund............................ 23 69 119 255
Montgomery Growth Fund...................................... 18 54 93 203
Neuberger & Berman Partners Portfolio....................... 14 42 73 161
Neuberger & Berman Maturity Bond Portfolio.................. 13 40 68 151
SAFECO Growth Portfolio..................................... 13 40 68 151
SAFECO Equity Portfolio..................................... 13 39 67 148
Strong Discovery Fund....................................... 17 52 90 196
Strong International Fund................................... 20 62 107 230
Van Eck Worldwide Bond Fund................................. 16 50 87 189
Van Eck Worldwide Hard Assets Fund.......................... 16 50 86 188
</TABLE>
- ------------------------
* For purposes of these examples, the effect of the annual Certificate
administration charge has been computed based on the average total Contract
Value during the year ended December 31, 1997 and the total actual amount of
annual contract administration charges collected during the year. For the
purpose of these examples, Portfolio annual expenses are assumed to continue
at the rates set forth in the table above. Also, the examples do not include
the affect of any Market Value Adjustment.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
------------------------
The foregoing tables and examples are included to assist you in understanding
the transaction and operating expenses imposed directly or indirectly under the
Certificates and the Portfolios. Amounts for state premium taxes or similar
assessments will also be deducted, where applicable.
See Appendix B for an explanation of the calculation of the amounts set forth
above.
5
<PAGE>
SUMMARY OF CERTIFICATE FEATURES
The following summary should be read in conjunction with the detailed
information in this Prospectus. Variations from the information appearing in
this Prospectus due to requirements particular to your state are described in
supplements which are attached to this Prospectus, or in endorsements to the
Certificate as appropriate.
The Certificates are designed to provide individuals with retirement benefits
through the accumulation of Net Purchase Payments on a fixed or variable basis,
and by the application of such accumulations to provide fixed or variable
annuity payments.
"We," "our," and "us" mean Fortis Benefits Insurance Company. "You" and "your"
mean a reader of this Prospectus who is contemplating making purchase payments
or taking any other action in connection with a Certificate.
PURCHASE PAYMENTS
The initial purchase payment under a Certificate must be at least $5,000 ($2,000
for a Certificate pursuant to a qualified contract). Additional purchase
payments under a Certificate must be at least $500. See "Issuance of a
Certificate and Purchase Payments."
On the Certificate Issue Date, except as hereafter explained, the initial
purchase payment is allocated, as specified by the Participant in the
Certificate application, among one or more of the Subaccounts of the Variable
Account, or to one or more of the Guarantee Periods in the Guarantee Periods
Fixed Account (or to the General Account Fixed Account if the Participant
resides in a state in which the Guaranteed Periods Fixed Account is not
offered), or to a combination thereof. As previously indicated, if the
Participant resides in a state requiring a refund of all purchase payments under
the "free look" privilege, the initial purchase payment will be allocated to the
Alliance Money Market Portfolio until the expiration of the time period
described under "Allocation of Purchase Payments and Certificate Value"
hereafter. Thereafter, it will be allocated as specified by the Participant.
Subsequent purchase payments are allocated in the same way, or pursuant to
different allocation percentages that the Participant may subsequently request
In Writing.
VARIABLE ACCOUNT INVESTMENT OPTIONS
Each of the Subaccounts of the Variable Account invests in shares of a
Portfolio. Certificate Value in each of the Subaccounts of the Variable Account
will vary to reflect the investment experience of each of the corresponding
Portfolios, as well as deductions for certain charges.
Each Portfolio has a separate and distinct investment objective. A full
description of the Portfolios and their investment objectives, policies, risks
and expenses can be found in the current Prospectus for the Portfolio, which
accompanies this Prospectus, and the Statement of Additional Information for the
Portfolio which is available upon request. (See Appendix C which contains a
summary of the investment objectives of each Portfolio.)
FIXED ACCOUNT INVESTMENT OPTIONS
Either a Guarantee Periods Fixed Account or a General Account Fixed Account is
available, depending upon your state of residence.
Any amount allocated by the Participant to the Guarantee Periods Fixed Account
earns a Guaranteed Interest Rate. The level of the Guaranteed Interest Rate
depends on the length of the Guarantee Period selected by the Participant. We
currently make available ten different Guarantee Periods, ranging from one to
ten years. If amounts are transferred, surrendered or otherwise paid out more
than fifteen days before or after the end of the applicable Guarantee Period, a
Market Value Adjustment will be applied to increase or decrease the amount that
is paid out. Accordingly, the Market Value Adjustment can result in gains or
losses to you.
Any amount allocated to the General Account Fixed Account will accrue interest
at a minimum effective annual rate plus such additional excess interest rate
which we may declare from time-to-time.
For a more complete discussion of the Fixed Accounts investment option and the
Market Value Adjustment, see "The Fixed Account."
TRANSFERS
During the Accumulation Period, you can transfer all or part of your Certificate
Value from one Subaccount to another or into the Fixed Account and, subject to
any Market Value Adjustment, from one Guarantee Period of a Guarantee Periods
Fixed Account to another or into a Subaccount. There are limitations on the
frequency and amounts of transfers from the General Account Fixed Account. There
is currently no charge for these transfers. We reserve the right to restrict the
frequency of, or otherwise condition, terminate, or impose charges upon,
transfers from a Subaccount during the Accumulation Period. During the Annuity
Period the person receiving annuity payments may make up to four transfers (but
not from a Fixed Annuity Option) during each year of the Annuity Period. For a
description of certain limitations on transfer rights, see "Allocations of
Purchase Payments and Certificate Value Transfers."
TOTAL OR PARTIAL SURRENDERS
Subject to certain conditions, all or part of the Certificate Value may be
surrendered by the Participant before the earlier of the Annuitant's death or
the Annuity Commencement Date. Amounts surrendered from the Guarantee Periods
Fixed Account may be subject to a Market Value Adjustment. See "Total and
Partial Surrenders" and "Market Value Adjustment." Particular attention should
be paid to the tax implications of any surrender, including possible penalties
for premature distributions. See "Federal Tax Matters."
CHARGES AND DEDUCTIONS
Fortis Benefits deducts daily charges at a rate of .45 % per annum of the value
of the average net assets in the Variable Account for the mortality and expense
risks it assumes. There is also an annual administrative charge each year for
Certificate administration and maintenance. This charge is $30 per year (subject
to any applicable state law limitations) and is deducted on each anniversary of
the
6
<PAGE>
Certificate Issue Date and upon total surrender of the Certificate. Also, there
may be state premium tax charges deducted from your Certificate Value. See
"Charges and Deductions."
ANNUITY PAYMENTS
The Certificate provides several types of annuity benefits to Participants or
other persons they properly designate to receive such payments, including Fixed
and Variable Annuity Options. The Participant has considerable flexibility in
choosing the Annuity Commencement Date. However, the tax implications of an
Annuity Commencement Date must be carefully considered, including the
possibility of penalties for commencing benefits either too soon or too late.
See "Annuity Commencement Date," "Annuity Forms" and "Federal Tax Matters" in
this Prospectus and "Taxation Under Certain Retirement Plans" in the Statement
of Additional Information.
DEATH BENEFIT
In the event that the Annuitant or Participant dies prior to the Annuity
Commencement Date, a death benefit is payable to the Beneficiary. See "Benefit
Payable on Death of Annuitant or Participant."
RIGHT TO EXAMINE THE CONTRACT
A Participant may elect during a "free look" period to cancel the Certificate
and receive a refund. See the cover page of this Prospectus.
LIMITATIONS IMPOSED BY RETIREMENT PLANS AND EMPLOYERS
Certain rights you would otherwise have under a Certificate may be limited by
the terms of any applicable employee benefit plan. These limitations may
restrict such things as total and partial surrenders, the amount or timing of
purchase payments that may be made, when annuity payments must start and the
type of annuity options that may be selected. Accordingly, you should
familiarize yourself with these and all other aspects of any retirement plan in
connection with which a Certificate is issued.
The record owner of the group variable annuity contract pursuant to which
Certificates may be issued will be a bank trustee whose sole function is to hold
record ownership of the contract or an employer (or the employer's designee) in
connection with an employee benefit plan. In the latter cases, certain rights
that a Participant otherwise would have under a Certificate may be reserved
instead by the employer.
TAX IMPLICATIONS
The tax implications for Participants or any other persons who may receive
payments under a Certificate, and those of any related employee benefit plan can
be quite important. A brief discussion of some of these is set out under
"Federal Tax Matters" in this Prospectus and "Taxation Under Certain Retirement
Plans" in the Statement of Additional Information, but such discussion is not
comprehensive. Therefore, you should consider these matters carefully and
consult a qualified tax adviser before making purchase payments or taking any
other action in connection with a Certificate or any related employee benefit
plan. Failure to do so could result in serious adverse tax consequences which
might otherwise have been avoided.
QUESTIONS AND OTHER COMMUNICATIONS
Any question about procedures of the Certificate should be directed to your
sales representative, or Fortis Benefits' Home Office: P.O. Box 64295, St. Paul,
Minnesota, 55164: 1-800-827-5877. Purchase payments and Written Requests should
be mailed or delivered to the same Home Office address. All communications
should include the Certificate number, the Participant's name and, if different,
the Annuitant's name. The number for telephone transfers is 1-800-827-5877.
Any purchase payment or other communication, except a free-look cancellation
notice, is deemed received at Fortis Benefit's Home Office on the actual date of
receipt there in proper form unless received (1) after the close of regular
trading on The New York Stock Exchange, or (2) on a date that is not a Valuation
Date. In either of these two cases, the date of receipt will be deemed to be the
next Valuation Date.
7
<PAGE>
FINANCIAL AND PERFORMANCE INFORMATION
The information presented below reflects the Accumulation Unit information for
the available Subaccounts of the Variable Account through December 31, 1997.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------------ -----------------------------
ACCUMULATION ACCUMULATION ACCUMULATION ACCUMULATION
UNITS IN FORCE UNIT VALUE UNITS IN FORCE UNIT VALUE
--------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
Alliance Money
Market
Portfolio........ 539,196 $ 10.378 649,382 $10.861561
Alliance
International
Portfolio........ 28,337 $ 10.517 245,490 $10.818424
Alliance Premier
Growth
Portfolio........ 19,611 $ 11.803 127,363 $15.729195
American Century
V.P. Balanced
Fund............. 10,307 $ 10.972 44,869 $12.639353
American Century
V.P. Capital
Appreciation
Fund............. 7,475 $ 9.412 15,641 $ 9.061024
Federated US Govt
Securities....... 19,937 $10.704721
Federated High
Income Bond Fund
II............... 83,778 $ 10.978 207,634 $12.441253
Federated Utility
Fund II.......... 18,507 $ 10.748 121,809 $13.550370
Federated American
Leaders Fund
II............... 43,455 $ 11.395 212,945 $15.012052
Fortis S&P 500
Index Series..... 20,189 $ 9.790 206,843 $12.896250
INVESCO - Variable
Health
Sciences......... 13,819 $11.006864
INVESCO Variable
Industrial
Income........... 27,808 $12.136873
INVESCO Variable
Technology....... 14,794 $11.445543
Lexington Natural
Resources
Trust............ 64,788 $ 12.050 90,146 $12.853076
Lexington Emerging
Markets Fund..... 6,919 $ 9.426 77,056 $ 8.299614
MFS Emerging
Growth Series.... 180,147 $ 11.335 303,026 $13.756132
MFS High Income
Series........... 36,197 $ 10.912 55,017 $12.342449
MFS World
Governments
Series........... 4,084 $ 10.411 10,694 $10.248705
Neuberger & Berman
Limited Maturity
Bond Portfolio... 32,024 $10.497834
Neuberger & Berman
Partners
Portfolio........ 47,329 $12.477670
Montgomery
Emerging Markets
Fund............. 17,917 $ 10.632 62,541 $10.526513
Montgomery Growth
Fund............. 70,482 $ 12.688 115,144 $16.232262
SAFECO Equity
Portfolio........ 20,103 $ 9.778 118,412 $12.151817
SAFECO Growth
Portfolio........ 18,249 $ 10.398 255,499 $14.992831
Strong Discovery
Fund II.......... 9,105 $ 10.058 21,234 $11.153400
Strong
International
Stock Fund II.... 34,083 $ 10.509 36,546 $ 9.049000
Van Eck Worldwide
Bond Fund........ 3,565 $ 10.293 26,552 $10.492666
Van Eck Worldwide
Hard Assets
Fund............. 47,229 $ 9.992 135,426 $ 9.774884
</TABLE>
Audited financial statements of the available Subaccounts of the Variable
Account are included in the Statement of Additional Information.
Advertising and other sales materials may include yield and total return figures
for the Subaccounts of the Variable Account. These figures are based on
historical results and are not intended to indicate future performance. "Yield"
is the income generated by an investment in the Subaccount over a period of time
specified in the advertisement. This rate of return is assumed to be earned over
a full year and is shown as a percentage of the investment. "Total return" is
the total change in value of an investment in the Subaccount over a period of
time specified in the advertisement. The rate of return shown would produce that
change in value over the specified period, if compounded annually. Yield and
total return figures do not reflect premium tax charges. This makes the
performance shown more favorable.
Financial information concerning Fortis Benefits is included in this Prospectus
under "Additional Information About Fortis Benefits" and "Fortis Benefits
Financial Statements."
FORTIS BENEFITS/FORTIS FINANCIAL GROUP MEMBER
Fortis Benefits Insurance Company, the issuer of the Certificates, was founded
in 1910. At the end of 1996, Fortis Benefits had approximately $94 billion of
total life insurance in force. Fortis Benefits is a Minnesota corporation and is
qualified to sell life insurance and annuity contracts in the District of
Columbia and in all states except New York. Fortis Benefits is an indirectly
wholly-owned subsidiary of Fortis, Inc., which is itself indirectly owned 50% by
Fortis AMEV and 50% by Fortis AG. Fortis, Inc. manages the United States
operations for these two companies.
Fortis Benefits is a member of the Fortis Financial Group, a joint effort by
Fortis Benefits, Fortis Advisers, Inc., Fortis Investors, Inc., and Time
Insurance Company, offering financial products through the management, marketing
and servicing of mutual funds, annuities and life insurance and disability
income products.
Fortis AMEV is a diversified financial services company headquartered in
Utrecht, The Netherlands, where its insurance operations began in 1847. Fortis
AG is a diversified financial services company headquartered in Brussels,
Belgium, where its insurance operations began in 1824. Fortis AMEV and Fortis AG
have merged their operating companies under the trade name of Fortis. The Fortis
group of companies is active in insurance, banking and financial services, and
real estate development in The Netherlands, Belgium, the United States, Western
Europe, and the Pacific Rim. The Fortis group of companies had approximately
$167 billion in assets as of year-end 1997.
All of the guarantees and commitments under the Certificates are general
obligations of Fortis Benefits, regardless of whether the Certificate Value has
been allocated to the Variable Account or to the Fixed Account. None of Fortis
Benefits' affiliated companies has any legal obligation to back Fortis Benefits'
obligations under the Certificates.
8
<PAGE>
THE VARIABLE ACCOUNT
The Variable Account, which is a segregated investment account of Fortis
Benefits, was established as Variable Account D by Fortis Benefits pursuant to
the insurance laws of Minnesota as of October 14, 1987. Although the Variable
Account is an integral part of Fortis Benefits, the Variable Account is
registered with the Securities and Exchange Commission as a unit investment
trust under the Investment Company Act of 1940. Assets in the Variable Account
representing reserves and liabilities under Certificates and other variable
annuity contracts issued by Fortis Benefits will not be chargeable with
liabilities arising out of any other business of Fortis Benefits.
There are a number of Subaccounts in the Variable Account. The assets in each
Subaccount are invested exclusively in one of the Portfolios listed on page one
of this Prospectus. Income and both realized and unrealized gains or losses from
the assets of each Subaccount of the Variable Account are credited to or charged
against that Subaccount without regard to income, gains or losses from any other
Subaccount of the Variable Account or arising out of any other business we may
conduct. New Subaccounts may be added as new Portfolios are added and made
available. Correspondingly, if any Portfolios are eliminated, Subaccounts may be
eliminated from the Variable Account.
THE PORTFOLIOS
Certificate holders may choose from among a number of different Portfolios, each
of which is a mutual fund available for purchase only as a funding vehicle for
benefits under variable life insurance and variable annuities issued by Fortis
Benefits and other life insurance companies. (See Appendix C which contains a
summary of the investment objectives of each Portfolio.) Each Portfolio
corresponds to one of the Subaccounts of the Variable Account. The assets of
each Portfolio are separate from the others and each Portfolio operates as a
separate investment portfolio whose performance has no effect on the investment
performance of any other Portfolio. More detailed information for each Portfolio
offered, such as its investment policies and restrictions, charges, risks
attendant to investing in it, and other aspects of its operations, may be found
in the current prospectus for each Portfolio. Such a prospectus for the
Portfolios being considered must accompany this Prospectus and should be read in
conjunction herewith. A copy of each prospectus may be obtained without charge
from Fortis Benefits by calling 1-800-827-5877, or writing P.O. Box 64295, St.
Paul, Minnesota 55164.
Fortis Benefits purchases and redeems Portfolios' shares for the Variable
Account at their net asset value without the imposition of any sales or
redemption charges. Any dividend or capital gain distributions attributable to
Certificates are automatically reinvested in shares of the Portfolio from which
they are received at the Portfolio's net asset value on the date paid. Such
dividends and distributions will have the effect of reducing the net asset value
of each share of the corresponding Portfolio and increasing, by an equivalent
value, the number of shares outstanding of the Portfolio. However, the value of
your interest in the corresponding Subaccount will not change as a result of any
such dividends and distributions.
As indicated, Portfolios may also be available to registered separate accounts
offering variable annuity and variable life products of other participating
insurance companies, as well as to the Variable Account and other separate
accounts of Fortis Benefits. Although Fortis Benefits does not anticipate any
disadvantages to this, there is a possibility that a material conflict may arise
between the interest of the Variable Account and one or more of the other
separate accounts participating in the Portfolios. A conflict may occur due to a
change in law affecting the operations of variable life and variable annuity
separate accounts, differences in the voting instructions of the Participants
and those of other companies, or some other reason. In the event of conflict,
Fortis Benefits will take any steps necessary to protect the Participants and
variable annuity payees.
THE FIXED ACCOUNT
Interests in either of two different Fixed Accounts are offered by this
Prospectus, depending upon the state of residence of the Certificate applicant:
a Guarantee Periods Fixed Account or a General Account Fixed Account. Both of
these Fixed Accounts are referred to as the Fixed Account elsewhere in this
prospectus where a distinction is not relevant. A Guaranteed Periods Fixed
Account is offered to Certificate applicants in most states. However, in a
limited number of states, a General Account Fixed Account is offered in lieu of
the Guarantee Periods Fixed Account. Applicants should inquire of Fortis
Benefits or their account representative to determine which Fixed Account is
available in their state. Charges under the Certificate are the same as when the
Variable Account is being used, except that the .45% per annum charged for
mortality and expense risk and administrative expenses is not imposed on amounts
of Certificate Value in the Fixed Account.
GUARANTEE PERIODS FIXED ACCOUNT
Any amount allocated by the Participant to the Fixed Account earns a Guaranteed
Interest Rate commencing with the date of such allocation. This Guaranteed
Interest Rate continues for a number of years (not to exceed ten) selected by
the Participant. At the end of this Guarantee Period, the Participant's
Certificate Value in that Guarantee Period, including interest accrued thereon,
will be allocated to a new Guarantee Period of the same length unless Fortis
Benefits has received a Written Request from the Participant to allocate this
amount to a different Guarantee Period or periods or to one or more of the
Subaccounts. We must receive this Written Request at least three business days
prior to the end of the Guarantee Period. The first day of the new Guarantee
Period (or other reallocation) will be the day after the end of the prior
Guarantee Period. We will notify the Participant at least 45 days and not more
than 75 days prior to the end of any Guarantee Period.
We currently make available ten different Guarantee Periods, ranging from one to
ten years. Each Guarantee Period has its own Guaranteed Interest Rate, which may
differ from those for other Guarantee Periods. From time to time we will, at our
discretion, change the Guaranteed Interest Rate for future Guarantee Periods of
various lengths. These changes will not affect the Guaranteed Interest Rates
being paid on Guarantee Periods that have already commenced. Each allocation or
transfer of an amount to a Guarantee Period commences the running of a new
Guarantee Period with respect to that amount, which will earn a Guaranteed
Interest Rate that will continue unchanged until the end of that period. The
Guaranteed Interest Rate will never be less than an effective annual rate of 3%.
9
<PAGE>
Fortis Benefits declares the Guaranteed Interest Rates from time to time as
market conditions dictate. Fortis Benefits advises a Participant of the
Guaranteed Interest Rate for a chosen Guarantee Period at the time a purchase
payment is received, a transfer is effectuated or a Guarantee Period is renewed.
Fortis Benefits has no specific formula for establishing the Guaranteed Interest
Rates for the Guarantee Periods. The rate may be influenced by, but not
necessarily correspond to, interest rates generally available on the types of
investments acquired with amounts allocated to the Guarantee Period. See
"Investments by Fortis Benefits." Fortis Benefits in determining Guaranteed
Interest Rates, may also consider, among other factors, the duration of a
Guarantee Period, regulatory and tax requirements, sales and administrative
expenses borne by Fortis Benefits, risks assumed by Fortis Benefits, Fortis
Benefits' profitability objectives, and general economic trends.
FORTIS BENEFITS' MANAGEMENT MAKES THE FINAL DETERMINATION OF THE GUARANTEED
INTEREST RATES TO BE DECLARED. FORTIS BENEFITS CANNOT PREDICT OR ASSURE THE
LEVEL OF ANY FUTURE GUARANTEED INTEREST RATES IN EXCESS OF AN EFFECTIVE ANNUAL
RATE OF 3%.
Information concerning the Guaranteed Interest Rates applicable to the various
Guarantee Periods at any time may be obtained from our Home Office or from your
sales representative.
MARKET VALUE ADJUSTMENT
For Certificates with allocations to the Guarantee Periods Fixed Account, except
as described below, if any Fixed Account Value is surrendered, transferred or
otherwise paid out before the end of the Guarantee Period in which it is being
held, a Market Value Adjustment will be applied. This generally includes amounts
that are paid out as a death benefit pursuant to the Certificate, amounts
applied to an annuity option, and amounts paid as a single sum in lieu of an
annuity. However, NO Market Value Adjustment will be applied to amounts that are
paid out during the period beginning fifteen days before and ending fifteen days
after the end of a Guarantee Period in which it was being held. Additionally, no
Market Value Adjustment will be applied to amounts that are withdrawn from a
Guarantee Period and paid out to the Participant; or transferred to the Variable
Account, on an automatic periodic basis under a formal Fortis Benefits program
for the withdrawal or transfer of the earnings of the Fixed Account. (There may
be conditions and limitations imposed by Fortis Benefits associated with such a
program. See your Fortis Benefits representative for the availability of any
such program, and the conditions and limitations of such a program, in your
state.)
The Market Value Adjustment may increase or decrease the amount of Fixed Account
Value being withdrawn or transferred. The comparison of two Guaranteed Interest
Rates determines whether the Market Value Adjustment produces an increase or a
decrease. The first rate to compare is the Guaranteed Interest Rate for the
amount being transferred or withdrawn. The second rate is the Guaranteed
Interest Rate then being offered for new Guarantee Periods of the same duration
as that remaining in the Guarantee Period from which the funds are being
withdrawn or transferred. If the first rate exceeds the second by more than
1/2%, the Market Value Adjustment produces an increase. If the first rate does
not exceed the second by at least 1/2%, the Market Value Adjustment produces a
decrease. Sample calculations are shown in Appendix A.
The Market Value Adjustment will be determined by multiplying the amount being
withdrawn or transferred from the Guarantee Period (before deduction of any
applicable surrender charge) by the following factor:
( 1 + I ) n / 12
----------- - 1
( 1 + J + .005 )
where,
- I is the Guaranteed Interest Rate being credited to the amount being
withdrawn from the existing Guarantee Period,
- J is the Guaranteed Interest Rate then being offered for new Guarantee
Periods with durations equal to the number of years remaining in the
existing Guarantee Period (rounded up to the next higher number of years),
and
- N is the number of months remaining in the existing Guarantee Period
(rounded up to the next higher number of months).
GENERAL ACCOUNT FIXED ACCOUNT
Accounts allocated to the General Account Fixed Account are held in the General
Account of Fortis Benefits. Because of exemptive and exclusionary provisions,
interests in the General Account Fixed Account have not been registered under
the Securities Act of 1933 and the General Account Fixed Account has not been
registered as an investment company under the Investment Company Act of 1940.
Accordingly, neither the General Account Fixed Account nor any interests therein
are subject to the provisions of these acts and, as a result, the staff of the
Securities and Exchange Commission has not reviewed the disclosures in the
Prospectus relating to the General Account Fixed Account. Disclosures regarding
the Fixed Account may, however, be subject to certain generally applicable
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in prospectuses. For Certificates with amounts
allocated to the General Account Fixed Account, this Prospectus is generally
intended to serve as a disclosure document only for the aspects of the
Certificate involving the Variable Account and contains only selected
information regarding the General Account Fixed Account. More information
regarding the General Account Fixed Account may be obtained from Fortis
Benefits' Home Office or from your sales representative.
Fortis Benefits guarantees that Certificate Value in the General Account Fixed
Account will accrue interest at an effective annual rate of at least 3%,
independent of the actual investment experience of the General Account. We may,
at our sole discretion, credit higher rates of interest, although we are not
obligated to credit interest in excess of the guaranteed rate of 3% per year.
Any interest rate in excess of 3% per year with respect to any amount in the
General Account Fixed Account pursuant to a Certificate will not be modified
more than once each calendar year. Any higher rate of interest will be quoted at
an effective annual rate. The rate of any excess interest initially or
subsequently credited to any amount can in many cases vary, depending on when
that amount was originally allocated to the General Account Fixed
10
<PAGE>
Account. Once credited, such interest will be guaranteed and will become part of
Certificate Value in the General Account Fixed Account from which deductions for
fees and charges may be made.
GENERAL ACCOUNT FIXED ACCOUNT TRANSFERS
Transfers out of the General Account Fixed Account have special limitations.
Prior to the Annuity Commencement Date, Participants may transfer part or all of
the Certificate Value from the General Account Fixed Account to the Variable
Account, provided that (1) no more than one such transfer is made each
Certificate year, (2) no more than 50% of the General Account Fixed Account
Value is transferred at any time (unless the balance in the General Account
Fixed Account after the transfer would be less than $1,000, in which case up to
the entire balance may be transferred), (3) at least $1,000 is transferred at
any one time (or, if less, the entire amount in the General Account Fixed
Account), and (4) you may not make a transfer into the General Account Fixed
Account within six months after a transfer out of such account. Irrespective of
the above, we may in our discretion permit a continuing request for transfer of
lesser specified amounts automatically on a periodic basis. However, we reserve
the right to discontinue or modify any such arrangements at our discretion. No
transfers from the General Account Fixed Account may be made after the Annuity
Commencement Date.
INVESTMENTS BY FORTIS BENEFITS
Our obligations with respect to the Guarantee Periods Fixed Account and the
General Account Fixed Account are legal obligations of Fortis Benefits and are
supported by our General Account assets, which also support obligations incurred
by us under other insurance and annuity contracts. Investments purchased with
amounts allocated to both Fixed Accounts are the property of Fortis Benefits and
Participants have no legal rights in such investments. Subject to applicable
law, we have sole discretion over the investment of assets in our General
Account and in the Fixed Account.
Amounts in the Fortis Benefits' General Account and the Fixed Account will be
invested in compliance with applicable state insurance laws and regulations
concerning the nature and quality of investments for the General Account. Within
specified limits and subject to certain standards and limitations, these laws
generally permit investment in federal, state and municipal obligations,
preferred and common stocks, corporate bonds, real estate mortgages, real estate
and certain other investments. See Fortis Benefits' Financial Statements" for
information on Fortis Benefits' investments. Investment management for amounts
in the General Account and in the Fixed Account is provided to Fortis Benefits
by Fortis Advisers, Inc.
Fortis Benefits intends to consider the return available on the instruments in
which it intends to invest amounts allocated to the Fixed Account when it
establishes Guaranteed Interest Rates. Such return is only one of many factors
considered in establishing the Guaranteed Interest Rates. See "Guarantee Periods
Fixed Account."
Fortis Benefits expects that amounts allocated to the Fixed Account generally
will be invested in debt instruments that approximately match Fortis Benefits'
liabilities with regard to the Guarantee Periods for Net Purchase Payments
allocated to Guarantee Periods Fixed Accounts and with regard to expected
holding periods for Net Purchase Payments allocated to the General Account Fixed
Account. Fortis Benefits expects that these will include primarily the following
types of debt instruments: (1) securities issued by the United States Government
or its agencies or instrumentalities, which securities may or may not be
guaranteed by the United States Government; (2) debt securities which have an
investment grade, at the time of purchase, within the four highest grades
assigned by Moody's Investors Services, Inc. ("Moody's") (Aaa, Aa, A or Baa),
Standard & Poor's Corporation ("Standard & Poor's") (AAA, AA, A or BBB), or any
other nationally recognized rating service; (3) other debt instruments
including, but not limited to, issues of or guaranteed by banks or bank holding
companies and corporations, which obligations although not rated by Moody's or
Standard & Poor's, are deemed by Fortis Benefits to have an investment quality
comparable to securities which may be purchased as stated above; and (4) other
evidences of indebtedness secured by mortgages or deeds of trust representing
liens upon real estate. Notwithstanding the foregoing, Fortis Benefits is not
obligated to invest amounts allocated to the Fixed Account according to any
particular strategy, except as may be required by applicable state insurance
laws and regulations. See "Regulation and Reserves."
FIXED ACCOUNT VALUE
The Certificate's Fixed Account Value on any Valuation Date is the sum of the
Net Purchase Payments allocated to the Fixed Account, plus any transfers from
the Variable Account, plus interest credited to the Fixed Account, less any
surrender charges or annual administrative charges allocated to the Fixed
Account or transfers to the Variable Account.
ACCUMULATION PERIOD
ISSUANCE OF A CERTIFICATE AND PURCHASE PAYMENTS
Fortis Benefits reserves the right to reject any application for a Certificate
or any purchase payment for any reason. If the issuing instructions can be
accepted in the form received, the initial purchase payment will be credited
within two Valuation Dates after the later of receipt of the issuing
instructions or receipt of the initial purchase payment at Fortis Benefits' Home
Office. If the initial purchase payment cannot be credited within five Valuation
Dates after receipt because the issuing instructions are incomplete, the initial
purchase payment will be returned unless the applicant consents to our retaining
the initial purchase payment and crediting it as of the end of the Valuation
Period in which the necessary requirements are fulfilled. The initial purchase
payment must be at least $5,000 ($2,000 for a Certificate issued pursuant to a
qualified plan).
The date that the initial purchase payment is applied to the purchase of the
Certificate is also the Certificate Issue Date. The Certificate Issue Date is
the date used to determine Certificate years, regardless of when the Certificate
is delivered. The crediting of investment experience in the Variable Account, or
a fixed rate of return in the Fixed Account, begins as of the Certificate Issue
Date.
11
<PAGE>
The Participant may make additional purchase payments at any time after the
Certificate Issue Date and prior to the Annuity Commencement Date, as long as
the Annuitant is living. Purchase payments (together with any required
information identifying the proper Certificates and account to be credited with
purchase payments) must be transmitted to our Home Office. Additional purchase
payments are credited to the Certificate and added to the Certificate Value as
of the end of the Valuation Period in which they are received in good order.
Each additional purchase payment under a Certificate must be at least $500. The
total of all purchase payments for all Fortis Benefits annuities having the same
owner or participant, or annuitant, may not exceed $1 million (not more than
$500,000 allocated to the Fixed Account) without Fortis Benefits' prior
approval, and we reserve the right to modify this limitation at any time.
Purchase payments in excess of the initial minimum may be made by monthly draft
against the bank account of any Participant who has completed and returned to us
a special "Thrift-O-Matic" authorization form that may be obtained from your
sales representative or from our Home Office. Arrangements can also be made for
purchase payments by wire transfer, payroll deduction, military allotment,
direct deposit and billing. Purchase payments by check should be made payable to
Fortis Benefits Insurance Company.
If the Certificate Value is less than $1,000, we may cancel the Certificate on
any Valuation Date. We will notify the Participant at least 90 days in advance
of our intention to cancel the Certificate. Such cancellation would be
considered a full surrender of the Certificate.
CERTIFICATE VALUE
Certificate Value is the total of any Variable Account Value in all the
Subaccounts of the Variable Account pursuant to the Certificate, plus any Fixed
Account Value.
There is no guaranteed minimum Variable Account Value. To the extent Certificate
Value is allocated to the Variable Account, you bear the entire investment risk.
