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UNUM LIFE INSURANCE COMPANY OF AMERICA
Group Variable Annuity Contracts
VA-I Separate Account
2211 Congress Street
Portland, Maine 04122
(800) 341-0441
VARIABLE ANNUITY III
[LOGO OF UNUM APPEARS HERE]
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PROSPECTUS
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MAY 1, 1997
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUS OF
THE APPLICABLE UNDERLYING FUNDS WHICH SHOULD BE RETAINED FOR FUTURE REFERENCE.
INVESTMENT IN THE CONTRACT INVOLVES INVESTMENT RISK, INCLUDING MARKET FLUCTU-
ATION AND POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
80017
This prospectus describes group annuity contracts ("Contracts") offered by UNUM
Life Insurance Company of America ("UNUM/America"), a subsidiary of UNUM Hold-
ing Company and its wholly-owned parent company, UNUM Corporation. The Con-
tracts are designed to enable Participants and Employers to accumulate funds
for retirement programs meeting the requirements of the following Sections of
the Internal Revenue Code of 1986, as amended (the "Code"): 401(a), 403(b), 408
and 457 and other related Sections as well as for programs offering non-quali-
fied annuities. A Participant is an employee or other person affiliated with
the Contractholder on whose behalf a Participant Account is maintained under
the terms of the Contract.
The Contracts permit Contributions to be deposited in the Guaranteed Interest
Division, which is part of UNUM/America's General Account, and in certain Sub-
Accounts in UNUM/America's VA-I Separate Account ("Variable Investment Divi-
sion"). Contributions to the Guaranteed Interest Division earn interest at a
guaranteed rate declared by UNUM/America. Contributions to the Variable Invest-
ment Division will increase or decrease in dollar value depending on the in-
vestment performance of the underlying funds in which the Sub-Accounts invest.
Special limits apply to transfers and withdrawals from the Guaranteed Interest
Division.
Currently, the Variable Investment Division consists of the nine Sub-Accounts
listed below: Next to each listed Sub-Account is the name of the fund (the
"Fund") in which the Sub-Account invests. For more information about the in-
vestment objectives, policies and risks of the Funds please refer to the pro-
spectus for each of the Funds.
<TABLE>
<S> <C>
Index Account.......................................... Dreyfus Stock Index Fund
Growth I Account....................................... Fidelity's Variable
Insurance Products Fund:
Growth Portfolio
Asset Manager Account.................................. Fidelity's Variable
Insurance
Products Fund II:
Asset Manager Portfolio
Growth II Account...................................... American Century
Variable
Portfolios, Inc.: VP
Capital Appreciation
Balanced Account....................................... American Century
Variable
Portfolios, Inc.: VP
Balanced
International Stock Account............................ T. Rowe Price
International
Series, Inc.
Socially Responsible Account........................... Calvert Responsibly
Invested
Balanced Portfolio
Equity-Income Account.................................. Fidelity's Variable
Insurance
Products Fund: Equity-
Income Portfolio
Small Cap Account...................................... Dreyfus Variable
Investment Fund
Small Cap Portfolio
</TABLE>
This prospectus is intended to provide information regarding the Contracts of-
fered by UNUM/America that you should know before investing. Please read and
retain this prospectus for future reference. A Statement of Additional Informa-
tion, dated May 1, 1997, has been filed with the Securities and Exchange Com-
mission and is available at no charge by writing or calling P.O. Box 9740,
Portland, Maine 04104, (800) 341-0441, Attention: Tax Deferred Annuities.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DEFINITIONS................................................................ 3
SUMMARY (Including Fee Table and Performance Information).................. 6
CONDENSED FINANCIAL INFORMATION............................................ 11
FINANCIAL STATEMENTS....................................................... 12
UNUM/AMERICA, LINCOLN LIFE, THE VARIABLE INVESTMENT DIVISION AND
THE FUNDS................................................................. 12
CONTRACT PROVISIONS........................................................ 17
DEDUCTIONS AND CHARGES..................................................... 24
ANNUITY PERIOD............................................................. 25
FEDERAL INCOME TAX CONSIDERATIONS.......................................... 27
VOTING RIGHTS.............................................................. 30
OTHER CONTRACT PROVISIONS.................................................. 31
GUARANTEED INTEREST DIVISION............................................... 32
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION.................. 34
</TABLE>
2
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DEFINITIONS
ACCUMULATION UNIT: An accounting unit of measure used to record amounts of
increases to, decreases from and accumulations in each Sub-Account during the
Accumulation Period.
ACCUMULATION UNIT VALUE: The dollar value of an Accumulation Unit in each Sub-
Account on any Valuation Date.
ACCUMULATION PERIOD: The period commencing on a Participant's Participation
Date and terminating when the Participant's Account balance is reduced to zero,
either through withdrawal(s), conversion to an annuity, imposition of charges,
payment of a Death Benefit or a combination thereof.
ACQUISITION AGREEMENT: The Asset Transfer and Acquisition Agreement between
UNUM/America and Lincoln Life which provides for the sale of UNUM/America's tax
sheltered annuity business to Lincoln Life, the assumption of UNUM/America's
obligations under the Contracts (other than the New York Contracts) by Lincoln
Life, and the assumption of UNUM/America's obligations under the New York
Contracts by Lincoln-NY.
ANNUITANT: The person receiving annuity payments under the terms of the
Contract.
ANNUITY COMMENCEMENT DATE: The date on which UNUM/America makes the first
annuity payment to the Annuitant as required by the Retired Life Certificate.
ANNUITY CONVERSION AMOUNT: The amount applied toward the purchase of an
annuity.
ANNUITY PERIOD: The period concurrent with or following the Accumulation
Period, during which an Annuitant's annuity payments are made.
BENEFICIARY: The person(s) designated to receive a Participant's Account
balance in the event of the Participant's death during the Accumulation Period
or the person(s) designated to receive any applicable remainder of an annuity
in the event of the Annuitant's death during the Annuity Period.
BUSINESS DAY: A day on which Lincoln Life's service office in Portland, Maine,
and the New York Stock Exchange are customarily open for business.
CLOSING DATE: The date of closing as provided in the Acquisition Agreement.
CONTRIBUTIONS: All amounts deposited under a Contract, including any amount
transferred from another contract or Trustee.
CONTRACT: A Group Variable Annuity contract issued by UNUM/America to the
Contractholder.
CONTRACTHOLDER: The party named as the Contractholder on the group annuity
contract issued by UNUM/America. The Contractholder may be an Employer, a
retirement plan trust, an association or any other entity allowed under the
law.
DIVISION(S): The Guaranteed Interest Division and/or the Variable Investment
Division.
EMPLOYER: The organization specified in the Contract which offers the Plan to
its employees.
FUNDS: The underlying funds in which the Sub-Accounts invest. Funds are
investment vehicles which offer their shares only to insurance companies'
separate accounts and other qualifying investors.
3
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GENERAL ACCOUNT: All assets of UNUM/America other than those in the Variable
Investment Division or any other separate account.
GROSS WITHDRAWAL AMOUNT: The amount by which a Participant's Account is reduced
when a withdrawal occurs, including any applicable Annual Administration
Charge.
GUARANTEED ANNUITY: An annuity for which UNUM/America guarantees the amount of
each payment for as long as the annuity is payable.
GUARANTEED INTEREST DIVISION: The Division maintained by UNUM/America for the
Contracts and other contracts for which UNUM/America guarantees the principal
amount and interest credited thereto subject to any fees and charges as set
forth in the Contract. Amounts allocated to the Guaranteed Interest Division
are part of the General Account.
LINCOLN LIFE: The Lincoln National Life Insurance Company.
LINCOLN-NY: Lincoln Life & Annuity Company of New York, a New York domestic
life insurance company established by Lincoln Life as a subsidiary.
LNC: Lincoln National Corporation.
NET CONTRIBUTIONS: The sum of all Contributions credited to a Participant
Account less any Net Withdrawal Amounts, outstanding loan (including principal
and due and accrued interest) and amounts converted to a Payout Annuity.
NET WITHDRAWAL AMOUNT: The amount paid when a withdrawal occurs.
NEW YORK CONTRACTS: Contracts originally issued in New York by UNUM Life
Insurance Company and subsequently through UNUM/America.
PARTICIPANT: An employee or other person affiliated with the Contractholder on
whose behalf an Account is maintained under the terms of the Contract.
PARTICIPANT ACCOUNT: An account maintained for a Participant during the
Accumulation Period the total balance of which equals the Participant's Account
balance in the Variable Investment Division plus the Participant's Account
balance in the Guaranteed Interest Division.
PARTICIPATION ANNIVERSARY: For each Participant, a date at one year intervals
from the Participant's Participation Date. If an anniversary occurs on a non-
Business Day, it is treated as occurring on the next Business Day.
PARTICIPATION DATE: A date assigned to each Participant corresponding to the
date on which the first Contribution on behalf of that Participant is received
by UNUM/America. A Participant will receive a new Participation Date if such
Participant makes a Total Withdrawal, as defined in this prospectus, and
Contributions on behalf of the Participant are resumed under any Contract.
PARTICIPATION YEAR: A period beginning with one Participation Anniversary and
ending the day before the next Participation Anniversary, except for the first
Participation Year which begins with the Participation Date.
PAYOUT ANNUITY: A series of payments paid under the terms of a Contract to a
person. A Payout Annuity may be either a Guaranteed Annuity or a Variable
Annuity.
PLAN: The retirement program offered by an Employer to its employees for which
a Contract is used to accumulate funds.
4
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SUB-ACCOUNT: An account established in the Variable Investment Division which
invests in shares of a corresponding Fund.
UNUM/AMERICA: UNUM Life Insurance Company of America, at its home office in
Portland, Maine.
VALUATION DATE: A Business Day. Accumulation Units and Annuity Units are
computed as of the close of trading on the New York Stock Exchange.
VALUATION PERIOD: A period used in measuring the investment experience of each
Sub-Account. The Valuation Period begins at the close of trading on the New
York Stock Exchange on one Valuation Date and ends at the corresponding time on
the next Valuation Date.
VARIABLE ANNUITY: An annuity with payments that increase or decrease in
accordance with the investment results of the selected Sub-Accounts.
VARIABLE INVESTMENT DIVISION: The Division which is maintained by UNUM/America
for these Contracts and certain other UNUM/America contracts for which
UNUM/America does not guarantee the principal amount or investment results. The
Variable Investment Division is the VA-I Separate Account which is a group of
assets segregated from the General Account whose income, gains and losses,
realized or unrealized, are credited to or charged against the Variable
Investment Division without regard to other income, gains or losses of
UNUM/America. The Variable Investment Division currently consists of nine Sub-
Accounts. Additional Sub-Accounts may be added in the future.
5
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SUMMARY
UNUM LIFE INSURANCE COMPANY OF AMERICA
UNUM/America is a life insurance company founded in Maine in 1966.
UNUM/America is a subsidiary of UNUM Holding Company and its wholly-owned
parent company, UNUM Corporation whose stock is traded on the New York Stock
Exchange. The consolidated assets of UNUM Corporation as of December 31, 1996
were $15.5 billion.