DETERMINATION OF VARIABLE ACCOUNT VALUE. A Certificate's Variable Account Value
is based on Accumulation Unit values, which are determined on each Valuation
Date. The value of an Accumulation Unit for a Subaccount on any Valuation Date
is equal to the previous value of that Subaccount's Accumulation Unit multiplied
by that Subaccount's net investment factor (discussed directly below) for the
Valuation Period ending on that Valuation Date. At the end of any Valuation
Period, a Certificate's Variable Account Value in a Subaccount is equal to the
number of Accumulation Units in the Subaccount times the value of one
Accumulation Unit for that Subaccount.
The number of Accumulation Units in each Subaccount is equal to:
- Accumulation Units purchased at the time that any Net Purchase Payments or
transferred amounts are allocated to the Subaccount; less
- Accumulation Units redeemed to pay for the portion of any transfers from
or partial surrenders allocated to the Subaccount; less
- Accumulation Units redeemed to pay charges under the Contract.
NET INVESTMENT FACTOR. If a Subaccount's net investment factor is greater than
one, the Subaccount's Accumulation Unit value has increased. If the net
investment factor is less than one, the Subaccount's Accumulation Unit value has
decreased. The net investment factor for a Subaccount is determined by dividing
(1) the net asset value per share of the Portfolio shares held by the
Subaccount, determined at the end of the current Valuation Period, plus the per
share amount of any dividend or capital gains distribution made with respect to
the Portfolio shares held by the Subaccount during the current Valuation Period,
minus a per share charge for the increase, plus a per share credit for the
decrease, in any income taxes assessed which we determine to have resulted from
the investment operation of the subaccount or any other taxes which are
attributable to this Certificate, by (2) the net asset value per share of the
Portfolio shares held in the Subaccount as determined at the end of the previous
Valuation Period, and subtracting from that result a factor representing the
mortality risk, expense risk and administrative expense charge.
DETERMINATION OF FIXED ACCOUNT VALUE. A Certificate's Fixed Account Value is
guaranteed by Fortis Benefits. Therefore, Fortis Benefits bears the investment
risk with respect to amounts allocated to the Fixed Account, except to the
extent that (a) Fortis Benefits may vary the Guaranteed Interest Rate for future
Guarantee Periods for Guarantee Periods Fixed Accounts and the current interest
for General Account Fixed Accounts (subject to the 3% effective annual minimum)
and (b) the Market Value Adjustment for Guarantee Periods Fixed Accounts imposes
investment risks on the Participant.
The Certificate's Fixed Account Value on any Valuation Date is equal to the
following amounts, in each case increased by accrued interest:
- The amount of Net Purchase Payments or transferred amounts allocated to
the Fixed Account; less
- The amount of any transfers or surrenders out of the Fixed Account.
ALLOCATION OF PURCHASE PAYMENTS AND CERTIFICATE VALUE
ALLOCATION OF PURCHASE PAYMENTS. In the application for a Certificate, the
Participant can allocate Net Purchase Payments, or portions thereof, to the
available Subaccounts of the Variable Account or to the Fixed Account (and to
Guarantee Periods within the Fixed Account for Certificates issued in states
where the Guarantee Periods Fixed Account is offered), or a combination thereof.
Percentages must be in whole numbers and the total allocation must equal 100%.
The percentage allocations for future Net Purchase Payments may be changed,
without charge, at any time by sending a Written Request to Fortis Benefits'
Home Office. Changes in the allocation of future Net Purchase Payments will be
effective on the date we receive the Participant's Written Request.
TRANSFERS. Transfers of Certificate Value from one available Subaccount to
another or into the Fixed Account, or from the Fixed Account to one of the
available Subaccounts, or in the case of a Guarantee Periods Fixed Account
transfers from one Guarantee Period to another Guarantee Period, can be made by
the Participant in Written Request
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to Fortis Benefits' Home Office, or by telephone transfer as described below.
There is currently no charge for any transfer, although transfers from a
Guarantee Period of a Guarantee Period Fixed Account that are (1) more than 15
days before or after the expiration thereof, or (2) are not a part of a formal
Fortis Benefits program for the transfer of earnings of the Fixed Account, are
subject to a Market Value Adjustment. See "Market Value Adjustment." Transfers
of Certificate Value from the General Account Fixed Account are restricted in
both amount and timing. See "Fixed Account -- General Account Fixed Account --
General Account Fixed Account Transfers."
The minimum transfer from a Subaccount or Guarantee Period is the lesser of
$1,000 or all of the Certificate Value in the Subaccount or Fixed Account.
Irrespective of the above we may permit a continuing request for transfers of
lesser specified amounts automatically on a periodic basis. However, we reserve
the right to restrict the frequency of or otherwise condition, terminate or
impose charges (not to exceed $25 per transfer) upon transfers. We will count
all transfers between and among the Subaccounts of the Variable Account and the
Fixed Account as one transfer, if all the transfer requests are made at the same
time as part of one request. We will execute the transfers and determine all
values in connection with transfers as of the end of the Valuation Period in
which we receive the transfer request. The amount of any positive or negative
Market Value Adjustment associated with a transfer from a Guarantee Period of
the Guarantee Periods Fixed Account, respectively, will be added to or deducted
from the transferred amount.
If you complete and return the telephone transfer section of the application,
transfers may be made pursuant to telephone instructions. We will honor
telephone transfer instructions from any person who provides the correct
identifying information. Fortis Benefits will not be responsible for, and you
will bear the risk of loss from, oral instructions, including fraudulent
instructions, which are reasonably believed to be genuine. We will employ
reasonable procedures to confirm that telephone instructions are genuine, but if
such procedures are not deemed reasonable, we may be liable for any losses due
to unauthorized or fraudulent instructions. Our procedures are to verify address
and social security number, tape record the telephone call, and provide written
confirmation of the transaction. We may modify or terminate our telephone
transfer procedures at any time. The number for telephone transfers is
1-800-827-5877.
Certain restrictions on very substantial investments in any one Subaccount are
set forth under "Limitations on Allocations" in the Statement of Additional
Information.
TOTAL AND PARTIAL SURRENDERS
TOTAL SURRENDERS. The Participant may surrender all of the Cash Surrender Value
at any time during the life of the Annuitant and prior to the Annuity
Commencement Date by a Written Request sent to Fortis Benefits' Home Office. We
reserve the right to require that the Certificate be returned to us prior to
making payment, although this will not affect our determination of the amount of
the Cash Surrender Value. Cash Surrender Value is the Certificate Value at the
end of the Valuation Period during which the Written Request for the total
surrender is received by Fortis Benefits at its Home Office, plus or minus any
applicable Market Value Adjustment. See "Market Value Adjustment."
The written consent of all collateral assignees and irrevocable beneficiaries
must be obtained prior to any total surrender. Surrenders from the Variable
Account will generally be paid within seven days of the date of receipt by
Fortis Benefits' Home Office of the Written Request. Postponement of payments
may occur, however, in certain circumstances. See "Postponement of Payment."
The amount paid upon total surrender of the Cash Surrender Value (taking into
account any prior partial surrenders) may be more or less than the total Net
Purchase Payments made. After a surrender of the Cash Surrender Value or at any
time the Certificate Value is zero, all rights of the Participant, Annuitant, or
any other person will terminate.
PARTIAL SURRENDERS. At any time prior to the Annuity Commencement Date and
during the lifetime of the Annuitant, the Participant may surrender a portion of
the Fixed Account Value and/or the Variable Account Value by sending to Fortis
Benefits' Home Office a Written Request. We will not accept a partial surrender
request unless the net proceeds payable to you as a result of the request are at
least $1,000. If the total Certificate Value in both the Variable Account and
Fixed Account would be less than $1,000 after the partial surrender, Fortis
Benefits will surrender the entire Cash Surrender Value under the Certificate.
In order for a request to be processed, the Participant must specify from which
Subaccounts of the Variable Account or Guarantee Periods of the Fixed Account,
if applicable, a partial surrender should be made.
We will surrender Accumulation Units from the Variable Account and/ or dollar
amounts from the Fixed Account so that the total amount of the partial surrender
equals the dollar amount of the partial surrender request. If the surrender is
from a Guarantee Period, the amount payable to the Participant will be reduced
by any applicable negative Market Value Adjustment, or increased by any positive
Market Value Adjustment unless the surrender is (1) within 15 days before or
after the expiration of a Guarantee Period, or (2) is a part of a formal Fortis
Benefits program for the transfer of earnings from the Fixed Account. The
partial surrender will be effective at the end of the Valuation Period in which
Fortis Benefits receives the Written Request for partial surrender at its Home
Office. Payments will generally be made within seven days of the effective date
of such request, although certain delays are permitted. See "Postponement of
Payment."
The Internal Revenue Code provides that a penalty tax will be imposed on certain
premature surrenders. For a discussion of this and other tax implications of
total and partial surrenders, including withholding requirements, see "Federal
Tax Matters." Also, under tax deferred annuity Certificates pursuant to Section
403(b) of the Internal Revenue Code, no distributions of voluntary salary
reduction amounts will be permitted prior to one of the following events:
attainment of age 59 1/2 by the employee or the employee's separation from
service, death, disability or hardship. (Hardship distributions will be limited
to the lesser of the amount of the hardship or the amount of salary reduction
contributions, exclusive of earnings thereon.)
BENEFIT PAYABLE ON DEATH OF ANNUITANT OR PARTICIPANT
If the Annuitant or Participant dies prior to the Annuity Commencement Date, a
death benefit will be paid to the Beneficiary. If more than
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one Annuitant has been named, the death benefit payable upon the death of an
Annuitant will only be paid upon the death of the last survivor of the persons
so named. The death benefit will equal the greater of:
(1) the sum of all Net Purchase Payments made less all prior
surrenders and any applicable prior negative Market Value Adjustments (in
the case of a Certificate having a Guarantee Periods Fixed Account), or
(2) the Certificate Value adjusted by any applicable Market Value
Adjustment (in the case of a Certificate having a Guarantee Periods Fixed
Account), as of the date used for valuing the death benefit.
The value of the death benefit is determined as of the end of the Valuation
Period in which we receive, at our Home Office, proof of death and the written
request as to the manner of payment. Upon receipt of these items, the death
benefit generally will be paid within seven days. Under certain circumstances,
payment of the death benefit may be postponed. See "Postponement of Payment." If
we do not receive a Written Request for a settlement method, we will pay the
death benefit in a single sum, based on values determined at that time.
The Beneficiary may (a) receive a single sum payment, which terminates the
Certificate, or (b) select an annuity option. If the Beneficiary selects an
annuity option, he or she will have all the rights and privileges of a payee
under the Certificate. If the Beneficiary desires an Annuity option, the
election should be made within 60 days of the date the death benefit becomes
payable. Failure to make a timely election can result in unfavorable tax
consequences. For further information, see "Federal Tax Matters."
We accept any of the following as proof of death: a copy of a certified death
certificate; a copy of a certified decree of a court of competent jurisdiction
as to the finding of death; or a written statement by a medical doctor who
attended the deceased at the time of death.
If the Participant dies before the Annuitant and before the Annuity Commencement
Date with respect to a Non-Qualified Certificate certain additional requirements
are mandated by the Internal Revenue Code, which are discussed below under
"Federal Tax Matters-- Required Distributions for Non-Qualified Certificates."
It is imperative that Written Notice of the death of the Participant be promptly
transmitted to Fortis Benefits at its Home Office, so that arrangements can be
made for distribution of the entire interest in the Certificate to the
Beneficiary in a manner that satisfies the Internal Revenue Code requirements.
Failure to satisfy these requirements may result in the Certificate not being
treated as an annuity contract for federal income tax purposes, which could have
adverse tax consequences.
THE ANNUITY PERIOD
ANNUITY COMMENCEMENT DATE
The Participant may specify an Annuity Commencement Date in the application. The
Annuity Commencement Date marks the beginning of the period during which an
Annuitant or other payee designated by the Participant receives annuity payments
under the Certificate. We reserve the right to not permit an Annuity
Commencement Date which is on or after the Annuitant's 75th birthday.
Depending on the type of retirement arrangement involved, amounts that are
distributed either too soon or too late may be subject to penalty taxes under
the Internal Revenue Code. See "Federal Tax Matters." You should consider this
carefully in selecting or changing an Annuity Commencement Date.
In order to advance or defer the Annuity Commencement Date, the Participant must
submit a Written Request during the Annuitant's lifetime. The request must be
received at our Home Office at least 30 days before the then-scheduled Annuity
Commencement Date. The new Annuity Commencement Date must also be at least 30
days after the Written Request is received. There is no right to make any total
or partial surrender during the Annuity Period.
COMMENCEMENT OF ANNUITY PAYMENTS
If the Certificate Value at the end of the Valuation Period which contains the
Annuity Commencement Date is less than $1,000, we may pay the entire Certificate
Value, without the imposition of any charges other than the premium tax charge,
if applicable, in a single sum payment to the Annuitant or other payee chosen by
the Participant and cancel the Certificate.
Otherwise, Fortis Benefits will apply (1) the Fixed Account Value to provide a
Fixed Annuity Option and (2) the Variable Account Value in any Subaccount to
provide a Variable Annuity Option using the same Subaccount, unless the
Participant has notified us by Written Request to apply the Fixed Account Value
and Variable Account Value in different proportions. Any such Written Request
must be received by us at our Home Office at least 30 days before the Annuity
Commencement Date.
Annuity payments under a Fixed or Variable Annuity Option will be made on a
monthly basis to the Annuitant or other properly-designated payee, unless we
agree to a different payment schedule. If more than one person is named as an
Annuitant, the Participant may elect to name one of such persons to be the sole
Annuitant as of the Annuity Commencement Date. We reserve the right to change
the frequency of any annuity payment so that each payment will be at least $50
($20 in Texas). There is no right to make any total or partial surrender during
the Annuity Period.
The amount of each annuity payment will depend on the amount of Certificate
Value applied to an annuity option, the form of annuity selected and the age of
the Annuitant. Information concerning the relationship between the Annuitant's
sex and the amount of annuity payments, including special requirements in
connection with employee benefits plans, is set forth under "Calculations of
Annuity Payments" in the Statement of Additional Information. The Statement of
Additional Information also contains detailed information about how the amount
of each annuity payment is computed.
The dollar amount of any fixed annuity payments is specified during the entire
period of annuity payments according to the provisions of the annuity form
selected. The dollar amount of variable annuity
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payments varies during the annuity period based on changes in Annuity Unit
Values for the Subaccounts that you choose to use in connection with your
payments.
RELATIONSHIP BETWEEN SUBACCOUNT INVESTMENT PERFORMANCE AND AMOUNT OF VARIABLE
ANNUITY PAYMENTS
If a Subaccount on which a variable annuity payment is based has an average
effective net investment return higher than 3% per annum during the period
between two such annuity payments, the Annuity Unit Value will increase, and the
second payment will be higher than the first. Conversely, if the Subaccount's
average effective net investment return over the period between the annuity
payments is less than 3% per annum, the Annuity Unit Value will decrease, and
the second payment will be lower than the first. "Net investment return," for
this purpose, refers to the Subaccount's overall investment performance, net of
the mortality and expense risk and administrative expense charges, which are
assessed at a nominal aggregate annual rate of .45%. We guarantee that the
amount of each variable annuity payment after the first payment will not be
affected by variations in our mortality experience or our expenses.
TRANSFERS. During the Annuity Period, the person receiving annuity payments may
make up to four transfers a year among Subaccounts. The current procedures for
and conditions on these transfers are the same as described above under
"Allocation of Purchase Payments and Certificate Value Transfers." Transfers
from a Fixed Annuity Option are not permitted during the Annuity Period.
ANNUITY FORMS
The Participant may select an annuity form or change a previous selection by
Written Request, which must be received by us at least 30 days before the
Annuity Commencement Date. One annuity form may be selected, although as
discussed above, payments under that form may be received on a combination fixed
and variable basis. If no annuity form selection is in effect on the Annuity
Commencement Date, in most cases we automatically apply Option B (described
below), with payments guaranteed for 10 years. If the Certificate is issued
under certain retirement plans, however, federal pension law may require that
any default payments be made pursuant to plan provisions and/or federal law. Tax
laws and regulations may impose further restrictions to assure that the primary
purpose of the plan is distribution of the accumulated funds to the employee.
The following options are available for fixed annuity payments and for variable
annuity payments.
OPTION A, LIFE ANNUITY. Payments are made as of the first Valuation Date of each
monthly period during the Annuitant's life, starting with the Annuity
Commencement Date. No payments will be made after the Annuitant dies. It is
possible for the payee to receive only one payment under this option, if the
Annuitant dies before the second payment is due.
OPTION B, LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 YEARS TO 20
YEARS. Payments are made as of the first Valuation Date of each monthly period
starting on the Annuity Commencement Date. Payments will continue as long as the
Annuitant lives. If the Annuitant dies before all of the guaranteed payments
have been made, we will continue installments of the guaranteed payments to the
Beneficiary.
OPTION C, JOINT AND FULL SURVIVOR ANNUITY. Payments are made as of the first
Valuation Date of each monthly period starting with the Annuity Commencement
Date. Payments will continue as long as either the Annuitant or the joint
Annuitant is alive. Payments will stop when both the Annuitant and the joint
Annuitant have died. It is possible for the payee or payees under this option to
receive only one payment, if both Annuitants die before the second payment is
due.
OPTION D, JOINT AND ONE-HALF CONTINGENT SURVIVOR ANNUITY. Payments are made as
of the first Valuation Date of each monthly period starting with the Annuity
Commencement Date. Payments will continue as long as either the Annuitant or the
joint Annuitant is alive. If the Annuitant dies first, payments will continue to
the joint Annuitant at one-half the original amount. If the joint Annuitant dies
first, payments will continue to the Annuitant at the original full amount.
Payments will stop when both the Annuitant and the joint Annuitant have died. It
is possible for the payee or payees under this option to receive only one
payment if both Annuitants die before the second payment is due.
We also have other annuity forms available and information about them can be
obtained from your sales representative or by calling or writing to our Home
Office.
DEATH OF ANNUITANT OR OTHER PAYEE
Under most annuity forms offered by Fortis Benefits, the amounts, if any,
payable on the death of the Annuitant during the Annuity Period are the
continuation of annuity payments for any remaining guarantee period or for the
life of any joint Annuitant. In all such cases, the person entitled to receive
payments also receives any rights and privileges under the annuity form in
effect.
Additional rules applicable to such distributions under Non-Qualified
Certificates are described under "Federal Tax Matters--Required Distributions
for Non-Qualified Certificates." Though the rules there described do not apply
to Certificates issued in connection with qualified plans, similar rules apply
to the plans themselves.
CHARGES AND DEDUCTIONS
PREMIUM TAXES
The states of South Dakota and Wyoming impose a premium tax upon the receipt of
a purchase payment. In these states, and in any other state or jurisdiction
where premium taxes or similar assessments are imposed upon the receipt of
purchase payments, Fortis Benefits will pay such taxes on behalf of the
Participant and then deduct a charge for these amounts from the Certificate
Value upon the surrender, death of annuitant or Participant, or annuitization of
the Certificate. In jurisdictions where premium taxes or similar assessments are
imposed at the time annuity payments begin, Fortis Benefits will deduct a charge
for such amounts from the Certificate Value at that time. In such jurisdictions,
the charge will be deducted on a pro-rata basis from the then-current Fixed
Account Value and, by redemption of Accumulation Units, the then-current
Variable Account Value in each Subaccount. Similarly, Fortis Benefits may deduct
premium taxes from Certificate Value when no deduction was made from purchase
payments, but is subsequently determined to be due. Conversely, Fortis Benefits
will credit to the Certificate Value the amount of any deductions for premium
taxes or similar assessments that are subsequently determined not to be owed.
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Applicable premium tax rates depend upon the Participant's then-current place of
residence. Applicable rates are subject to change by legislation, administrative
interpretations or judicial acts.
CHARGES AGAINST THE VARIABLE ACCOUNT
MORTALITY AND EXPENSE RISK CHARGE. We will assess each Subaccount of the
Variable Account with a daily charge for mortality and expense risk at a nominal
annual rate of .45% of the average daily net assets of the Variable Account
(consisting of approximately .30% for mortality risk and approximately .15% for
expense risk). This charge is assessed during both the Accumulation Period and
the Annuity Period. We guarantee not to increase this charge for the duration of
the Certificate.
The mortality risk borne by Fortis Benefits arises from its obligation to make
annuity payments (determined in accordance with the annuity tables and other
provisions contained in the Certificate) for the full life of all Annuitants
regardless of how long all Annuitants or any individual Annuitant might live. In
addition, Fortis Benefits bears a mortality risk in that it guarantees to pay a
death benefit upon the death of an Annuitant or Participant prior to the Annuity
Commencement Date.
The expense risk assumed is that actual expenses incurred in connection with
issuing and administering the Certificate will exceed the limits on
administrative charges set in the Certificate.
If the administrative charges and the mortality and expense risk charge are
insufficient to cover the expenses and costs assumed, the loss will be borne by
the Company. Conversely, if the amount deducted proves more than sufficient, the
excess will be profit to the Company.
ANNUAL ADMINISTRATIVE CHARGE
A $30 annual administrative charge is deducted each Certificate year from the
Certificate Value on each anniversary of the Certificate Issue Date. (This
charge will be lower to the extent legally required in some states.) This charge
is to help cover administrative costs such as those incurred in issuing
Certificates, establishing and maintaining the records relating to Certificates,
making regulatory filings and furnishing confirmation notices, voting materials
and other communications, providing computer, actuarial and accounting services,
and processing Certificate transactions. We do not anticipate any profit from
this charge. This charge will initially be waived during the Annuity Period,
although Fortis Benefits reserves the right to reinstitute it at any time.
The annual administrative charge will be deducted by redemption of Accumulation
Units from each Subaccount of the Variable Account and from the Fixed Account in
the same proportion as the then-current Certificate Value is then allocated
among those alternatives pursuant to the Certificate. If the Certificate is
totally surrendered, the full annual administrative charge will be deducted at
the time of surrender.
TAX CHARGE
We currently impose no charge for taxes payable by us in connection with the
Certificate, other than for premium taxes and similar assessments when
applicable. We reserve the right to impose a charge for any other taxes that may
become payable by us in the future in connection with the Certificates or the
Separate Account.
The annual administrative charge and charges against the Variable Account
described above are for the purposes described and Fortis Benefits may receive a
profit as a result of these charges.
MISCELLANEOUS
Because the Variable Account invests in shares of the Portfolios, the net assets
of the Variable Account will reflect the investment advisory fees and certain
other expenses incurred by the Portfolios that are described in their
prospectuses.
GENERAL PROVISIONS
THE CERTIFICATES
The Certificate, copies of any applications, amendments, riders, or endorsements
attached to the Certificate and copies of any supplemental applications,
amendments, endorsements, or revised Certificate pages which are mailed to you
are the entire Certificate. Only an officer of Fortis Benefits can agree to
change or waive any provisions of a Certificate. Any change or waiver must be in
writing and signed by an officer of Fortis Benefits. The Certificates are
non-participating and do not share in dividends or earnings of Fortis Benefits.
POSTPONEMENT OF PAYMENT
Fortis Benefits may defer for up to 15 days the payment of any amount
attributable to a purchase payment made by check to allow the check reasonable
time to clear. For a description of other circumstances in which amounts payable
out of Variable Account assets could be deferred, see "Postponement of Payments"
in the Statement of Additional Information. Fortis Benefits may also defer
payment of surrender proceeds payable out of the Fixed Account for a period of
up to 6 months.
MISSTATEMENT OF AGE OR SEX AND OTHER ERRORS
If the age or sex of the Annuitant has been misstated, any amount payable will
be that which the purchase payments paid would have purchased at the correct age
and sex. If we have made any overpayments because of incorrect information about
age or sex, or any other miscalculation, Fortis Benefits will deduct the
overpayment from the next payment or payments due. We add underpayments to the
next payment. The amount of any adjustment will be credited or charged with
interest at the effective annual rate of 3% per year.
ASSIGNMENT
Rights and interests under a Qualified Certificate may be assigned only in
certain narrow circumstances referred to in the Certificate. Participants and
other payees may assign their rights and interests under Non-Qualified
Certificates, including their ownership rights.
We take no responsibility for the validity of any assignment. A change in
ownership rights must be made in writing and a copy must be sent to Fortis
Benefits' Home Office. The change will be effective on the date it was made,
although we are not bound by a change until the date we record it.
The rights under a Certificate are subject to any assignment of record at the
Home Office of Fortis Benefits. An assignment or pledge of a Certificate may
have adverse tax consequences. See below under "Federal Tax Matters."
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BENEFICIARY
Before the Annuity Commencement Date and while the Annuitant is living, the
Participant may name or change a beneficiary or a contingent beneficiary by
sending a Written Request of the change to Fortis Benefits. Under certain
retirement programs, however, spousal consent may be required to name or change
a beneficiary, and the right to name a beneficiary other than the spouse may be
subject to applicable tax laws and regulations. We are not responsible for the
validity of any change. A change will take effect as of the date it is signed
but will not affect any payments we make or action we take before receiving the
Written Request. We also need the consent of any irrevocably named person before
making a requested change.
In the event of the death of a Participant or Annuitant prior to the Annuity
Commencement date the Beneficiary will be determined as follows:
- If there is any surviving Participant, the surviving Participant will be
the Beneficiary (this overrides any other beneficiary designation).
- If there is no surviving Participant, the Beneficiary will be the
beneficiary designated by the Participant.
- If there is no surviving Participant and no surviving beneficiary who has
been designated by the Participant, then the estate of the last surviving
Participant will be the Beneficiary.
REPORTS
We will mail to the Participant (or to the person receiving payments during the
annuity period), at the last known address of record, any reports and
communications required by any applicable law or regulation. You should
therefore give us prompt written notice of any address change. This will include
annual audited financial statements of the Portfolios, but not necessarily of
the Variable Account or Fortis Benefits.
RIGHTS RESERVED BY FORTIS BENEFITS
Fortis Benefits reserves the right to make certain changes if, in its judgment,
they would best serve the interests of Participants and Annuitants or would be
appropriate in carrying out the purposes of the Certificates. Any changes will
be made only to the extent and in the manner permitted by applicable laws. Also,
when required by law, Fortis Benefits will obtain your approval of the changes
and approval from any appropriate regulatory authority. Such approval may not be
required in all cases, however. Examples of the changes Fortis Benefits may make
include:
- To operate the Variable Account in any form permitted under the Investment
Company Act of 1940 or in any other form permitted by law.
- To transfer any assets in any Subaccount to another Subaccount, or to one
or more separate accounts, or to the Fixed Account; or to add, combine or
remove Subaccounts in the Variable Account.
- To substitute, for the Portfolio shares held in any Subaccount, the shares
of another Portfolio or the shares of another investment company or any
other investment permitted by law.
- To make any changes required by the Internal Revenue Code or by any other
applicable law in order to continue treatment of the Certificate as an
annuity.
- To change the time or time of day at which a Valuation Date is deemed to
have ended.
- To make any other necessary technical changes in the Certificate in order
to conform with any action the above provisions permit Fortis Benefits to
take, including to change the way Fortis Benefits assesses charges, but
without increasing as to any then outstanding Certificate the aggregate
amount of the types of charges which Fortis Benefits has guaranteed.
DISTRIBUTION
The Certificates will be sold by individuals who, in addition to being licensed
by state insurance authorities to sell the Certificates of Fortis Benefits, are
also registered representatives of Jack White & Company, an unaffiliated
broker-dealer. The selling activities of Jack White & Company are by means of a
dealer agreement with Fortis Investors, Inc., the principal underwriter of the
Certificates. Fortis Investors and Jack White & Company are registered with the
Securities and Exchange Commission under the Securities Exchange Act of 1934 as
broker-dealers and are members of the National Association of Securities
Dealers, Inc.
As compensation for distributing the Certificates, Fortis Benefits pays Jack
White & Company a fee based upon a formula which is not expected to exceed .10%
per annum of the average daily Certificate Value of the Certificates sold by it.
Fortis Benefits did not pay any amount to Fortis Investors in 1996 or 1997
associated with distribution of the Certificates. In the distribution agreement,
Fortis Benefits has agreed to indemnify Fortis Investors (and its agents,
employees, and controlling persons) for certain damages and expenses, including
those arising under federal securities laws.
See Note 13 to the Notes to Fortis Benefits' Financial Statements as to amounts
it has paid to Fortis, Inc. for various services.
Fortis Investors is an indirect subsidiary of Fortis AMEV and Fortis AG and is
therefore under common control with Fortis Benefits. Fortis Investors' principal
business address is the same as that of our Home Office. Fortis Investors is not
obligated to sell any specific amount of interests under the Certificates.
$75,000,000 of interests in the Guarantee Periods Fixed Account and an
indefinite amount of interests in the Variable Account have been registered with
the Securities and Exchange Commission.
FEDERAL TAX MATTERS
The following description is a general summary of the tax rules, primarily
related to federal income taxes, which in the opinion of Fortis Benefits are
currently in effect. These rules are based on laws, regulations and
interpretations which are subject to change at any time. This summary is not
comprehensive and is not intended as tax advice. Federal estate and gift tax
considerations, as well as state and local
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taxes, may also be material. You should consult a qualified tax adviser as to
the tax implications of taking any action under a Certificate or related
retirement plan.
NON-QUALIFIED CERTIFICATES
Section 72 of the Internal Revenue Code ("Code") governs the taxation of
annuities in general. Purchase payments made under Non-Qualified Certificates
are not excludible or deductible from the gross income of the Participant or any
other person. However, any increase in the accumulated value of a Non-Qualified
Certificate resulting from the investment performance of the Variable Account or
interest credited to the Fixed Account is generally not taxable to the
Participant or other payee until received by him or her, as surrender proceeds,
death benefit proceeds, or otherwise. The exception to this rule is that,
generally, Participants who are not natural persons are taxed annually on any
increase in the Certificate Value. However, this exception does not apply in all
cases, and you may wish to discuss this with your tax adviser.
The following discussion applies generally to Certificates owned by natural
persons.
In general, surrenders or partial withdrawals under Certificates are taxed as
ordinary income to the extent of the accumulated income or gain under the
Certificate. If a Participant assigns or pledges any part of the value of a
Certificate, the value so pledged or assigned is taxed to the Participant as
ordinary income to the same extent as a partial withdrawal.
With respect to annuity payment options, although the tax consequences may vary
depending on the option elected under the Certificate, until the investment in
the Certificate is recovered, generally only the portion of the annuity payment
that represents the amount by which the Certificate Value exceeds the
"investment in the Certificate" will be taxed. In general, a person's
"investment in the Certificate" is the aggregate amount of purchase payments
made by him or her. After an Annuitant's or other payee's "investment in the
Certificate" is recovered, the full amount of any additional annuity payments is
taxable. For variable annuity payments, in general, the taxable portion of each
annuity payment (prior to recovery of the "investment in the Certificate") is
determined by a formula which establishes the specific dollar amount of each
annuity payment that is not taxed. This dollar amount is determined by dividing
the "investment in the Certificate" by the total number of expected annuity
payments. For fixed annuity payments, in general, prior to recovery of the
"investment in the Certificate," there is no tax on the amount of each payment
which bears the same ratio to that payment as the "investment in the
Certificate" bears to the total expected value of the annuity payments for the
term of the payments. However, the remainder of each annuity payment is taxable.
The taxable portion of a distribution (in the form of an annuity or a single sum
payment) is taxed as ordinary income.
For purposes of determining the amount of taxable income resulting from
distributions, all Certificates and other annuity contracts issued by us or our
affiliates to the Participant within the same calendar year will be treated as
if they were a single Certificate.
There is a 10% penalty under the Code on the taxable portion of a "premature
distribution." Generally, an amount is a "premature distribution" unless the
distribution is (1) made on or after the Participant or other payee reaches age
59 1/2, (2) made to a Beneficiary on or after death of the Participant, (3) made
upon the disability of the Participant or other payee, or (4) part of a series
of substantially equal annuity payments for the life or life expectancy of the
Participant or the Participant and Beneficiary. Premature distributions may
result, for example, from an early Annuity Commencement Date, an early
surrender, partial surrender or assignment of a Certificate or the early death
of an Annuitant who is not also the Participant or other person receiving
annuity payments under the Certificate.
A transfer of ownership of a Certificate, or designation of an Annuitant or
other payee who is not also the Participant, may result in certain income or
gift tax consequences to the Participant that are beyond the scope of this
discussion. A Participant contemplating any transfer or assignment of a
Certificate should contact a competent tax adviser with respect to the potential
tax effects of such transaction.
REQUIRED DISTRIBUTIONS FOR NON-QUALIFIED CERTIFICATES
In order that a Non-Qualified Certificate be treated as an annuity contract for
federal income tax purposes, Section 72(s) of the Code requires (a) if any
person receiving annuity payments dies on or after the Annuity Commencement Date
but prior to the time the entire interest in the Certificate 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 the
person's death; and (b) if any Participant dies prior to the Annuity
Commencement Date, the entire interest in the Certificate will be distributed
(1) within five years after the date of that person's death or (2) as annuity
payments which will begin within one year of that Participant's death and which
will be made over the life of the Participant's designated Beneficiary or over a
period not extending beyond the life expectancy of that Beneficiary. However, if
the Participant's designated Beneficiary is the surviving spouse of the
Participant, the Certificate may be continued with the surviving spouse deemed
to be the new Participant. Where the Participant or other person receiving
payments is not a natural person, the required distributions provided by Section
72(A) apply upon the death of the primary Annuitant.
No regulations interpreting the requirements of Section 72(s) have yet been
issued (although proposed regulations have been issued interpreting similar
requirements for qualified plans). Fortis Benefits intends to review and modify
the Certificate if necessary to ensure that it complies with the requirements of
Section 72(s) when clarified by regulation or otherwise.
Generally, unless the Beneficiary elects otherwise, the above requirements will
be satisfied where the death occurs prior to the Annuity Commencement Date by
paying the death benefit in a single sum, subject to proof of the Participant's
death. The Beneficiary, however, may elect by Written Request to receive an
annuity option instead of a lump sum payment. However, if the election is not
made within 60 days of the date the single sum death benefit otherwise becomes
payable, particularly where the annuitant dies and the annuitant is not the
Participant, the IRS may disregard the election for tax purposes and tax the
Beneficiary as if a single sum payment had been made.
18
<PAGE>
QUALIFIED CERTIFICATES
The Certificates may be used with several types of tax-qualified plans. The tax
rules applicable to Participants, Annuitants and other payees vary according to
the type of plan and the terms and conditions of the plan itself. In general,
purchase payments made under a retirement program recognized under the Code on
behalf of an individual are excludable from the individual's gross income for
tax purposes during the Accumulation Period. The portion, if any, of any
purchase payment made by or on behalf of an individual under a Certificate that
is not excluded from the individual's gross income for tax purposes during the
Accumulation Period constitutes the individual's "investment in the
Certificate." Aggregate deferrals under all plans at the employee's option may
be subject to limitations.
When annuity payments begin, the individual will receive back his or her
"investment in the Certificate" if any, as a tax-free return of capital. The
dollar amount of annuity payments received in any year in excess of such return
is taxable as ordinary income. When payments are received as an annuity, the
tax-free return of capital is treated as if received ratably over the entire
period of the annuity until fully recovered (as described above with respect to
Non-Qualified Certificates).
The Certificates are available in connection with the following types of
retirement plans: Section 403(b) annuity plans for employees of certain
tax-exempt organizations and public educational institutions; Section 401 or
403(a) qualified pension, profit-sharing or annuity plans; individual retirement
annuities ("IRAs") under Section 408(b); simplified employee pension plans
("SEPs") under Section 408(k); SIMPLE IRA Plans under Section 408(p); Section
457 unfunded deferred compensation plans of public employers and tax-exempt
organizations' and private employer unfunded deferred compensation plans. The
tax implications of these plans are further discussed in the Statement of
Additional Information under the heading "Taxation Under Certain Retirement
Plans."
WITHHOLDING
Annuity payments and other amounts received under Certificates are subject to
income tax withholding unless the recipient elects not to have taxes withheld.
The amounts withheld will vary among recipients depending on the tax status of
the individual and the type of payments from which taxes are withheld.
Notwithstanding the recipient's election, withholding may be required with
respect to certain payments to be delivered outside the United States and with
respect to certain distributions from certain types of qualified retirement
plans, unless the proceeds are transferred directly from the qualified plan to
another qualified retirement plan. Moreover, special "backup withholding" rules
may require Fortis Benefits to disregard the recipient's election if the
recipient fails to supply Fortis Benefits with a "TIN" or taxpayer
identification number (social security number for individuals), or if the
Internal Revenue Service notifies Fortis Benefits that the TIN provided by the
recipient is incorrect.
PORTFOLIO DIVERSIFICATION
The United States Treasury Department has adopted regulations under Section
817(h) of the Code which set standards of diversification for the investments
underlying the Certificates, in order for the Certificates to be treated as
annuities. Fortis Benefits believes that these diversification standards will be
satisfied. Failure to do so would result in immediate taxation to Participants
or persons receiving annuity payments of all returns credited to Certificates,
except in the case of certain Qualified Certificates. Also, current regulations
do not provide guidance as to any circumstances in which control over allocation
of values among different investment alternatives may cause Participants or
persons receiving annuity payments to be treated as the owners of Variable
Account assets for tax purposes. Fortis Benefits reserves the right to amend the
Certificates in any way necessary to avoid any such result. The Treasury
Department may establish standards in this regard through regulations or
rulings. Such standards may apply only prospectively, although retroactive
application is possible if such standards were considered not to embody a new
position.
CERTAIN EXCHANGES
Section 1035 of the Code provides generally that no gain or loss will be
recognized under the exchange of a life insurance or annuity contract for an
annuity contract. Thus, a properly completed exchange from one of these types of
products into a Certificate pursuant to the special annuity contract exchange
form we provide for this purpose is not generally a taxable event under the
Code, and your investment in the Certificate will be the same as your investment
in the product you exchanged out of.
Because of the complexity of these and other tax aspects in connection with an
exchange, you should consult a tax adviser before making any exchange.
TAX LAW RESTRICTIONS AFFECTING SECTION 403(B) PLANS
Section 403(b)(12) of the Internal Revenue Code restricts the distribution under
Section 403(b) annuity contracts of:
(1) elective contributions made for years beginning after December 31, 1988;
(2) earnings on those contributions; and
(3) earnings on amounts held as of December 31, 1988.
Distribution of these amounts may only occur upon death of the employee,
attainment of age 59 1/2, separation from service, disability, or financial
hardship. In addition, income attributable to elective contributions made after
December 31, 1988 may not be distributed in the case of hardship.
19
<PAGE>
FURTHER INFORMATION ABOUT FORTIS BENEFITS
GENERAL
Fortis Benefits is engaged in the offer and sale of insurance products,
including fixed and variable life insurance policies, fixed and variable annuity
contracts, and group life, accident and health insurance policies. The Company
markets its products to small business and individuals through a national
network of independent agents, brokers, and financial institutions.
SELECTED FINANCIAL DATA
The following is a summary of certain financial data of Fortis Benefits. This
summary has been derived in part from, and should be read in conjunction with,
the financial statements of Fortis Benefits included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Premiums and policy charges.............................. $1,238,006 $1,295,878 $1,232,329 $1,022,446 $ 955,053
Net investment income.................................... 228,724 206,023 203,537 162,514 153,657
Net realized gains (losses) on investment................ 41,101 25,731 55,080 (28,815) 73,623
Other income............................................. 36,458 31,725 33,085 35,958 27,100
---------- ---------- ---------- ---------- ----------
TOTAL REVENUES......................................... $1,544,289 $1,559,357 $1,524,031 $1,192,103 $1,209,433
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total benefits and expenses.............................. $1,442,059 $1,470,066 $1,442,270 $1,157,651 $1,100,199
Federal Income taxes..................................... 35,120 31,099 27,891 11,595 31,090
Income before cumulative effect of accounting changes.... 67,110 58,192 53,870 22,857 78,144
Net income............................................... 67,110 58,192 53,870 22,857 81,707
BALANCE SHEET DATA
Total assets............................................. $6,819,484 $5,951,876 $5,143,012 $4,043,914 $3,584,139
Total liabilities........................................ 5,939,378 5,171,203 4,431,914 3,569,717 3,052,231
Total shareholder's equity............................... 880,106 780,673 711,098 474,197 531,908
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
1997 COMPARED TO 1996
FINANCIAL POSITION
Total invested assets of Fortis Benefits Insurance Company (the "Company")
increased to $3.3 billion in 1997 compared to $3.1 billion in 1996. As of
December 31, 1997, 96% of the Company's fixed maturity securities consisted of
investment grade bonds. Mortgage loans represent 18.1% of total invested assets
compared to 18.9% in 1996. The Company believes that adequate reserves have been
established for potential delinquencies and foreclosures. The mortgage loan
portfolio consists generally of small loans on commercial properties, dispersed
throughout the United States. The Company's delinquency and foreclosure rate are
well below industry averages.
RESULTS OF OPERATIONS
REVENUES
The Company's major products are group medical, group disability and dental,
group life, and annuity and individual life insurance coverages sold through a
network of independent agents and brokers. Total group medical, group disability
and dental, group life, and annuity and individual life premiums represented
37%, 35%, 21% and 7% respectively of total premium in 1997 and 45%, 30%, 19% and
6% respectively in 1996. The decrease in group medical premium is the result of
a decision in 1996 to discontinue new sales of certain medical products.
The Company continues to match investment portfolio composition to liquidity
needs and capital requirements. Changes in interest rates during 1997, 1996, and
1995 resulted in recognition of realized gains and losses.
BENEFITS
Policyholder benefit to premium ratio decreased from 84% in 1996 to 82% in 1997,
as a result of general improved experience. The primary improvement was in the
group life business which experienced these mortality declines consistently
throughout 1997. Annuity and individual life also experienced lower mortality
experience in 1997 in addition to higher interest crediting on the Company's
steadily increasing policy base of interest sensitive and investment products.
Group medical, group disability and dental, group life, and annuity and
individual life benefit to premium ratio was 77%, 82%, 76% and 124% respectively
in 1997 and 78%, 84%, 86%, and 131% respectively in 1996.
EXPENSES
The Company's general and administrative expense to premium ratio has increased
in 1997 to 17.5% from 15.3% in 1996. Enabling the application systems to be Year
2000 compliant and managed dental initiatives are the primary reasons for this
increase. Included in the
20
<PAGE>
managed dental initiative expense is an $13.5 million write-off of the expenses
incurred on behalf of a company that provides the managed care services.
Commission rates have increased from the levels in 1996. This is primarily due
to changes in the mix of business by product lines as well as the change in
first year versus renewal premiums.
YEAR 2000
The Year 2000 issue is the result of computer programs having been written using
two digits rather than four to define a year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than 2000. This could result in the failure of major systems or miscalculations,
which could have a material impact on the operations of the Company and any of
its businesses or subsidiaries. All of the Company's major businesses are
heavily dependent upon internal computer systems, and many have significant
interaction with systems of third parties.
A comprehensive review of the Company's computer systems and business processes
has been conducted to identify the major systems that could be affected by the
Year 2000 issue. Steps are being taken to resolve any potential problems
including modification to existing software and the purchase of new software.
These measures are scheduled to be completed and tested on a timely basis. The
Company's goal is to complete internal remediation and testing of each system by
early 1999.
Factors that could influence the total costs to be incurred by the Company in
connection with the Year 2000 issue include the ability of the Company to
successfully identify systems containing two-digit year codes, the nature and
amount of programming required to fix the affected programs, the related labor
and consulting costs for such remediation, and the ability of third parties that
interface with the Company to successfully address their Year 2000 issues.
The Company is evaluating the Year 2000 readiness of advisors and other third
parties whose system failures could have an impact on the Company's operations.
The potential materiality of any such impact is not entirely know at this time.
The Company is closely monitoring these entities to avoid any unforeseen
circumstances.
1996 COMPARED TO 1995
REVENUES
Traditional life insurance premiums of Fortis Benefits (the "Company") are
principally composed of group life coverages. Total life premiums increased over
1995 due primarily to group life sales in 1996. Interest sensitive and
investment product policy charges, which consist primarily of cost of insurance
charges, increased 37% from 1995 to 1996. Continued sales of interest sensitive
and investment products has steadily increased the policy base on which these
charges are assessed.
Total accident and health premiums increased in 1996 compared to 1995 due to an
increase in the group disability product sales and strong persistency. Partially
offsetting this increase was a 3% decrease in the group medical products driven
by a decision to roll the fully insured medical business into a common medical
plan and the decision to cease new sales of large group self funded medical
plans, effective January 1, 1996. Beginning April 1, 1996 and continuing into
1997, the groups will gradually be rolled to a third party administrator.
The Company continues to match investment portfolio composition to liquidity
needs and capital requirements. Changes in interest rates during 1996, 1995 and
1994 resulted in recognition of realized gains and losses.
BENEFITS
The Company's group life benefits which are included in the traditional life
benefits were higher in 1996 compared to 1995 as a result of increased
mortality. Interest sensitive and investment product benefits for the period
ended December 31, 1996 increased 23% from 1995. This increase was the result of
higher interest crediting on the Company's steadily increasing policy base in
1996 compared to 1995.
The accident and health claims to premium ratio improved from 1995 to 1996 due
primarily to the improved claim closure rates in the group disability lines.
EXPENSES
The commission rates have declined from the levels in 1995. This is primarily
due to change in the mix of business by product lines as well as the change in
the first year versus renewal premiums. Interest sensitive and investment
products commission increased from 1996 compared to 1995; however, the Company
deferred $62.4 million of these commissions in 1996, compared to $52.7 million
in 1995. The additional commission and deferral is the result of an increase in
sales
of the company's variable life and variable annuity products. This increase in
deferred commissions more than offset the increase in paid commissions and
lowered the net commission expense for 1996.
In 1996, the Company consolidated the fully insured group medical business
administration processing. This has resulted in expense savings as demonstrated
by the reduction in the general and administrative expenses. Also contributing
to the expense reduction was the decision to discontinue issuing large group
self funded medical business.
CASH FLOW AND LIQUIDITY
The market value of cash, short-term investments and publicly traded bonds and
stocks is at least equal to all policyholder reserves and liabilities. The
Company's portfolio is readily marketable and convertible to cash to a degree
sufficient to provide for short-term needs. The Company expects its operating
activities to continue to meet its capital resource needs. The Company
consistently monitors its liability durations and invests assets accordingly.
The Company has no material commitments or off-balance sheet financing
arrangements which would reduce sources of funds in the upcoming year.
The National Association of Insurance Commissioners' risk-based capital formula
helps to establish guidelines for capital levels. At December 31, 1997, the
Company's capital exceeded the minimum recommended risk-based capital level.
21
<PAGE>
COMPETITION
Fortis Benefits seeks to compete primarily on the basis of customer service,
product design, and, in the case of products funded through Series Fund, the
investment results achieved by Fortis Advisers, Inc. Many other insurance
companies compete with Fortis Benefits in each of its markets, including on the
basis of price. Many of these companies, which include some of the largest and
best known insurance companies, have considerably greater resources than Fortis
Benefits.
REGULATION AND RESERVES
The Company is subject to regulation and supervision by the insurance
departments of the states in which it is licensed to do business. This
regulation covers a variety of areas, including benefit reserve requirements,
adequacy of insurance company capital and surplus, various operational
standards, and accounting and financial reporting procedures. Fortis Benefits'
operations and accounts are subject to periodic examination by insurance
regulatory authorities.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed up to prescribed limits for insurance contract losses,
if covered, incurred by insolvent companies. The amount of any future
assessments of Fortis Benefits under these laws cannot be reasonably estimated.
Most of these laws do provide, however, that an assessment may be excused or
deferred if it would threaten an insurer's own financial strength.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Federal measures that may adversely affect the insurance
business include health care reform, employee benefit regulation, controls on
medicare costs and medical entitlement programs, tax law changes affecting the
taxation of insurance companies or of insurance products, changes in the
relative desirability of various personal investment vehicles, and removal of
impediments on the entry of banking institutions into the business of insurance.
Pursuant to state insurance laws and regulations, Fortis Benefits is obligated
to carry on its books, as liabilities, reserves to meet its obligations under
outstanding insurance contracts. These reserves are based on assumptions about,
among other things, future claims experience and investment returns. Neither the
reserve requirements nor the other aspects of state insurance regulation provide
absolute protection to holders of insurance contracts, including the
Certificates, if Fortis Benefits were to incur claims or expenses at rates
significantly higher than expected (due, for example, to acquired immune
deficiency syndrome or other infectious diseases or catastrophes) or significant
unexpected losses on its investments.
EMPLOYEES AND FACILITIES
Fortis Benefits has approximately 2,000 employees and considers its employee
relations to be excellent; Fortis Benefits owns its Home Office building,
consisting of 295,000 square feet in Woodbury, Minnesota. It also has
administrative offices in Kansas City, Missouri. Fortis Benefits leases a
portion of that building consisting of 297,000 square feet. In addition Fortis
Benefits has several regional claims and sales offices throughout the United
States. Fortis Benefits occupies approximately 100% of its home office and 70%
of its administration building, which it expects will be adequate for its
purposes for the foreseeable future.
22
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
Set forth is information concerning the Company's directors and executive
officers, to the extent responsible for its variable annuity operations,
together with their business experience and principal occupations for the past
five years:
<TABLE>
<S> <C>
OFFICER-DIRECTORS
Dean C. Kopperud, 45 Senior Vice President--Marketing and Sales; also
Director since 1995 officer of affiliated companies.
Robert Brian Pollock, 43 President and Chief Executive Officer; before then
Director Since 1988 Senior Vice President--Life and Disability.
Thomas Michael Keller, 50 Executive Vice President; before then Senior Vice
Director since 1990 President of Fortis, Inc.
OTHER DIRECTORS
Allen Royal Freedman, 57 Chairman and Chief Executive Officer of Fortis, Inc.
Chairman of the Board
since 1995
J. Kerry Clayton, 52 Executive Vice President of Fortis, Inc.
Director Since 1997
Arie Aristide Fakkert, 54 Assistant General Manager of Fortis International
Director Since 1987 N.V.
EXECUTIVE OFFICERS
Rhonda Schwartz, 39 Senior Vice President and General Counsel--Life and
Investment Products; before then secretary and
General Counsel of Fortis Inc.
Michael John Peninger, 43 Senior Vice President and Chief Financial Officer
Jon H. Nicholson, 48 Senior Vice President--Custom Solutions Group.
Peggy L. Ettestad, 40 Senior Vice President--Life Operations; before that
Vice President of General Electric Company.
Melinda S. Urion, 44 Senior Vice President--Chief Financial Officer since
1997; before then Senior Vice President-- Finance &
CFO of American Express Financial Corporation.
Dickson W. Lewis, 49 Senior Vice President--Distribution and Marketing
since 1997; before then President of Hedstrom/
Blessing Marketing.
</TABLE>
Fortis Benefits' officers serve at the pleasure of the board of directors, and
members of the board serve without compensation (except for expenses of
attending board meetings), until their successors are duly elected and
qualified.
Mr. Freedman is a director of Systems and Computer Technology Corporation and
Genesis Health Ventures. Mr. Freedman is also a director of the following
registered investment companies: Fortis Equity Portfolios, Inc.; Fortis Growth
Fund, Inc.; Fortis Fiduciary Fund, Inc., Fortis Income Portfolios, Inc.; Fortis
Securities, Inc.; Fortis Tax-Free Portfolios, Inc.; Fortis Money Portfolios,
Inc.; Fortis Advantage Portfolios, Inc.; Fortis World Wide Portfolios, Inc.;
Fortis Series Fund, Inc.; Special Portfolios, Inc.
23
<PAGE>
EXECUTIVE COMPENSATION
Set forth below is certain information concerning the compensation of the
executive officers of Fortis Benefits.
- --------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------- ----------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION LTIP PAYOUTS COMPENSATION (1)
- ------------------------------------------- --------- --------- --------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Robert B. Pollock 1997 $ 275,000 $ 56,817 $ 0 $ 0 $ 15,762
President and Chief Executive Officer 1996 215,000 69,660 0 0 15,318
1995 215,000 84,000 0 0 14,851
- -----------------------------------------------------------------------------------------------------------------------------------
Francis J. Guthrie 1997 235,000 140,388 0 0 15,762
Executive Vice President 1996 88,125 0 0 0 12,279
1995 N/A N/A 0 0 0
- -----------------------------------------------------------------------------------------------------------------------------------
Debra Foss 1997 160,000 63,100 0 0 13,386
Sr. Vice President-- 1996 150,000 15,100 0 0 1,500
Human Resources 1995 37,500 5,000 0 0 NOT ELIGIBLE
- -----------------------------------------------------------------------------------------------------------------------------------
William D. Greiter 1997 187,000 48,195 0 0 14,112
Senior Vice President-- 1996 178,500 48,195 0 0 12,829
Provider Markets 1995 170,000 38,808 0 0 12,528
- -----------------------------------------------------------------------------------------------------------------------------------
Michael John Peninger 1997 200,000 31,194 0 0 13,872
Senior Vice President and 1996 165,000 51,975 0 0 13,018
Chief Financial Officer 1995 165,000 39,150 0 0 12,249
</TABLE>
- ------------------------
(1) This column includes contributions made by Fortis Benefits for the year for
the benefit for the named individual to a defined contribution retirement
plan.
LONG-TERM INCENTIVE PLAN AWARDS TABLE
(LONG-TERM INCENTIVE PLAN(1) AWARDS IN LAST FISCAL YEAR)
<TABLE>
<CAPTION>
PERFORMANCE OR
OTHER PERIOD ESTIMATED FUTURE PAYOUTS UNDER
NUMBER OF UNTIL NON-STOCK PRICE BASED PLANS
SHARES, UNITS OR MATURATION OR ----------------------------------
NAME OTHER RIGHTS PAYOUT THRESHOLD TARGET MAXIMUM
- --------------------------------------------------- ---------------- --------------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Robert B. Pollock.................................. 348 Units 3 years 0 Units 348 Units 1,044 Units
Francis J. Guthrie................................. 174 Units 3 years 0 Units 174 Units 522 Units
Debra Foss......................................... 0 Units 3 years 0 Units 0 Units 0 Units
William D. Greiter................................. 184 Units 3 years 0 Units 184 Units 552 Units
Michael John Peninger.............................. 178 Units 3 years 0 Units 178 Units 534 Units
</TABLE>
- ------------------------
(1) Units shown in this table represent performance units granted pursuant to an
Executive Incentive Compensation Plan in which officers and managers of
Fortis Benefits participate. Awards are made pursuant to this plan based on
the employee's position with Fortis Benefits and salary level and the extent
to which the employee and Fortis Benefits meet certain performance
objectives over 1- and 3-year periods. Employees may elect to defer awards
payable to them under this plan.
As additional compensation to its employees and executive officers, Fortis
Benefits has an Employees' Uniform Retirement Plan and an Executive Retirement
Plan which generally provide an annual annuity benefit upon retirement at age 65
(or a reduced benefit upon early retirement) equal to: .9% of the employee's
Average Annual compensation up to the employee's social security covered
compensation, plus 1.3% of compensation above the social security covered
compensation, up to $255,300, as adjusted by an index, multiplied by the
employee's years of credited services.
In addition, Fortis Benefits provides an unfunded Supplemental Executive
Retirement Plan for certain executives of Fortis Benefits. Mr. Pollock is the
only named executive currently covered by the Plan. Under the Supplemental
Executive Retirement Plan, the annual benefit is calculated by subtracting the
benefit payable under the Employees' Uniform Retirement Plan and the estimated
Social Security benefit from the "Target Benefit." The "Target Benefit" is equal
to 50% of Final Average Salary (average salary over the final 36 consecutive
months of employment) reduced for less than 20 years of service at retirement.
Upon retirement prior to age 65 and after attaining age 55
24
<PAGE>
with 10 years of service, special early retirement rules apply. The salary used
to calculate the Final Average Salary consists of regular compensation and the
annual target incentive bonus of the participant. The estimated annual benefit
of Mr. Pollock, based on current compensation levels, under this plan is
$63,740.
The following table illustrates the COMBINED estimated life annuity benefit
payable from the Employees' Uniform Retirement Plan and Executive Retirement
Plan to employees with the specified Final Average Salary and years of service
upon retirement.
PENSION PLAN TABLE*
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------------
FINAL AVERAGE SALARY 10 15 20 25 30 35
- --------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
$125,000................... $15,078 $ 22,617 $ 30,156 $ 37,695 $ 45,234 $ 52,772
150,000................... 18,328 27,492 36,656 45,820 54,984 64,147
175,000................... 21,578 32,367 43,156 53,945 64,734 75,522
200,000................... 24,828 37,242 49,656 62,070 74,484 86,897
225,000................... 28,078 42,117 56,156 70,195 84,234 98,272
250,000................... 30,695 46,042 61,389 76,737 92,084 107,432
275,000+.................. 31,163 46,744 62,326 77,907 93,489 109,070
</TABLE>
- ------------------------
*The table excludes social security benefits. In general, for the purposes of
these plans, compensation includes salary and bonuses. The credited years of
service with Fortis Benefits for these individuals named in the Summary
Compensation Table above are as follows: 18, 4, 2, 14, and 13, respectively.
OWNERSHIP OF SECURITIES
All of Fortis Benefits' outstanding shares are owned by Time Insurance Company,
515 West Wells, Milwaukee, Wisc. 53201, which is itself wholly owned by Fortis,
Inc., One Chase Manhattan Plaza, New York, N.Y. 10005. Fortis, Inc., in turn is
wholly owned by Fortis International, Inc., which is wholly owned by AMEV/VSB
1990 N.V., both of which share the same address with N.V. AMEV., Archimedeslaan
10, 3584 BA, Utrecht, The Netherlands. AMEV/VSB 1990 N.V. is 50% owned by Fortis
AMEV and 50% owned, through certain subsidiaries, by Fortis AG, Boulevard Emile
Jacqmain 53, 1000 Brussels, Belgium.
VOTING PRIVILEGES
In accordance with its view of current applicable law, Fortis Benefits will vote
shares of each of the Portfolios which are attributable to a Certificate at
regular and special meetings of the shareholders of the Portfolios in proportion
to instructions received from the persons having the voting interest in the
Certificate as of the record date for the corresponding Portfolio shareholders
meeting. Participants have the voting interest during the Accumulation Period,
persons receiving annuity payments during the Annuity Period, and Beneficiaries
after the death of the Annuitant or Participant. However, if the Investment
Company Act of 1940 or any rules thereunder should be amended or if the present
interpretation thereof should change, and as a result Fortis Benefits determines
that it is permitted to vote shares of the Portfolios in its own right, it may
elect to do so.
During the Accumulation Period, the number of shares of a Portfolio attributable
to a Certificate is determined by dividing the amount of Certificate Value in
the corresponding Subaccount pursuant to the Certificate as of the record date
for the shareholders meeting by the net asset value of one Portfolio share as of
that date. During the Annuity Period, or after the death of the Annuitant or
Participant, the number of Portfolio shares deemed attributable to the
Certificate will be computed in a comparable manner, based on the liability for
future variable annuity payments allocable to that Subaccount under the
Certificate as of the record date. Such liability for future payments will be
calculated on the basis of the mortality assumptions and the assumed interest
rate used in determining the number of Annuity Units credited to the Certificate
and the applicable Annuity Unit value on the record date. During the Annuity
Period, the number of votes attributable to a Certificate will generally
decrease since funds set aside to make the annuity payments will decrease.
Fortis Benefits will vote shares for which it has received no timely
instructions, and any shares attributable to excess amounts Fortis Benefits has
accumulated in the related Subaccount, in proportion to the voting instructions
which it receives with respect to all Certificates and other variable annuity
contracts participating in a Portfolio. To the extent that Fortis Benefits or
any affiliated company holds any shares of a Portfolio, they will be voted in
the same proportion as instructions for that Portfolio that are received from
persons holding the voting interest with respect to all Fortis Benefits separate
accounts participating in that Portfolio. Shares held by separate accounts other
than the Variable Account will in general be voted in accordance with
instructions of participants in such other separate accounts. This diminishes
the relative voting influence of the Certificates.
Each person having a voting interest in a Subaccount of the Separate Account
will receive proxy material, reports and other materials relating to the
appropriate Portfolio. Pursuant to the procedures described above, these persons
may give instructions regarding the election of the Board of Directors of the
Portfolios, ratification of the selection of its independent auditors, the
approval of the investment managers of a Portfolio, changes in fundamental
investment policies of a Portfolio and all other matters that are put to a vote
by Portfolio shareholders.
LEGAL MATTERS
The legality of the Certificates described in this Prospectus has been passed
upon by David A. Peterson, Esquire, Assistant General Counsel
25
<PAGE>
with the law department of Fortis Benefits. Messrs. Freedman, Levy, Kroll &
Simonds, Washington, D.C., have advised Fortis Benefits on certain federal
securities law matters.
OTHER INFORMATION
Registration Statements have been filed with the Securities and Exchange
Commission under the Securities Act of 1933 as amended, with respect to the
Certificates discussed in this Prospectus. Not all of the information set forth
in the Registration Statement, amendments and exhibits thereto has been included
in this Prospectus. Statements contained in this Prospectus concerning the
content of the Certificates 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 Securities and Exchange
Commission.
A Statement of Additional Information is available upon request. Its contents
are as follows:
CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Fortis Benefits and the Variable Account....... 2
Calculation of Annuity Payments................ 2
Postponement of Payments....................... 3
Services....................................... 4
- Safekeeping of Variable Account Assets..... 4
- Experts.................................... 4
- Principal Underwriter...................... 4
Limitations on Allocations..................... 4
Change of Investment Adviser or Investment
Policy........................................ 4
Taxation Under Certain Retirement Plans........ 5
Withholding.................................... 9
Terms of Exemptive Relief in Connection With
Mortality and Expense Risk Charge............. 9
Variable Account Financial Statements.......... 10
APPENDIX A--Performance Information............ A-1
</TABLE>
FORTIS BENEFITS FINANCIAL STATEMENTS
The financial statements of Fortis Benefits that are included in this Prospectus
should be considered primarily as bearing on the ability of Fortis Benefits to
meet its obligations under the Certificates. The Certificates are not entitled
to participate in earnings, dividends or surplus of Fortis Benefits.
26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Fortis Benefits Insurance Company
We have audited the accompanying balance sheets of Fortis Benefits Insurance
Company, an indirect, wholly-owned subsidiary of Fortis AMEV and Fortis AG, as
of December 31, 1997 and 1996, and the related statements of income, changes in
shareholder's equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fortis Benefits Insurance
Company at December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young, LLP
Minneapolis, Minnesota
February 27, 1998
F-1
<PAGE>
BALANCE SHEETS
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost 1997--$2,325,589;
1996--$2,078,438)................................................................... $2,415,915 $2,115,499
Equity securities, at fair value (cost 1997--$88,719; 1996--$84,144)................. 109,832 106,290
Mortgage loans on real estate, less allowance for possible losses (1997--$11,085;
1996--$9,697)....................................................................... 602,064 582,869
Policy loans......................................................................... 68,566 60,722
Short-term investments............................................................... 70,537 182,817
Real estate and other investments.................................................... 55,035 29,628
--------- ---------
3,321,949 3,077,825
Cash and cash equivalents.............................................................. 9,901 20,474
Receivables:
Uncollected premiums................................................................. 74,220 71,386
Reinsurance recoverable on unpaid and paid losses.................................... 13,852 12,939
Other................................................................................ 19,762 9,045
--------- ---------
107,834 93,370
Accrued investment income.............................................................. 47,376 39,519
Deferred policy acquisition costs...................................................... 291,742 268,075
Property and equipment at cost, less accumulated depreciation.......................... 42,773 52,882
Deferred federal income taxes.......................................................... 15,037 17,008
Other assets........................................................................... 4,250 8,005
Assets held in separate accounts....................................................... 2,978,622 2,374,718
--------- ---------
TOTAL ASSETS........................................................................... $6,819,484 $5,951,876
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-2
<PAGE>
BALANCE SHEETS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
--------- ---------
<S> <C> <C>
POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY
POLICY RESERVES AND LIABILITIES:
Future policy benefit reserves:
Traditional life insurance......................................................... $ 449,017 $ 434,378
Interest sensitive and investment products......................................... 1,264,227 1,175,480
Accident and health................................................................ 792,249 834,119
--------- ---------
2,505,493 2,443,977
Unearned revenues.................................................................... 10,653 12,622
Other policy claims and benefits payable............................................. 260,596 191,940
Policyholder dividends payable....................................................... 8,197 8,783
--------- ---------
2,784,939 2,657,322
Debt................................................................................. 26,433 --
Accrued expenses..................................................................... 49,909 42,223
Current income taxes payable......................................................... 10,549 17,424
Other liabilities.................................................................... 113,222 104,834
Due to affiliates.................................................................... 6,925 4,926
Liabilities related to separate accounts............................................. 2,947,401 2,344,474
--------- ---------
TOTAL POLICY RESERVES AND LIABILITIES.................................................. 5,939,378 5,171,203
SHAREHOLDER'S EQUITY:
Common Stock, $5 par value:
Authorized, issued and outstanding shares--1,000,000............................... 5,000 5,000
Additional paid-in capital........................................................... 468,000 468,000
Retained earnings.................................................................... 332,723 265,613
Unrealized gains on investments, net................................................. 68,981 36,290
Unrealized gains on assets held in separate accounts, net............................ 5,402 5,770
--------- ---------
TOTAL SHAREHOLDER'S EQUITY............................................................. 880,106 780,673
--------- ---------
TOTAL POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY............................ $6,819,484 $5,951,876
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-3
<PAGE>
FORTIS BENEFITS INSURANCE COMPANY
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
REVENUES
Insurance operations:
Traditional life insurance premiums....................................... $ 269,540 $ 258,496 $ 251,353
Interest sensitive and investment product policy charges.................. 77,429 63,336 46,076
Accident and health insurance premiums.................................... 891,037 974,046 934,900
---------- --------- ---------
1,238,006 1,295,878 1,232,329
Net investment income....................................................... 228,724 206,023 203,537
Net realized gains on investments........................................... 41,101 25,731 55,080
Other income................................................................ 36,458 31,725 33,085
---------- --------- ---------
TOTAL REVENUES............................................................ 1,544,289 1,559,357 1,524,031
BENEFITS AND EXPENSES
Benefits to policyholders:
Traditional life insurance................................................ 204,497 220,227 202,911
Interest sensitive investment products.................................... 103,077 90,358 73,676
Accident and health claims................................................ 707,113 778,439 769,588
---------- --------- ---------
1,014,687 1,089,024 1,046,175
Policyholder dividends........................................................ 2,935 4,169 4,305
Amortization of deferred policy acquisition costs............................. 43,931 39,325 41,291
Insurance commissions......................................................... 107,378 94,723 95,559
General and administrative expenses........................................... 273,128 242,825 254,940
---------- --------- ---------
TOTAL BENEFITS AND EXPENSES............................................... 1,442,059 1,470,066 1,442,270
---------- --------- ---------
Income before federal income taxes............................................ 102,230 89,291 81,761
Federal income taxes.......................................................... 35,120 31,099 27,891
---------- --------- ---------
NET INCOME.................................................................... $ 67,110 $ 58,192 $ 53,870
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes.