LINCOLN LIFE
On October 1, 1996 (the "Closing Date"), UNUM/America completed the sale of
its tax-sheltered annuity business to The Lincoln National Life Insurance
Company ("Lincoln Life"), pursuant to an acquisition agreement with Lincoln
Life (the "Acquisition Agreement"). Under the Acquisition Agreement, Lincoln
Life assumed UNUM/America's obligations under the Contracts and Lincoln Life &
Annuity Company of New York ("Lincoln-NY") assumed UNUM/America's obligations
under Contracts originally issued in New York by UNUM Life Insurance Company
(the "New York Contracts") (other than those obligations to Contractholders
and/or Participants who neither consented nor were deemed to have consented to
the assumption).
Lincoln Life is a subsidiary of LNC, which is a publicly-owned company whose
stock is traded on the New York Stock Exchange. LNC had consolidated assets of
$71.7 billion as of December 31, 1996. See "Acquisition Agreement with The
Lincoln National Life Insurance Company."
CONTRACTS OFFERED
The Group Variable Annuity Contracts offered by this prospectus are available
to Employers and other entities to provide a way to accumulate funds for
retirement and to provide Payout Annuities. UNUM/America offers Contracts
designed to enable Participants and Employers to accumulate funds for
retirement programs meeting the requirements of the following Sections of the
Internal Revenue Code of 1986, as amended (the "Code"): 401(a), 403(b), 408,
457 and other related Sections as well as for programs offering non-qualified
annuities.
HOW CONTRIBUTIONS ARE MADE
Contributions under the Contract are deposited by the Contractholder.
Depending upon the type of Plan offered, Contributions may consist of salary
reduction Contributions, Employer Contributions or Participant post-tax
Contributions. Contributions are forwarded by the Contractholder to
UNUM/America and allocated among the two Divisions in accordance with
information provided by the Contractholder. See "Contract Provisions,
Contributions under the Contract."
DIVISIONS OFFERED
Contributions may be allocated to the Guaranteed Interest Division or to the
Variable Investment Division or to both Divisions. The Variable Investment
Division currently consists of nine Sub-Accounts. A Contractholder may choose
to offer between zero and nine of the Sub-Accounts to its Participants under a
Contract. The Sub-Accounts invest their assets in shares of a corresponding
Fund. For a full description of the Funds, see the prospectuses for the Funds.
Special limits apply to transfers and withdrawals from the Guaranteed
Interest Division. See "Guaranteed Interest Division."
6
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TRANSFERS BETWEEN DIVISIONS AND SUB-ACCOUNTS
During the Accumulation Period, a Participant or a Contractholder under
certain Plans may make transfers between and among Divisions and Sub-Accounts.
Certain Plans may limit the transfers in dollar amount, type of Contribution,
or frequency. Certain Plans may require Contractholder approval for a transfer.
See "Transfers between Divisions and Sub-Accounts."
WITHDRAWALS
Subject to the restrictions imposed by the Code and regulations thereof and
by the applicable Plan, each year Participants may withdraw up to 20% of the
Guaranteed Interest Division account balance, or, if liquidating or
transferring the entire Guaranteed Interest Division account value, specified
amounts according to a pre-determined five year schedule. With respect to Plans
subject to Title I of the Employee Retirement Income Security Act of 1974
(ERISA), the Contractholder must authorize UNUM/America to process a withdrawal
request by a Participant. Withdrawal requests under Section 457 Plans must also
be authorized by the Contractholder. With respect to withdrawal requests by
Participants under Plans not subject to Title I of ERISA, certain Contracts may
require that the Participants must certify to UNUM/America that an eligible
event under the Code has occurred. Withdrawal requests must be in writing and
in a form acceptable to UNUM/America.
Certain Plans are also subject to distribution requirements under Section
401(a)(9) of the Code including the incidental death benefit requirements of
Section 401(a)(9)(G). Certain transfers from one Qualified Plan contract to
another Qualified Plan contract are not subject to withdrawal restrictions
under the Code. Certain withdrawals are subject to a 10% Federal Excise Tax for
premature distributions.
See "Federal Income Tax Considerations."
DEATH BENEFITS
The Contracts provide for a Death Benefit for a Participant who dies during
the Accumulation Period. See "Contract Provisions, Death Benefits."
PAYOUT ANNUITIES
As permitted by the applicable Plan, a Participant or a Beneficiary of a
deceased Participant may elect to convert all or part of the Participant's
Account balance or the Death Benefit, as appropriate, to a Payout Annuity.
UNUM/America offers both Guaranteed and Variable Annuities. The range of
annuity options available include life annuities and annuities for a specific
time period as well as others described more fully in this prospectus. See
"Annuity Period."
FREE-LOOK PROVISION
A Participant under a Section 403(b) or 408 Plan and certain Non-Qualified
Plans has ten days, in most cases, from the date the Participant receives an
Active Life Certificate to notify UNUM/America in writing that the Participant
does not choose to participate under the Contract and to receive a return of
funds. See "Free-Look Period."
FEE TABLE
The following table and examples, prescribed by the Securities and Exchange
Commission (the "SEC"), are included to assist Contractholders and Participants
in understanding the transaction and operating expenses imposed directly or
indirectly under the Contracts. The standardized tables and
7
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examples assume the highest deductions possible under the Contracts, whether or
not such deductions actually would be made from a Participant's Account.
<TABLE>
<S> <C>
Contract Related Transaction Expenses/1//
Sales Load Imposed on Purchases: 0%
Annual Administration Charge/2// $25
Separate Account Annual Expenses
(as a percentage of average daily net assets)
Mortality and Expense Risk Charge: 1.20%
Other Charges: 0.00%
Total Separate Account
Annual Expenses: 1.20%
</TABLE>
Fund Expenses/4// (as a percentage of average daily net assets)
<TABLE>
<CAPTION>
INDEX G-1/5// AMGR/5// G-II BAL INT'L SOC RES/6// EQI/5// SMCAP
----- ------- -------- ---- ---- ----- ----------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees: 0.245 0.61 0.64 1.00 1.00 1.05 0.71 0.51 0.75
Other Expenses (after
expense
reimbursements): 0.055 0.08 0.10 0 0 0 1.13 0.07 0.04
Total Fund Expenses: 0.300 0.69 0.74 1.00 1.00 1.05 0.84 0.58 0.79
</TABLE>
Example #1: Assuming total withdrawal of the Participant's Account balance at
the end of the period shown./3//
A $1,000 investment would be subject to the expenses shown, assuming 5%
annual return on assets.
<TABLE>
<CAPTION>
G-
INDEX I/5// AMGR/5// G-II BAL INT'L SOC RES/6// EQI/5// SMCAP
------ ------ -------- ------ ------ ------ ----------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year 15.76 19.69 20.19 22.80 22.80 23.30 21.19 18.58 20.69
3 Years 48.91 60.86 62.39 70.27 70.27 71.77 65.42 57.51 63.91
5 Years 84.37 104.58 107.14 120.35 120.35 122.87 112.24 98.92 109.69
10 Years 184.21 225.99 231.23 257.99 257.99 263.05 241.61 214.38 236.43
</TABLE>
Example #2: Assuming annuitization of the Contract at the end of the period
shown.
A $1,000 investment would be subject to the expenses shown, assuming 5%
annual return on assets.
<TABLE>
<CAPTION>
G-
INDEX I/5// AMGR/5// G-II BAL INT'L SOC RES/6// EQI/5// SMCAP
------ ------ -------- ------ ------ ------ ----------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year 15.76 19.69 20.19 22.80 22.80 23.30 21.19 18.58 20.69
3 Years 48.91 60.86 62.39 70.27 70.27 71.77 65.42 57.51 63.91
5 Years 84.37 104.58 107.14 120.35 120.35 122.87 112.24 98.92 109.69
10 Years 184.21 225.99 231.23 257.99 257.99 263.05 241.61 214.38 236.43
</TABLE>
Example #3: Assuming persistency of the Contracts through the periods shown.
A $1,000 investment would be subject to the expenses shown, assuming 5%
annual return on assets.
<TABLE>
<CAPTION>
G-
INDEX I/5// AMGR/5// G-II BAL INT'L SOC RES/6// EQI/5// SMCAP
------ ------ -------- ------ ------ ------ ----------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year 15.76 19.69 20.19 22.80 22.80 23.30 21.19 18.58 20.69
3 Years 48.91 60.86 62.39 70.27 70.27 71.77 65.42 57.51 63.91
5 Years 84.37 104.58 107.14 120.35 120.35 122.87 112.24 98.92 109.69
10 Years 184.21 225.99 231.23 257.99 257.99 263.05 241.61 214.38 236.43
</TABLE>
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The effect of the Annual Administration Charge for a period is determined by
dividing the total amount of such charges collected in the previous year by the
total average net assets of the accounts for the previous year, as of the
previous month ended; accounts include accounts available under Variable
Annuity III of UNUM/America and under corresponding accounts of Lincoln Life,
pending assumption reinsurance by Lincoln Life of Variable Annuity III
contracts issued through such UNUM/America accounts.
- --------
/1//Premium taxes are not shown. UNUM/America deducts the amount of premium
taxes, if any, when paid. Loans taken by a Participant with respect to the
Participant's Account balance in the Guaranteed Interest Division may be
subject to a charge for establishing the loan.
/2//The Employer has the option of paying the Annual Administration charge on
behalf of the Participants under a Contract. In such a situation, the pro-
jected expenses would be lower than those indicated in the examples. This
charge is not imposed during the Annuity Period. In certain situations the
Annual Administration Charge may be reduced or eliminated. See "Deductions
& Charges--Annual Administration Charge."
/3//The Contracts are designed for retirement planning. Withdrawals prior to
retirement or the Annuity Commencement Date are not consistent with the
long-term purposes of the Contracts and the applicable tax laws. Withdraw-
als may also be subject to federal income tax and a 10% Federal tax penal-
ty.
/4//Until complete order instructions are received, initial Contributions may
be allocated temporarily to Fidelity's Variable Insurance Products Fund:
Money Market Portfolio ("VIPF Money Market Portfolio"). Management fees for
this fund are 0.21%. Other expenses are 0.09%. Total Fund Expenses are
0.30%. See "Initial Contributions."
/5//A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, certain funds have entered into arrange-
ments with their custodian and transfer agent whereby interest earned on
uninvested cash balances was used to reduce custodian and transfer agent
expenses. Including these reductions, the total operating expenses pre-
sented in the table would have been 0.56% for Equity Income Portfolio,
0.67% for Growth Portfolio, and 0.73% for Asset Manager Portfolio.
/6//The figures above are based on expenses for fiscal year 1996, and have been
restated to reflect an increase in transfer agency expenses of 0.03% ex-
pected to be incurred in 1997. "Management Fees" includes a performance ad-
justment, which could cause the fee to be as high as 0.85% or as low as
0.55%, depending on performance. "Other Expenses" reflects an indirect fee
of 0.03%. Net fund operating expenses after reductions for fees paid indi-
rectly (again, restated) would be 0.81%.
The fee table and examples reflect expenses and charges of the Sub-Accounts
and the expenses of the applicable fund for the year ended December 31, 1996.