F-4
<PAGE>
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
UNREALIZED GAINS
GAINS (LOSSES) ON
ADDITIONAL (LOSSES) ON ASSETS HELD IN
COMMON PAID-IN RETAINED INVESTMENTS, SEPARATE
STOCK CAPITAL EARNINGS NET ACCOUNTS, NET TOTAL
----------- ----------- ----------- --------------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995................. $ 5,000 $ 358,000 $ 153,551 $ (42,908) $ 554 $ 474,197
Net income............................... -- -- 53,870 -- -- 53,870
Additional paid-in capital............... -- 50,000 -- -- -- 50,000
Change in unrealized gains (losses) on
investments, net........................ -- -- -- 131,039 -- 131,039
Change in unrealized gains (losses) on
assets held in separate accounts, net... -- -- -- -- 1,992 1,992
----------- ----------- ----------- ------- ------ ---------
Balance, December 31, 1995............... 5,000 408,000 207,421 88,131 2,546 711,098
Net income............................... -- -- 58,192 -- -- 58,192
Additional paid-in capital............... -- 60,000 -- -- -- 60,000
Change in unrealized gains (losses) on
investments, net........................ -- -- -- (51,841) -- (51,841)
Change in unrealized gains (losses) on
assets held in separate accounts, net... -- -- -- -- 3,224 3,224
----------- ----------- ----------- ------- ------ ---------
Balance, December 31, 1996............... 5,000 468,000 265,613 36,290 5,770 780,673
Net income............................... -- -- 67,110 -- -- 67,110
Change in unrealized gains (losses) on
investments, net........................ -- -- -- 32,691 -- 32,691
Change in unrealized gains (losses) on
assets held in separate account, net.... -- -- -- -- (368) (368)
----------- ----------- ----------- ------- ------ ---------
Balance, December 31, 1997............... $ 5,000 $ 468,000 $ 332,723 $ 68,981 $ 5,402 $ 880,106
----------- ----------- ----------- ------- ------ ---------
----------- ----------- ----------- ------- ------ ---------
</TABLE>
See accompanying notes.
F-5
<PAGE>
STATEMENTS OF CASH FLOWS
FORTIS BENEFITS INSURANCE COMPANY
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
------------ ---------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................................. $ 67,110 $ 58,192 $ 53,870
Adjustments to reconcile net income to net cash provided by operating
activities:
(Decrease)/increase in future policy benefit reserves for
traditional, interest sensitive and accident and health policies.... (2,496) 26,193 80,478
Increase in other policy claims and benefits and policyholder
dividends payable................................................... 68,070 18,638 27,676
Provision for deferred federal income taxes.......................... (6,449) (1,094) (13,584)
(Decrease)/increase in income taxes payable.......................... (6,875) 12,049 1,023
Amortization of deferred policy acquisition costs.................... 43,931 39,325 41,291
Policy acquisition costs deferred.................................... (69,694) (66,515) (56,391)
Provision for mortgage loan losses................................... 1,388 1,344 924
Provision for depreciation........................................... 14,351 17,312 15,654
Write-off of investment.............................................. 3,000 -- --
Amortization of investment (discounts) premiums, net................. (466) 1,821 (239)
Change in receivables, accrued investment income, unearned premiums,
accrued expenses and other liabilities.............................. (2,720) 38,614 3,427
Net realized gains on investments.................................... (41,101) (25,731) (55,080)
Other................................................................ (12,496) (261) (2,431)
------------ ---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................ 55,553 119,887 96,618
INVESTING ACTIVITIES
Purchases of fixed maturity investments................................ (3,611,770) (2,778,352) (2,151,133)
Sales or maturities of fixed maturity investments...................... 3,378,898 2,652,887 2,000,068
Decrease (increase) in short-term investments.......................... 112,280 (29,318) (35,908)
Purchases of other investments......................................... (209,771) (210,182) (240,264)
Sales of other investments............................................. 205,084 163,569 112,598
Purchases of property and equipment.................................... (4,242) (10,992) (19,975)
Other.................................................................. (617) -- 1,229
------------ ---------- -----------
NET CASH USED IN INVESTING ACTIVITIES............................ (130,138) (212,388) (333,385)
FINANCING ACTIVITIES
Activities related to investment products:
Considerations received.............................................. 200,760 128,446 187,484
Surrenders and death benefits........................................ (190,361) (125,274) (60,522)
Interest credited to policyholders................................... 53,613 49,802 48,918
Additional paid-in capital from shareholder............................ -- 60,000 50,000
------------ ---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES........................ 64,012 112,974 225,880
------------ ---------- -----------
(Decrease) increase in cash and cash equivalents......................... (10,573) 20,473 (10,887)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................... 20,474 1 10,888
------------ ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR......................... $ 9,901 $ 20,474 $ 1
------------ ---------- -----------
------------ ---------- -----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FORTIS BENEFITS INSURANCE COMPANY
DECEMBER 31, 1997
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Fortis Benefits Insurance Company (the Company) is an indirect, wholly-owned
subsidiary of Fortis AMEV and Fortis AG. The Company is incorporated in
Minnesota and distributes its products in all states except New York. To date,
the majority of the Company's revenues have been derived from group employee
benefits products and the remainder from individual life and annuity products.
BASIS OF STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The Company follows generally accepted accounting principles which differ in
certain respects from statutory accounting practices prescribed or permitted by
regulatory authorities. The more significant of these principles are:
REVENUE RECOGNITION AND FUTURE POLICY BENEFIT RESERVES
Premiums for traditional life insurance are recognized as revenues when due over
the premium-paying period. Reserves for future policy benefits are computed
using the net level method and include investment yield, mortality, withdrawal,
and other assumptions based on the Company's experience, modified as necessary
to reflect anticipated trends and to include provisions for possible unfavorable
deviations.
Revenues for interest sensitive and investment products consist of charges
assessed against policy account balances during the period for the cost of
insurance, policy administration, and surrender charges. Future policy benefit
reserves are computed under the retrospective deposit method and consist of
policy account balances before applicable surrender charges. Policy benefits
charged to expense during the period include amounts paid in excess of policy
account balances and interest credited to policy account balances. Interest
crediting rates for universal life and investment products ranged from 2.5% to
8.75% in 1997 and 1996.
Premiums for accident and health insurance products, including medical, long and
short-term disability and dental insurance products, are recognized as revenues
ratably over the contract period in proportion to the risk insured. Reserves for
future disability benefits are based on the 1964 Commissioners Disability Table
at 6% interest. Calculated reserves are modified based on the Company's actual
experience.
CLAIMS AND BENEFITS PAYABLE
Other policy claims and benefits payable for reported and incurred but not
reported claims and related claims adjustment expenses are determined using
case-basis estimates and past experience. The methods of making such estimates
and establishing the related liabilities are continually reviewed and updated.
Any adjustments resulting therefrom are reflected in income currently.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business, which vary with and are directly related to
the production of new business, are deferred to the extent recoverable and
amortized. For traditional life insurance products, such costs are amortized
over the premium paying period. For interest sensitive and investment products,
such costs are amortized in relation to expected future gross profits. For
accident and health and group life insurance products, these costs represent the
present value at the acquisition of these lines in the October 1, 1991 purchase
(see Note 2) of future profits which are amortized against the expected premium
revenues of the lines acquired. Estimation of future gross profits requires
significant management judgment and are reviewed periodically. As excess amounts
of deferred costs over future premiums or gross profits are identified, such
excess amounts are expensed.
INVESTMENTS
The Company's investment strategy is developed based on many factors including
insurance liability matching, rate of return, maturity, credit risk, tax
considerations and regulatory requirements.
All fixed maturity investments and all marketable equity securities are
classified as available-for-sale and carried at fair value.
Changes in fair values of available-for-sale securities, after related deferred
income taxes and after adjustment for the changes in pattern of amortization of
deferred policy acquisition costs and participating policyholder dividends are
reported directly in shareholder's equity as unrealized gains (losses) on
investments and, accordingly, have no effect on net income. The unrealized
appreciation or depreciation is net of deferred policy acquisition cost
amortization and taxes that would have been required as a charge or credit to
income had such unrealized amounts been realized.
Mortgage loans constitute first liens on commercial real estate and other income
producing properties. The insurance statutes in Minnesota generally require that
the initial principal loaned not exceed 80% of the appraised value of the
property securing the loan. The Company's policy fully complies with this
statute. Mortgage loans on real estate are reported at unpaid balance, adjusted
for amortization of premium or discount, less allowance for possible losses. The
change in the allowance for possible losses is recorded with realized gains and
losses on investments.
Policy loans are reported at their unpaid balance. Short term investments are at
cost which approximates fair value.
Realized gains and losses on sales of investments, and declines in value judged
to be other-than-temporary, are recognized on the specific identification basis.
Investment income is recorded as earned.
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation. The
Company provides for depreciation principally on the straight-line method over
the estimated useful lives of the related property.
INCOME TAXES
Income taxes have been provided using the liability method in accordance with
Financial Accounting Standards Board ("FASB") Statement 109, ACCOUNTING FOR
INCOME TAXES. Deferred tax assets and liabilities are determined based on the
differences between the financial reporting and the tax bases and are measured
using the enacted tax rates.
SEPARATE ACCOUNTS
Revenues and expenses related to the separate account assets and liabilities, to
the extent of benefits paid, are provided to the separate account policyholders
and are excluded from the amounts reported in the accompanying statements of
operations.
Assets and liabilities associated with the separate accounts relate to deposits
and annuity considerations for variable life and annuity products for which the
contract holder, rather than the Company, bears the investment risk. Separate
account assets are reported at fair value.
GUARANTY FUND ASSESSMENTS
There are a number of insurance companies that are currently under regulatory
supervision. This may result in future assessments by state guaranty fund
associations to cover losses to policyholders of insolvent or rehabilitated
companies. These assessments can be partially recovered through a reduction in
future premium taxes in some states. The Company believes it has adequately
provided for the impact of future assessments.
STATEMENTS OF CASH FLOWS
The Company considers investments with a maturity at the date of their
acquisition of three months or less to be cash equivalents. These securities are
carried principally at amortized cost which approximates fair value.
NEW FINANCIAL ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 defines the financial statement presentation for all changes in a
company's equity during a period except those resulting from investments by
owners and distributions to owners. SFAS No. 130 will be adopted by the Company
in the first quarter of 1998. Because the statement is merely a change in
presentation, the Company does not expect the adoption of this statement to have
a significant impact on the financial statements.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 financial statements have been reclassified
to conform to the 1997 presentation.
2. ACQUIRED BUSINESS
In 1991, the Company purchased certain assets and assumed certain
liabilities from The Mutual Benefit Life Insurance Company in Rehabilitation
(MBL). The seller transferred to the Company, the assets and liabilities
relating to the group life, accident and health, disability and dental insurance
business of MBL. The acquisition was accounted for as a purchase. The original
purchase price of the acquisition was $318,000,000. Subsequent additional
payments of $20,850,000 were made ending in 1994. These additional payments, as
well as $126,515,000 of the original purchase price represent the estimated
present value of future profits on the lines of business acquired at the date of
acquisition and have been accounted for as deferred policy acquisition costs
(see Note 4).
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
3. INVESTMENTS
AVAILABLE-FOR-SALE SECURITIES
The following is a summary of the available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAIN LOSS FAIR VALUE
---------- -------- -------- ----------
<S> <C> <C> <C> <C>
December 31, 1997:
Fixed maturities:
Governments.................................. $ 228,856 $ 8,698 $ 30 $ 237,524
Public utilities............................. 121,128 4,217 13 125,332
Industrial and miscellaneous................. 1,932,894 77,442 1,625 2,008,711
Other........................................ 42,711 1,637 -- 44,348
---------- -------- -------- ----------
Total fixed maturities....................... 2,325,589 91,994 1,668 2,415,915
Equity securities............................ 88,719 24,769 3,656 109,832
---------- -------- -------- ----------
Total...................................... $2,414,308 $116,763 $ 5,324 $2,525,747
---------- -------- -------- ----------
---------- -------- -------- ----------
December 31, 1996:
Fixed maturities:
Governments.................................. $ 321,574 $ 3,418 $ 1,323 $ 323,669
Public utilities............................. 92,116 2,758 403 94,471
Industrial and miscellaneous................. 1,656,420 38,413 6,527 1,688,306
Other........................................ 8,328 750 25 9,053
---------- -------- -------- ----------
Total fixed maturities....................... 2,078,438 45,339 8,278 2,115,499
Equity securities............................ 84,144 23,340 1,194 106,290
---------- -------- -------- ----------
Total...................................... $2,162,582 $68,679 $ 9,472 $2,221,789
---------- -------- -------- ----------
---------- -------- -------- ----------
</TABLE>
The amortized cost and fair value of available-for-sale investments in fixed
maturities at December 31, 1997, by contractual maturity, are shown below (in
thousands).
<TABLE>
<CAPTION>
AMORTIZED
COST FAIR VALUE
---------- ----------
<S> <C> <C>
Due in one year or less............................................... $ 75,748 $ 76,109
Due after one year through five years................................. 849,193 865,006
Due after five years through ten years................................ 543,847 562,900
Due after ten years................................................... 856,801 911,900
---------- ----------
Total................................................................. $2,325,589 $2,415,915
---------- ----------
---------- ----------
</TABLE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
MORTGAGE LOANS
The Company has issued commercial mortgage loans on properties located
throughout the United States. Approximately 37% of outstanding principal is
concentrated in the states of New York, California and Florida, at December 31,
1997 as compared to concentrated interests in California, Texas and New York of
36% at December 31, 1996. Loan commitments outstanding totaled $34,235,000 at
December 31, 1997.
INVESTMENTS ON DEPOSIT
The Company had fixed maturities carried at $2,548,000 and $2,537,000 at
December 31, 1997 and 1996, respectively, on deposit with various governmental
authorities as required by law.
INVESTMENT IN MANAGED DENTAL INITIATIVE
In 1997, the Company acquired a 99% ownership in a managed dental initiative
called Dental Health Alliance, Inc. (DHA). Based on an analysis of future DHA
profitability, the entire investment was written-off at December 31, 1997. The
income statement reflects $13,561,000 of general and administrative expenses
related to 1997 DHA losses and ownership write-off.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
3. INVESTMENTS (CONTINUED)
NET UNREALIZED GAINS (LOSSES)
The adjusted net unrealized gains (losses) recorded in shareholder's equity for
the year ended December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Change in unrealized gains (losses) before adjustments............. $ 53,239 $ (83,065) $ 214,452
Adjustments:
Increase) decrease in amortization of deferred policy acquisition
costs............................................................. (2,096) 3,376 (9,789)
Deferred income taxes (expense) benefit............................ (18,820) 31,072 (71,632)
--------- --------- ---------
Change in net unrealized gains (losses)............................ 32,323 (48,617) 133,031
Net unrealized gains (losses), beginning of year................... 42,060 90,677 (42,354)
--------- --------- ---------
Net unrealized gains, end of year.................................. $ 74,383 $ 42,060 $ 90,677
--------- --------- ---------
--------- --------- ---------
</TABLE>
NET INVESTMENT INCOME AND NET REALIZED GAINS ON INVESTMENTS
Major categories of net investment income and realized gains on investments for
each year were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
NET INVESTMENT INCOME
Fixed maturities................................................... $ 160,444 $ 141,973 $ 139,062
Equity securities.................................................. 9,306 6,682 2,026
Mortgage loans on real estate...................................... 54,662 52,949 49,227
Policy loans....................................................... 4,144 3,195 2,797
Short-term investments............................................. 2,851 5,175 11,863
Real estate and other investments.................................. 4,635 5,358 4,750
--------- --------- ---------
236,042 215,332 209,725
Expenses........................................................... (7,318) (9,309) (6,188)
--------- --------- ---------
$ 228,724 $ 206,023 $ 203,537
--------- --------- ---------
--------- --------- ---------
NET REALIZED GAINS ON INVESTMENTS
Fixed maturities................................................... $ 13,827 $ 3,334 $ 50,393
Equity securities.................................................. 26,760 18,281 2,830
Mortgage loans on real estate...................................... 301 (144) (242)
Short-term investments............................................. -- 57 (3)
Real estate and other investments.................................. 213 4,203 2,102
--------- --------- ---------
$ 41,101 $ 25,731 $ 55,080
--------- --------- ---------
--------- --------- ---------
</TABLE>
Proceeds from sales of investments in fixed maturities were $3,360,682,000,
$2,652,887,000, and $2,000,068,000 in 1997, 1996 and 1995, respectively. Gross
gains of $30,860,000, $28,606,000 and $61,070,000 and gross losses of
$17,033,000, $25,272,000, and $10,677,000 were realized on the sales in 1997,
1996 and 1995, respectively.
4. DEFERRED POLICY ACQUISITION COSTS
The changes in deferred policy acquisition costs by product were as follows
(in thousands):
<TABLE>
<CAPTION>
INTEREST
SENSITIVE AND
TRADITIONAL INVESTMENT ACCIDENT
LIFE PRODUCTS AND HEALTH TOTAL
----------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance, January 1, 1996....................... $ 38,532 $ 170,840 $ 28,137 $ 237,509
Acquisition costs deferred..................... -- 66,515 -- 66,515
Acquisition costs amortized.................... (5,375) (19,695) (14,255) (39,325)
Reduced amortization of deferred acquisition
costs from unrealized losses on
available-for-sale securities................. -- 3,376 -- 3,376
----------- --------------- ----------- ---------
Balance, January 1, 1997....................... 33,157 221,036 13,882 268,075
Acquisition costs deferred..................... 37,857 31,837 -- 69,694
Acquisition costs amortized.................... (20,738) (14,501) (8,692) (43,931)
Increased amortization of deferred acquisition
costs from unrealized gains on
available-for-sale securities................. -- (2,096) -- (2,096)
----------- --------------- ----------- ---------
Balance, December 31, 1997..................... $ 50,276 $ 236,276 $ 5,190 $ 291,742
----------- --------------- ----------- ---------
----------- --------------- ----------- ---------
</TABLE>
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
4. DEFERRED POLICY ACQUISITION COSTS (CONTINUED)
Included within total deferred policy acquisition costs at December 31, 1997 is
$10,434,000 of present value of future profits (PVP) resulting from acquisitions
accounted for as a purchase. All remaining PVP will be amortized in 1998.
During 1997, 1996 and 1995, the Company sold portions of its investment
portfolio and in accordance with FASB Statement 97, the recognition of the
realized net capital gains resulted in additional amortization of deferred
acquisition costs of $732,000, $1,894,000 and $4,825,000, respectively. In
addition, the Company recorded policyholder dividends payable of $1,095,000 in
1995.
5. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 for each year follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Land........................................................................ $ 1,900 $ 1,900
Building and improvements................................................... 24,148 25,133
Furniture and equipment..................................................... 87,537 95,370
--------- ---------
113,585 122,403
Less accumulated depreciation............................................... (70,812) (69,521)
--------- ---------
Net property and equipment.................................................. $ 42,773 $ 52,882
--------- ---------
--------- ---------
</TABLE>
6. ACCIDENT AND HEALTH RESERVES
Activity for the liability for unpaid accident and health claims and claims
adjustment expenses is summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Balance as of January 1, net of reinsurance recoverables........... $ 947,711 $ 928,832 $ 838,810
Add: Incurred losses related to:
Current year..................................................... 773,316 865,907 827,261
Prior years...................................................... (59,634) (64,094) (28,520)
--------- --------- ---------
Total incurred losses.......................................... 713,682 801,813 798,741
Deduct: Paid losses related to:
Current year..................................................... 437,405 549,144 492,460
Prior years...................................................... 235,952 233,790 216,259
--------- --------- ---------
Total paid losses.............................................. 673,357 782,934 708,719
--------- --------- ---------
Balance as of December 31, net of reinsurance recoverables......... $ 988,036 $ 947,711 $ 928,832
--------- --------- ---------
--------- --------- ---------
</TABLE>
The table above compares to the amounts reported on the balance sheet in the
following respects: (1) the table above is presented net of ceded reinsurance
and the accident and health reserves reported on the balance sheet are gross of
ceded reinsurance; (2) the table above includes claims adjustment expense
liabilities that are included in accrued expenses on the balance sheet; and (3)
the table above includes accident and health benefits payable which are included
with other policy claims and benefits payable reported on the balance sheet.
In each of the years presented above, the accident and health insurance line of
business experienced overall favorable development on claims reserves
established as of the previous year end. The favorable development was a result
of lower medical costs due to less uncertainty in the health business and a
reduction of loss reserves due to lower than anticipated inflation in medical
costs.
Management has incorporated the favorable reserve development into its current
estimates of reserve levels. Accordingly, future development on December 31,
1997 reserves is not expected to be as favorable as that experienced in the past
two years.
7. FEDERAL INCOME TAXES
The Company reports its taxable income in a consolidated federal income tax
return along with other affiliated subsidiaries of Fortis, Inc. Income tax
expense or credits are allocated among the affiliated subsidiaries by applying
corporate income tax rates to taxable income or loss determined on a separate
return basis according to a Tax Allocation Agreement.
Deferred income taxes reflect the net tax effects of temporary differences
between the basis of assets and liabilities for financial statement purposes and
for income tax purposes.
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
7. FEDERAL INCOME TAXES (CONTINUED)
The significant components of the Company's deferred tax liabilities and assets
as of December 31, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Separate account assets/liabilities....................................... $ 56,620 $ 40,989
Reserves.................................................................. 43,143 51,271
Claims and benefits payable............................................... 15,238 7,764
Accrued liabilities....................................................... 8,785 8,439
Investments............................................................... 4,795 2,648
Other..................................................................... 3,042 1,549
--------- ---------
Total deferred tax assets............................................... 131,623 112,660
Deferred tax liabilities:
Deferred policy acquisition costs......................................... 72,369 67,850
Unrealized gains.......................................................... 39,015 20,402
Fixed assets.............................................................. 3,914 3,110
Investments............................................................... 1,220 1,942
Other..................................................................... 68 2,348
--------- ---------
Total deferred tax liabilities.......................................... 116,586 95,652
--------- ---------
Net deferred tax asset.................................................. $ 15,037 $ 17,008
--------- ---------
--------- ---------
</TABLE>
The Company is required to establish a valuation allowance for any portion of
the deferred tax asset that management believes will not be realized. In the
opinion of management, it is more likely than not that the Company will realize
the benefit of the deferred tax assets, and, therefore, no such valuation
allowance has been established.
The Company's tax expense (benefit) for the year ended December 31 is shown as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current.............................................................. $ 41,569 $ 32,193 $ 39,660
Deferred............................................................. (6,449) (1,094) (11,769)
--------- --------- ---------
$ 35,120 $ 31,099 $ 27,891
--------- --------- ---------
--------- --------- ---------
</TABLE>
Federal income tax payments and refunds resulted in net payments of $58,859,000,
$16,434,000, and $40,453,000 in 1997, 1996 and 1995, respectively.
The Company's effective income tax rate varied from the statutory federal income
tax rate as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory income tax rate............................................ 35.0% 35.0% 35.0%
Other, net........................................................... (.6) (.2) (0.9)
--------- --------- ---------
34.4% 34.8% 34.1%
--------- --------- ---------
--------- --------- ---------
</TABLE>
8. ASSETS HELD IN SEPARATE ACCOUNTS
Separate account assets at December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Premium and annuity considerations for the variable annuity products and
variable universal life products for which the contract holder, rather
than the Company, bears the investment risk.............................. $2,947,401 $2,344,474
Assets of the separate accounts owned by the Company, at fair value....... 31,221 30,244
---------- ----------
$2,978,622 $2,374,718
---------- ----------
---------- ----------
</TABLE>
9. REINSURANCE
In the second quarter of 1996, First Fortis Life Insurance Company (First
Fortis), an affiliate, received approval from the New York State Insurance
Department for a reinsurance agreement with the Company. The agreement, which
became effective as of January 1, 1996, decreased First Fortis' long-term
disability reinsurance retention from a $10,000 net monthly benefit to a $2,000
net monthly benefit for claims incurred on and after January 1, 1996. The
Company has assumed $5,742,000 and $6,144,000 of premium from First Fortis in
1997 and 1996, respectively. The Company has assumed $5,452,000 and $3,599,000
of reserves in 1997 and 1996, respectively, from First Fortis.
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
9. REINSURANCE (CONTINUED)
The maximum amount that the Company retains on any one life is $500,000 of life
insurance including accidental death. Amounts in excess of $500,000 are
reinsured with other life insurance companies on a yearly renewable term basis.
Ceded reinsurance premiums for the year ended December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Life insurance........................................................ $ 8,159 $ 8,680 $ 4,661
Accident and health insurance......................................... 13,712 6,793 3,410
--------- --------- ---------
$ 21,871 $ 15,473 $ 8,071
--------- --------- ---------
--------- --------- ---------
</TABLE>
Recoveries under reinsurance contracts for the year ended December 31 were as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Life insurance........................................................ $ 2,973 $ 7,225 $ 2,489
Accident and health insurance......................................... 14,781 5,993 8,807
--------- --------- ---------
$ 17,754 $ 13,218 $ 11,296
--------- --------- ---------
--------- --------- ---------
</TABLE>
Reinsurance ceded would become a liability of the Company in the event the
reinsurers are unable to meet the obligations assumed under the reinsurance
agreement. To minimize its exposure to significant losses from reinsurance
insolvencies, the Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk arising from similar geographic
regions, activities or economic characteristics of the reinsurers.
10. DIVIDEND RESTRICTIONS
Dividend distributions to parent are restricted as to amount by state
regulatory requirements. The Company had $52,367,000 free from such restrictions
at December 31, 1997. Distributions in excess of this amount would require
regulatory approval.
11. REGULATORY ACCOUNTING REQUIREMENTS
Statutory-basis financial statements are prepared in accordance with
accounting practices prescribed or permitted by Minnesota insurance regulatory
authorities. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners ("NAIC"), as
well as state laws, regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed; such practices may differ from state to state, may differ from
company to company within a state, and may change in the future. The NAIC is
currently in the process of codifying statutory accounting practices. This
project, which is not expected to be completed before 1999, may result in
changes to the accounting practices that insurance enterprises use to prepare
their statutory-basis financial statements.
Insurance enterprises are required by State Insurance Departments to adhere to
minimum risk-based capital ("RBC") requirements developed by the NAIC. The
Company exceeds the minimum RBC requirements.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
11. REGULATORY ACCOUNTING REQUIREMENTS (CONTINUED)
Reconciliations of net income and shareholder's equity on the basis of statutory
accounting to the related amounts presented in the accompanying statements were
as follows (in thousands):
<TABLE>
<CAPTION>
NET INCOME SHAREHOLDER'S EQUITY
------------------------------- --------------------
1997 1996 1995 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Based on statutory accounting practices........ $ 62,593 $ 55,046 $ 30,576 $ 528,671 $ 482,507
Deferred policy acquisition costs.............. 25,763 27,190 15,100 291,742 268,075
Investment valuation differences............... (497) (2,219) 330 80,245 31,326
Deferred and uncollected premiums.............. (107,194) (4,096) -- -- --
Policy reserves................................ 89,895 (19,873) (29,238) (150,649) (131,159)
Commissions.................................... (3,171) (1,639)
Current income taxes payable................... 6,450 2,386 (1,294) 3,712 (7,895)
Deferred income taxes.......................... 6,449 (1,094) 11,769 (520) 17,008
Realized gains on investments.................. 251 2,599 1,938 -- --
Realized gains transferred to the Interest
Maintenance Reserve (IMR), net of tax......... 9,644 2,335 31,711 -- --
Amortization of IMR, net of tax................ (6,315) (6,130) (5,261) -- --
Write-off of investment........................ (11,705) -- -- -- --
Pension expense................................ (4,153) -- --
Guaranty Funds................................. -- 3,023 --
Property and equipment......................... -- -- -- 15,520 20,481
Interest maintenance reserve................... -- -- -- 53,348 50,019
Asset valuation reserve........................ -- -- -- 75,939 62,961
Other, net..................................... (900) 664 (1,761) (17,902) (12,650)
--------- --------- --------- --------- ---------
As reported herein............................. $ 67,110 $ 58,192 $ 53,870 $ 880,106 $ 780,673
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
12. TRANSACTIONS WITH AFFILIATED COMPANIES
The Company receives various services from Fortis, Inc. and its affiliates.
These services include assistance in benefit plan administration, corporate
insurance, accounting, tax, auditing, investment and other administrative
functions. The fees paid to Fortis, Inc. for these services for years ended
December 31, 1997, 1996 and 1995, were $12,015,000, $13,319,000 and $10,074,00,
respectively.
In conjunction with the marketing of its variable annuity products, the Company
paid $72,105,000, $68,616,000 and $59,308,000 in commissions to its affiliate,
Fortis Investors, Inc., for the years ended December 31, 1997, 1996 and 1995,
respectively.
Administrative expenses allocated for the Company may be greater or less than
the expenses that would be incurred if the Company were operating on a separate
company basis.
Fortis Information Technology (Fortis IT) is a business unit within the Company
and is managed by Fortis, Inc. Based upon an agreement established with Fortis
Inc., over/under charges are transferred annually to Fortis, Inc. The amounts
transferred were $5,149,000 in 1997; $476,000 in 1996 and $0 in 1995. Effective
January 1, 1998, Fortis IT operations have been transferred to Fortis, Inc.
13. FAIR VALUE DISCLOSURES
VALUATION METHODS AND ASSUMPTIONS
The fair values for fixed maturity securities and equity securities are based on
quoted market prices, where available. For fixed maturity securities not
actively traded, fair values are estimated using values obtained from
independent pricing services or, in the case of private placements, are
estimated by discounting expected future cash flows using a current market rate
applicable to the yield, credit quality, and maturity of the investments.
Mortgage loans are reported at unpaid principal balance less allowances for
possible losses. The fair values of mortgage loans are estimated using
discounted cash flow analyses, using interest rates currently being offered for
similar loans to borrowers with similar credit ratings. Mortgage loans with
similar characteristics are aggregated for purposes of the calculations. It is
not practicable to estimate the fair value of policy loans as repayment terms
are at the discretion of the policyholder. For short-term investments, the
carrying amount is a reasonable estimate of fair value. The fair values for the
Company's policy reserves under the investment products are determined using
cash surrender value. As the debt was underwritten in the current year, the
outstanding balance is a reasonable estimate of fair value.
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
13. FAIR VALUE DISCLOSURES (CONTINUED)
The fair values under all insurance contracts are taken into consideration in
the Company's overall management of interest rate risk, such that the Company's
exposure to changing interest rates is minimized through the matching of
investment maturities with amounts due under insurance contracts.
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31
----------------------------------------------
1997 1996
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Assets:
Investments:
Securities available-for-sale:
Fixed maturities...................................... $2,415,915 $2,415,915 $2,115,499 $2,115,499
Equity securities..................................... 109,832 109,832 106,290 106,290
Mortgage loans on real estate............................. 602,064 661,055 582,869 614,555
Policy loans.............................................. 68,566 68,566 60,722 60,722
Short-term investments.................................... 70,537 70,537 182,817 182,817
Assets held in separate accounts.......................... 2,978,622 2,978,622 2,374,718 2,371,601
Liabilities:
Individual and group annuities (subject to discretionary
withdrawal).............................................. $ 977,495 $ 945,558 $ 916,754 $ 886,110
Debt...................................................... 26,433 26,433 -- --
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
The Company is named as a defendant in a number of legal actions arising
primarily from claims made under insurance policies. These actions have been
considered in establishing policy benefit and loss reserves. Management and its
legal counsel are of the opinion that the settlement of these actions will not
have a material adverse effect on the Company's financial position or results of
operations.
15. RETIREMENT AND OTHER EMPLOYEE BENEFITS
The Company is an indirect wholly-owned subsidiary of Fortis, Inc., which
sponsors a defined benefit pension plan covering employees and certain agents
who meet eligibility requirements as to age and length of service. The benefits
are based on years of service and career compensation. Fortis, Inc.'s funding
policy is to contribute annually the maximum amount that can be deducted for
federal income tax purposes, and to charge each subsidiary an allocable amount
based on its employee census. Pension cost allocated to the Company amounted to
approximately $1,594,000, $1,354,000 and $1,179,000 for 1997, 1996 and 1995,
respectively. As of January 1, 1997, the Plan's total accumulated benefit
obligation determined in accordance with ERISA was approximately $56,838,000.
This amount was based on an assumed interest rate of 8.00% and included vested
benefits of approximately $54,831,000. The fair market value of the Plan assets
as of January 1, 1997 was approximately $60,004,000.
The Company participates in a contributory profit sharing plan, sponsored by
Fortis, Inc., covering employees and certain agents who meet eligibility
requirements as to age and length of service. Benefits are payable to
participants on retirement or disability and to the beneficiaries of
participants in the event of death. The first three percent of an employee's
contribution is matched 200% by the Company. The amount expensed was
approximately $3,926,000, $3,913,000 and 3,765,000 for 1997, 1996 and 1995,
respectively.
In addition to retirement benefits, the Company participates in other health
care and life insurance benefit plans ("postretirement benefits") for retired
employees, sponsored by Fortis, Inc. Health care benefits, either through a
Fortis Inc.-sponsored retiree plan for retirees under age 65 or through a cost
offset for individually purchased Medigap policies for retirees over age 65, are
available to employees who retire on or after January 1, 1993, at age 55 or
older, with 15 years or more service. Life insurance, on a retiree pay all
basis, is available to those who retire on or after January 1, 1993.
Net postretirement benefit costs allocated to the Company for the years ended
December 31, 1997, 1996 and 1995 were $304,000, $290,000 and $287,000,
respectively, and includes the expected cost of such benefits for newly eligible
or vested employees, interest cost, gains and losses arising from differences
between actuarial assumptions and actual experience, and amortization of the
transition obligation. The Company made contributions to the plans of
approximately $20,000, $8,000 and $0 in 1997, 1996 and 1995, respectively, as
claims were incurred.
At December 31, 1997 and 1996, the unfunded postretirement benefit obligation
for retirees and other fully eligible or vested plan participants was $1,148,000
and $844,000, respectively. The discount rate used in determining the
accumulated postretirement benefit obligation was 7.5%. The health care cost
trend rate for those under age 65 was 12.8%, graded to 5.5% over 26 years. The
health care cost trend rate for those over age 65 was 12.0%, graded to 6.2% over
26 years.
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FORTIS BENEFITS INSURANCE COMPANY
16. DEBT
The following is a summary of the debt at December 31, 1997 (in thousands):
<TABLE>
<S> <C>
Mortgage note bearing a floating interest rate of 200 basis points over LIBOR, (5.84%
at December 31, 1997) adjustable every six months, principal and interest due
monthly, matures July 2001........................................................... $ 3,150
Mortgage note bearing a floating interest rate of 225 basis points over LIBOR (5.84%
at December 31, 1997) adjustable every six months, principal and interest due
monthly, balloon payment due July 1998............................................... 18,100
Mortgage note bearing interest at 7.60%, principal and interest due monthly, matures
October 2002......................................................................... 5,183
---------
$ 26,433
---------
---------
</TABLE>
Maturities of the debt as of December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998.................................................................................. $ 18,222
1999.................................................................................. 126
2000.................................................................................. 136
2001.................................................................................. 3,119
2002.................................................................................. 4,830
---------
26,433
---------
---------
</TABLE>
These mortgage notes are collateralized by certain real estate investments
included in real estate and other investments in the balance sheet.
Interest expense paid by the Company during 1997 on this debt was approximately
$1,075,000.
17. YEAR 2000 ISSUES (UNAUDITED)
The Year 2000 issue is the result of computer programs having been written
using two digits rather than four to define a year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than 2000. This could result in the failure of major systems or miscalculations,
which could have a material impact on the operations of the Company and any of
its businesses or subsidiaries. All of the Company's major businesses are
heavily dependent upon internal computer systems, and many have significant
interaction with systems of third parties.
A comprehensive review of the Company's computer systems and business processes
has been conducted to identify the major systems that could be affected by the
Year 2000 issue. Steps are being taken to resolve any potential problems
including modification to existing software and the purchase of new software.
These measures are scheduled to be completed and tested on a timely basis. The
Company's goal is to complete internal remediation and testing of each system by
early 1999.
Factors that could influence the total costs to be incurred by the Company in
connection with the Year 2000 issue include the ability of the Company to
successfully identify systems containing two-digit year codes, the nature and
amount of programming required to fix the affected programs, the related labor
and consulting costs for such remediation, and the ability of third parties that
interface with the Company to successfully address their Year 2000 issues.
The Company is evaluating the Year 2000 readiness of advisors and other third
parties whose system failures could have an impact on the Company's operations.
The potential materiality of any such impact is not entirely known at this time.
The Company is closely monitoring these entities to avoid any unforeseen
circumstances.
F-16
<PAGE>
APPENDIX A--SAMPLE MARKET VALUE ADJUSTMENT CALCULATIONS
The formula which will be used to determine the Market Value Adjustment is:
( 1 + I ) n/12
---------- - 1
( 1 + J + .005 )
Sample Calculation 1: Positive Adjustment
Amount withdrawn or transferred $10,000
Existing Guarantee Period 7 years
Time of withdrawal or transfer beginning of 3rd year of Existing
Guarantee Period
Guaranteed Interest Rate (I) 8%*
Guaranteed Interest Rate for
new 5-year guarantee (J) 7%*
Remaining Guarantee Period (N) 60 months
Market Value Adjustment
1 + .08 60/12
$10,000 x ------------- - 1] = $234.73
[( 1 + .07 + .005 )
Amount transferred or withdrawn (adjusted for Market Value
Adjustment): $10,234.73
Sample Calculation 2: Negative Adjustment
Amount withdrawn or transferred $10,000
Existing Guarantee Period 7 years
Time of withdrawal or transfer beginning of 3rd year of Existing
Guarantee Period
Guaranteed Interest Rate (I) 8%*
Guaranteed Interest Rate for
new 5-year guarantee (J) 9%*
Remaining Guarantee Period (N) 60 months
Market Value Adjustment:
1 + .08 60/12
$10,000 x ------------- - 1] = - $666.42
[( 1 + .09 + .005 )
Amount transferred or withdrawn (adjusted for Market Value
Adjustment): $9,333.58
Sample Calculation 3: Negative Adjustment
<TABLE>
<S> <C>
Amount withdrawn or transferred $10,000
Guarantee Period 7 years
Time of withdrawal or transfer beginning of 3rd year of Existing
Guarantee Period
Guaranteed Interest Rate (I) 8%*
Guaranteed Interest Rate for
new 5-year guarantee (J) 7.75%*
Remaining Guarantee Period (N) 60 months
Market Value Adjustment:
</TABLE>
1 + .08 60/12
$10,000 x --------------- - 1] = - $114.94
[( 1 + .0775 + .005 )
Amount transferred or withdrawn (adjusted for Market Value
Adjustment): $9,885.06
- ------------------------
*Assumed for illustrative purposes only.
A-1
<PAGE>
APPENDIX B--EXPLANATION OF EXPENSE CALCULATIONS
The expense for a given year is calculated by multiplying the projected
beginning of the year policy value by the total expense rate. The total expense
rate is the sum of the variable account expense rate plus the total Portfolio
expense rate plus the annual administrative charge rate.
The policy values are projected by assuming a single payment of $1,000 grows at
an annual rate equal to 5% reduced by the total expense rate described above.
For example, the 3 year expense for the Alliance Money Market Portfolio is
calculated as follows:
<TABLE>
<S> <C> <C>
Total Variable Account Annual Expenses 0.45%
+ Total Portfolio Operating Expenses 0.64%
+ Annual Administrative Charges (see below) 0.05%
= Total Expense Rate 1.14%
</TABLE>
The Annual Administrative Charge rate is calculated by dividing the total Annual
Contract Charges we collected in 1997 on similar contracts by the average policy
value in force in 1997 on such contracts.
Year 1 Beginning Policy Value = $1000.00
Year 1 Expense = $1000.00 x 0.0114 = $11.41
Year 2 Beginning Policy Value = $1038.59
Year 2 Expense = $1038.59 x 0.0114 = $11.85
Year 3 Beginning Policy Value = $1078.67
Year 3 Expense = $1078.67 x 0.0114 = $12.31
So the cumulative expenses for years 1-3 for the Alliance Money Market Portfolio
are equal to:
$11.41 + $11.85 + $12.31 = $35.57
B-1
<PAGE>
APPENDIX C--PARTICIPATING PORTFOLIOS
ALLIANCE VARIABLE PRODUCTS SERIES FUND, INC.
The Alliance Variable Products Series Fund, Inc. is an open-ended series
investment company. It was incorporated under Maryland law on November 17, 1987.
Alliance Capital Management L.P. serves as the Fund's manager.
ALLIANCE MONEY MARKET PORTFOLIO
INVESTMENT OBJECTIVE: Seeks safety of principal, maintenance of liquidity and
maximum current income by investing in a broadly diversified portfolio of money
market securities.
ALLIANCE INTERNATIONAL PORTFOLIO
INVESTMENT OBJECTIVE: Seeks to obtain a total return on its assets from
long-term growth of capital and from income principally through a broad
portfolio of marketable securities of established non-United States companies
(or United States companies having their principal activities and interests
outside the United States), companies participating in foreign economies with
prospects for growth, and foreign government securities.
ALLIANCE PREMIER GROWTH PORTFOLIO
INVESTMENT OBJECTIVE: Seeks growth of capital rather than current income. In
pursuing its investment objective, the Premier Growth Portfolio will employ
aggressive investment policies. Since investments will be made based upon their
potential for capital appreciation, current income will be incidental to the
objective of capital growth.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
American Century Variable Portfolios, Inc. is a open-end management investment
company. It was organized as a Maryland corporation on June 4, 1987. American
Century Investment Management, Inc., serves as the investment manager of
American Century Portfolios.
AMERICAN CENTURY VP BALANCED FUND
INVESTMENT OBJECTIVE: Capital growth and current income. Seeks to achieve its
investment objective by maintaining approximately 60% of the assets in common
stocks that are considered to have better-then-average prospects for
appreciation and the remaining assets in bonds and other fixed income
securities.
AMERICAN CENTURY VP CAPITAL APPRECIATION FUND
INVESTMENT OBJECTIVE: Capital Growth. Seeks to achieve its investment objective
by investing primarily in common stocks that are considered to have
better-than-average prospects for appreciation.
FEDERATED INSURANCE SERIES
Federated Insurance Series is an open-end management investment company. It was
established as a Massachusetts business trust under a Declaration of Trust dated
September 15, 1993. Federated Advisers is the investment adviser.
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
INVESTMENT OBJECTIVE: Seeks to provide current income. Under normal
circumstances, the portfolio pursues its investment objective by investing at
least 65% of the value of its total assets in securities issued or guaranteed as
to payment of principal and interest by the U.S. Government, its agencies or
instrumentalities.
AMERICAN LEADERS FUND II
INVESTMENT OBJECTIVE: To achieve long-term growth of capital and to provide
income.
UTILITY FUND II
INVESTMENT OBJECTIVE: To achieve high current income and moderate capital
appreciation.
HIGH INCOME BOND FUND II
INVESTMENT OBJECTIVE: To seek high current income.
C-1
<PAGE>
FORTIS SERIES FUND, INC.
The Fortis Series Fund, Inc. is an open-end series investment fund. It was
incorporated under Minnesota law in 1986. Fortis Advisers, Inc. serves as the
fund's manager.
FORTIS S&P 500 INDEX SERIES
INVESTMENT OBJECTIVE: Seeks to replicate the total return of the Standard &
Poor's 500 Composite Stock Price Index primarily through investment in equity
securities.
INVESCO VARIABLE INVESTMENT FUNDS, INC.
The INVESCO Variable Investment Funds, Inc. is an open-end series management
investment company. It was incorporated under Maryland law on August 19, 1993.
INVESCO Funds Group, Inc. serves as the Fund's manager.
INVESCO INDUSTRIAL INCOME PORTFOLIO
INVESTMENT OBJECTIVE: Seeks the best possible current income while following
sound investment practices. Capital growth potential is an additional
consideration in the selection of the portfolio securities. The portfolio
normally invests at least 65% of its total assets in dividend-paying common
stocks.
INVESCO HEALTH SCIENCES PORTFOLIO
INVESTMENT OBJECTIVE: Seeks capital appreciation. The portfolio normally invests
at least 80% of its total assets in equity securities of companies that develop,
produce, or distribute products or services related to health care.
INVESCO TECHNOLOGY PORTFOLIO
INVESTMENT OBJECTIVE: Seeks capital appreciation. The portfolio normally invests
at least 80% of its total assets in equity securities of companies in
technology-related industries such as computers, communications, video,
electronics, oceanography, office and factory automation, and robotics.
LEXINGTON NATURAL RESOURCES TRUST
The Lexington Natural Resources Trust is an open-end management investment
company. It was organized as a Massachusetts business trust on October 7, 1988.
Lexington Management Corporation is the Investment Adviser of the fund.
INVESTMENT OBJECTIVE: To seek long-term growth of capital through investment
primarily in common stocks of companies that own or develop natural resources
and other basic commodities, or supply goods and services to such companies.
LEXINGTON EMERGING MARKETS FUND, INC.
The Lexington Emerging Markets Fund, Inc. is an open-end management investment
company. It was organized as a corporation under Maryland law on December 27,
1993. Lexington Management Corporation is the fund's investment adviser.
INVESTMENT OBJECTIVE: To seek long-term growth of capital primarily through
investment in equity securities of companies domiciled in, or doing business in,
emerging countries and emerging markets.
MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE TRUST
MFS Variable Insurance Trust is an open-end management investment company. It
was organized as a business trust under the laws of the Commonwealth of
Massachusetts by a Declaration of Trust dated February 1, 1994. Massachusetts
Financial Services Company manages each series.
MFS EMERGING GROWTH SERIES
INVESTMENT OBJECTIVE: Seeks to provide long-term growth of capital. The series'
policy is to invest primarily in common stocks of small and medium-sized
companies that are early in their life cycle but which have the potential to
become major enterprises.
C-2
<PAGE>
MFS HIGH INCOME SERIES
INVESTMENT OBJECTIVE: Seeks high current income by investing primarily in a
professionally managed portfolio of fixed income securities, some of which may
involve equity features.
MFS WORLD GOVERNMENTS SERIES
INVESTMENT OBJECTIVE: Seeks preservation and growth of capital, together with
moderate current income. The series attempts to provide investors with an
opportunity to enhance the value and increase the protection of their investment
against inflation and otherwise by taking advantage of investment opportunities
in the U.S. as well as in other countries where opportunities may be more
rewarding.
THE MONTGOMERY FUNDS III
The Montgomery Funds III is an open-end investment company. This Delaware
business trust was organized on August 24, 1994. The trust is managed by
Montgomery Asset Management, L.P.
MONTGOMERY VARIABLE SERIES: GROWTH FUND
INVESTMENT OBJECTIVE: Seeks capital appreciation by investing primarily in
equity securities, usually common stock, of domestic companies of all sizes.
MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
INVESTMENT OBJECTIVE: Seeks capital appreciation by investing primarily in
equity securities of companies in countries having economies and markets
generally considered by the World Bank or the United Nations to be emerging or
developing.
NEUBERGER & BERMAN ADVISERS MANAGERS TRUST
Neuberger & Berman Advisers Managers Trust is an open-end diversified series
management investment company. It was established as a Delaware business trust
on May 23, 1994. Neuberger & Berman Management Incorporated serves as manager of
the Fund.
NEUBERGER & BERMAN LIMITED MATURITY BOND PORTFOLIO
INVESTMENT OBJECTIVE: Seeks highest current income consistent with low risk to
principal and liquidity; and secondarily, total return. Principal investments
are short-to-intermediate term debt securities, primarily investment grade.
NEUBERGER & BERMAN PARTNERS PORTFOLIO
INVESTMENT OBJECTIVE: Seeks capital growth. Principal investments are common
stocks and other equity securities of established companies.
SAFECO RESOURCE SERIES TRUST
The SAFECO Resource Series Trust is an open-end series management investment
company. It is a Delaware business trust established by a trust instrument dated
May 13, 1993. SAFECO Asset Management Company is the fund's manager.
SAFECO EQUITY PORTFOLIO
INVESTMENT OBJECTIVE: Seeks long-term growth of capital and reasonable current
income. The Equity Portfolio ordinarily invests principally in common stocks or
securities convertible into common stocks.
SAFECO GROWTH PORTFOLIO
INVESTMENT OBJECTIVE: Seeks growth of capital and the increased income that
ordinarily follows from such growth. The Growth Portfolio ordinarily invests in
a preponderance of its assets in common stock selected for potential
appreciation.
STRONG VARIABLE INSURANCE FUNDS, INC.
The Strong Variable Insurance Funds, Inc. is an open-end management investment
company. It was incorporated in Wisconsin. Strong Capital Management, Inc. is
the investment adviser.
THE STRONG DISCOVERY FUND II
INVESTMENT OBJECTIVE: Seeks to identify emerging investment trends and
attractive growth opportunities.
C-3
<PAGE>
THE STRONG INTERNATIONAL STOCK FUND II
INVESTMENT OBJECTIVE: Seeks capital growth. The fund invests primarily in the
equity securities of issuers located outside of the United States.
VAN ECK WORLDWIDE INSURANCE TRUST
Van Eck Worldwide Insurance Trust is an open-end management investment company.
It was organized as a business trust under the laws of the Commonwealth of
Massachusetts on January 7, 1987. Van Eck Associates Corporation serves as
investment adviser and manager to the two funds listed below.
WORLDWIDE HARD ASSETS FUND
INVESTMENT OBJECTIVE: Seeks long-term capital appreciation by investing
globally, primarily in (i) precious metals, (ii) ferrous and non-ferrous metals,
(iii) oil and gas, (iv) forest products, (v) real estate, and (vi) other basic
non-agricultural commodities.
WORLDWIDE BOND FUND
INVESTMENT OBJECTIVE: Seeks high total return through a flexible policy of
investing globally, primarily in debt securities.
C-4
<PAGE>
CERTIFICATES UNDER
FLEXIBLE PREMIUM DEFERRED
COMBINATION VARIABLE AND FIXED ANNUITY CONTRACTS
VALUE ADVANTAGE PLUS VARIABLE ANNUITY
Issued by
FORTIS BENEFITS INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1998
This Statement of Additional Information is not a Prospectus. It is intended
that this Statement of Additional Information be read in conjunction with the
Prospectus for certificates under flexible premium deferred combination variable
and fixed annuity contracts ("Certificates"), dated May 1, 1998. A copy of the
Prospectus may be obtained without charge from Fortis Investors, Inc.
1-800-827-5877, mailing address: P.O. Box 64272, St. Paul, MN 55164. You have
the option of receiving benefits under a Contract through Fortis Benefits'
Variable Account D or through Fortis Benefits' Guarantee Periods Fixed Account
or its General Account Fixed Account.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Fortis Benefits and the Variable Account . . . . . . . . . . . . . . . . . .1
Calculation of Annuity Payments. . . . . . . . . . . . . . . . . . . . . . .2
Postponement of Payments . . . . . . . . . . . . . . . . . . . . . . . . . .3
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
- Safekeeping of Variable Account Assets . . . . . . . . . . . . . . . . .3
- Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
- Principal Underwriter . . . . . . . . . . . . . . . . . . . . . . . . .4
Taxation Under Certain Retirement Plans. . . . . . . . . . . . . . . . . . .4
Withholding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Variable Account Financial Statements. . . . . . . . . . . . . . . . . . . .9
Appendix A -- Performance Information. . . . . . . . . . . . . . . . . . .A-1
</TABLE>
In order to supplement the description in the Prospectus, the following provides
additional information about the Certificates and other matters which may be of
interest to you. Terms used in this Statement of Additional Information have
the same meanings as are defined in the Prospectus under the heading "Special
Terms Used in This Prospectus."
FORTIS BENEFITS AND THE VARIABLE ACCOUNT
Fortis Benefits Life Insurance Company, the issuer of the Certificates, is a
Minnesota corporation qualified to sell life insurance and annuity contracts in
the District of Columbia and in all states except New York. Fortis Benefits is
a wholly-owned subsidiary of Fortis Insurance Company, a stock company organized
under the laws of Wisconsin, which itself is a wholly-owned subsidiary of
Fortis, Inc. Fortis, Inc. is a corporation based in New York, which manages
the United States operations of Fortis AMEV and Fortis AG.
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Fortis AMEV has been in business since 1847 and is a publicly-traded,
multi-national insurance, real estate, and financial services group
headquartered in The Netherlands. It is one of the largest holding companies in
Europe, with subsidiary companies in twelve countries on four continents.
Fortis AMEV is the third largest insurance company in the Netherlands.
Fortis AG is a multi-national insurance, real estate and financial services firm
that has been in business since 1824. It has subsidiary companies in eight
countries. Fortis AG is one of the largest life insurance companies in Belgium.
Fortis AMEV and Fortis AG have combined assets of approximately $167 billion.
The assets allocated to the Variable Account are the exclusive property of
Fortis Benefits. Registration of the Variable Account under the Investment
Company Act of 1940 does not involve supervision of the management or investment
practices or policies of the Variable Account or of Fortis Benefits by the
Securities and Exchange Commission. Fortis Benefits may accumulate in the
Variable Account proceeds from charges under the Certificates and other amounts
in excess of the Variable Account assets representing reserves and liabilities
under Certificates and other variable annuity contracts issued by Fortis
Benefits. Fortis Benefits may from time to time transfer to its General Account
any of such excess amounts. Under certain remote circumstances the assets of
one Subaccount may not be insulated from liability associated with another
Subaccount.
Best's Insurance Reports has assigned Fortis Benefits a rating of A (Excellent)
for financial position and operating performance. Fortis Benefits has a rating
of AA from Standard & Poor's. As defined by Standard & Poor's, insurers rated
AA offer "excellent financial security." These ratings represent such rating
agencies' independent opinion of Fortis Benefits' financial strength and ability
to meet policy holder obligations, but have no relevance to the performance and
quality of the assets in Subaccounts of the Variable Account.
CALCULATION OF ANNUITY PAYMENTS
FIXED ANNUITY OPTION
The amount of each annuity payment under a Fixed Annuity Option is fixed and
guaranteed by Fortis Benefits. Monthly fixed annuity payments will start as of
the end of the Valuation Period that contains the Annuity Commencement Date. At
that time, the Contract Value , after any Market Value Adjustment, is computed
and that portion of the Contract Value which will be applied to the Fixed
Annuity Option selected is determined. The amount of the first monthly payment
under the Fixed Annuity Option selected will be at least as large as would
result from using the annuity tables contained in the Contract to apply such
amount of Contract Value to the annuity form selected. The dollar amounts of
any fixed annuity payments after the first are specified during the entire
period of annuity payments according to the provisions of the annuity form
selected.
VARIABLE ANNUITY OPTION
ANNUITY UNITS. To the extent a Variable Annuity Option has been selected, we
convert the Accumulation Units for each Subaccount of the Variable Account into
Annuity Units for each Subaccount at their values determined as of the end of
the Valuation Period which contains the Annuity Commencement Date. As of such
time, any Fixed Account Value to be applied to a Variable Annuity Option is also
converted, after any Market Value Adjustment, to Annuity Units in the
Subaccounts selected based on the then-current Annuity Unit value. The initial
number of Annuity Units in each Subaccount is determined by dividing the amount
of the initial monthly variable annuity payment (see "Variable Annuity Option --
Variable Annuity Payments," below) allocable to that Subaccount by the value of
one Annuity Unit in that Subaccount as of the time of the conversion. The
number of Annuity Units for each Subaccount will remain constant, as long as an
annuity remains in force and the allocation among the Subaccounts has not
changed.
The value of each Subaccount's Annuity Units will vary to reflect the investment
experience of the Subaccount as well as charges deducted from the Subaccount.
The value of each Subaccount's Annuity Units is equal to the prior value of the
Subaccount's Annuity Units multiplied by the net investment factor for that
Subaccount (discussed in the Prospectus
2
<PAGE>
under "Contract Value") for the Valuation Period ending on that Valuation Date,
with an offset for the 4% assumed interest rate used in the annuity tables of
the Contract.
VARIABLE ANNUITY PAYMENTS. Variable annuity payments start at the end of the
Valuation Period that contains the Annuity Commencement Date, and will vary in
amount as the related Annuity Unit values vary. The amount of the first monthly
payment is shown on the annuity tables contained in the Contract for each $1,000
of Contract Value applied to the Variable Annuity Option selected as of the end
of such Valuation Period. The first variable annuity payment is, in effect,
allocated among the Subaccounts in the same proportion as the Contract Value is
allocated among the Subaccounts upon commencement of annuity payments.
Payments after the first will vary in amount and are determined on the first
Valuation Date of each subsequent monthly period. If the monthly payment under
the annuity form selected is based on the value of Annuity Units of a single
Subaccount, the monthly payment is found by multiplying the number of the
Contract's Annuity Units for the Subaccount by the Annuity Unit value of such
Subaccount as of the first Valuation Date in each monthly period following the
Annuity Commencement Date. If the monthly payment under the Variable Annuity
Option selected is based upon the value of Annuity Units in more than one
Subaccount, this is repeated for each applicable Subaccount. The sum of these
payments is the variable annuity payment.
GENDER OF ANNUITANT
The amount of each annuity payment ordinarily will be higher for a male
Annuitant than for a female Annuitant with an otherwise identical Contract.
This is because, statistically, females tend to have longer life expectancies
than males. However, there will be no differences between male and female
Annuitants in any jurisdiction, including Montana, where such differences are
not permitted. We will also make available Certificates with no such
differences in connection with certain employer-sponsored benefit plans.
Employers should be aware that, under most such plans, Certificates that make
distinctions based on gender are prohibited by law.
POSTPONEMENT OF PAYMENTS
With respect to amounts in the Subaccounts of the Variable Account, payment of
any amount due upon a total or partial surrender, death or under an annuity
option will ordinarily be made within seven days after all documents required
for such payment are received by Fortis Benefits at its Home Office. However,
Fortis Benefits may defer the determination, application or payment of any death
benefit, transfer, partial or total surrender or annuity payment, to the extent
dependent on Accumulation or Annuity Unit Values, for any period during which
the New York Stock Exchange is closed (other than customary weekend and holiday
closings) or trading on the New York Stock Exchange is restricted as determined
by the Securities and Exchange Commission, for any period during which any
emergency exists as a result of which it is not reasonably practicable for
Fortis Benefits to determine the investment experience for the Contract, or for
such other periods as the Securities and Exchange Commission may by order permit
for the protection of investors.
SERVICES
SAFEKEEPING OF VARIABLE ACCOUNT ASSETS
Title to the assets of the Variable Account is held by Fortis Benefits. The
assets of the Variable Account are kept segregated and held separate and apart
from Fortis Benefits' other assets. Fortis Advisers, Inc., an affiliate of
Fortis Benefits, maintains records of all purchases and redemptions of shares of
the Portfolios held by each of the Subaccounts of the Variable Account.
3
<PAGE>
EXPERTS
The financial statements of Fortis Benefits Insurance Company appearing in the
Prospectus and those of Separate Account D appearing in this Statement of
Additional Information and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon also
appearing in the Prospectus or this Statement of Additional Information,
respectively, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
PRINCIPAL UNDERWRITER
Fortis Investors, Inc. ("Fortis Investors"), the principal underwriter of the
Certificates, is a Minnesota corporation and a member of the Securities
Investors Protection Corporation. The offering of the Certificates is
continuous, and Fortis Investors does not anticipate discontinuing the offering
of the Certificates, although it reserves the right to do so. Certificates
generally will be issued for Annuitants from ages zero to ninety in all states.
TAXATION UNDER CERTAIN RETIREMENT PLANS
Federal income tax information concerning the purchase of Certificates for
specific types of retirement plans is set forth below. You should also refer to
"Federal Tax Matters" in the Prospectus. The tax information provided is not
comprehensive, and you should consult a qualified tax adviser before taking any
action in connection with a retirement plan.
SECTION 403(b) ANNUITIES FOR EMPLOYEES OF CERTAIN TAX-EXEMPT ORGANIZATIONS
OR PUBLIC EDUCATIONAL INSTITUTIONS
PURCHASE PAYMENTS. Under Section 403(b) of the Internal Revenue Code ("Code"),
payments made by certain employers (i.e., tax-exempt organizations meeting the
requirements of Section 501(c)(3) of the Code, or public educational
institutions) to purchase Certificates for their employees are excludible from
the gross income of employees to the extent that such aggregate purchase
payments do not exceed certain limitations prescribed by the Code. This is the
case whether the purchase payments are a result of voluntary salary reduction
amounts or employer contributions. Salary reduction payments are, however,
subject to FICA (social security) taxes.
TAXATION OF DISTRIBUTIONS. Distributions from a Section 403(b) tax-deferred
annuity are taxed as ordinary income to the recipient as described under
"Federal Tax Matters" in the Prospectus. Taxable distributions received
before the employee attains age 59 1/2 generally are subject to a 10% penalty
tax in addition to regular income tax. Certain distributions are excepted
from this penalty tax, including distributions following the employee's
death, disability, separation from service after age 55, separation from
service at any age if the distribution is in the form of an annuity for the
life (or life expectancy) of the employee (or the employee and Beneficiary)
and distributions not in excess of deductible medical expenses. In addition,
no distributions of voluntary salary reduction amounts will be permitted
prior to one of the following events: attainment of age 59 1/2 by the
employee or the employee's separation from service, death, disability or
hardship. (Hardship distributions will be limited to the lesser of the
amount of the hardship or the amount of salary reduction contributions,
exclusive of earnings thereon.)
REQUIRED DISTRIBUTIONS. Generally, distributions from Section 403(b)
annuities must commence not later than April 1 of the calendar year following
the calendar year in which the employee attains age 70 1/2, and such
distributions must be made over a period that does not exceed the life
expectancy of the employee (or the employee and Beneficiary). A penalty tax
of 50% would be imposed on any amount by which the minimum required
distribution in any year exceeded the amount actually distributed in that
year. In addition, in the event that the employee dies before his or her
entire interest in the Contract has been distributed, the employee's entire
interest must be distributed in accordance with rules similar to those
applicable upon the death of the Participant or Payee in the case of a
Non-Qualified Contract, as described in the Prospectus. Certain of these and
other provisions are incorporated in a special endorsement attached
4
<PAGE>
to Certificates that are intended to qualify under Section 403(b), and reference
should be made to that endorsement for its complete terms.
TAX-FREE EXCHANGES AND ROLLOVERS. The Code provides for the tax-free transfer
of one Section 403(b) annuity for another Section 403(b) annuity, and the IRS
has ruled (Revenue Ruling 90-24) that amounts transferred may qualify as
tax-free transfers under certain circumstances. In addition, Section 403(b)(8)
of the code permits tax-free rollovers from Section 403(b) programs to
individual retirement annuities or other Section 403(b) programs under certain
circumstances.
SECTION 401 QUALIFIED PENSION, PROFIT-SHARING OR ANNUITY PLANS
PURCHASE PAYMENTS. Subject to certain limitations prescribed by the Code,
purchase payments made by an employer (or a self-employed individual) under a
pension, profit-sharing or annuity plan qualified under Section 401 or Section
403(a) of the Code are generally deductible by the employer and excluded from
the taxable income of the employee for federal income tax purposes, whether made
under a salary reduction agreement or directly by employer contributions.
Salary reduction payments are, however, subject to FICA (social security) taxes.
Purchase payments made directly by an employee generally are made on an
after-tax basis.