HOWEVER, THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES AND CHARGES OF THE SUB-ACCOUNTS OR THE FUNDS. SIMILARLY, THE
ASSUMED 5% ANNUAL RATE OF RETURN IS NOT AN ESTIMATE OR A GUARANTEE OF FUTURE
INVESTMENT PERFORMANCE. See "Deductions and Charges" in this prospectus and the
discussion of Fund Management in the prospectus for each of the Funds for
further information.
PERFORMANCE INFORMATION
From time-to-time the Variable Investment Division may advertise or use in
sales literature information concerning the investment performance of the
various Sub-Accounts. No performance presentation should be considered as
representative of future investment results. Actual performance is a function
not only of the investment management of the underlying Funds and market
forces, but of the time and frequency of Contributions, the charges and fees
imposed under the Contract, the fees and expenses of the Funds, and transfers
made by a Participant, among other factors.
9
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The investment performance of the Sub-Accounts may be advertised in
comparison with the performances of other variable annuities, other investment
companies (such as mutual funds), and recognized indices (such as the Dow Jones
Industrial Average, Standard & Poor's 500 Composite Stock Price Index, NASDAQ
Index, Consumer Price Index), and data published by Lipper Analytical Services,
Inc., Morningstar, and Variable Annuity Research and Data Service or comparable
services. Performance of the Sub-Accounts may also be compared with performance
of other types of investments. Some advertisements may also include published
editorial comments and performance rankings by independent organizations and
publications that monitor the performance of separate accounts and mutual
funds.
The Sub-Accounts may advertise average annual total return performance
information according to the SEC standardized formula. Average annual total
return shows the average annual percentage increase, or decrease, in the value
of a hypothetical $1,000 contribution allocated to a Sub-Account from the
beginning to the end of each specified period of time. The SEC standardized
formula gives effect to all applicable charges under the Contracts. This method
of calculating performance further assumes that (i) a $1,000 contribution was
allocated to a Sub-Account, (ii) no transfers or additional payments were made
and (iii) the withdrawal of the investment occurs at the end of the period.
Premium taxes are not included in the term "charges" for purposes of this
calculation. The Sub-Accounts may also advertise this total return performance
as described above on a cumulative basis.
The Sub-Accounts may present total return information computed on a calendar
year basis. The Sub-Accounts may also present total return information over
specified periods of time (computed on an average annual or cumulative basis)
assuming that no administrative charge will be deducted. The Sub-Accounts may
present hypothetical examples that apply the total return to a hypothetical
initial investment. The Sub-Accounts may also present total return information
based on different amounts of periodic investments. For additional performance
information, please refer to the Statement of Additional Information.
PUBLISHED RATINGS
From time to time, in advertisements or in reports to Contractholders,
UNUM/America may reflect endorsements. Endorsements are often in the form of a
list of organizations, individuals or other parties which recommend
UNUM/America or the Contracts. The endorser's name will be used only with the
endorser's consent. It should be noted that the list of endorsements may change
from time to time.
Also, from time to time, the rating of UNUM/America as an insurance company
by A.M. Best may be referred to in advertisements or in reports to
Contractholders. Each year the A.M. Best Company reviews the financial status
of thousands of insurers, culminating in the assignment of Best's Ratings.
These ratings reflect Best's opinion of the relative financial strength and
operating performance of an insurance company in comparison to the norms of the
life/health insurance Industry. Best's ratings range from A++ to F.
In addition, the claims-paying ability of UNUM/America as measured by the
Standard and Poor's Rating Group may be referred to in advertisements or in
reports to Contractholders. A Standard and Poor's insurance claims-paying
ability rating is an assessment of an operating insurance company's financial
capacity to meet the obligations of its insurance policies in accordance with
their terms. Standard and Poor's ratings range from AAA to CCC.
From time to time UNUM/America may refer to Moody's Investors Service rating
of UNUM/America. Moody's Investors Service financial strength ratings indicate
an insurance company's ability to discharge policyholder obligations and claims
and are based on an analysis of the insurance company and its relationship to
its parent, subsidiaries, and affiliates. Moody's Investors Service ratings
range from Aaa to C.
10
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CONDENSED FINANCIAL INFORMATION
The financial data included below should be read in conjunction with the
financial statements and the related data included in the Statement of
Additional Information.
ACCUMULATION UNIT VALUES
(FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996
SUB-ACCOUNT ------- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Index Account
December 12
Commencement $9.9060
Beginning of Period $9.9629 $ 9.4953 $12.1814 $12.8906 $13.9245 $13.8792 $18.7565
End of Period $9.9629 $9.4953 $12.1814 $12.8906 $13.9245 $13.8792 $18.7565 $22.7054
Growth I Account
May 1 Commencement $ 10.00
Beginning of Period $12.1759 $13.1505 $15.5094 $15.3208 $20.4909
End of Period $12.1759 $13.1505 $15.5094 $15.3208 $20.4909 $23.2198
Growth II Account
May 1 Commencement $ 10.00
Beginning of Period $11.5975 $11.3049 $12.3212 $12.0313 $15.5840
End of Period $11.5975 $11.3049 $12.3212 $12.0313 $15.5840 $14.7133
Asset Manager Account
May 1 Commencement $ 10.00
Beginning of Period $10.7598 $11.8933 $14.2241 $13.1979 $15.2510
End of Period $10.7598 $11.8933 $14.2241 $13.1979 $15.2510 $17.2668
Balanced Account
May 1 Commencement $ 10.00
Beginning of Period $12.4515 $11.5582 $12.2957 $12.2225 $14.6286
End of Period $12.4515 $11.5582 $12.2957 $12.2225 $14.6286 $16.2128
International Stock
Account
May 2 Commencement $ 10.00
Beginning of Period $ 9.8622 $10.8333
End of Period $ 9.8622 $10.8333 $12.2756
Socially Responsible
Account
May 2 Commencement $ 10.00
Beginning of Period $ 9.9692 $12.7827
End of Period $ 9.9692 $12.7827 $14.2222
Equity-Income Account
May 2 Commencement $ 10.00
Beginning of Period $10.4780 $13.9856
End of Period $10.4780 $13.9856 $15.7898
Small Cap Account
May 2 Commencement $ 10.00
Beginning of Period $10.3818 $13.2713
End of Period $10.3818 $13.2713 $15.2861
Pending Allocation
Account
October 15 Commencement $ 10.00
Beginning Period $10.1054 $10.6938
End of Period $10.1054 $10.6938 $11.2772
</TABLE>
NUMBER OF ACCUMULATION UNITS OUTSTANDING AT END OF PERIOD
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996
---- ------ ------- ------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Index Account 0 72,405 296,075 836,187 1,526,878 1,929,447 2,395,545 3,057,792
Growth I Account 5,166 317,275 1,340,146 3,071,862 4,459,417 5,843,047
Growth II Account 53,904 566,562 1,242,216 1,733,360 2,191,475 2,541,938
Asset Manager Account 36,645 462,405 2,232,731 4,369,937 4,882,920 5,447,414
Balanced Account 13,453 282,439 673,424 1,041,814 1,294,883 1,545,581
Socially Responsible
Account 26,073 133,871 328,168
Equity-Income Account 320,659 1,529,172 2,997,007
International Stock
Account 354,936 803,485 1,588,914
Small Cap Account 400,376 1,461,575 3,032,803
Pending Allocation
Account 11,980 21,372 35,465
</TABLE>
11
<PAGE>
Number of Fund Shares held by each of the corresponding Sub-Accounts as of
December 31st of each year.
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996
---- ------ ------- ------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dreyfus Stock Index Fund 0 58,271 241,984 703,885 1,611,415 2,070,026 2,613,187 3,424,850
Fidelity's Variable
Insurance Products
Fund:
Growth Portfolio 0 0 3,399 211,238 900,965 2,170,399 3,130,382 4,358,634
American Century
Variable Portfolios,
Inc.:
VP Capital Appreciation 0 0 72,384 756,506 1,642,987 2,264,937 2,832,766 3,653,828
Fidelity's Variable
Insurance Products Fund II:
Asset Manager's
Portfolio 0 0 31,429 412,427 2,060,497 4,183,403 4,717,794 5,557,982
American Century
Variable Portfolios,
Inc.:
VP Balanced 0 0 27,075 568,960 1,364,740 2,137,066 2,691,551 3,324,693
Calvert Responsibly
Invested Balanced
Portfolio 0 0 0 0 0 180,421 1,005,155 2,631,922
Fidelity's Variable
Insurance Products
Fund:
Equity-Income Portfolio 0 0 0 0 0 218,939 1,110,190 2,251,100
T. Rowe Price
International Stock
Portfolio 0 0 0 0 0 343,942 773,288 1,543,703
Dreyfus Variable
Investment Fund:
Small Cap Portfolio 0 0 0 0 0 113,847 420,623 890,516
Fidelity's Variable
Insurance Products
Fund:
Money Market Portfolio 0 0 0 0 0 121,067 228,610 399,944
</TABLE>
FINANCIAL STATEMENTS
The financial statements of the Variable Investment Division and of
UNUM/America may be found in the Statement of Additional Information.
UNUM/AMERICA, LINCOLN LIFE,
THE VARIABLE INVESTMENT DIVISION AND THE FUNDS
UNUM LIFE INSURANCE COMPANY OF AMERICA
UNUM/America is a life insurance company originally chartered under Maine law
in 1966 as Unionmutual Stock Life Insurance Company of America. On November 18,
1986, its name was changed to UNUM Life Insurance Company of America. On
December 31, 1991, it was merged with UNUM Life Insurance Company and UNUM
Pension and Insurance Company, with the surviving company being UNUM Life
Insurance Company of America ("UNUM/America"). UNUM/America's principal
executive offices are located at 2211 Congress Street, Portland, Maine 04122.
UNUM/America's telephone number is (207) 770-2211. UNUM/America provides a
broad line of disability, health and life insurance products, in addition to
group retirement products. UNUM/America is currently licensed to issue variable
contracts in 47 states and the District of Columbia. Administrative services
necessary for the operation of the Variable Investment Division and the
Contracts are provided by The Lincoln National Life Insurance Company. See
"Deductions and Charges--Annual Administration Charge."
UNUM/America is a subsidiary of UNUM Holding Company and its wholly-owned
parent company, UNUM Corporation. UNUM Corporation was organized under Delaware
law on January 11, 1985. UNUM Corporation is a publicly-owned company whose
stock is traded on the New York Stock Exchange. UNUM Corporation has
consolidated assets of $15.5 billion as of December 31, 1996.
ACQUISITION AGREEMENT WITH THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
On October 1, 1996 (the "Closing Date"), UNUM/America completed the sale of
its tax-sheltered annuity business to The Lincoln National Life Insurance
Company ("Lincoln Life"), pursuant to an acquisition agreement with Lincoln
Life (the "Acquisition Agreement"). Under the Acquisition
12
<PAGE>
Agreement, Lincoln Life assumed UNUM/America's obligations under the Contracts
(other than those obligations to Contractholders and/or Participants who
neither consented nor were deemed to have consented to the assumption).
Lincoln Life is a stock life insurance company incorporated under the laws of
Indiana on June 12, 1905. Lincoln Life is principally engaged in offering life
insurance policies and annuity policies, and ranks among the largest United
States stock life insurance companies in terms of assets and life insurance in
force. Lincoln Life is also one of the leading life reinsurers in the United
States. Lincoln Life is licensed in all states (except New York) and the
District Of Columbia, Guam, and the Virgin Islands.
Lincoln-NY is a life insurance company chartered under New York law on June
6, 1996. Lincoln-NY is licensed to sell variable contracts in New York.
Lincoln-NY is a subsidiary of Lincoln Life.
Lincoln Life is wholly owned by Lincoln National Corporation ("LNC"), a
publicly held insurance holding company incorporated under Indiana law on
January 5, 1968. The principal office of Lincoln Life is located at 1300 South
Clinton Street, Fort Wayne, Indiana 46801. The principal office of LNC is
located at 200 East Berry Street, Fort Wayne, Indiana 46802. Through
subsidiaries, LNC engages primarily in the issuance of life insurance and
annuities, property-casualty insurance, and other financial services.
UNUM/America and Lincoln Life have notified or will notify Contractholders
and/or Participants regarding the assumption of their Contracts by Lincoln
Life. In some states the Contractholder will be deemed to have consented to the
assumption if it does not opt out within a certain time period. In other states
affirmative consent will be sought. If the Contractholder opts out of the
assumption (or refuses to consent where affirmative consent is required),
UNUM/America will remain as the insurer of the Contract and Participants under
that Contract will not be given the opportunity to have their certificates
assumed by Lincoln Life. Whether or not a Contract is assumed by Lincoln Life,
it will be administered by Lincoln Life. If the Contractholder consents to the
assumption or is deemed to have consented to the assumption, as applicable,
UNUM/America and Lincoln Life will notify each Participant under the Contract
regarding the assumption and provide each Participant an opportunity to opt
out. (If required, affirmative Participant consent will be sought.) If, under a
Contract some Participants opt out and some do not, the Contract will be
bifurcated--one Contract will have UNUM/America as the insurer and the other
will have Lincoln Life as the insurer. Both Contracts, however, will be
administered by Lincoln Life. As noted above, the notification process is
subject to regulatory requirements which vary from state to state. Thus the
notification procedures employed by UNUM/America and Lincoln Life may vary from
those described above. In any event, Contractholders and/or Participants will
receive all notifications and be given all consent and opt out rights required
by law.
Assuming that an assumption is approved under the above procedures, the
effect of the assumption is to substitute Lincoln Life for UNUM/America as the
insurer. In addition, a Participant's Account balance in the Variable
Investment Division will be transferred to a Lincoln Life separate account as
of the effective date of the assumption of the obligations to the Participant
under the Contract by Lincoln Life. The assumption will result in the
substitution of Lincoln Life for UNUM/America as the insurer under the
Contracts (thus, Lincoln Life will back the guarantees of the Guaranteed
Interest Division), and the transfer of Account balances to the Lincoln Life
separate account. Otherwise, the rights of Contractholders and Participants
under the Contracts will not change solely as a result of the assumption. There
will be no adverse tax consequences to Contractholders or Participants as a
result of the transfer. See "Federal Income Tax Considerations."
UNUM/America and Lincoln Life currently expect that UNUM/America will
continue to offer the Contracts after the Closing Date in those states where
Lincoln Life has not yet received all the approvals necessary to sell its own
group annuity Contracts. While such Contracts would be issued by UNUM/America,
Contractholders and/or Participants will be required to agree, at the time such
13
<PAGE>
Contracts are issued, to an automatic transfer of such Contracts to Lincoln
Life at such time as Lincoln Life receives the necessary approvals to sell its
own Contracts. UNUM/America anticipates that it will continue to sell Contracts
on this basis for no more than eighteen months after the Closing Date.
In the event that, after the Closing Date, UNUM/America offers Contracts that
will be automatically assumed by Lincoln Life, Contractholders and Participants
will receive, at the time the Contract is offered or sold to them, a prospectus
or continue to other disclosures pertaining to Lincoln Life. It is currently
anticipated that the Lincoln Life separate account will invest in the
underlying Funds that are currently available through the Sub-Accounts of
UNUM/America's Variable Investment Division, but there can be no assurance that
such Funds will always be made available through the Lincoln Life separate
account.
LNC EQUITY SALES CORPORATION
LNC Equity Sales Corporation ("LNC Equity"), a registered broker-dealer, is
the principal underwriter of the Contracts. As such, LNC Equity will be
offering the Contracts and performing all duties and functions that are
necessary and proper for distribution of the Contracts. LNC Equity has also
entered into sales agreements with independent broker-dealers for the sale of
the Contracts. LNC Equity may pay sales commissions to broker-dealers up to an
amount equivalent to 3.5% of Contributions under a Contract. LNC Equity's
principal business office is at 3811 Illinois Road, Suite 205, Fort Wayne,
Indiana 46804.
THE VARIABLE INVESTMENT DIVISION
On December 31, 1991, pursuant to the merger of UNUM Life Insurance Company
and UNUM Pension and Insurance Company into UNUM/America, the Variable
Investment Division was transferred intact to UNUM/America. Prior to that, on
July 8, 1988, the Board of Directors of UNUM Life Insurance Company authorized
the establishment of the Variable Investment Division called the TSAVA Separate
Account in accordance with the Maine Insurance Code. On February 7, 1991, the
Board of Directors of UNUM Life Insurance Company expanded the scope of the
Variable Investment Division and changed its name to the VA-I Separate Account.
Under Maine law, the funds in the Variable Investment Division are owned by
UNUM/America and UNUM/America is not, nor can UNUM/America be, a trustee with
respect to those funds. The Variable Investment Division is registered with the
SEC as a unit investment trust under the Investment Company Act of 1940 ("1940
Act"). Registration with the SEC does not involve supervision of the management
or investment practices or policies of either the Variable Investment Division
or UNUM/America by the SEC.
The Variable Investment Division currently consists of nine Sub-Accounts. The
Sub-Accounts invest in shares of the Funds. Therefore, the investment
experience of the Sub-Accounts depends on the performance of the Funds.
The income, gains and losses, realized or unrealized, from assets allocated
to the Variable Investment Division are credited to or charged against the
Variable Investment Division, without regard to other income, gains or losses
in UNUM/America's general account or any other separate account. The Contract
provides that the assets of the Variable Investment Division may not be charged
with liabilities arising out of any other business of UNUM/America.
UNUM/America may accumulate in the Variable Investment Division proceeds from
charges under the Contract and other amounts in excess of the Variable
Investment Division assets representing Contract reserves and liabilities.
UNUM/America is the issuer of the Contracts and the obligations set forth
therein, other than those of the Contractholder or the Participant, are
UNUM/America's. As noted previously, however, UNUM/America has entered into an
agreement providing for the assumption of
14
<PAGE>
UNUM/America's obligations under the Contracts by Lincoln Life. See
"Acquisition Agreement with The Lincoln National Life Insurance Company."
THE FUNDS
The nine Sub-Accounts invest directly in nine corresponding Funds. Each of
these Funds was formed as an investment vehicle for insurance company separate
accounts.
Information about each of the Funds, including their investment objectives
and investment management, is contained below. Additional information about the
Funds, their investment policies, risks, fees and expenses and all other
aspects of their operations, can be found in the prospectuses for the Funds,
which should be read carefully before investing. There is no assurance that any
Fund will achieve its stated objectives. Additional copies of the Funds'
prospectuses, as well as their Statements of Additional Information, can be
obtained directly from each of the Funds without charge by writing to the
particular Funds at the addresses noted on the front of the Fund prospectus.
Shares of the Funds are sold not only to the Sub-Accounts but also to variable
annuity and variable life separate accounts of other insurance companies. For a
disclosure of possible conflicts involved in the Sub-Accounts investing in
Funds that are so offered, see the applicable Fund prospectus.
On the effective date of a Participant's transfer to Lincoln Life, the
Participant's Account balance in the Variable Investment Division will be
transferred to a Lincoln Life separate account. UNUM/America and Lincoln Life
intend that the Lincoln Life separate account will have nine Sub-Accounts which
will invest in the same nine Funds currently offered by UNUM/America's Variable
Investment Division. Any deletion of Funds or substitution of different Funds
would require regulatory approval. Additional Funds may nevertheless be added
or deleted in the future.
DREYFUS STOCK INDEX FUND
Dreyfus Stock Index Fund is an open-end, non-diversified management
investment company known as an index fund. Its goal is to provide investment
results that correspond to the price and yield performance of publicly traded
common stocks in the aggregate, as represented by the Standard & Poor's 500
Composite Stock Price Index. The Fund is neither sponsored by nor affiliated
with Standard & Poor's Corporation.
The Dreyfus Corporation, located at 200 Park Avenue, New York, New York
10166, acts as the Fund manager and Mellon Equity Associates, an affiliate of
Dreyfus located at 500 Grant Street, Pittsburgh, Pennsylvania 15258, is the
Fund index manager.
CALVERT RESPONSIBLY INVESTED BALANCED PORTFOLIO OF ACACIA CAPITAL CORPORATION
CALVERT RESPONSIBLY INVESTED BALANCED PORTFOLIO: The Calvert Responsibly
Invested Balanced Portfolio seeks total return above the rate of inflation
through an actively managed, nondiversified portfolio of common and preferred
stocks, bonds, and money market instruments which offer income and growth
opportunity and which satisfy the social concern criteria established for the
Portfolio. Shares of the Portfolio are offered only to insurance companies for
allocation to certain of their variable accounts.
The Calvert Asset Management Company, Inc., located at 4550 Montgomery
Avenue, Suite 1000N, Bethesda, Maryland 20814, serves as the Portfolio's
investment advisor.
THE SMALL CAP PORTFOLIO OF DREYFUS VARIABLE INVESTMENT FUND
Dreyfus Variable Investment Fund is an open-end, diversified management
investment company.
15
<PAGE>
THE SMALL CAP PORTFOLIO: The Portfolio seeks to maximize capital appreciation.
The Small Cap Portfolio seeks out companies that The Dreyfus Corporation
believes have the potential for significant growth. Under normal market
conditions, the Portfolio will invest at least 65% of its total assets in
companies with market capitalization of less than $1.5 billion, at the time of
purchase, both domestic and foreign, which the Portfolio believes to be
characterized by new or innovative products or services which should enhance
prospects for growth in future earnings. The Portfolio may also invest in
special situations such as corporate restructurings, mergers or acquisitions.
The Dreyfus Corporation, located at 200 Park Avenue, New York, New York
10166, serves as the Fund's investment adviser.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND: EQUITY INCOME PORTFOLIO, GROWTH
PORTFOLIO, AND MONEY MARKET PORTFOLIO
EQUITY-INCOME PORTFOLIO: The Portfolio seeks reasonable income by normally
investing at least 65% of its total assets in income-producing common or
preferred stock and the remainder in debt securities.
GROWTH PORTFOLIO: The Portfolio seeks to achieve capital appreciation. The
Portfolio normally purchases common stocks, although its investments are not
restricted to any one type of security. Capital appreciation may also be found
in other types of securities, including bonds and preferred stocks.