TAXATION OF DISTRIBUTIONS. Distributions from Certificates purchased under
these qualified plans are taxable as ordinary income, except to the extent
allocable to an employee's after-tax contributions, as described under
"Federal Tax Matters -- Qualified Plans," in the Prospectus. However, if an
employee or other payee receives a "lump sum" distribution, as defined in the
Code, from an exempt employees' trust, the taxable portion of the
distribution may be subject to special tax treatment. For most individuals
receiving lump sum distributions after attaining age 59 1/2, the rate of tax
may be determined under a special 5-year income averaging provision. Those
who attained age 50 by January 1, 1986 may instead elect to use a 10-year
income averaging provision based on the income tax rates in effect for 1986.
Taxable distributions received prior to attainment of age 59 1/2 under a
Contract purchased under a qualified plan are subject to the same 10% penalty
tax (and the same exceptions) as described above with respect to Section
403(b) annuities.
REQUIRED DISTRIBUTIONS. The minimum distribution requirements for these
qualified plans are generally the same as described above with respect to
Section 403(b) annuities.
TAX-FREE ROLLOVERS. If, within 60 days of receipt, an employee who receives
a single sum distribution transfers all of the taxable amount received to
another plan qualified under Section 401 or 403(a), or to an individual
retirement account or annuity as provided for under the Code, the transferred
amount will not be taxed in the year of distribution. Certain "partial"
distributions may also qualify for tax-free rollover treatment, but only if
transferred to an individual retirement account or annuity. However, income
tax may be withheld from the distribution unless the distribution is
transferred directly from the qualified plan to the individual retirement
account or individual retirement annuity.
INDIVIDUAL RETIREMENT ANNUITIES
PURCHASE PAYMENTS. Individuals may make contributions for individual
retirement annuity ("IRA") Contracts. Deductible contributions for any year
may be made up to the lesser of $2,000 or 100% of compensation for
individuals who (1) are not (and whose spouses are not) active participants
in another retirement plan, (2) are unmarried and have adjusted gross income
of $25,000 or less, or (3) are married and have adjusted gross income of
$40,000 or less. An individual may also establish an IRA for his or her
spouse if they file a joint return for the taxable year and his or her spouse
earns less than the individual does for that year. The annual purchase
payments for both spouses' Contracts cannot exceed the lesser of $4,000 or
100% of the couple's combined earned income, and no more than $2,000 may be
contributed to either spouse's IRA for any year. Individuals who are active
participants in other retirement plans and whose adjusted gross income (with
certain special adjustment) exceed the cut-off point ($25,000 for unmarried,
$40,000 for married persons filing jointly, and $0 for married persons filing
a separate return) by less than $10,000 are entitled to make deductible IRA
contributions in proportionately reduced amounts. For example, a married
individual who is an active participant in another retirement plan and files
a separate tax return is entitled to a partial IRA deduction if the
5
<PAGE>
individual's adjusted gross income is less than $10,000 and no IRA deduction
if his or her adjusted gross income is equal to or greater than $10,000.
An individual may make non-deductible IRA contributions to the extent of (1)
the lesser of $2,000 ($4,000 in the case of a spousal IRA) or 100% of
compensation over (2) the IRA deductible contribution made with respect to
the individual.
An individual may not make any contributions to his/her own IRA for the year
in which he/she reaches age 70 1/2 or for any year thereafter. Contributions
to a spouse's IRA may not be made for any year in which that spouse reaches
age 70 1/2 or for any year thereafter.
TAXATION OF DISTRIBUTIONS. Distributions from IRA Contracts are taxed as
ordinary income to the recipient, although special rules exist for the
tax-free return of non-deductible contributions. In addition, taxable
distributions received under an IRA Contract prior to age 59 1/2 are subject
to a 10% penalty tax in addition to regular income tax. Certain
distributions are exempted from this penalty tax including distributions
following the owner's death or disability or distribution in the form of an
annuity for the life (or life expectancy) of the owner (or the owner and
beneficiary), or distributions not in excess of deductible medical expenses
or certain distributions to pay health insurance premiums after an extended
period of unemployment.
REQUIRED DISTRIBUTIONS. The minimum distribution requirements for IRAs are
generally the same as described above with respect to Section 403(b)
annuities. Certain of these and other provisions are incorporated in a
special endorsement attached to IRA Certificates, and reference should be
made to that endorsement for its complete terms.
TAX-FREE ROLLOVERS. The Code permits funds to be transferred in a tax-free
rollover from a qualified employer pension, profit-sharing, annuity, bond
purchase or tax-deferred annuity plan to an IRA Contract if certain
conditions are met, and if the rollover of assets is completed within 60 days
after the distribution from the qualified plan is received. In addition, not
more frequently than once every twelve months, amounts may be rolled over
tax-free from one IRA to another, subject to the 60-day limitation and other
requirements. The once-per-year limitation on rollovers does not apply to
direct transfers of funds between IRA custodians or trustees.
SIMPLIFIED EMPLOYEE PENSION PLANS
PURCHASE PAYMENTS. Under Section 408(k) of the Code, employers may establish
a type of IRA plan referred to as a simplified employee pension plan (SEP).
Employer contributions to a SEP cannot exceed the lesser of $24,000 or 15% of
the employee's earned income. Employees of certain small employers may have
contributions made to a special kind of SEP (SARSEP) on their behalf on a
salary reduction basis if the SARSEP plan was in effect on December 31, 1996.
These salary reduction contributions may not exceed $9,500 in 1997, which is
indexed for inflation. Employees of tax-exempt organizations and state or
local government agencies have never been eligible for the salary reduction
type of SEP.
TAXATION OF DISTRIBUTIONS. Generally, distribution payments from SEPs are
subject to the same distribution rules described above for IRAs.
REQUIRED DISTRIBUTIONS. SEP distributions are subject to the same minimum
required distribution rules described above for IRAs.
TAX-FREE ROLLOVERS. Generally, rollovers and direct transfers may be made to
and from SEPs in the same manner as described above for IRAs, subject to the
same conditions and limitations. Rollovers to other IRAs, excluding SIMPLE
IRAs are also possible. Special rules apply if the rollover is from a SARSEP
IRA.
6
<PAGE>
SECTION 408(p) SIMPLE IRA PLANS
PURCHASE PAYMENTS: Under Section 408(p) of the Code, small employers may
establish a type of IRA plan referred to as a Savings Incentive Match Plan for
Employees (SIMPLE Plan). An employee may contribute annually through his or her
employer a pre-tax salary reduction contribution not to exceed the lesser of
$6,000 or 100% of compensation. The employer must annually either (1) match the
employee contribution dollar for dollar up to 3% of pay, or (2) make a 2% of pay
contribution for each eligible employee regardless of whether the employee makes
any salary reduction contribution. In two out of every five years, the employer
has the option to reduce the matching contribution as low as 1% of pay but
advance notice must be provided to employees.
TAXATION OF DISTRIBUTIONS: Generally, distributions from SIMPLE IRA Plans are
subject to the same distribution rules described above for IRAs. However, if an
individual withdraws any amount from his SIMPLE IRA Plan within the first two
years of his or her commencement of participation in the employer's SIMPLE IRA
Plan, the 10% penalty tax for premature distribution, if such tax applies, will
be increased to 25%.
REQUIRED DISTRIBUTIONS: SIMPLE distributions are subject to the same minimum
distribution rules described above for IRAs.
TAX-FREE ROLLOVERS: Generally, rollovers and direct transfers may be made to
and from SIMPLE IRAs in the same manner as described above for IRAs, subject to
the same conditions and limitations. Rollovers or transfers to other IRAs, other
than SIMPLE IRAs, are also possible but only after the second anniversary of
commencement of participation in the employer's SIMPLE IRA Plan.
SECTION 457 UNFUNDED DEFERRED COMPENSATION PLANS OF PUBLIC EMPLOYERS
AND TAX-EXEMPT ORGANIZATIONS
PURCHASE PAYMENTS. Under Section 457 of the Code, all individuals who perform
services for a state or local government or governmental agency may participate
in a deferred compensation program. Other tax-exempt employers may establish
unfunded deferred compensation plans under Section 457 for employees and/or
independent contractors.
Though not actually a qualified plan as that term is normally used, this type of
program allows individuals to defer the receipt of compensation that otherwise
would be currently payable and therefore to defer the payment of federal income
taxes on such amounts. Assuming that the program meets the requirements to be
considered an eligible deferred compensation plan (an "EDCP"), an individual may
contribute (and thereby defer from current income for tax purposes) the lesser
of $7,500 or 33-1/3% of the individual's includible compensation. (Includible
compensation means compensation from the employer which would be currently
includible in gross income for federal tax purposes.) In addition, during the
last three years before an individual attains normal retirement age, additional
"catch-up" deferrals are permitted.
The amounts which are deferred may be used by the employer to purchase the
Certificates offered by this Prospectus. The Contract is owned by the employer
and is subject to the claims of the employer's creditors. The employee has no
rights or interest in the Contract and is entitled only to payment in accordance
with the EDCP provisions.
TAXATION OF DISTRIBUTIONS. Amounts received by an individual from an EDCP are
includible in gross income for the taxable year in which such amounts are paid
or otherwise made available.
DISTRIBUTIONS BEFORE SEPARATION FROM SERVICE. Distributions generally are
not permitted under an EDCP prior to separation from service or reaching age
70 1/2, except in cases of severe financial hardship. Hardship distributions
are includible in the gross income of the individual in the year in which
paid.
REQUIRED DISTRIBUTIONS. The distribution requirements for these qualified plans
are generally the same as described above with respect to Section 403(b)
annuities. However, if distributions do not commence before the employee's
death,
7
<PAGE>
the entire interest in the Contract must be distributed within 15 years if the
beneficiary is not the employee's surviving spouse.
TAX-FREE TRANSFERS. The Code permits the tax-free direct transfer of EDCP
amounts to another EDCP, subject to certain conditions. Any transfers must be
with employer consent.
PRIVATE EMPLOYER UNFUNDED DEFERRED COMPENSATION PLANS
PURCHASE PAYMENTS. Private taxable employers may establish unfunded,
non-qualified deferred compensation plans for a select group of management or
highly compensated employees and/or for independent contractors. Certain
arrangements of tax-exempt employers entered into prior August 16, 1986, and not
subsequently modified, are also subject to the rules for private taxable
employer deferred compensation plans discussed below. (Unfunded deferred
compensation plans of other tax-exempt employers are generally subject to the
requirements of Section 457.)
These types of programs allow individuals to defer receipt of up to 100% of
compensation which would otherwise be includible in income and therefore to
defer the payment of federal income taxes on such amounts. Purchase payments
made by the employer, however are not immediately deductible by the employer,
and the employer is currently taxed on any increase in Contract Value.
Deferred compensation plans represent a contractual promise on the part of the
employer to pay current compensation at some future time. The Contract is owned
by the employer and is subject to the claims of the employer's creditors. The
individual has no right or interest in the Contract and is entitled only to
payment from the employer's general assets in accordance with plan provisions.
TAXATION OF DISTRIBUTIONS. Amounts received by an individual from a private
employer deferred compensation plan are includible in gross income for the
taxable year in which such amounts are paid or otherwise made available.
EXCESS DISTRIBUTIONS--15% TAX.
Certain persons, particularly those who participate in more than one
tax-qualified retirement plan, may be subject to an additional tax of 15% on
certain excess aggregate distributions from those plans. In general, excess
distributions are taxable distributions for all tax qualified plans in excess of
a specified annual limit for payments made in the form of an annuity (currently
$160,000) or five times the annual limit for lump sum distributions.
WITHHOLDING
Annuity payments and other amounts received under Certificates are subject to
income tax withholding unless the recipient elects not to have taxes withheld.
The amounts withheld will vary among recipients depending on the tax status of
the individual and the type of payments from which taxes are withheld.
Notwithstanding the recipient's election, withholding may be required with
respect to certain payments to be delivered outside the United States and, with
respect to certain distributions from certain types of qualified retirement
plans, unless the proceeds are transferred directly to another qualified
retirement plan. Moreover, special "backup withholding" rules may require
Fortis Benefits to disregard the recipient's election if the recipient fails to
supply Fortis Benefits with a "TIN" or taxpayer identification number (social
security number for individuals), or if the Internal Revenue Service notifies
Fortis Benefits that the TIN provided by the recipient is incorrect.
MISCELLANEOUS
The computer systems Fortis Benefits uses to process policy transactions and
valuations need to be adjusted to be able to continue to administer its policies
after Year 2000. Fortis Benefits is devoting all resources necessary to make
these systems modifications and expects that the necessary changes will be
completed on time and in a way that will result
8
<PAGE>
in no disruption to its policy servicing operations. However, as is the case
with most system conversion projects, risks and uncertainties exist, due in part
to reliance on third party vendors. Nonperformance by any of these entities, or
other unforeseen circumstances, could have a material adverse impact on Fortis
Benefits' ability to perform its policy servicing operations. Fortis Benefits is
closely monitoring these entities to avoid any unforeseen circumstances.
VARIABLE ACCOUNT FINANCIAL STATEMENTS
9
<PAGE>
Report of Independent Auditors
Board of Directors
Fortis Benefits Insurance Company
We have audited the accompanying statement of net assets of Fortis Benefits
Insurance Company Variable Account D (comprising, respectively, the Fortis
Series Fund, Inc.'s Growth Stock, U.S. Government Securities, Money Market,
Asset Allocation, Diversified Income, Global Growth, Aggressive Growth, Growth &
Income, High Yield, Global Asset Allocation, Global Bond, International Stock,
Value, S & P 500 and Blue Chip Stock Subaccounts; the Norwest Select Fund's
ValuGrowth, Intermediate Bond, Small Company Stock and Income Equity
Subaccounts; the Scudder Variable Life Investment Fund's International
Subaccount; the Alliance Variable Product Series' Money Market, International
and Premier Growth Subaccounts; the SAFECO Resource Series' Growth and Equity
Subaccounts; the Federated Insurance Series' U.S. Government Securities II, High
Income Bond Fund II, Utility II and American Leaders II Subaccounts; the
Lexington Funds, Inc.'s Natural Resources Trust and Emerging Markets
Subaccounts; the MFS Variable Insurance Trusts' Emerging Growth, High Income and
World Government Subaccounts; the Montgomery Variable Fund's Emerging Markets
and Growth Subaccounts; the Strong Variable Insurance Funds' Discovery II,
Government Securities II, Advantage II and International II
10
<PAGE>
Subaccounts; the American Century Investments' VP Balanced and VP Growth
Subaccounts; the Van Eck Worldwide Insurance Trust's Worldwide Bond Fund and
Worldwide Hard Assets Fund Subaccounts; which are for the year ended December
31, 1997 and the period from February 1, 1996 to December 31, 1996, the
Federated Insurance Series' U.S. Government Securities II Subaccount; the
Neuberger & Berman, Inc.'s AMT Limited Maturity Bond and AMT Partners
Subaccounts; and INVESCO, Inc.'s Health & Sciences, Industrial Income and
Technology Subaccounts which are for the period from May 1, 1997 to December
31, 1997. These financial statements are the responsibility of the management
of Fortis Benefits Insurance Company. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1997 by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the portfolio
subaccounts constituting Fortis Benefits Insurance Company Variable Account D at
December 31, 1997, and the changes in its net assets for the periods described
in the first paragraph, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 27, 1998
11
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Statement of Net Assets
December 31, 1997
<TABLE>
<CAPTION>
ATTRIBUTABLE TO
FORTIS BENEFITS
NET ASSETS AT INSURANCE
SHARES COST MARKET VALUE COMPANY
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments in Fortis Series Fund, Inc.:
Growth Stock 14,375,006 $ 319,371,939 $ 526,688,738 $ -
U.S. Government Securities 12,436,321 133,641,350 132,824,879 -
Money Market 4,418,694 48,519,928 48,737,748 -
Asset Allocation 24,886,252 369,053,147 438,465,903 -
Diversified Income 8,183,245 96,070,615 98,063,099 -
Global Growth 13,579,667 192,589,384 275,542,311 -
Aggressive Growth 6,280,567 79,209,399 86,757,870 -
Growth & Income 11,433,483 159,110,074 214,442,986 -
High Yield 5,030,852 51,098,901 54,179,260 -
Global Asset Allocation 3,466,188 40,992,002 46,053,856 3,929,345
Global Bond 1,765,333 19,093,344 18,796,550 5,498,223
International Stock 4,743,824 56,508,624 63,379,379 3,929,653
Value 3,534,352 43,077,826 47,432,774 989,974
S & P 500 5,973,876 77,839,842 89,188,764 5,305,433
Blue Chip Stock 4,414,170 55,644,996 65,094,254 5,199,878
Investments in Norwest Select Fund:
ValuGrowth 1,255,007 17,561,630 21,661,424 -
Intermediate Bond 830,073 9,156,722 9,180,606 -
Small Company Stock 901,726 11,658,864 11,506,028 1,673,475
Income Equity 2,910,000 34,946,322 39,808,806 -
Investments in Scudder Variable Life Investment
Fund
International 438,322 5,596,162 6,184,726 -
Investments in Alliance Variable Product Series:
Money Market 7,052,507 7,052,507 7,052,507 -
International 176,819 2,624,996 2,655,816 -
Premier Growth 95,455 1,984,749 2,003,592 -
NET ASSET VALUE FOR
ATTRIBUTABLE TO ACCUMULATION VARIABLE ANNUITY
VARIABLE UNITS CONTRACTS PER
ANNUITY OUTSTANDING ACCUMULATION UNIT
CONTRACTS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investments in Fortis Series Fund, Inc.:
Growth Stock $ 526,688,738 157,557,760 $ 3.34
U.S. Government Securities 132,824,879 7,743,923 17.15
Money Market 48,737,748 31,691,981 1.54
Asset Allocation 438,465,903 156,035,843 2.81
Diversified Income 98,063,099 49,942,498 1.96
Global Growth 275,542,311 14,220,295 19.38
Aggressive Growth 86,757,870 6,551,667 13.24
Growth & Income 214,442,986 11,003,248 19.49
High Yield 54,179,260 4,194,544 12.92
Global Asset Allocation 42,124,511 2,918,483 14.43
Global Bond 13,298,327 1,123,401 11.84
International Stock 59,449,726 4,239,821 14.02
Value 46,442,800 3,402,217 13.65
S & P 500 83,883,331 5,698,661 14.72
Blue Chip Stock 59,894,376 4,149,587 14.43
Investments in Norwest Select Fund:
ValuGrowth 21,661,424 1,260,231 17.19
Intermediate Bond 9,180,606 740,789 12.39
Small Company Stock 9,832,553 611,312 16.08
Income Equity 39,808,806 2,920,566 13.63
Investments in Scudder Variable Life Investment
Fund
International 6,184,726 437,666 14.13
Investments in Alliance Variable Product Series:
Money Market 7,052,507 649,382 10.86
International 2,655,816 245,490 10.82
Premier Growth 2,003,592 127,363 15.73
</TABLE>
12
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Statement of Net Assets (continued)
<TABLE>
<CAPTION>
ATTRIBUTABLE NET ASSET
TO VALUE FOR
FORTIS ATTRIBUTABLE VARIABLE
BENEFITS TO ACCUMULATION ANNUITY
NET ASSETS AT INSURANCE VARIABLE UNIT CONTRACTS PER
SHARES COST MARKET VALUE COMPANY ANNUITY OUTSTANDING ACCUMULATION
CONTRACTS UNITS
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments in SAFECO Resource Series:
Growth 159,934 $4,246,527 $3,734,465 $ - $3,734,465 255,499 $14.62
Equity 57,151 1,477,843 1,439,067 - 1,439,067 118,412 12.15
Investments in Federated Insurance Series:
U.S. Government Securities II 20,249 212,638 213,422 - 213,422 19,937 10.70
High Income Bond Fund II 235,896 2,533,079 2,583,066 - 2,583,066 207,634 12.44
Utility II 115,477 1,602,778 1,650,178 - 1,650,178 121,810 13.55
American Leaders II 162,682 3,094,027 3,193,445 - 3,193,445 212,945 15.00
Investments in Lexington Funds, Inc.:
Natural Resources Trust 77,554 1,209,583 1,156,327 - 1,156,327 90,147 12.83
Emerging Markets 71,797 625,202 639,707 - 639,707 77,056 8.30
Investments in MFS Variable Insurance Trust:
Emerging Growth 258,277 4,073,740 4,168,592 - 4,168,592 303,026 13.76
High Income 54,983 650,542 679,037 - 679,037 55,017 12.34
World Government 10,612 108,301 108,348 - 108,348 10,694 10.13
Investments in Montgomery Variable Funds:
Emerging Markets 62,209 665,132 657,547 - 657,547 62,541 10.51
Growth 126,112 1,765,250 1,903,023 - 1,903,023 115,144 16.53
Investments in Strong Variable Insurance Funds:
Discovery II 19,683 247,313 236,792 - 236,792 21,234 11.15
Government Securities II - - - - - - -
Advantage II - - - - - - -
International II 35,494 339,380 330,805 - 330,805 36,547 9.05
Investments in American Century Investments:
VP Balanced 68,765 565,613 566,623 - 566,623 44,869 12.63
VP Growth 14,644 149,824 141,757 - 141,757 15,651 9.06
</TABLE>
13
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Statement of Net Assets (continued)
<TABLE>
<CAPTION>
ATTRIBUTABLE NET ASSET
TO FORTIS ATTRIBUTABLE ACCUMULATIO VALUE FOR
NET ASSETS AT BENEFITS TO VARIABLE N UNITS VARIABLE
SHARES COST MARKET VALUE INSURANCE ANNUITY OUTSTANDING ANNUITY
COMPANY CONTRACTS CONTRACTS PER
ACCUMULATION
UNIT
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments in Van Eck Worldwide
Insurance Trust:
Worldwide Bond Fund 25,351 $ 277,884 $ 278,607 $ - $ 278,607 26,552 $10.49
Worldwide Hard Assets Fund 84,227 1,381,845 1,323,208 - 1,323,208 135,426 9.77
Investments in Neuberger & Berman,
Inc.:
AMT Limited Maturity Bond 23,809 334,594 336,187 - 336,187 32,024 10.50
AMT Partners 28,668 573,526 590,553 - 590,553 47,329 12.48
Investments in INVESCO, Inc.:
Health & Sciences 13,819 149,889 153,663 - 153,663 13,820 11.12
Industrial Income 19,806 351,069 337,492 - 337,492 27,808 12.14
Technology 14,713 174,352 168,898 - 168,898 14,794 11.42
----------------------------------------------------------------------
Totals $1,859,213,254 $2,332,292,685 $26,525,981 $2,305,766,704 469,532,644
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
14
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets
Year ended December 31, 1997
<TABLE>
<CAPTION>
FORTIS FORTIS U.S. FORTIS FORTIS FORTIS FORTIS
GROWTH GOVERNMENT MONEY FORTIS ASSET DIVERSIFIED GLOBAL AGGRESSIVE
STOCK SECURITIES MARKET ALLOCATION INCOME GROWTH GROWTH
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Dividend income $ 49,675 $9,784,129 $2,375,151 $ 60,002,739 $ 6,905,359 $ - $ 1,231
Mortality and expense and policy advance
charges (7,089,187) (1,875,555) (750,583) (5,433,367) (1,307,512) (3,682,512) (1,052,753)
Net realized gain (loss) on investments 20,147,178 (347,001) 820,447 6,303,022 177,507 5,836,551 102,856
Net unrealized appreciation (depreciation)
of investments during the period 41,012,209 2,402,114 (304,737) 7,447,945 2,515,054 12,455,062 2,161,309
-------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 54,119,875 9,963,687 2,140,278 68,320,339 8,290,408 14,609,101 1,212,643
CAPITAL TRANSACTION
Purchase of Variable Account units 11,292,630 5,975,823 49,678,086 25,706,170 3,115,896 19,063,321 14,369,199
Redemption of Variable Account units (53,729,345) (38,528,792) (58,875,709) (27,015,058) (14,932,392) (19,838,860) (5,395,939)
Mortality and expense charges redeemed 7,089,187 1,875,555 750,583 5,433,367 1,307,512 3,682,512 1,052,753
Funding of subaccount by Fortis Benefits
Insurance Company - - - - - - -
Redemption of Fortis Benefits Insurance
Company investment in subaccount - - - - - - -
Dividend income distribution to Fortis
Benefits Insurance Company - - - - - - -
Net increase (decrease) from capital -------------------------------------------------------------------------------------------
transactions (35,347,528) (30,677,414) (8,447,040) 4,124,479 (10,508,984) 2,906,973 10,026,013
Net assets at beginning of period 507,916,391 153,538,606 55,044,510 366,021,085 100,281,675 258,026,237 75,519,214
-------------------------------------------------------------------------------------------
Net assets at end of period $526,688,738 $132,824,879 $48,737,748 $438,465,903 $ 98,063,099 $275,542,311 $86,757,870
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
</TABLE>
15
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets (continued)
Year ended December 31, 1997
<TABLE>
<CAPTION>
FORTIS GLOBAL FORTIS FORTIS
FORTIS GROWTH FORTIS HIGH ASSET GLOBAL INTERNATIONAL FORTIS
& INCOME YIELD ALLOCATION BOND STOCK FORTIS VALUE S & P 500
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Dividend income $ 6,654,164 $ 71,851 $ 2,358,159 $ 805,285 $ 2,559,479 $ 2,718,491 $ 1,361,090
Mortality and expense and policy
advance charges (2,311,419) (641,985) (489,857) (172,763) (684,830) (377,532) (607,630)
Net realized gain (loss)
on investments 1,120,673 85,907 218,706 (68,168) 309,917 61,399 831,297
Net unrealized appreciation
(depreciation) of investments
during the period 33,449,045 4,156,960 2,537,910 (676,900) 2,974,721 3,471,343 9,928,599
-----------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations 38,912,463 3,672,733 4,624,918 (112,546) 5,159,287 5,873,701 11,513,356
CAPITAL TRANSACTIONS
Purchase of Variable Account
units 56,082,796 14,037,885 9,248,738 2,704,435 16,326,079 29,249,997 82,381,056
Redemption of Variable Account
units (4,951,613) (3,986,387) (1,791,957) (2,463,332) (2,103,233) (695,317) (23,769,708)
Mortality and expense charges
redeemed 2,311,419 641,983 489,857 172,763 684,830 377,532 607,630
Funding of subaccount by Fortis
Benefits Insurance Company - - - - - - -
Redemption of Fortis Benefits
Insurance Company investment
in subaccount - - - - - - -
Dividend income distribution to
Fortis Benefits Insurance Company - - (193,973) (128,042) (157,141) (21,662) (79,618)
-----------------------------------------------------------------------------------------------
Net increase (decrease) from
capital transactions 53,442,602 10,693,483 7,752,665 285,824 14,750,535 28,910,550 59,139,360
Net assets at beginning of period 122,087,921 39,813,044 33,676,273 18,623,272 43,469,557 12,648,523 18,536,048
-----------------------------------------------------------------------------------------------
Net assets at end of period $214,442,986 $54,179,260 $46,053,856 $18,796,550 $63,379,379 $47,432,774 $89,188,764
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
16
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets (continued)
Year ended December 31, 1997
<TABLE>
<CAPTION>
NORWEST NORWEST
FORTIS BLUE NORWEST INTERMEDIATE SMALL NORWEST SCUDDER ALLIANCE
CHIP VALUGROWTH BOND COMPANY INCOME INTERNATIONAL MONEY MARKET
STOCK STOCK EQUITY
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Dividend income $ 293,654 $ 579,724 $ 633,659 $ 1,503,400 $ 330,791 $ 89,071 $375,670
Mortality and expense and policy
advance charges (447,570) (221,359) (101,678) (95,073) (305,439) (66,114) (33,431)
Net realized gain (loss) on investments 107,559 104,535 2,550 25,285 38,572 40,064 -
Net unrealized appreciation
(depreciation) of investments during
the period 8,118,339 2,305,264 165,968 (863,445) 4,243,198 164,076 -
------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 8,071,982 2,768,164 700,499 570,167 4,307,122 227,097 342,239
CAPITAL TRANSACTIONS
Purchase of Variable Account units 42,777,440 8,653,105 3,293,135 5,021,855 25,830,279 2,768,738 168,171,990
Redemption of Variable Account units (832,257) (476,484) (779,906) (276,048) (309,223) (302,454)(167,088,962)
Mortality and expense charges redeemed 447,570 221,359 101,678 95,073 305,439 66,114 33,431
Funding of subaccount by Fortis Benefits
Insurance Company - - - - - - -
Redemption of Fortis Benefits Insurance
Company investment in subaccount - - - - - - -
Dividend income distribution to Fortis
Benefits Insurance Company (58,517) - - - - - -
------------------------------------------------------------------------------------------
Net increase (decrease) from capital
transactions 42,334,236 8,397,980 2,614,907 4,840,880 25,826,495 2,532,398 1,116,459
Net assets at beginning of period 14,688,036 10,495,280 5,865,200 6,094,981 9,675,189 3,425,231 5,593,809
------------------------------------------------------------------------------------------
Net assets at end of period $65,094,254 $21,661,424 $9,180,606 $11,506,028 $39,808,806 $6,184,726 $7,052,507
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
17
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets (continued)
Year ended December 31, 1997
<TABLE>
<CAPTION>
FEDERATED
ALLIANCE U.S. FEDERATED
ALLIANCE PREMIER SAFECO SAFECO GOVERNMENT HIGH INCOME FEDERATED
INTERNATIONAL GROWTH GROWTH EQUITY SECURITIES II* BOND FUND II UTILITY II
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Dividend income $ 19,713 $ 954 $ 506,511 $ 102,844 $ 3,957 $ 67,548 $ 4,035
Mortality and expense and policy advance
charges (4,653) (4,656) (4,146) (4,251) (265) (3,413) (1,118)
Net realized gain (loss) on investments 524,319 185,183 260,166 21,442 (1,381) 120,901 48,748
Net unrealized appreciation (depreciation)
of investments during the period 25,774 12,341 (501,499) (19,125) 784 31,419 44,341
---------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 565,153 193,822 261,032 100,910 3,095 216,455 96,006
CAPITAL TRANSACTIONS
Purchase of Variable Account units 65,480,879 13,005,720 13,595,285 4,689,201 1,957,483 7,473,177 8,386,519
Redemption of Variable Account units (63,692,893) (11,432,296) (10,315,753) (3,551,876) (1,747,421) (6,024,386) (7,031,477)
Mortality and expense charges redeemed 4,653 4,656 4,146 4,251 265 3,413 1,118
Funding of subaccount by Fortis Benefits
Insurance Company - - - - - - -
Redemption of Fortis Benefits Insurance
Company investment in subaccount - - - - - - -
Dividend income distribution to Fortis
Benefits Insurance Company - - - - - - -
---------------------------------------------------------------------------------------
Net increase (decrease) from capital
transactions 1,792,639 1,578,080 3,283,678 1,141,576 210,327 1,452,204 1,356,160
Net assets at beginning of period 298,024 231,690 189,755 196,581 - 914,407 198,012
---------------------------------------------------------------------------------------
Net assets at end of period $ 2,655,816 $ 2,003,592 $ 3,734,465 $ 1,439,067 $ 213,422 $ 2,583,066 $ 1,650,178
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
</TABLE>
* For the period from May 1, 1997 to December 31, 1997.
SEE ACCOMPANYING NOTES.