MONEY MARKET PORTFOLIO: The Portfolio seeks to obtain as high a level of
current income as is consistent with preserving capital and providing
liquidity. For more information regarding the Portfolio, into which initial
Contributions are invested pending UNUM/America's receipt of a complete order,
please see the "Initial Contributions" section.
Fidelity Management & Research Company ("FMR") is the manager of the Equity-
Income Portfolio, the Growth Portfolio and the Money Market Portfolio and is
located at 82 Devonshire Street, Boston, Massachusetts 02109.
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
ASSET MANAGER PORTFOLIO: The Portfolio seeks high total return with reduced
risk over the long term by allocating its assets among domestic and foreign
stocks, bonds and short-term fixed income instruments.
FMR is the manager of the Portfolio and is located at 82 Devonshire Street,
Boston, Massachusetts 02109. FMR or its affiliate may compensate Lincoln Life
or its affiliate for administrative, distribution, or other services. Such
compensation would be based on assets of the Fidelity Funds attributable to the
Contracts and certain other contracts issued by Lincoln Life and its
affiliates.
VP CAPITAL APPRECIATION AND VP BALANCED OF AMERICAN CENTURY VARIABLE
PORTFOLIOS, INC.
VP CAPITAL APPRECIATION: The Portfolio seeks capital growth by investing
primarily in common stocks that are considered by management to have better-
than-average prospects for appreciation.
VP BALANCED: The Portfolio seeks capital growth and current income. Its
investment team intends to maintain approximately 60% of the portfolio's assets
in common stocks that are considered by its manager to have better than average
prospects for appreciation and the balance in bonds and other fixed income
securities.
16
<PAGE>
American Century Variable Portfolios, Inc. is managed by American Century
Investment Management, Inc. (formerly Investors Research Corporation), which
also manages the American Century Family of mutual funds. American Century
Investment Management, Inc. has its principal place of business at 4500 Main
Street, Kansas City, Missouri 64111.
Lincoln Life or its affiliate may perform certain administrative or other
services that would otherwise be performed by American Century Services
Corporation, and American Century Investment Management, Inc. may pay Lincoln
Life or its affiliate for such services. Such compensation would be based on
assets of the American Century Funds attributable to the Contracts and certain
other contracts issued by Lincoln Life and its affiliates.
INTERNATIONAL STOCK PORTFOLIO OF T. ROWE PRICE INTERNATIONAL SERIES, INC.
INTERNATIONAL STOCK PORTFOLIO: The International Stock Portfolio seeks long-
term growth of capital through investments primarily in common stocks of
established, non-U.S. companies.
The Series is managed by Rowe Price-Fleming International, Inc., one of
America's largest international no load mutual fund managers with approximately
$25 million under management as of December 31, 1996, from its offices in
Baltimore, London, Tokyo, Hong Kong and Singapore.
CONTRACT PROVISIONS
GENERAL
UNUM/America has designed these Contracts for Employers and other entities to
enable Participants and Employers to accumulate funds for retirement programs
meeting the requirements of the following Sections of the Internal Revenue Code
of 1986, as amended (the "Code"): 401(a), 403(b), 408, 457 and other related
Sections as well as for programs offering non-qualified annuities. An Employer,
Association or trustee in some circumstances, may enter into a Contract with
UNUM/America by filling out an application and returning it to UNUM/America.
Upon UNUM/America's acceptance of the application, Contractholders or an
affiliated Employer can forward Contributions on behalf of employees who then
become Participants under the Contracts. For Plans that have allocated rights
to the Participant, UNUM/America will issue to each Participant a separate
Active Life Certificate that describes the basic provisions of the Contract to
each Participant.
CONTRIBUTIONS UNDER THE CONTRACT
Generally, under the Contracts, Contributions are forwarded by the
Contractholders to UNUM/America for investment. Depending on the Plan, the
Contributions may consist of salary reduction Contributions, Employer
Contributions or post-tax Contributions. Lincoln Life will administer the
Contracts after the Closing Date. Contractholders will be notified of any
change in procedures.
Contributions may accumulate on either a guaranteed or variable basis
depending upon the Divisions available under the Contract and/or the Division
in which the Contributions are deposited. Contributions to the Guaranteed
Interest Division become part of UNUM/America's General Account and are
guaranteed a minimum rate of interest.
UNUM/America will also declare in advance a guaranteed interest rate which
will be effective for all amounts in the Participant's Account balance in the
Guaranteed Interest Division during the designated year. This rate will never
be less than the minimum rate of interest. UNUM/America may also declare in
advance separate interest rate guarantees which are in excess of the guaranteed
interest rate for some or all of the Participant's Account balance in the
Guaranteed Interest Division for specific period(s) during the designated year.
UNUM/America assumes the risk of investment gain or loss on contributions to
the Guaranteed Interest Division. See "Guaranteed Interest Division."
17
<PAGE>
Contributions to the Variable Investment Division are credited with a rate of
return dependent upon the investment experience of the Sub-Accounts in which
the Contributions are invested.
Contributions by Participants may be in any amount unless there is a minimum
amount set by the Contractholder or Plan. A Contract may require the
Contractholder to contribute a minimum annual amount on behalf of all
Participants. Annual Contributions under Qualified Plans may be subject to
maximum limits imposed by the Code. Annual Contributions under non-qualified
plans may be limited by the terms of the Contract. In the Statement of
Additional Information see "Tax Law Considerations" for a discussion of these
limits. Subject to any restrictions imposed by the Plan or the Code, transfers
from other contracts and qualified rollover Contributions will be accepted.
Section 830.205 of the Texas Education Code provides that Employer or state
Contributions (other than salary reduction Contributions) on behalf of
Participants in the Texas Optional Retirement Program ("ORP") vest after one
year of participation in the program. UNUM/America will return Employer
Contributions to the Contractholder for those employees who terminate
employment in all Texas institutions of higher education before becoming
vested. During this first participation year in the ORP, ORP Participants may
only direct Employer and state Contributions to the Guaranteed Interest
Division.
Contributions must be in United States funds unless UNUM/America agrees in
writing to accept other currencies. Any non-US funds will be converted to U.S.
funds. All withdrawals and distributions under this Contract will be in U.S.
funds. If a bank or other financial institution does not honor the check or
other payment method constituting a Contribution, UNUM/America will treat the
Contribution as invalid. All allocation and subsequent transfers resulting from
the invalid Contributions shall be reversed and the party responsible for the
invalid Contribution shall reimburse UNUM/America for any losses or expenses
resulting from the invalid Contribution.
INITIAL CONTRIBUTIONS
The initial Contribution for a Participant will be credited to the
Participant's Account no later than two Business Days after it is received by
UNUM/America if it is preceded or accompanied by a completed enrollment form
containing all the information necessary for processing the Participant's
Contribution. If UNUM/America does not receive a complete enrollment form,
UNUM/America will notify the Contractholder or the Participant that
UNUM/America does not have the necessary information to process the
Contribution. If the necessary information is not provided to UNUM/America
within five (5) Business Days after UNUM/America first receives the initial
Contribution, UNUM/America will return the initial Contribution less any
withdrawal(s) by the Participant or by the Contractholder, unless the
Participant or the Contractholder specifically consents to UNUM/America
retaining the Contribution until the enrollment form is made complete.
Notwithstanding the above, when the Contract includes language regarding the
"Pending Allocation Account", the following shall apply: Where state approval
has been obtained, if UNUM/America receives Contributions which are not
accompanied by a properly completed Enrollment Form, UNUM/America will notify
the Contractholder of that fact and deposit the Contributions to the Pending
Allocation Account, unless such Contributions are designated to another Account
in accordance with the Plan. Within two business days of receipt of a properly
completed Enrollment Form, the Participant's Account balance in the Pending
Allocation Account will be transferred in accordance with the allocation
percentages elected on the Enrollment Form. All future Contributions will also
be allocated in accordance with these percentages until such time as the
Participant may notify UNUM/America of a change. If a properly completed
Enrollment Form is not received after three monthly notices have been sent, the
Participant's Account balance in the Pending Allocation Account will be
refunded to the Contractholder within 105 days of the date of the initial
Contribution. The Pending Allocation Account invests in Fidelity's Variable
Insurance Products Fund: Money Market Portfolio and is not available as an
investment option under the group annuity
18
<PAGE>
contract. Mortality & Expense Risk Charges and the Annual Administration Charge
do not apply to this Account. These charges will be applicable upon receipt of
a properly completed Enrollment Form and the Participant's contract
Participation Date will be the date money was deposited in the Pending
Allocation Account.
ALLOCATION OF CONTRIBUTIONS
A Participant must designate in writing, subject to the Plan, the percent of
their Contribution which will be allocated to each Division and to each Sub-
Account available under their Contract. The Contributions allocation percentage
to the Guaranteed Investment Division or any Sub-Account can be in any whole
percent. A Participant whose Employer offers two or more UNUM/America contracts
for the same type of Qualified or Non-Qualified Plan may allocate Contributions
to a maximum of ten Sub-Accounts and Guaranteed Interest Division.
Participants, subject to the terms of the Plan, may change the allocation of
Contributions by notifying UNUM/America in writing or by telephone in
accordance with procedures published by UNUM/America. Telephone requests for
allocation changes follow the same verification of identity rules as for
Transfers. (See "Telephone Transfers.") When UNUM/America receives a notice in
writing, the form must be acceptable to UNUM/America. Upon receipt by
UNUM/America, the change will be effective for all Contributions received
concurrently with the allocation change form and for all future Contributions,
unless a later date is requested. Changes in the allocation of future
Contributions have no effect on amounts a Participant may have already
contributed. Such amounts, however, may be transferred between Divisions and
Sub-Accounts pursuant to the requirements described in "Transfers between
Divisions and Sub-Accounts." Allocations of employer contributions may be
restricted by the applicable plan.
SUBSEQUENT CONTRIBUTIONS
The Contractholder will forward Contributions to UNUM/America specifying the
amount being contributed on behalf of each Participant. The Contractholder must
send Contributions and provide such allocation information in accordance with
procedures established by UNUM/America. The Contributions shall be allocated
among the Guaranteed Interest Division and the Variable Investment Division in
accordance with the Contractholder's or the Participant's written instructions
as described above in "Allocation of Contributions."
INVESTMENT OF CONTRIBUTIONS
Contributions are invested as of the date of receipt at UNUM/America,
provided that they are received on a Business Day and allocation information is
provided in a form acceptable to UNUM/America in accordance with procedures
established by UNUM/America. Contributions on behalf of a Participant which are
allocated to the Variable Investment Division will be credited with
Accumulation Units as of that date. A Participant's interest in the Variable
Investment Division during the Accumulation Period is the value of the
Participant's Accumulation Units in the Variable Investment Division. The
number of Accumulation Units credited to a Participant's Account in a Sub-
Account is calculated by dividing the Contribution allocated to the Sub-Account
by the dollar value of an Accumulation Unit next determined after receipt of
the Contribution. The number of Accumulation Units purchased will not vary as a
result of any subsequent fluctuations in the Accumulation Unit Value. The
Accumulation Unit Value, of course, fluctuates with the investment performance
of the underlying Fund and also reflects deductions and charges made against
the Variable Investment Division.