18
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets (continued)
Year ended December 31, 1997
<TABLE>
<CAPTION>
LEXINGTON
FEDERATED NATURAL LEXINGTON MONTGOMERY
AMERICAN RESOURCES EMERGING MFS EMERGING MFS HIGH MFS WORLD EMERGING
LEADERS II TRUST MARKETS GROWTH INCOME GOVERNMENT MARKETS
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Dividend income $ 11,802 $ 37,809 $ 238 $ 5,222 $ - $ 3,011 $ 585
Mortality and expense and policy advance
charges (6,487) (4,044) (1,766) (8,094) (3,208) (888) (2,178)
Net realized gain (loss) on investments 366,916 147,314 22,277 278,077 64,089 (9,538) 17,971
Net unrealized appreciation (depreciation)
of investments during the period 87,367 (60,160) 13,703 124,482 28,378 (237) (9,020)
---------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 459,598 120,919 34,452 399,687 89,259 (7,652) 7,358
CAPITAL TRANSACTIONS
Purchase of Variable Account units 20,909,386 7,675,556 10,873,736 50,380,648 2,109,055 4,223,973 7,351,843
Redemption of Variable Account units (18,677,016) (7,422,947) (10,335,967) (48,657,063) (1,917,469) (4,151,384) (6,894,401)
Mortality and expense charges redeemed 6,487 4,044 1,766 8,094 3,208 888 2,178
Funding of subaccount by Fortis Benefits
Insurance Company - - - - - - -
Redemption of Fortis Benefits Insurance
Company investment in subaccount - - - - - - -
Dividend income distribution to Fortis
Benefits Insurance Company - - - - - - -
---------------------------------------------------------------------------------------
Net increase (decrease) from capital
transactions 2,238,857 256,653 539,535 1,731,679 194,794 73,477 459,620
Net assets at beginning of period 494,990 778,755 65,720 2,037,226 394,984 42,523 190,569
---------------------------------------------------------------------------------------
Net assets at end of period $ 3,193,445 $1,156,327 $ 639,707 $ 4,168,592 $ 679,037 $ 108,348 $ 657,547
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
19
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets (continued)
Year ended December 31, 1997
<TABLE>
<CAPTION>
STRONG STRONG AMERICAN AMERICAN
MONTGOMERY DISCOVERY GOVERNMENT STRONG STRONG CENTURY VP CENTURY
GROWTH FUND II SECURITIES II ADVANTAGE II INTERNATIONAL II BALANCED VP GROWTH
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Dividend income $ 80,509 $ - $ 4,238 $ 6,644 $ 25,600 $ 8,363 $ 2,139
Mortality and expense and policy advance
charges (2,758) (673) (446) (122) (2,462) (1,284) (355)
Net realized gain (loss) on investments 110,597 6,584 1,688 6,199 (1,178) (65,865) 32,718
Net unrealized appreciation (depreciation)
of investments during the period 156,818 (12,707) 277 1,352 (11,451) 51 (7,181)
-----------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 345,166 (6,796) 5,757 14,073 10,509 (58,735) 27,321
CAPITAL TRANSACTIONS
Purchase of Variable Account units 4,720,065 1,491,187 192,449 40,789 13,896,848 9,336,521 5,761,482
Redemption of Variable Account units (4,059,313) (1,339,858) (267,953) (356,157) (13,937,360) (8,825,530) (5,717,321)
Mortality and expense charges redeemed 2,758 673 446 122 2,462 1,284 355
Funding of subaccount by Fortis Benefits
Insurance Company - - - - - - -
Redemption of Fortis Benefits Insurance
Company investment in subaccount - - - - - - -
Dividend income distribution to Fortis
Benefits Insurance Company - - - - - - -
-----------------------------------------------------------------------------------------
Net increase (decrease) from capital
transactions 663,510 152,002 (75,058) (315,246) (38,050) 512,275 44,516
Net assets at beginning of period 894,347 91,586 69,301 301,173 358,346 113,083 69,920
-----------------------------------------------------------------------------------------
Net assets at end of period $ 1,903,023 $ 236,792 $ - $ - $ 330,805 $ 566,623 $ 141,757
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
20
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets (continued)
Year ended December 31, 1997
<TABLE>
<CAPTION>
VAN ECK NEUBERGER &
VAN ECK WORLDWIDE BERMAN AMT NEUBERGER &
WORLDWIDE HARD ASSETS LIMITED BERMAN AMT
BOND FUND FUND MATURITY BOND* PARTNERS*
-------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS
Dividend income $ 1,403 $ 21,541 $ - $ -
Mortality and expense and policy
advance charges (1,009) (4,933) (742) (1,259)
Net realized gain (loss) on
investments 15,991 176,670 8,178 12,902
Net unrealized appreciation
(depreciation) of investments
during the period 325 (76,669) 1,593 17,027
-------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations 16,710 116,609 9,029 28,670
CAPITAL TRANSACTIONS
Purchase of Variable Account units 2,437,708 13,173,938 3,132,473 1,237,645
Redemption of Variable Account
units (2,213,520) (12,443,877) (2,806,057) (677,021)
Mortality and expense charges
redeemed 1,009 4,933 742 1,259
Funding of subaccount by Fortis
Benefits Insurance Company - - - -
Redemption of Fortis Benefits
Insurance Company investment in
subaccount - - - -
Dividend income distribution to
Fortis Benefits Insurance Company - - - -
-------------------------------------------------------------
Net increase (decrease) from
capital transactions 225,197 734,994 327,158 561,883
Net assets at beginning of period 36,700 471,605 - -
-------------------------------------------------------------
Net assets at end of period $ 278,607 $ 1,323,208 $ 336,187 $ 590,553
-------------------------------------------------------------
-------------------------------------------------------------
<CAPTION>
INVESCO INVESCO
HEALTH& INDUSTRIAL INVESCO COMBINED
SCIENCES* INCOME* TECHNOLOGY* VARIABLE ACCOUNT
-------------------------------------------------------------
OPERATIONS
Dividend income $ 1,508 $ 23,677 $ - $ 100,392,623
Mortality and expense and policy
advance charges (293) (361) (393) (27,814,406)
Net realized gain (loss) on
investments (3,047) 5,339 1,683 38,273,799
Net unrealized appreciation
(depreciation) of investments
during the period 3,774 (13,577) (5,452) 137,496,762
-------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations 1,942 15,078 (4,162) 248,348,778
CAPITAL TRANSACTIONS
Purchase of Variable Account units 664,230 512,375 1,293,756 871,752,580
Redemption of Variable Account
units (512,802) (190,322) (1,121,089) (684,463,505)
Mortality and expense charges
redeemed 293 361 393 27,814,406
Funding of subaccount by Fortis
Benefits Insurance Company - - - -
Redemption of Fortis Benefits
Insurance Company investment in
subaccount - - - -
Dividend income distribution to
Fortis Benefits Insurance Company - - - (638,953)
-------------------------------------------------------------
Net increase (decrease) from
capital transactions 151,721 322,414 173,060 214,464,528
Net assets at beginning of period - - - 1,869,479,379
-------------------------------------------------------------
Net assets at end of period $ 153,663 $ 337,492 $ 168,898 $2,332,292,685
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
* For the period from May 1, 1997 to December 31, 1997.
SEE ACCOMPANYING NOTES.
21
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets
Year ended December 31, 1996
<TABLE>
<CAPTION>
FORTIS U.S. FORTIS
FORTIS GROWTH GOVERNMENT FORTIS MONEY FORTIS ASSET DIVERSIFIED FORTIS GLOBAL
STOCK SECURITIES MARKET ALLOCATION INCOME GROWTH
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERTIONS
Dividend income $ 1,755,003 $ 11,268,567 $ 1,961,696 $ 18,389,804 $ 7,814,749 $ 349,640
Mortality and expense and policy advance
charges (6,383,239) (2,182,582) (304,880) (4,666,220) (1,375,570) (2,982,707)
Net realized gain (loss) on investments 6,173,815 (229,036) 875,419 4,730,794 94,162 1,304,350
Net unrealized appreciation (depreciation)
of investments during the period 62,258,164 (8,049,967) (396,193) 17,669,052 (3,883,159) 34,010,868
-------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 63,803,743 806,982 2,136,042 36,123,430 2,650,182 32,682,151
CAPITAL TRANSACTIONS
Purchase of Variable Account units 40,354,935 9,792,095 53,529,569 35,139,069 4,487,798 56,339,715
Redemption of Variable Account units (19,671,112) (32,995,603) (38,173,512) (27,343,627) (12,133,337) (4,633,717)
Mortality and expense charges redeemed 6,383,239 2,182,582 304,880 4,666,220 1,375,570 2,982,707
Funding of subaccount by Fortis Benefits
Insurance Company - - - - - -
Redemption of Fortis Benefits Insurance
Company investment in subaccount - - - - - -
Dividend income distribution to
Fortis Benefits Insurance Company - - - - - -
Net increase (decrease) from capital -------------------------------------------------------------------------------------
transactions 27,067,062 (21,020,926) 15,660,937 12,461,662 (6,269,969) 54,688,705
Net assets at beginning of period 417,045,586 173,752,550 37,247,531 317,435,993 103,901,462 170,655,381
-------------------------------------------------------------------------------------
Net assets at end of period $507,916,391 $153,538,606 $ 55,044,510 $366,021,085 $100,281,675 $258,026,237
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
22
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets (continued)
Year ended December 31, 1996
<TABLE>
<CAPTION>
FORTIS FORTIS GLOBAL FORTIS
AGGRESSIVE FORTIS GROWTH FORTIS HIGH ASSET FORTIS GLOBAL INTERNATIONAL
GROWTH & INCOME YIELD ALLOCATION BOND STOCK
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Dividend income $ 130,127 $ 3,357,159 $ 3,381,726 $ 1,354,041 $ 900,099 $ 1,318,016
Mortality and expense and policy advance
charges (818,660) (1,187,861) (431,670) (300,249) (142,264) (377,251)
Net realized gain (loss) on investments 1,462,499 214,625 60,612 62,447 11,779 153,762
Net unrealized appreciation (depreciation)
of investments during the period 311,941 14,270,467 (261,534) 2,171,960 394,408 3,249,452
----------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 1,085,907 16,654,390 2,749,134 3,288,199 1,164,022 4,343,979
CAPITAL TRANSACTIONS
Purchase of Variable Account units 45,154,232 51,705,892 14,950,454 15,032,759 8,709,675 24,843,475
Redemption of Variable Account units (9,407,569) (1,795,563) (3,738,286) (743,168) (2,924,096) (2,013,891)
Mortality and expense charges redeemed 818,660 1,187,861 431,670 300,249 142,264 377,251
Funding of subaccount by Fortis Benefits
Insurance Company - - - 2,944,303 5,030,752 2,926,075
Redemption of Fortis Benefits Insurance
Company investment in subaccount - - - - - -
Dividend income distribution to Fortis
Benefits Insurance Company - - - (142,728) (218,365) (101,798)
----------------------------------------------------------------------------------------
Net increase (decrease) from capital
transactions 36,565,323 51,098,190 11,643,838 17,391,415 10,740,230 26,031,112
Net assets at beginning of period 37,867,984 54,335,341 25,420,072 12,996,659 6,719,020 13,094,466
----------------------------------------------------------------------------------------
Net assets at end of period $75,519,214 $122,087,921 $39,813,044 $33,676,273 $18,623,272 $43,469,557
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
23
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets (continued)
Year ended December 31, 1996
<TABLE>
<CAPTION>
FORTIS NORWEST NORWEST
FORTIS BLUE CHIP NORWEST INTERMEDIATE SMALL COMPANY
FORTIS VALUE* S & P 500* STOCK* VALUGROWTH BOND STOCK
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Dividend income $ 67,900 $ 102,931 $ 50,146 $ 82,203 $ 266,665 $ 512,352
Mortality and expense and policy
advance charges (50,034) (58,475) (42,346) (106,853) (59,335) (36,673)
Net realized gain (loss) on investments 4,138 79,382 101,880 55,679 2,306 8,076
Net unrealized appreciation (depreciation)
of investments during the period 883,605 1,420,323 1,330,919 1,308,423 (240,519) 722,953
----------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 905,609 1,544,161 1,440,599 1,339,452 (30,883) 1,206,708
CAPITAL TRANSACTIONS
Purchase of Variable Account units 11,049,449 14,397,817 12,543,584 4,632,105 3,468,748 3,069,610
Redemption of Variable Account units (62,025) (990,762) (2,873,938) (340,655) (700,061) (128,442)
Mortality and expense charges redeemed 50,034 58,475 42,346 106,853 59,335 36,673
Funding of subaccount by Fortis Benefits
Insurance Company 710,000 3,550,000 3,550,000 - - 1,038,350
Redemption of Fortis Benefits Insurance
Company investment in subaccount - - - - - -
Dividend income distribution to Fortis
Benefits Insurance Company (4,544) (23,643) (14,555) - - -
----------------------------------------------------------------------------------------
Net increase (decrease) from capital
transactions 11,742,914 16,991,887 13,247,437 4,398,303 2,828,022 4,016,191
Net assets at beginning of period - - - 4,757,525 3,068,061 872,082
----------------------------------------------------------------------------------------
Net assets at end of period $12,648,523 $18,536,048 $14,688,036 $10,495,280 $5,865,200 $6,094,981
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
</TABLE>
* For the period from May 1, 1996 to December 31, 1996.
SEE ACCOMPANYING NOTES.
24
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets (continued)
Year ended December 31, 1996
<TABLE>
<CAPTION>
NORWEST ALLIANCE ALLIANCE
INCOME SCUDDER MONEY ALLIANCE PREMIER SAFECO
EQUITY* INTERNATIONAL MARKET*** INTERNATIONAL*** GROWTH*** GROWTH**
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Dividend income $ 73,375 $ 47,233 $ 102,380 $ 1,304 $ 24,242 $ 14,945
Mortality and expense and policy
advance charges (42,286) (37,291) (10,300) (544) (671) (48)
Net realized gain (loss) on investments 3,546 7,053 - 1,004 28,494 (6,108)
Net unrealized appreciation (depreciation)
of investments during the period 619,284 312,160 - 5,046 6,502 (10,564)
--------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 653,919 329,155 92,080 6,810 58,567 (1,775)
CAPITAL TRANSACTIONS
Purchase of Variable Account units 9,076,709 1,328,103 29,009,905 3,914,735 1,256,492 441,504
Redemption of Variable Account units (97,725) (80,771) (23,518,476) (3,624,065) (1,084,040) (250,022)
Mortality and expense charges redeemed 42,286 37,291 10,300 544 671 48
Funding of subaccount by Fortis Benefits
Insurance Company - - - - - -
Redemption of Fortis Benefits Insurance
Company investment in subaccount - - - - - -
Dividend income distribution to Fortis
Benefits Insurance Company - - - - - -
--------------------------------------------------------------------------------------
Net increase (decrease) from capital
transactions 9,021,270 1,284,623 5,501,729 291,214 173,123 191,530
Net assets at beginning of period - 1,811,453 - - - -
--------------------------------------------------------------------------------------
Net assets at end of period $9,675,189 $3,425,231 $ 5,593,809 $ 298,024 $ 231,690 $ 189,755
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
* For the period from May 1, 1996 to December 31, 1996.
** For the period from December 1, 1996 to December 31, 1996.
*** For the period from February 1, 1996 to December 31, 1996.
SEE ACCOMPANYING NOTES.
25
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets (continued)
Year ended December 31, 1996
<TABLE>
<CAPTION>
LEXINGTON
FEDERATED FEDERATED NATURAL LEXINGTON
SAFECO HIGH INCOME FEDERATED AMERICAN RESOURCES EMERGING
EQUITY** BOND FUND II*** UTILITY II*** LEADERS II*** TRUST*** MARKETS***
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Dividend income $ 17,950 $ 20,894 $ 2,018 $ 3,741 $ 1,130 $ -
Mortality and expense and policy
advance charges (26) (1,205) (203) (869) (909) (253)
Net realized gain (loss) on investments - 6,428 11,122 22,746 33,868 (583)
Net unrealized appreciation (depreciation)
of investments during the period (19,651) 18,570 3,058 12,051 6,904 801
------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations (1,727) 44,687 15,995 37,669 40,993 (35)
CAPITAL TRANSACTIONS
Purchase of Variable Account units 198,282 1,538,226 1,026,928 1,372,344 2,056,140 1,131,006
Redemption of Variable Account units - (669,711) (845,114) (915,892) (1,319,287) (1,065,504)
Mortality and expense charges redeemed 26 1,205 203 869 909 253
Funding of subaccount by Fortis Benefits
Insurance Company - - - - - -
Redemption of Fortis Benefits Insurance
Company investment in subaccount - - - - - -
Dividend income distribution to Fortis
Benefits Insurance Company - - - - - -
------------------------------------------------------------------------------------
Net increase (decrease) from capital
transactions 198,308 869,720 182,017 457,321 737,762 65,755
Net assets at beginning of period - - - - - -
------------------------------------------------------------------------------------
Net assets at end of period $196,581 $ 914,407 $ 198,012 $ 494,990 $ 778,755 $ 65,720
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>
** For the period from December 1, 1996 to December 31, 1996.
*** For the period from February 1, 1996 to December 31, 1996.
SEE ACCOMPANYING NOTES.
26
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets (continued)
Year ended December 31, 1996
<TABLE>
<CAPTION>
MONTGOMERY STRONG STRONG
MFS EMERGING MFS HIGH MFS WORLD EMERGING MONTGOMERY DISCOVERY GOVERNMENT
GROWTH*** INCOME*** GOVERNMENT*** MARKETS*** GROWTH*** FUND II*** SECURITIES II***
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Dividend income $ 8,097 $ 21,440 $ - $ 391 $ 41,303 $ 6,715 $ 1,630
Mortality and expense and
policy advance charges (3,876) (1,019) (116) (375) (1,779) (544) (671)
Net realized gain (loss)
on investments 148,625 12,701 2,897 (499) 42,751 (5,280) 2,051
Net unrealized appreciation
(depreciation)of investments
during the period (29,630) 116 283 1,434 (19,045) 2,186 (276)
--------------------------------------------------------------------------------------------
Net increase (decrease) in net
assets resulting from operations 123,216 33,238 3,064 951 63,230 3,077 2,734
CAPITAL TRANSACTIONS
Purchase of Variable Account units 21,176,704 672,340 262,500 801,303 2,961,408 321,349 743,861
Redemption of Variable Account units (19,266,570) (311,613) (223,157) (612,060) (2,132,070) (233,384) (677,965)
Mortality and expense charges redeemed 3,876 1,019 116 375 1,779 544 671
Funding of subaccount by Fortis
Benefits Insurance Company - - - - - - -
Redemption of Fortis Benefits Insurance
Company investment in subaccount - - - - - - -
Dividend income distribution to Fortis
Benefits Insurance Company - - - - - - -
--------------------------------------------------------------------------------------------
Net increase (decrease) from capital
transactions 1,914,010 361,746 39,459 189,618 831,117 88,509 66,567
Net assets at beginning of period - - - - - - -
--------------------------------------------------------------------------------------------
Net assets at end of period $ 2,037,226 $ 394,984 $ 42,523 $ 190,569 $ 894,347 $ 91,586 $ 69,301
--------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------
</TABLE>
*** For the period from February 1, 1996 to December 31, 1996.
SEE ACCOMPANYING NOTES.
27
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Statement of Changes in Net Assets (continued)
Year ended December 31, 1996
<TABLE>
<CAPTION>
VAN ECK VAN ECK
STRONG STRONG AMERICAN AMERICAN WORLDWIDE WORLDWIDE COMBINED
ADVANTAGE INTERNATIONAL CENTURY VP CENTURY BOND HARD ASSETS VARIABLE
II*** II*** BALANCED*** VP GROWTH*** FUND*** FUND*** ACCOUNT
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Dividend income $ 5,379 $ 1,058 $ 140 $ 113 $ 468 $ 3,629 $ 53,462,399
Mortality and expense and policy (48) (26) (1,205) (203) (869) (1,505) (21,613,710)
advance charges
Net realized gain (loss) on investments 1,416 15,704 2,990 (5,589) (109) (3,564) 15,488,353
Net unrealized appreciation
(depreciation) of investments during
the period (1,352) 2,576 959 (886) 398 18,031 128,100,118
-----------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations 5,395 19,312 2,884 (6,565) (112) 16,591 175,437,160
CAPITAL TRANSACTIONS
Purchase of Variable Account units 1,277,539 4,776,591 651,649 1,563,734 63,735 2,385,593 499,209,661
Redemption of Variable Account units (981,809) (4,437,583) (542,655) (1,487,452) (27,792) (1,932,084) (227,006,165)
Mortality and expense charges redeemed 48 26 1,205 203 869 1,505 21,613,710
Funding of subaccount by Fortis
Benefits Insurance Company - - - - - - 19,749,480
Redemption of Fortis Benefits Insurance
Company investment in subaccount - - - - - - -
Dividend income distribution to Fortis
Benefits Insurance Company - - - - - - (505,633)
-----------------------------------------------------------------------------------------
Net increase (decrease) from capital
transactions 295,778 339,034 110,199 76,485 36,812 455,014 313,061,053
Net assets at beginning of period - - - - - - 1,380,981,166
-----------------------------------------------------------------------------------------
Net assets at end of period $ 301,173 $ 358,346 $ 113,083 $ 69,920 $ 36,700 $ 471,605 $1,869,479,379
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
</TABLE>
*** For the period from February 1, 1996 to December 31, 1996.
SEE ACCOMPANYING NOTES.
28
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements
December 31, 1997
1. GENERAL
FORTIS BENEFITS INSURANCE COMPANY
Variable Account D (the Account) was established as a segregated asset account
of Fortis Benefits Insurance Company (Fortis Benefits) on October 14, 1987 under
Minnesota law. The Account is registered under the Investment Company Act of
1940 as a unit investment trust.
Fortis Benefits was founded in 1910. At the end of 1997, Fortis Benefits had
approximately $94 billion of total life insurance in force. Fortis Benefits is a
Minnesota corporation and is qualified to sell life insurance and annuity
contracts in the District of Columbia and in all states except New York. Fortis
Benefits is an indirectly wholly-owned subsidiary of Fortis, Inc., which is
itself indirectly owned 50% by N.V. AMEV and 50% by Compagnie Financiere et de
Reassurance du Group AG ("Group AG"). Fortis, Inc. manages the United States
operations for these two companies.
N.V. AMEV is a diversified financial services company headquartered in Utrecht,
The Netherlands, where its insurance operations began in 1847. Group AG is a
diversified financial services company headquartered in Brussels, Belgium, where
its insurance operations began in 1824. N.V. AMEV and Group AG have merged their
operating companies under the trade name of Fortis. The Fortis group of
companies is active in insurance, banking, and financial services, and real
estate development in The Netherlands, Belgium, the United States, Western
Europe, and the Pacific Rim. The Fortis group of companies had assets in excess
of $167 billion at the end of 1997.
There were forty-nine subaccounts that had activity in 1997, forty-seven of
these subaccounts are active, and two are inactive as of December 31, 1997. The
investment objectives and policies of each of the Account's subaccounts are as
follows.
29
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements
December 31, 1997
ACTIVE SUBACCOUNTS
FORTIS SERIES FUND, INC.
- - GROWTH STOCK SUBACCOUNT--seeks growth of capital through short-term and
long-term appreciation.
30
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
1. GENERAL (CONTINUED)
FORTIS SERIES FUND, INC. (CONTINUED)
- - U.S. GOVERNMENT SECURITIES SUBACCOUNT--seeks to earn a high level of
current income consistent with prudent investment risk.
- - MONEY MARKET SUBACCOUNT--seeks high level of capital stability and
liquidity and, to the extent consistent with these objectives, a high level
of current income.
- - ASSET ALLOCATION SUBACCOUNT--seeks favorable overall rates of return on
capital, primarily through increased ownership of equity securities during
periods when stock market conditions appear favorable, and short-term and
long-term debt instruments during periods when stock market conditions are
less favorable.
- - DIVERSIFIED INCOME SUBACCOUNT--seeks high level of current income by
investing primarily in a diversified portfolio of government securities and
investment grade corporate bonds.
- - GLOBAL GROWTH SUBACCOUNT--seeks growth of capital through long-term capital
appreciation, through ownership of equity securities, allocated among
diverse international markets.
- - AGGRESSIVE GROWTH SUBACCOUNT--seeks long-term capital appreciation in
equity securities.
- - GROWTH & INCOME SUBACCOUNT--seeks growth of capital and current income,
through ownership of equity securities that provide an income component and
the potential for growth.
- - HIGH YIELD SUBACCOUNT--seeks maximum total return through current income
and capital appreciation, through ownership of a diversified portfolio of
high-yielding fixed-income securities.
31
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
1. GENERAL (CONTINUED)
FORTIS SERIES FUND, INC. (CONTINUED)
- - GLOBAL ASSET ALLOCATION SUBACCOUNT--seeks favorable overall rates of return
on capital, primarily through increased ownership of foreign and domestic
equity securities during periods when stock market conditions appear
favorable, and short-term and long-term foreign and domestic debt
instruments during periods when stock market conditions are less favorable.
- - GLOBAL BOND SUBACCOUNT--seeks total return from current income and capital
appreciation, by investing in a global portfolio of high quality fixed
income securities.
- - INTERNATIONAL STOCK SUBACCOUNT--seeks capital appreciation by investing
primarily in equity securities of non-United States companies.
- - VALUE SUBACCOUNT--seeks growth of capital through short and long-term
capital appreciation. Investing in equity securities based on the "Value"
philosophy.
- - S&P 500 SUBACCOUNT--seeks growth of capital by replicating the total return
of the Standard & Poor's 500 Composite Stock Price Index.
- - BLUE CHIP STOCK SUBACCOUNT--seeks capital appreciation by investing
primarily in large and medium-sized blue chip companies.
NORWEST SELECT FUNDS
- - VALUGROWTH SUBACCOUNT--seeks growth of capital by investing principally in
medium and large capitalization companies that possess above-average growth
characteristics and attractive valuations.
- - INTERMEDIATE BOND SUBACCOUNT--seeks income through investing primarily in a
diversified portfolio of government and corporate bonds in an evenly
balanced maturity structure.
32
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
1. GENERAL (CONTINUED)
NORWEST SELECT FUNDS (CONTINUED)
- - SMALL COMPANY STOCK SUBACCOUNT--seeks growth of capital by investing
primarily in the common stock of small and medium size domestic companies,
in the early stage of development or may produce goods and services which
have a favorable prospect for growth.
- - INCOME EQUITY SUBACCOUNT--seeks income by investing primarily in the common
stock of large domestic companies that are perceived to have above-average
return potential based on current market valuations.
SCUDDER VARIABLE LIFE INVESTMENT FUND
- - INTERNATIONAL SUBACCOUNT--seeks long-term growth of capital primarily
through diversified holdings of marketable foreign securities.
ALLIANCE VARIABLE PRODUCT SERIES
- - MONEY MARKET SUBACCOUNT--seeks income by investing in money market
securities, with less than one year until maturity, and meets the objective
of safety of principal, excellent liquidity and maximum current income to
the extent consistent with the first two objectives.
- - INTERNATIONAL SUBACCOUNT--seeks to obtain a total return on its assets from
long-term growth of capital principally through a broad portfolio of
marketable securities of established foreign companies.
- - PREMIER GROWTH SUBACCOUNT--seeks growth of capital by pursuing aggressive
investment policies, investments will be based upon their potential for
capital appreciation.
33
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
1. GENERAL (CONTINUED)
SAFECO RESOURCE SERIES
- - GROWTH SUBACCOUNT--seeks growth of capital and the increased income that
ordinarily follows from such growth.
- - EQUITY SUBACCOUNT--seeks long-term growth of capital and reasonable income
by investing principally in common stocks.
FEDERATED INSURANCE SERIES
- - U.S. GOVERNMENT SECURITIES II SUBACCOUNT--seeks to provide current income,
by investing at least 65% of the value of the assets in securities of the
U.S. Government, its agencies or instrumentalities.
- - HIGH INCOME BOND FUND II SUBACCOUNT--seek high current income, by investing
primarily in a professionally managed, diversified portfolio of fixed
income securities.
- - UTILITY II SUBACCOUNT--seeks high current income and moderate capital
appreciation, by investing primarily in a professionally managed
diversified portfolio of equity and debt securities of utility companies.
- - AMERICAN LEADERS II SUBACCOUNT--seeks long-term capital growth, by
investing the majority of its assets in common stock of "blue chip"
companies.
LEXINGTON FUNDS, INC.
- - NATURAL RESOURCES TRUST SUBACCOUNT--seeks long-term growth of capital
through investments primarily in common stocks of companies that own or
develop natural resources and other basic commodities, or supply goods and
services to such companies.
- - EMERGING MARKETS SUBACCOUNT--seeks long-term growth of capital primarily
through investment in equity securities and equivalents of companies
domiciled in, or doing business in, emerging countries and emerging
markets.
34
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
1. GENERAL (CONTINUED)
MFS VARIABLE INSURANCE TRUST
- - EMERGING GROWTH SUBACCOUNT--seeks long-term growth of capital through
investment in common stock of companies that are early in their life cycle,
with potential to become major enterprises.
- - HIGH INCOME SUBACCOUNT--seeks high current income through investing,
primarily in a professionally managed diversified portfolio of fixed income
securities, some of which may involve equity features.
- - WORLD GOVERNMENT SUBACCOUNT--seeks growth of capital, with moderate current
income through investment in an internationally diversified portfolio
consisting primarily of debt securities and, to a lesser extent, equity
securities.
MONTGOMERY VARIABLE FUNDS
- - EMERGING MARKETS SUBACCOUNT--seeks long-term growth of capital primarily
through investment in equity securities and equivalents of companies
domiciled in, or doing business in, emerging countries and emerging
markets.
- - GROWTH SUBACCOUNT--seeks capital appreciation by investing at least 65% of
its assets in the equity securities of domestic companies.
STRONG VARIABLE INSURANCE FUNDS
- - DISCOVERY II SUBACCOUNT--seeks capital growth by investing in securities
that are believed to represent growth opportunities.
- - INTERNATIONAL II SUBACCOUNT--seeks capital growth by investing primarily in
equity securities of issuers located outside of the United States.
35
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
1. GENERAL (CONTINUED)
AMERICAN CENTURY INVESTMENTS
- - VP BALANCED SUBACCOUNT--seeks capital growth and current income by
investing in a combination of common stocks (and other equity equivalents)
and fixed income securities.
- - VP GROWTH SUBACCOUNT--seeks capital growth by investing in common stocks
that have a better than average potential for appreciation.
VAN ECK WORLDWIDE INSURANCE TRUST
- - WORLDWIDE BOND FUND SUBACCOUNT--seeks high return through a flexible policy
of investing globally, primarily in debt securities.
- - WORLDWIDE HARD ASSETS FUND SUBACCOUNT--seeks long-term capital appreciation
by investing in equity and debt securities of companies engaged in the
exploration, development, production and distribution of gold and other
natural resources, such as strategic and other metals, minerals, forest
products, oil, natural gas and coal.
NEUBERGER & BERMAN, INC.
- - AMT LIMITED MATURITY BOND SUBACCOUNT--seeks to provide the highest current
income consistent with low risk by primarily investing in U.S. Government
and Agency securities and investment grade debt securities issued by
financial institutions, corporations and others.
- - AMT PARTNERS SUBACCOUNT--seeks capital growth, by investing principally in
common stock of any other equity securities of established companies.
INVESCO VARIABLE INVESTMENTS FUNDS, INC.
- - HEALTH & SCIENCES SUBACCOUNT--seeks capital appreciation by investing in
equity securities of companies that develop, produce or distribute products
or services related to health care.
36
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
1. GENERAL (CONTINUED)
INVESCO VARIABLE INVESTMENTS FUNDS, INC. (CONTINUED)
- - INDUSTRIAL INCOME SUBACCOUNT--seeks the best possible current income while
following sound investment practices. The fund normally invests 65% of its
total assets in dividend-paying common stock, and an additional 10% in
equity securities that do not pay a regular dividend, with the remainder
being invested in corporate bonds.
- - TECHNOLOGY SUBACCOUNT--seeks capital appreciation by investing in equity
securities of companies in technology-related industries.
INACTIVE SUBACCOUNTS
STRONG VARIABLE INSURANCE FUNDS
- - GOVERNMENT SECURITIES II SUBACCOUNT--seeks total return by investing for a
high level of current income with a moderate degree of share-price
fluctuation.
- - ADVANTAGE II SUBACCOUNT--seeks current income with a very low degree of
share-price fluctuation, by investing primarily in ultra short-term
investment-grade debt obligations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The assets of the Account are segregated from Fortis Benefits' other assets. The
operations of the Account are part of Fortis Benefits. The following is a
summary of significant accounting policies consistently followed by the Account
in the preparation of its financial statements.
INVESTMENT TRANSACTIONS
Capital gain distributions from subaccounts are recorded on the ex-dividend date
and reinvested upon receipt.
37
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
INVESTMENT INCOME
Dividend income from subaccounts is recorded on the ex-dividend date and
reinvested upon receipt.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of net assets at the date of the financial
statements and the reported amounts of net increase and decrease in net assets
from operations during the reporting period. Actual results could differ from
these estimates.
3. INVESTMENTS
Investment in shares of the Fortis Series Fund, Inc. Subaccounts are stated at
market value, which is based on the percentage owned by the Account of the net
asset value of the respective portfolios of these Series. The Series' net asset
value is based on market quotations of the securities held in the portfolio.
Investment in the other subaccounts is valued at the net asset (market) value
per share at the close of business on December 31, 1997, as reported by the
respective mutual fund.
The cost of investments sold and redeemed is determined on the average cost
method. Unrealized appreciation or depreciation of investments represents the
Account's share of the subaccounts' undistributed net investment income,
undistributed realized gains or losses and unrealized appreciation or
depreciation.
38
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
Purchases and sales of shares of the Fund are recorded on the trade date. The
number of shares and aggregate cost of purchases, including reinvested dividends
and realized capital gains, and average cost of investments sold or redeemed
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
SHARES
-------------------------------- COST OF COST OF SALES/
PURCHASED SOLD PURCHASES REDEMPTIONS
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fortis Series Fund, Inc.:
Growth Stock 335,736 1,531,197 $ 11,342,305 $ 33,582,166
U.S. Government Securities 1,516,213 3,606,464 15,759,952 38,875,792
Money Market 4,699,565 5,310,661 52,053,237 58,055,261
Asset Allocation 4,812,001 1,449,334 85,708,909 20,712,037
Diversified Income 865,982 1,255,212 10,021,255 14,754,885
Global Growth 995,381 999,116 19,063,321 14,002,309
Aggressive Growth 1,136,613 420,068 14,370,430 5,293,083
Growth & Income 3,670,172 288,495 62,736,960 3,830,940
High Yield 1,365,421 386,498 14,109,736 3,900,480
Global Asset Allocation 869,773 147,998 11,606,897 1,767,225
Global Bond 309,549 239,582 3,509,720 2,659,542
International Stock 1,405,870 168,466 18,885,558 1,950,457
Value 2,474,886 56,145 31,968,488 655,579
S & P 500 6,117,672 1,766,129 83,742,146 23,018,029
Blue Chip Stock 3,219,587 67,752 43,071,094 783,215
Norwest Select Fund:
ValuGrowth 552,655 28,517 9,232,829 371,949
Intermediate Bond 353,877 70,931 3,926,794 777,355
Small Company Stock 451,498 19,700 6,525,255 250,763
Income Equity 2,067,474 24,292 26,161,070 270,651
Scudder Variable Life Investment Fund:
International 201,696 21,882 2,857,809 262,389
Alliance Variable Product Series:
Money Market 168,743,834 167,088,962 168,547,660 167,088,962
International 4,259,167 4,102,363 65,500,592 63,168,574
Premier Growth 659,976 579,278 13,006,674 11,247,113
SAFECO Resource Series:
Growth 558,931 408,849 14,101,796 10,055,588
Equity 200,558 150,645 4,792,045 3,530,435
Federated Insurance Series:
U.S. Government Securities II 189,579 169,330 1,961,440 1,748,802
High Income Bond Fund II 717,728 571,130 7,540,725 5,903,485
</TABLE>
39
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 (CONTINUED)
SHARES
-------------------------------- COST OF COST OF SALES/
PURCHASED SOLD PURCHASES REDEMPTIONS
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federated Insurance Series (continued):
Utility II 654,493 555,782 $ 8,390,554 $ 6,982,730
American Leaders II 1,176,026 1,045,781 20,921,188 18,310,100
Lexington Funds, Inc.:
Natural Resources Trust 514,330 491,272 7,713,365 7,275,632
Emerging Markets 1,022,290 957,013 10,873,974 10,313,690
MFS Variable Insurance Trust:
Emerging Growth 3,384,527 3,280,119 50,385,870 48,378,986
High Income 180,043 161,398 2,109,055 1,853,381
World Government 415,944 409,351 4,226,984 4,160,922
Montgomery Variable Funds:
Emerging Markets 610,961 569,631 7,352,428 6,876,431
Growth 360,865 307,287 4,800,574 3,948,716
Strong Variable Insurance Funds:
Discovery II 122,063 110,861 1,491,187 1,333,274
Government Securities II 19,685 26,896 196,687 266,265
Advantage II 4,923 35,492 47,433 349,958
International II 1,239,125 1,235,541 13,922,448 13,938,538
American Century Investments:
VP Balanced 1,182,715 1,128,948 9,344,884 8,891,395
VP Growth 566,923 559,107 5,763,621 5,684,603
Van Eck Worldwide Insurance Trust:
Worldwide Bond Fund 227,792 205,747 2,439,111 2,197,529
Worldwide Hard Assets Fund 807,446 751,425 13,195,479 12,267,207
Neuberger & Berman, Inc.:
AMT Limited Maturity Bond 226,730 202,921 3,132,473 2,797,879
AMT Partners 62,683 34,016 1,237,645 664,119
INVESCO, Inc.:
Health & Sciences 63,755 49,852 665,738 515,849
Industrial Income 30,556 10,750 536,052 184,983
Technology 114,405 99,648 1,293,756 1,119,404
</TABLE>
40
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
SHARES
-------------------------------- COST OF COST OF SALES/
PURCHASED SOLD PURCHASES REDEMPTIONS
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fortis Series Fund, Inc.:
Growth Stock 1,370,049 636,480 $ 42,109,938 $ 13,497,297
U.S. Government Securities 2,026,793 3,066,517 21,060,662 33,224,639
Money Market 5,073,668 3,484,284 55,491,265 37,298,093
Asset Allocation 3,197,739 1,656,181 53,528,873 22,612,833
Diversified Income 1,059,188 1,005,530 12,302,547 12,039,175
Global Growth 3,199,292 254,987 56,689,355 3,329,367
Aggressive Growth 3,211,708 654,509 45,284,359 7,945,070
Growth & Income 3,941,717 123,779 55,063,051 1,580,938
High Yield 1,807,146 365,643 18,332,180 3,677,674
Global Asset Allocation 1,559,894 73,695 16,386,800 823,449
Global Bond 1,364,526 280,803 9,609,774 3,130,682
International Stock 2,507,267 175,126 26,161,491 1,961,927
Value 1,116,954 3,953 11,117,349 62,431
S & P 500 1,704,862 90,342 14,500,748 935,023
Blue Chip Stock 1,529,208 271,863 12,593,730 2,786,613
Norwest Select Fund:
ValuGrowth 353,709 25,400 4,714,308 284,976
Intermediate Bond 348,598 64,140 3,735,413 697,755
Small Company Stock 383,591 9,976 3,581,962 120,366
Income Equity 862,403 9,655 9,150,084 94,179
Scudder Variable Life Investment Fund:
International 102,501 6,404 1,375,336 73,718
Alliance Variable Product Series:
Money Market 29,112,285 23,518,475 29,112,285 23,518,476
International 267,100 245,510 3,916,039 3,623,061
Premier Growth 85,058 69,550 1,280,734 1,055,546
SAFECO Resource Series:
Growth 22,197 12,345 456,449 256,130
Equity 9,848 - 216,232 -
Federated Insurance Series:
High Income Bond Fund II 157,321 67,532 1,559,120 663,283
Utility II 90,922 74,159 1,028,946 833,992
American Leaders II 95,526 62,716 1,376,085 893,146
Lexington Funds, Inc.:
Natural Resources Trust 152,853 98,312 2,057,270 1,285,419
Emerging Markets 113,436 106,965 1,131,006 1,066,087
</TABLE>
41
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 (CONTINUED)
SHARES
-------------------------------- COST OF COST OF SALES/
PURCHASED SOLD PURCHASES REDEMPTIONS
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Variable Insurance Trust:
Emerging Growth 1,578,769 1,407,439 $ 21,184,801 $ 19,117,945
High Income 63,722 27,858 693,780 298,912
World Government 25,429 21,388 262,500 220,260
Montgomery Variable Funds:
Emerging Markets 76,490 58,302 801,694 612,559
Growth 247,860 176,044 3,002,711 2,089,319
Strong Variable Insurance Funds:
Discovery II 30,107 21,579 328,064 238,664
Government Securities II 77,845 70,643 745,491 675,914
Advantage II 127,142 97,506 1,282,918 980,393
International II 426,367 397,453 4,777,649 4,457,879
American Century Investments:
VP Balanced 81,810 72,450 651,789 539,665
VP Growth 151,040 144,527 1,563,847 1,481,863
Van Eck Worldwide Insurance Trust:
Worldwide Bond Fund 6,378 2,578 64,203 27,683
Worldwide Hard Assets Fund 146,445 118,292 2,389,222 1,928,520
</TABLE>
Fortis Benefits' investment in the subaccounts represented the following number
of shares of the Funds held and aggregate cost of amounts invested at December
31, 1997:
<TABLE>
<CAPTION>
COST OF
SHARES SHARES
----------------------------
<S> <C> <C>
Fortis Series Fund, Inc.:
Global Asset Allocation 295,737 $ 3,040,051
Global Bond 516,382 5,230,947
International Stock 294,127 3,002,830
Value 73,766 752,487
S & P 500 355,359 3,584,178
Blue Chip Stock 352,534 3,534,435
Norwest Select Fund:
Small Company Stock 131,150 1,389,185
</TABLE>
42
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
4. ORGANIZATIONAL EXPENSES AND OTHER CHARGES
ORGANIZATION EXPENSES
Fortis Benefits assumed all organizational expenses of the Account.
PREMIUM TAXES
Where premium taxes or similar assessments are imposed by states or other
jurisdiction upon receipt of purchase payments, Fortis Benefits pays such taxes
on behalf of the contract owner and then will deduct a charge for these amounts
from the contract value upon surrender, death of the annuitant or contract
owner, or annuitization of the contract. In jurisdiction where premium taxes or
similar assessments are imposed at the time annuity payments begin, Fortis
Benefits will deduct a charge on a pro rata basis from the contract value at
that time.
POLICY ADMINISTRATION CHARGE
A $35 annual policy administrative charge is deducted each contract year from
value of each Opportunity Variable Annuity and Masters Variable Annuity and $30
for each Norwest Passage Variable Annuity and Value Advantage Plus Variable
Annuity on each anniversary of the contract date and upon total surrender of the
contract. This charge will be waived during the accumulation period if the
contract value at the end of the contract year (or upon total surrender) is
$25,000 or more, for the Opportunity Variable Annuity, Masters Variable Annuity
and Norwest Passage Variable Annuity.
MORTALITY AND EXPENSE RISK CHARGE
Fortis Benefits assesses each subaccount of the Opportunity Variable Annuity,
Masters Variable Annuity and Norwest Passage Variable Annuity a daily charge for
mortality and expense risk at an annual rate of 1.25% of the net assets. For the
Value Advantage Plus Variable Annuity the mortality and expense risk charge is
assessed at an annual rate of 0.45%.
43
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
4. ORGANIZATIONAL EXPENSES AND OTHER CHARGES (CONTINUED)
ADMINISTRATIVE CHARGE
Fortis Benefits assesses each subaccount of the Opportunity Variable Annuity and
Masters Variable Annuity a daily charge for administrative expense at annual
rate of 0.10% of the net assets. For the Norwest Passage Variable Annuity the
mortality and expense risk charge is assessed at an annual rate of 0.15%.
SURRENDER CHARGE
FREE SURRENDERS
The following amounts can be withdrawn from the contract without a surrender
charge:
- - Any purchase payments received more than five years prior to the surrender
date for Opportunity Variable Annuity and seven years for Master Variable
Annuity and have not been previously surrendered.
- - In any contract year, up to 10% of the purchase payments received less than
five years prior to the surrender date for Opportunity Variable Annuity and
seven years prior to the surrender date for Masters Variable Annuity.
- - For Master Variable Annuity any earnings that have not been previously
surrendered.
- - For Value Advantage Plus Variable Annuity there is no surrender charge.
AMOUNT OF SURRENDER CHARGE
Surrender charges apply only if the amount being withdrawn exceeds the sum of
the amounts listed above under Free Surrenders. The surrender charge is based on
a percentage of the amount of purchase payments surrendered. The percentage of
payments is set at 5% during the first five years on the Opportunity Variable
Annuity and Norwest Passage Variable Annuity contracts with a sliding scale down
to zero by the end of the fifth year, and is set at 7% during the first seven
years of the Master Variable Annuity contracts, with a sliding scale down to
zero by the end of the seventh year. Surrender charges collected by Fortis
Benefits were $3,567,880 and $2,727,170 in 1997 and 1996, respectively.
44
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
5. FEDERAL INCOME TAXES
The operations of the Account form part of, and are taxed with, the operations
of Fortis Benefits, which is taxed as a life insurance company under the
Internal Revenue Code. As a result, the net asset value of the subaccounts are
not affected by income taxes on income distributions received by the
subaccounts.
6. RELATED PARTY TRANSACTIONS
Fortis Advisers, Inc. (a wholly-owned subsidiary of Fortis, Inc.) provides
investment management services to Fortis Series Fund, Inc. in exchange for
investment advisory and management fees. Investment advisory and management fees
are based on each portfolio's daily net assets and decrease in reduced
percentages as average daily net assets increase. The fees represent an
investment expense to Fortis Series Fund, Inc. which reduces the portfolios' net
assets. The fees charged by Fortis Advisers, Inc. are not available on an
individual variable account basis. Fees for all variable accounts to which
Fortis Advisers, Inc. provided investment management services amounted to
$14,415,172 and $11,076,174 in 1997 and 1996, respectively.
7. YEAR 2000 ISSUE (UNAUDITED)
The Year 2000 issue is the result of computer programs having been written using
two digits rather than four to define a year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than 2000. This could result in the failure of major systems or miscalculations,
which could have a material impact on the operations of the Account. The Account
has no computer systems of its own but is dependent upon the systems of Fortis
Benefits, Fortis Advisers and certain other third parties.
45
<PAGE>
Fortis Benefits Insurance Company
Variable Account D
Notes to Financial Statements (continued)
7. YEAR 2000 ISSUE (UNAUDITED) (CONTINUED)
A comprehensive review of Fortis Benefits' and Fortis Advisers' computer systems
and business processes has been conducted to identify the major systems that
could be affected by the Year 2000 issue. Steps are being taken to resolve any
potential problems including modification to existing software and the purchase
of new software. These measures are scheduled to be completed and tested on a
timely basis. Fortis Benefits' and Fortis Advisers' goal is to complete internal
remediation and testing of each system by early 1999. The Year 2000 readiness of
the unaffiliated investment managers and other third parties whose system
failures could have an impact on the Account's operations is currently being
evaluated. The potential materiality of any such impact is not known at this
time.
46
<PAGE>
APPENDIX A
PERFORMANCE INFORMATION
In advertising and other sales material for the Certificates, yield and total
return information for the Subaccounts of the Variable Account may be included.
The information below provides investment results for the indicated Subaccounts
of the Variable Account. The results shown in this section are not an estimate
or guarantee of future investment performance, and do not represent the actual
experience of amounts invested by a particular Participant.
YIELD CALCULATIONS
Yield information for the Alliance Money Market Subaccount will be based on the
seven days ended on a specified date. It will be computed by determining the
net change, exclusive of capital changes, in the value of a hypothetical
pre-existing account (after the deduction of all asset based charges) having a
balance of one Accumulation Unit at the beginning of the period and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return , and multiplying the base period return by
(365/7), with the resulting yield figure carried to the nearest hundredth of one
percent. The seven day yield for the Alliance Money Market Subaccount as of
December 31, 1997 was 4.86%.
An effective yield may also be quoted for the Alliance Money Market Subaccount.
Effective yield is calculated by compounding the current yield as follows:
365/7
Effective Yield = [(Base Period Return + 1) ] - 1
The seven day effective yield for the Alliance Money Market Subaccount as of
December 31, 1997 was 4.97%.
Yield information for the other Subaccounts will be based on the thirty days
ended on a specified date and carried to the nearest hundredth of a percent,
according to the following formula:
|( A-B ) 6 |
2|( ---- +1) -1 |
|( CD] ) |
|_ _|
Where:
A = net investment income earned during the period by the Portfolio whose
shares are owned by the Subaccount,
B = expenses accrued for the period,
C = the average daily number of Accumulation Units outstanding during the
period, and
D = the offering price per Accumulation Unit at the end of the last day of
the period.
The following table sets figures for the thirty days ended December 31, 1996.
<TABLE>
<CAPTION>
SUBACCOUNT YIELD
---------- -----
<S> <C>
Federated High Yield Bond . . . . . . . . . . . . . . . . . . . . .8.67%
Federated U.S. Government Securities . . . . . . . . . . . . . . .2.35%
MFS High Income . . . . . . . . . . . . . . . . . . . . . . . . . 14.01%
MFS World Governments . . . . . . . . . . . . . . . . . . . . . . .2.67%
Van Eck Worldwide Bond . . . . . . . . . . . . . . . . . . . . . .6.49%
</TABLE>
A-1
<PAGE>
TOTAL RETURN CALCULATIONS
Total return information will be given for the one-year and five-year periods
ended on a specified date, provided that, if the registration statement has been
effective for a Subaccount only during a shorter period, then such shorter
period will be used.
AVERAGE ANNUAL TOTAL RETURN
Total average annual compounded rates of return for each period will be computed
to the nearest one hundredth of a percent, according to the following formula:
n
P(1 + T) = CSV
WHERE: P = a hypothetical initial purchase payment of $1,000,
T = average annual total return,
n = number of years, and
CSV = end of period Cash Surrender Value of hypothetical $1,000
purchase payment made at the beginning of the period, assuming
deduction of a proportionate amount of the annual administrative
charge (based on average Contract size).
The following table show total average annual rates of return for the periods
indicated:
<TABLE>
<CAPTION>
Subaccount One Year Period Commencement to
Ended Dec. 31, 1997 Dec. 31, 1997
- -------------------------------------------------- ------------------ ---------------
<S> <C> <C>
Alliance International Portfolio -0.14% 2.67%
Alliance Premier Growth Portfolio 30.25% 25.34%
American Century VP Balanced Fund 12.18% 11.57%
American Century VP Capital Appreciation Fund -6.73% -6.66%
Federated High Income Bond Fund II 10.33% 10.63%
Federated Utility II 23.07% 15.79%
Federated American Leaders II 28.74% 22.27%
Federated U.S. Government Securities II NA NA
INVESCO Industrial Income Portfolio NA NA
INVESCO Health Sciences Portfolio NA NA
INVESCO Technology Portfolio NA NA
Lexington Natural Resources Trust 3.66% 12.57%
Lexington Emerging Markets Fund -14.96% -10.97%
MFS Emerging Growth Series 18.36% 16.72%
MFS High Income Series 10.11% 10.16%
MFS World Government Series -4.57% -0.27%
Montgomery Emerging Markets Fund -4.02% -1.18%
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
Subaccount One Year Period Commencement to
Ended Dec. 31, 1997 Dec. 31, 1997
- -------------------------------------------------- ------------------ ---------------
<S> <C> <C>
Montgomery Growth Fund 24.93% 27.45%
Neuberger & Berman Limited Maturity Bond Portfolio NA 17.04%
Neuberger & Berman Partners Portfolio NA NA
SAFECO Equity Portfolio 21.27% 17.04%
SAFECO Growth Portfolio 41.19% 42.80%
Strong Discovery Fund II 7.89% 4.36%
Strong International Stock Fund II -16.90% -6.72%
Van Eck Worldwide Bond Fund -1.07% 1.00%
Van Eck Worldwide hard Assets Fund -5.17% -2.77%
</TABLE>
CUMULATIVE TOTAL RETURN
Total cumulative rates of return for each period will be computed to the
nearest one hundredth of a percent, according to the following formula:
CTR = (CSV - P) 100
---------
P
Where: P = a hypothetical initial purchase payment of $1,000,
CTR = cumulative total return, and
CSV = end of period Cash Surrender Value of hypothetical $1,000
purchase payment made at the beginning of the period, assuming
deduction of a proportional amount of the annual administrative
charge (based on average Contract size).
The following table shows cumulative total rates of return for the periods
indicated:
<TABLE>
<CAPTION>
Subaccount One Year Period Commencement to
Ended Dec. 31, 1996 Dec. 31, 1996
- ----------------------------------------------- ------------------- ---------------
<S> <C> <C>
Alliance International Portfolio 0.14% 5.18%
Alliance Premier Growth Portfolio 30.25% 54.29%
American Century VP Balanced Fund 12.18% 23.39%
American Century VP Capital Appreciation Fund -6.73% -12.39%
Federated High Income Bond Fund II 10.33% 21.41%
Federated Utility II 23.07% 32.50%
Federated American Leaders II 28.74% 47.12%
Federated U.S. Government Securities II NA 7.05%
INVESCO Industrial Income Portfolio NA 21.37%
INVESCO Health Sciences Portfolio NA 10.07%
INVESCO Technology Portfolio NA 14.46%
Lexington Natural Resources Trust 3.66% 25.53%
Lexington Emerging Markets Fund 14.96% -20.00%
MFS Emerging Growth Series 18.36% 34.56%
</TABLE>
A-3
<PAGE>
<TABLE>
<CAPTION>
Subaccount One Year Period Commencement to
Ended Dec. 31, 1996 Dec. 31, 1996
- ----------------------------------------------- ------------------- ---------------
<S> <C> <C>
MFS High Income Series 10.11% 20.42%
MFS World Government Series -4.57% -0.51%
Montgomery Emerging Markets Fund -4.02% 2.27%
Montgomery Growth Fund 24.93% 59.32%
Neuberger & Berman Limited Maturity Bond Portfolio NA 4.98%
Neuberger & Berman Partners Portfolio NA 24.78%
SAFECO Equity Portfolio 21.27% 18.52%
SAFECO Growth Portfolio 41.19% 46.93%
Strong Discovery Fund II 7.89% 8.53%
Strong International Stock Fund II -16.90% -12.51%
Van Eck Worldwide Bond Fund -1.07% 1.93%
Van Eck Worldwide hard AssetsFund -5.17% -5.25%
</TABLE>
Yield figures do not reflect any surrender charge, and yield and total return
figures do not reflect any premium tax charge. Yield and total return figures do
reflect the reimbursement of certain Fortis Series expenses. Current Fixed
Account effective annual rates of interest may also be quoted in advertising and
other sales materials, and these rates do not reflect any deductions or charges.
Fortis Benefits may advertise its relative performance as compiled by outside
organizations. Following is a list of ratings services which may be referred to
in advertisements, along with the category in which the applicable Subaccount is
included:
RATING SERVICE CATEGORY
-------------- --------
Alliance Money Market Subaccount
Morningstar Publications, Inc.
Lipper Analytical Services, Inc.
Alliance International Subaccount
Morningstar Publications, Inc. International
Lipper Analytical Services, Inc. International
Alliance Premier Growth Subaccount
Morningstar Publications, Inc. Growth
Lipper Analytical Services, Inc. Growth
Federated High Yield Bond Subaccount
Morningstar Publications, Inc. High Yield Bond
Lipper Analytical Services, Inc.
Federated Utility Subaccount
Morningstar Publications, Inc. Specialty Fund
Lipper Analytical Services, Inc.
A-4
<PAGE>
Federated American Leaders Subaccount
Morningstar Publications, Inc. Growth & Income
Lipper Analytical Services, Inc.
Lexington Natural Resources Subaccount
Morningstar Publications, Inc. Specialty Fund
Lipper Analytical Services, Inc.
Lexington Emerging Markets Subaccount
Morningstar Publications, Inc. International Stock
Lipper Analytical Services, Inc.
MFS Emerging Growth Subaccount
Morningstar Publications, Inc. Aggressive Growth
Lipper Analytical Services, Inc. Mid Cap Funds
MFS High Income Subaccount
Morningstar Publications, Inc. High Yield Bonds
Lipper Analytical Services, Inc. Mid Cap Funds
MFS World Governments Subaccount
Morningstar Publications, Inc. International Bonds
Lipper Analytical Services, Inc.
Montgomery Emerging Markets Subaccount
Morningstar Publications, Inc. Diversified Emerging Markets
Lipper Analytical Services, Inc. Emerging Markets Funds
Montgomery Growth Subaccount
Morningstar Publications, Inc. Growth
Lipper Analytical Services, Inc. Growth
Strong Discovery Subaccount
Morningstar Publications, Inc. Aggressive Growth
Lipper Analytical Services, Inc. Capital Appreciation Fund
Strong Government Securities Subaccount
Morningstar Publications, Inc. Government Bond - General
Lipper Analytical Services, Inc.
Strong Advantage Subaccount
Morningstar Publications, Inc. Corporate Bond - General
Lipper Analytical Services, Inc.
A-5
<PAGE>
Strong International Stock Subaccount
Morningstar Publications, Inc. Foreign Stock
Lipper Analytical Services, Inc. International Fund
TCI Balanced Subaccount
Morningstar Publications, Inc. Balanced
Lipper Analytical Services, Inc.
TCI Growth Subaccount
Morningstar Publications, Inc. Growth
Lipper Analytical Services, Inc.
Van Eck Worldwide Bond Subaccount
Morningstar Publications, Inc. International Bond
Lipper Analytical Services, Inc.
Van Eck Gold and Natural Resources Subaccount
Morningstar Publications, Inc. Specialty Fund
Lipper Analytical Services, Inc. Gold Oriented Fund
A-6
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The estimated expenses of the issuance and distribution of the Contracts,
other than commissions on sales of the Contracts are as follows:
<TABLE>
<S> <C>
Amount
-------
Securities and Exchange Commission
registration fee $ 0
Printing and engraving $ 3,000.00
Accounting fees and expenses $ 1,500.00
Legal fees and expenses $ 3,000.00
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 300.083 of Minnesota Law General Provision provides in part that a
corporation organized under such law shall have power to indemnify anyone made,
or threatened to be made, a party to a threatened, pending or completed
proceeding, whether civil or criminal, administrative or investigative, because
he is or was a director or officer of the corporation, or served as a director
or officer of another corporation at the request of the corporation.
Indemnification in such a proceeding may extend to judgments, penalties, fines
and amounts paid in settlement, as well as to reasonable expenses, including
attorneys' fees and disbursements. In a civil proceeding, there can be no
indemnification under the statute, unless it appears that the person seeking
indemnification has acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the corporation and its
shareholders and unless such person has received no improper personal benefit;
in a criminal proceeding, the person seeking indemnification must also have no
reasonable cause to believe his conduct was unlawful.
Article VI Section 5 of the By-laws of the Fortis Benefits Insurance
Company provides as follows:
Section 5. The Company shall indemnify (including therein the prepayment
of expenses) any person who is or was a director, officer or employee, or
who is or was serving at the request of the Company as a director, officer
or employee of another corporation, partnership, joint venture, trust or
other enterprise for expenses (including attorney's fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him with
respect to any threatened, pending or completed action, suit or proceedings
against him by reason of the fact that he is or was such a director,
officer or employee to the extent and in the manner permitted by law.
Section 12 of the Principal Underwriter agreement incorporated as exhibit 1
to this registration statement (which is incorporated herein by this reference)
provides that Fortis Investors, Inc. and Fortis Benefits will indemnify each
other, and each other's officers, directors and controlling persons, with
respect to certain types of misstatements or omissions in connection with the
offer and sale of the Certificates.
<PAGE>
Certain officers, directors or controlling persons of Fortis Investors, Inc. are
also officers, directors and controlling persons of Fortis Benefits.
Pursuant to the Principal Underwriter and Servicing Agreement, Fortis
Investors has agreed to indemnify Variable Account D, Fortis Benefits, and each
of its officers, directors and controlling persons for damages and expenses (1)
arising out of certain material misstatements and omissions in connection with
the offer and sale of the Contracts, if the misstatement or omission was based
on information furnished by Fortis Investors or (2) otherwise arising out of
Fortis Investors' negligence, bad faith, willful misfeasance or reckless
disregard of its responsibilities. Pursuant to its Dealer Sales Agreements, a
form of which is filed as Exhibit 3(b) to this registration statement and is
incorporated herein by this reference, firms that sell the contracts agree to
indemnify Fortis Benefits, Fortis Investors, the Separate Account, and their
officers, directors, employees, agents, and controlling persons from liabilities
and expenses arising out of the wrongful conduct or omissions of said selling
firm or its officers, directors, employees, controlling persons or agents.
Item 15. Recent Sales of Unregistered Securities (3 years)
The Registrant discovered that its registration of the dollar amounts of
sales in the non-unitized interest in the fixed account of a similar previously
registered product had inadvertently been exceeded, resulting in unregistered
sales of $61,164,136 between February 27, 1995 and October 25, 1995. The
Registrant claims no exemption for such excess and has provided a Notice of
Rescission rights to those individuals who purchased unregistered securities.
The principal underwriter of such securities was Fortis Investors, Inc., an
affiliated broker/dealer.
Item 16. Exhibits and Financial Statement Schedule
a. Exhibits
1. (a) Form of Principal Underwriter and Servicing Agreement
(incorporated by reference from Form N-4 Registration Statement of
Fortis Benefits and its Variable Account D filed on January 11, 1994,
File No. 33-73986);
(b) Form of Amendment to Principal Underwriting (incorporated by
reference from Form N-4 Registration Statement of Fortis Benefits and
its Variable Account D filed on January 11, 1994, File No. 33-73986).
2. Form of Asset Transfer and Acquisition Agreement dated August 28, 1991
and supplement thereto dated October 1, 1991 (incorporated by
reference from Form 8-K filed on October 16, 1991 [as amended by Form
8 filed on October 21, 1991], File No. 33-37576).
3. (a) Articles of Incorporation of Fortis Benefits Insurance Company
(incorporated by reference from Form S-6 Registration Statement of
Fortis Benefits and its Variable Account C filed on March 17, 1986,
File No. 33-03919);
(b) By-laws of Fortis Benefits Insurance Company (incorporated by
reference from Form S-6 Registration Statement of Fortis Benefits and
its Variable Account C filed on March 17, 1986, File No. 33-03919);
<PAGE>
(c) Amendment to Articles of Incorporation and By-laws dated November
21, 1991 (incorporated by reference from Post-Effective Amendment No.
1 to the Form N-4 Registration Statement of Fortis Benefits and its
Variable Account D filed on March 2, 1992, File No. 33-37577).
4. (a) Form of Combination Fixed and Variable Group Annuity Contract
(incorporated by reference from Form N-4 Registration Statement of
Fortis Benefits filed on November 2, 1995, File No. 33-63935);
(b) Form of Certificate to be used in connection with Contract filed
as Exhibit 4 (a) (incorporated by reference from Form N-4 Registration
Statement of Fortis Benefits filed on November 2, 1995, File No.
33-63935);
(c) Form of Combination Fixed and Variable Individual Annuity Contract
(General Account Fixed Account) (incorporated by reference from Form
N-4 Registration Statement of Fortis Benefits filed on November 2,
1995, File No. 33-63935);
(d) Form of IRA Endorsement (incorporated by reference from
Pre-Effective Amendment No. 1 to the From N-4 Registration Statement
of Fortis Benefits and its Variable Account D filed on March 28, 1991,
File No. 33-37577);
(e) Form of Section 403(b) Annuity Endorsement (incorporated by
reference from Pre-Effective Amendment No. 1 to Form N-4 Registration
Statement of Western Life and its Variable Account D filed on March
28, 1991).
5. Opinion and consent of David A. Peterson, Esq., Assistant General
Counsel of Fortis Benefits Insurance Company, as to the legality of
the securities being registered (included as part of the original
filing of this Form S-1 Registration Statement filed on October 31,
1995).
10. Fortis, Inc. Executive Incentive Compensation Plan (incorporated by
reference from Amendment No. 1 to Form S-1 Registration Statement of
Fortis Benefits filed on March 28, 1991, File No. 33-37576).
23. Consent of Ernst & Young LLP - filed herewith.
24. Power of Attorney for Messrs. Freedman, Mackin, Mahoney, Clancy,
Meler, Keller, Gaddy, Pollock, Clayton and Greiter (incorporated by
reference from Form S-6 Registration Statement of Fortis Benefits and
its Variable Account C filed on December 17, 1993, File No. 33-73138).
b. Not applicable.
Item 17. Undertakings
The Registrant hereby undertakes:
<PAGE>
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement::
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement, including (but not limited to) any addition or deletion of
a managing underwriter.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the indemnification provision described in response to
Item 14, 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 governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant has caused this amended Registration Statement to be signed
on its behalf in the City of St. Paul, State of Minnesota on this 17th day of
April, 1998.
FORTIS BENEFITS INSURANCE COMPANY
(Registrant)
By: /s/
--------------------------------------
Robert Brian Pollock, President
As required by the Securities Act of 1933 and the Investment Company Act of
1940, this Registration Statement has been signed by the following persons, in
the capacities indicated, on April 17, 1998.
Signature Title With Fortis Benefits
- --------- --------------------------
Chairman of the Board
*
- --------------------------------
Allen Royal Freedman
Director
*
- --------------------------------
J. Kerry Clayton
Director
*
- --------------------------------
Thomas Michael Keller
Director
- --------------------------------
Arie Aristide Fakkert
/s/ Director
- --------------------------------
Dean C. Kopperud
/s/ President and Director
- -------------------------------- (Chief Executive Officer)
Robert Brian Pollock
/s/ Senior Vice President, Controller
- -------------------------------- and Treasurer (Principal
Michael John Peninger Accounting Officer and
Principal Financial Officer)
*By: /s/
- -------------------------------
Robert Brian Pollock
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
ITEM
Number Description
- ------ -----------
23 Consent of Accountants
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 27, 1998 on the financial statements of Fortis
Benefits Insurance Company and our report dated March 27, 1998 on the financial
statements of Fortis Benefits Insurance Company Variable Account D in
Post-Effective Amendment No. 5 to the Registration Statement (Form S-1 No.
33-63829) and related Prospectus and Statement of Additional Information of
Fortis Benefits Insurance Company for the registration of flexible premium
deferred combination variable and fixed annuity contracts.
/s/
Ernst & Young LLP
Minneapolis, Minnesota
April 27, 1998