DETERMINATION OF ACCUMULATION UNIT VALUE
UNUM/America determines the Accumulation Unit Value of each Sub-Account on
each Valuation Date. The Accumulation Unit Values for all Sub-Accounts other
than the Index Account were initially
19
<PAGE>
set at ten dollars ($10). The Accumulation Unit Value was initially set at
$9.9060 for the Index Account. Subsequent Accumulation Unit Values are
determined by multiplying the Net Investment Factor for the current Valuation
Period by the Accumulation Unit Value as of the end of the immediately
preceding Valuation Period.
UNUM/America uses a Net Investment Factor to measure the daily fluctuations
in value of a Sub-Account. The Net Investment Factor for any Valuation Period
is determined as follows:
(a) The net asset value per share of the underlying Fund as of the end of
a Valuation Period is added to the amount per share of any dividends or
capital gain distributions paid by the Fund during that Valuation Period;
(b) The amount in (a) above is then divided by the net asset value per
share of the underlying Fund as of the end of the immediately preceding
Valuation Period;
(c) The result of (a) divided by (b) is then multiplied by one minus the
annual mortality and expense risk charge to the n/365th power where n
equals the number of calendar days since the immediately preceding Valua-
tion Date.
The above calculation will be adjusted by the amount per share of any taxes
which are incurred by UNUM/America because of the existence of the Variable
Investment Division.
The Participant's Account balance is equal to the sum of the Participant's
Account balances in both the Variable Investment Division and the Guaranteed
Interest Division.
TRANSFERS BETWEEN DIVISIONS AND SUB-ACCOUNTS
During the Accumulation Period and subject to the terms of the Plan,
transfers may be made of all or part of a Participant's Account balance in any
Division or Sub-Account to another Sub-Account or Division. Transfers will not
change the allocation of future Contributions to the Divisions and Sub-
Accounts. UNUM/America does not require that any minimum amount be transferred.
To effect a transfer, UNUM/America must receive a written transfer request in a
form acceptable to UNUM/America. During any one calendar year, a Participant
may make one transfer from the Guaranteed Interest Division to the Variable
Investment Division in an amount not to exceed 20% of the Guaranteed Interest
Division Account balance pursuant to the provisions of the Contract.
Transfers to or from the Variable Investment Division are made using the
Accumulation Unit Value next computed following UNUM/America's receipt of the
written transfer request.
TELEPHONE TRANSFERS BETWEEN DIVISIONS AND SUB-ACCOUNTS
UNUM/America may accept telephone transfers from Participants when this is
allowed by the Contractholder. In order to prevent unauthorized or fraudulent
transfers, UNUM/America will require a Participant to provide certain
identifying information before UNUM/America will act upon their instructions.
UNUM/America may also assign the Participant a Personal Identification Number
(PIN) to serve as identification. UNUM/America will not be liable for following
telephone instructions it reasonably believes are genuine. Telephone transfer
requests may be recorded and written confirmation of all transfer requests will
be mailed to the Participant or Contractholder on the next Business Day.
Telephone transfers will be processed on the Business Day that they are
received when they are received at the UNUM/America Home Office before 4:00
p.m. Eastern Time. If the Participant or Contractholder determines that a
transfer has been made in error, the Participant or Contractholder must notify
UNUM/America within 30 days of the confirmation notice date. See "Contract
Provisions, Transfers between Divisions and Sub-Accounts."
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WITHDRAWALS
During the Accumulation Period and subject to the terms of the Plan,
withdrawals may be made from either or both Divisions of all or part of the
Participant's Account balance in a Division or Sub-Account remaining after
deductions for any applicable (1) Annual Administration Charge (imposed on
Total Withdrawals), (2) premium taxes, and (3) outstanding loan including loan
security. Annuity Conversion Amounts are not considered withdrawals. See
"Annuity Period, Annuities: General."
Special limits apply to withdrawals (and transfers to the Variable Investment
Division) from the Guaranteed Interest Division. See "Guaranteed Interest
Division."
Notwithstanding such limits, a Participant may withdraw 100% of their
Guaranteed Interest Division Account balance at any time provided that
UNUM/America receives satisfactory proof of the following events: (a) the
Participant has attained age 59 1/2; (b) the Participant has died; (c) the
Participant has incurred a disability as defined under the Contract; (d) the
Participant has separated from service from their Employer; or (e) the
Participant has incurred a financial hardship. A Contractholder has options of
(i) choosing to eliminate financial hardship as an event entitling the
Participant to a 100% withdrawal from the Contract; and/or (ii) adding a
requirement that the Participant be 55 years of age and separated from service
to be entitled to a 100% withdrawal from the Guaranteed Interest Division.
Contractholders choosing one or more of these options may receive a higher
declared interest rate on the Guaranteed Interest Division than will holders of
Contracts without these provisions.
All withdrawal requests must indicate the amount to be withdrawn and be
submitted in a form acceptable to UNUM/America. If the request does not specify
the Sub-Accounts and/or the Divisions from which the withdrawal is to be made,
the withdrawal will be made pro rata based on balances in the Sub-Accounts and
the Guaranteed Interest Division. UNUM/America does not require that any
minimum amount be withdrawn. Telephone withdrawal requests are not available.
Withdrawals from the Variable Investment Division are made by reducing the
Participant's number of Accumulation Units in the applicable Sub-Account. In
determining the number of Accumulation Units to be reduced, UNUM/America uses
the Accumulation Unit Value next computed after UNUM/America's receipt of the
written withdrawal request.
Payment of all Variable Investment Division withdrawal amounts will be made,
within the time period allowed under current Federal law but in no case later
than seven days, after receipt by UNUM/America of the withdrawal request in a
form acceptable to UNUM/America. See "Market Emergencies."
TOTAL WITHDRAWALS
A Total Withdrawal can only be made by a Participant who has no outstanding
loans under the Contract. A Total Withdrawal of a Participant's Account will
occur when (a) the Participant or Contractholder requests the liquidation of
the Participant's entire Account balance, or (b) the amount requested results
in a remaining Participant's Account balance of less than or equal to the
Annual Administration Charge, in which case the request is treated as if it
were a request for liquidation of the Participant's entire account balance.
Any Active Life Certificate must be surrendered to UNUM/America when a Total
Withdrawal occurs. If a Contractholder resumes Contributions on behalf of a
Participant after a Total Withdrawal, the Participant will receive a new
Participation Date and Active Life Certificate.
A Participant refund under the free-look provisions is not considered a Total
Withdrawal.
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PARTIAL WITHDRAWALS
A Partial Withdrawal of a Participant's Account will occur when less than a
Total Withdrawal is made from a Participant's Account.
SYSTEMATIC WITHDRAWAL OPTION
Participants who are at least age 59 1/2, are separated from service from
their employer, or are disabled, and certain spousal beneficiaries and
alternate payees who are former spouses, may be eligible for a Systematic
Withdrawal Option ("SWO") under the Contract. Under the SWO a Participant may
elect to withdraw either a monthly amount which is an approximation of the
interest earned between each payment period based upon the interest rate in
effect at the beginning of each respective payment period, or a flat dollar
amount withdrawn on a periodic basis. Payments are made only from the
Guaranteed Interest Account. A Participant must have a vested pre-tax account
balance of at least $10,000 in order to select the SWO. A Participant may
transfer amounts from the Variable Investment Division to the Guaranteed
Interest Division in order to support SWO payments. These transfers, however,
are subject to the transfer restrictions described in this Prospectus and/or
imposed by any applicable Plan. A one-time fee of up to $30 may be charged to
set up the SWO. This charge is waived for total vested pre-tax account balances
of $25,000 or more. Additional restrictions applicable to withdrawals under a
Contract generally may also apply to exercise of the SWO. More information
about SWO, including applicable fees and charges, is available in the Contracts
and Active Life Certificates as well as from UNUM/America.
MAXIMUM CONSERVATION OPTION
Under certain Contracts participants who are at least age 70 1/2 may request
that UNUM/America calculate and pay to them the minimum annual distribution
required by Sections 401(a)(9), 403(b)(10), 408(a) or 457(d) of the Code. The
Participant must complete forms as required by UNUM/America in order to elect
this option. UNUM/America will base its calculation solely on the Participant's
Account Value with UNUM/America. Participants who select this option are
responsible for determining the minimum distributions amount applicable to
their non-UNUM/America contracts.
WITHDRAWAL RESTRICTIONS
Withdrawals under Section 403(b) Contracts are subject to the limitations
under Section 403(b)(11) of the Code and regulations thereof and in any
applicable Plan document. That section provides that salary reduction
Contributions deposited and earnings credited on any salary reduction
Contributions after December 31, 1988 may only be withdrawn if the Participant
has (1) died; (2) become disabled; (3) attained age 59 1/2; (4) separated from
service; or (5) incurred a hardship. Amounts accumulated in one Section
403(b)(1) contract may be transferred to another Section 403(b)(1) contract or
Section 403(b)(7) custodial account without a penalty under the Code. If
amounts accumulated in a Section 403(b)(7) custodial account are deposited in a
Contract, such amounts will be subject to the same withdrawal restrictions as
are applicable to post-1988 salary reduction Contributions under the Contracts.
For more information on these provisions see "Federal Income Tax
Considerations."
Withdrawal requests for a Participant under Section 457(b) Plans and Plans
subject to Title I of ERISA must be authorized by the Contractholder on behalf
of a Participant. All withdrawal requests will require the Contractholder's
written authorization and written documentation specifying the portion of the
Participant's Account balance which is available for distribution to the
Participant. Withdrawal requests for Section 457(f) Plans must be requested by
the Contractholder.
As required by Section 830.105 of the Texas Education Code, withdrawal
requests by Participants in the Texas Optional Retirement Program ("ORP") are
only permitted in the event of
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(1) death; (2) retirement; (3) termination of employment in all Texas
institutions of higher education; or (4) attainment of age 70 1/2. A
Participant in an ORP Contract is required to obtain a certificate of
termination from the Participant's Employer before a withdrawal request can be
granted.
For withdrawal requests (other than transfers to other investment vehicles),
by Participants under Plans not subject to Title I of ERISA and non-457 Plans,
the Participant must certify to UNUM/America that one of the events listed in
the Code has occurred (and provide supporting information, if requested) and
that UNUM/America may rely on such representation in granting such withdrawal
request. See "Federal Income Tax Considerations." A Participant should consult
their tax adviser as well as review the provisions of their Plan before
requesting a withdrawal.
In addition to the restrictions noted above, a Plan may contain additional
withdrawal or transfer restrictions.
Early withdrawals, as defined under Section 72(q) and 72(t) of the Code, may
be subject to a ten percent excise tax.
DEATH BENEFITS
The payment of death benefits will be governed by the provisions of the
applicable Plan and the Code. In the event of the death of a Participant during
the Accumulation Period, UNUM/America will pay the Beneficiary, if one is
living, or the Plan the greater of the following amounts:
(1) The Net Contributions, or
(2) The Participant's Account balance less any outstanding loan (includ-
ing principal and due and accrued interest), as of the date of notifica-
tion.
If UNUM/America is not notified of the Participant's death within six months
of such death, the Beneficiary will receive the Death Benefit amount described
in paragraph (2).
A Beneficiary may elect to have the Death Benefit (1) paid as a lump sum, (2)
converted to a Payout Annuity or (3) as a combination of a lump sum payment and
a Payout Annuity.
UNUM/America will calculate the Death Benefit as of the end of the Valuation
Period during which it receives both satisfactory notification of the
Participant's death and an election of a form of Death Benefit (as described
below). Payment of a lump sum election will be made within the time period
prescribed by Federal law but in no case later than seven days following such
calculation. Payment of an annuity option will be paid in accordance with the
provisions regarding annuities.
See "Annuity Period." If no election is made within sixty days following
UNUM/America's receipt of satisfactory notice of the Participant's death, the
Death Benefit will be paid in the form of a lump sum payment and will be
calculated as of the end of the Valuation Period during which that sixtieth day
occurs (and payment will be made within the time period prescribed by Federal
law but in no case later than seven days after such calculation date).
Satisfactory proof of death may consist of: 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; a written statement by a medical doctor who
attended the deceased at the time of death; or any other proof satisfactory to
UNUM/America.
Notwithstanding the above, if the Beneficiary is someone other than the
spouse of the deceased Participant, the Code provides that the Beneficiary may
not elect an annuity which would commence later than December 31st of the
calendar year following the calendar year of the Participant's death. If a non-
spousal Beneficiary elects to receive payment in a single lump sum, the Code
provides that such payment must be received no later than December 31st of the
fourth calendar year following the calendar year of the Participant's death.
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If the Beneficiary is the surviving spouse of the deceased Participant,
distributions are not required under the Code to begin earlier than December
31st of the calendar year in which the Participant would have attained age 70
1/2. If the surviving spouse dies before the date distributions commence, then,
for purposes of determining the date distributions to the Beneficiary must
commence, the date of death of the surviving spouse is substituted for the date
of death of the Participant.
If there is no living named Beneficiary on file with UNUM/America at the time
of a Participant's death and unless the Plan directs otherwise, UNUM/America
will pay the Death Benefit to the Participant's estate in the form of a lump
sum payment, upon receipt of satisfactory proof of the Participant's death, but
only if such proof of death is received by UNUM/America no later than the end
of the fourth calendar year following the year of the Participant's death. In
such case, valuation of the Death Benefit will occur as of the end of the
Valuation Period during which due proof of death is received by UNUM/America,
and the lump sum Death Benefit will be paid within the time period prescribed
by Federal law but in no case later than seven days of that date.
DEDUCTIONS AND CHARGES
CHARGES AGAINST THE VARIABLE INVESTMENT DIVISION
MORTALITY AND EXPENSE RISK CHARGES
Certain charges will be assessed as a percentage of the value of the net
assets of the Variable Investment Division to compensate UNUM/America for risks
assumed in connection with the Contracts.
UNUM/America deducts from the net assets of the Variable Investment Division
a daily charge of 1.20% on an annual basis.
This charge is assessed both during the Accumulation Period and the Annuity
Period although, during the Annuity Period, UNUM/America will bear no mortality
risk with respect to the Annuity Options that do not involve life
contingencies. This amount is intended to compensate UNUM/America for certain
Mortality and Expense Risks UNUM/America assumes in operating the Variable
Investment Division and for providing services to the Participant. The total
charge may not be altered.
The Expense Risk is the risk that UNUM/America's actual expenses in issuing
and administering the Contract will be more than UNUM/America estimated. The
Mortality Risk borne by UNUM/America arises from the chance that UNUM/America's
actuarial estimate of mortality rates during the Annuity Period, as guaranteed
in the Contract, may prove erroneous and that an Annuitant may live longer than
expected. This contractual guarantee assures that neither an Annuitant's own
longevity nor an improvement in life expectancy generally will have any adverse
effect under the Contracts. In addition, UNUM/America bears the Mortality Risk
that it guarantees to pay a Death Benefit that may be higher than the
Participant's Account balance upon the death of the Participant prior to the
Annuity Period.
CHARGES AGAINST THE CONTRACTS
The charges that UNUM/America assesses in connection with the Contracts are
described below.
ANNUAL ADMINISTRATION CHARGE
UNUM/America provides many administrative functions in connection with the
Contracts, including receiving and allocating Contributions in accordance with
the Contracts, making annuity
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payments when they become due, and preparing and filing all reports required to
be filed by the Variable Investment Division. In addition, UNUM/America
provides Participants with Account statements and accounting services that keep
track of pre-tax monies, employee and Employer monies, vested Account balances
and rollover or transferred monies.
In consideration for these administrative services, UNUM/America currently
deducts $25 (or the balance of the Participant's Account if less) per year from
each Participant's Account balance on the last Business Day of the month in
which a Participation Anniversary occurs. This charge is deducted only during
the Accumulation Period. This Annual Administration Charge is also withdrawn
from a Participant's Account balance if and when a Participant's Account is
totally withdrawn on any date other than the last Business Day of the month in
which the Participation Anniversary occurs.
The Annual Administration Charge may be reduced or waived for those
Participants who are participating under another UNUM/America contract which
imposes an Annual Administration Charge or where UNUM/America's interest costs
or expenses are reduced due to the terms of the Contract, economies of scale or
administrative assistance provided by the Contractholder. In addition, the
Employer has the option of paying the Annual Administration charge on behalf of
the Participants under a Contract.
Under certain Contracts, the Contractholder may also choose to have the
Annual Administration Charge paid only by those Participants in the Variable
Investment Division. Contracts offering this provision will typically have a
declared interest rate in the Guaranteed Interest Division which is lower than
under contracts not offering this provision. For contracts offering this
provision, the Annual Administration Charge will be withdrawn as described in
this section.
Since the Closing Date, Lincoln Life has administered the Contracts on behalf
of UNUM/America pursuant to an administrative services agreement. See
"Acquisition Agreement with The Lincoln National Life Insurance Company."
PREMIUM TAXES
Certain states require that a premium tax be paid on contributions to a
variable annuity contract. Others assess a premium tax at the time of
annuitization. UNUM/America will deduct any applicable premium tax from the
Participant's Account balance at the time required by state law.
MISCELLANEOUS
The Variable Investment Division purchases shares from the Funds at net asset
value. The net asset value reflects investment management fees and other
expenses that have already been deducted from the assets of the Funds. The
Funds' investment management fees, expenses and expense limitations, if
applicable, are more fully described in each prospectus for the Funds.
ANNUITY PERIOD
PAYOUT ANNUITIES: GENERAL
To the extent permitted by the Plan, the Participant, or the Beneficiary of a
deceased Participant, may elect to convert all or part of the Participant's
Account balance or the Death Benefit to a Payout Annuity. Payout Annuities are
available as either a Guaranteed or Variable Annuity or a combination of both.
Annuity payments from the Guaranteed Interest Division remain constant
throughout the annuity period. Annuity payments from the Variable Investment
Division fluctuate depending upon the investment experience of the applicable
Sub-Accounts. Variable Annuity payments are based upon Annuity Unit Values. See
"Annuity Payments" below and "Determination of Variable Annuity Payments" in
the Statement of Additional Information for further information.
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The Annuity Commencement Date marks the date on which the first annuity
payment is made to an Annuitant. For Plans subject to Section 401(a)(9)(B) of
the Code, a Beneficiary must select an Annuity Commencement Date that is not
later than one year after the date of the Participant's death. A Participant or
Contractholder may select any Annuity Commencement Date for the Annuitant which
is then reflected in the Retired Life Certificate. However, since an annuity
payment is considered a distribution under the Code, selection of an Annuity
Commencement Date may be affected by the distribution restrictions under the
Code and the minimum distribution requirements under Section 401(a)(9) of the
Code. See "Federal Income Tax Considerations." The selection of an Annuity
Commencement Date, the annuity option, the amount of the Payout Annuity and
whether the amount is to be paid as a Guaranteed or a Variable Annuity must be
made by the Participant in writing, in a satisfactory form, and received at
least 30 days in advance of the Annuity Commencement Date. After the Annuity
Commencement Date an Annuitant may not change either their annuity option or
the type (i.e., variable or guaranteed) of Payout Annuity for any amount
applied toward the purchase of an annuity.
The Annuity Conversion Amount is either the Participant's Account balance, or
a portion thereof, or the Death Benefit plus interest, as of the Annuity
Payment Calculation Date. For a Guaranteed Annuity, the Annuity Commencement
Date is typically one month after the Annuity Payment Calculation Date;
subsequent payments are at one month intervals from the Annuity Commencement
Date. For a Variable Annuity, the Annuity Commencement Date is 10 Business Days
after the initial Annuity Payment Calculation Date; subsequent monthly payments
have Annuity Payment Calculation Dates which are 10 Business Days prior. The 10
Business Days are necessary to calculate the amount of the Payout Annuity
payments and to mail the checks in advance of their monthly due dates.
If the Participant's Account balance or the Beneficiary's Death Benefit is
less than $2,000 or if the amount of the first scheduled payment is less than
$20, the annuity may be cancelled and the Participant or Beneficiary required
to accept payment of the entire amount in a lump sum.
PAYOUT ANNUITY PAYMENTS
The amount of each annuity payment will depend upon the Annuity Conversion
Amount applied to an annuity option, the form of the annuity option selected
and the age of the Participant at the Annuity Commencement Date. Unless
otherwise notified, the Participant's Account balance in the Guaranteed
Interest Division will be applied toward a Guaranteed Annuity and the
Participant's Account balance in the Variable Investment Division toward a
Variable Annuity.
The payment amount for a Guaranteed Annuity is determined by dividing the
Participant's Annuity Conversion Amount in the Guaranteed Interest Division as
of the initial Annuity Payment Calculation Date by the applicable Annuity
Conversion Factor as defined in the Contract.
The initial payment amount for a Variable Annuity is determined by dividing
the Participant's Annuity Conversion Amount(s) in the applicable Sub-
Account(s) as of the initial Annuity Payment Calculation Date by the applicable
Annuity Conversion Factor as defined in the Contract. The amounts of subsequent
payments vary depending on the investment experience of the Sub-Account(s) and
the interest rate option selected by the Contractholder or Annuitant. The
payment amounts will not be affected by UNUM/America's mortality or expense
experience and will not be reduced by an Annual Administration Charge. For
additional information on the determination of subsequent payment amounts,
refer to the Statement of Additional Information, "Determination of Variable
Annuity Payments."
PAYOUT ANNUITY OPTIONS
Participants are offered a range of annuity options including, but not
limited to, the following:
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SINGLE LIFE ANNUITY
Payments are made monthly during the lifetime of the Annuitant, and the
annuity terminates with the last payment preceding death.
LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10, 15 OR 20 YEARS
Payments are made monthly during the lifetime of the Annuitant with a monthly
payment guaranteed to the Beneficiary for the remainder of the selected number
of years, if the Annuitant dies before the end of the period selected. Payments
under this annuity option are smaller than a Single Life Annuity without a
guaranteed payment period.
JOINT LIFE ANNUITIES
Payments are made monthly during the joint lifetime of the Annuitant and a
designated second person.
NON-LIFE ANNUITIES
Annuity payments are guaranteed monthly for the selected number of years.
While there is no right to make any total or partial withdrawals during the
Annuity Period, an Annuitant who has selected this annuity option as a Variable
Annuity or a surviving Beneficiary may request at any time during the payment
period that the present value of any remaining installments be paid in one lump
sum.
Under Qualified Plans, any annuity selected must be payable over a period
that does not extend beyond the life expectancy of the Participant and the
Participant's designated Beneficiary. If the Beneficiary is someone other than
the Participant's spouse, the present value of payments to be made to the
Participant must be more than 50% of the present value of the total payments to
be made to the Participant and the Beneficiary.
In the event that an Annuitant dies before the end of a designated Annuity
period, the Beneficiary, if any, or the Annuitant's estate will receive any
remaining payments due under the annuity option in effect.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion assumes that the contracts will qualify as annuity
contracts for Federal income tax purposes. The description of the Federal
income tax status of amounts received under the Contracts is not exhaustive and
is not intended to cover all situations. Contractholders and Participants
should seek advice from their tax advisers on a regular basis as to the
application of Federal (and, where applicable, state and local) tax laws to
amounts received by them or their Beneficiaries under the Contracts. All dollar
amounts and percentages stated below are subject to change according to Federal
law. With respect to the transfer of Contracts from UNUM/America to Lincoln
Life or Lincoln-NY, there will be no adverse tax consequences to
Contractholders or participants as a result of the transfer. For additional
Federal Income Tax Considerations, please refer to the Statement of Additional
Information.
NON-QUALIFIED PLANS
Under a non-qualified Plan, an individual may make Contributions to the
Contract which are neither tax-deductible or tax deferred. The earnings on the
Contributions accumulate on a tax-deferred basis until withdrawn. Non-Qualified
Plans investing in annuity contracts are subject to the Federal Taxation rules
of Section 72 of the Code.
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The Code does not limit the Participant's contributions to a Section 72 plan.
There are no Code restrictions on withdrawals or minimum age when the
Participant must begin withdrawals.
Section 401(A) Plans. Section 401(a) of the Code provides special tax
treatment for pension, profit sharing and stock bonus Plans established by
employers for their employees. Contributions to a Section 401(a) Plan and any
earnings attributable to such Contributions are currently excluded from the
Participant's income. Section 401(a) Plans are subject to, among other things,
limitations on: maximum contributions, minimum coverage and participation,
minimum funding, minimum vesting requirements and distribution requirements.
The specific limitations are outlined in the plan document adopted by the
employer.
A Participant who makes a withdrawal from a Section 401(a) program must
include that amount in current income. In addition, Section 401(k)(2) of the
Code requires that salary reduction Contributions made and/or earnings credited
on any salary reduction Contributions may not be withdrawn from the
Participant's Section 401(k) program prior to the Participant having (1)
attained age 59 1/2, (2) separated from service, (3) become disabled, (4) died
or (5) incurred a hardship. Hardship withdrawals may not include any income
credited after December 31, 1988 that is attributable to any salary reduction
Contributions. In addition, Section 402 of the Code permits tax-free rollovers
from Section 401(a) programs to individual retirement annuities or certain
other Section 401(a) programs under certain circumstances.
Section 403(b) Plans. A Participant who is an employee of a hospital or other
tax-exempt organization described in Section 501(c)(3) or 501(e) of the Code
may exclude from current earnings amounts contributed to a Section 403(b)
program. Under the terms of a Section 403(b) program, an Employer may make
Contributions directly to the program on behalf of the Participant, the
Participant may enter into a salary reduction agreement with the Participant's
Employer authorizing the Employer to contribute a percentage of the
Participant's salary to the program and/or the Participant may authorize the
Employer to make after tax Contributions to the program. Currently, the Code
permits employees to defer up to $9,500 of their income through salary
agreements. All Contributions made to the Section 403(b) program are subject to
the limitations described in Code Sections 402(g) regarding elective deferral
amounts, 403(b)(2) regarding the maximum exclusion allowance, and 415(a)(2) and
415(c) regarding the limitations on annual additions.
A Participant who makes a withdrawal from their Section 403(b) program must
include that amount in current income. In addition, Section 403(b)(11) of the
Code requires that salary reduction Contributions made and/or earnings credited
on any salary reduction Contributions after December 31, 1988 may not be
withdrawn from the Participant's Section 403(b) program prior to the
Participant having (1) attained age 59 1/2, (2) separated from service, (3)
become disabled, (4) died or (5) incurred a hardship. Hardship withdrawals may
not include any income credited after December 31, 1988 that is attributable to
any salary reduction Contributions. The Internal Revenue Service has ruled
(Revenue Ruling 90-24) that amounts may be transferred between Section 403(b)
investment vehicles as long as the transferred funds retain withdrawal
restrictions at least as restrictive as that of the transferring investment
vehicle. 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. Qualified distributions
eligible for rollover treatment may be subject to a 20% federal tax withholding
depending on whether or not the distribution is paid directly to an eligible
retirement plan.
Section 408 Plans (IRAS). Under current law, individuals may contribute and
deduct the lesser of $2,000 or 100% of their compensation to an IRA. The $2,000
is increased to $4,000 when the IRA covers the taxpayer and a non-working
spouse. The deduction for Contributions is phased out for individuals who are
considered active participants under qualified Plans and whose Adjusted Gross
Income attains a certain level. For a single person the $2,000 deduction is
available when the taxpayers Adjusted Gross Income is $25,000 or less. For each
$50 that the taxpayer's Adjusted
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Gross Income rises above $25,000, the taxpayer's deductible IRA is reduced by
$10. When the single taxpayer's Adjusted Gross Income is $35,000 or greater, a
tax deduction for an IRA is no longer available. For a married couple filing
jointly, the threshold level is $40,000 rather than $25,000. For a married
person filing separately, the threshold is $0.
In addition, certain amounts distributed from Section 401(a) and 403(b) Plans
may be rolled over to an IRA on a tax-free basis if done in a timely manner
(within 60 days of the Participant's receipt of the distribution). The
limitations on contributions discussed above do not apply to amounts rolled
over to an IRA.
All Participants in an IRA receive an IRA Disclosure. This document explains
the tax rules that apply to IRAs in greater detail.
Eligible Section 457 Plans. Eligible Section 457 Plans may be established by
state and local governments as well as private tax-exempt organizations (other
than churches). Participants may contribute on a before tax basis to a deferred
compensation Plan of their employer in accordance with the employer's Plan and
Section 457 of the Code. Section 457 places limitations on the amount of
Contributions to these Plans. Generally, the limitation is one-third of
includable compensation or $7,500 whichever is less. In the Participant's final
year of employment the $7,500 limit is increased to $15,000.
Participants in an Eligible 457 Plan may not receive a withdrawal or other
distribution from their Plan except in the event of separation of service from
the employer, attainment of age 70 1/2, or when faced with an unforeseen
emergency. The Contractholder's Plan may further restrict the Participant's
rights to a withdrawal.
An employee electing to participate in an Eligible Section 457 Plan should
understand that their rights and benefits are governed strictly by the terms of
the Plan, that they are in fact a general creditor of the Employer under the
terms of the Plan, that the Employer is legal owner of any contract issued with
respect to the Plan and that the Employer retains all rights under the contract
issued with respect to the Plan. Participants under Eligible Section 457 Plans
should look to the terms of their Plan for any charges in regard to
participation other than those disclosed in this Prospectus.
Section 457(f) Plans. Section 457(f) Plans may be established by state and
local governments as well as private tax-exempt organizations. Employers and
Participants may contribute on a before-tax basis to a deferred compensation
Plan of their employer in accordance with the employer's Plan. Section 457(f)
does not place limitations on the amount of Contributions to these Plans;
however, the Internal Revenue Service may review these plans to determine if
the deferral amount is acceptable to the IRS based on the nature of the 457(f)
Plan.
Participants in 457(f) Plans may not receive a withdrawal or other
distribution from their 457(f) Plans until a distributable event occurs. The
Plan will define such events.
An employee electing to participate in a Section 457(f) Plan should
understand that their rights and benefits are governed strictly by the terms of
the Plan, that they are in fact a general creditor of the Employer under the
terms of the Plan, that the Employer is legal owner of any contract issued with
respect to the Plan and that the Employer retains all rights under the contract
issued with respect to the Plan. Participants under Section 457(f) Plans should
look to the terms of their Plan for any charges in regard to participating
other than those disclosed in this Prospectus.
Taxation of Annuities: General. In Qualified Plans such as 401(a), 403(b),
408 and Eligible 457 Plans, the Participant is not taxed on the value in their
accounts until they receive payments from the account. In some situations,
default or forgiveness of a loan will result in taxable income. Distributions
from all these Plans are taxed under the rules of Sections 72 and 402 of the
Code.
29
<PAGE>
Taxation Prior to the Annuity Commencement Date. Section 72 of the Code
provides that a total or partial withdrawal prior to the Annuity Commencement
Date will be taxable to the extent the amount of the income in the
Participant's account exceeds the Participant's investment in the Participant's
account. In general, distributions from a Participant's Account under Sections
401(a), 403(b) and 408 Plans under which the Participant made after-tax
contributions will be taxable according to a formula based on the ratio of the
Participant's investment in the contract to the total value of the
Participant's Account balance as of the date of the distribution. Under an
Eligible 457 Plan the Participant is taxed on the value when it is made
available to the Participant. In a 457(f) Plan the Participant is taxed when
their right to a distribution is no longer subject to a substantial risk of
forfeiture.
Penalty Tax for Premature Distributions. Sections 72(q) and 72(t) impose a
10% excise tax on certain premature distributions for non-qualified and Section
401(a), 403(b) and 408 Plans. The penalty tax will not apply to distributions
made on account of the Participant having (i) attained age 59 1/2; (ii) become
disabled; or (iii) died. The penalty tax will also not apply under 401(a) and
403(b) retirement plans where a Participant separates from service after age
55. In addition, the penalty does not apply if the distribution is received as
a series of substantially equal periodic payments made for the life (or life
expectancy) of the Participant or the joint lives (or life expectancies) of the
Participant and a designated Beneficiary. The 10% excise tax is an additional
tax; it does not apply to any money that the Participant receives as a return
of their cost basis. The 10% excise tax does not apply to Section 457 Plans.
Minimum Distributions. Participants in Plans subject to Code Sections 401(a),
403(b), 408 and Eligible 457 Plans are subject to Minimum Distribution Rules.
For a Participant who attains age 70 1/2 after December 31, 1987, distributions
must begin by April 1 of the calendar year following the calendar year in which
the Participant attains age 70 1/2. For a Participant who attains age 70 1/2
before January 1, 1988, distributions must begin on the April 1 of the calendar
year following the later of (1) the calendar year in which the Participant
attains age 70 1/2 or (2) the calendar year in which the Participant retires.
VOTING RIGHTS
UNUM/America is the legal owner of the shares of the Funds held by the
Variable Investment Division. As such, UNUM/America is entitled to vote those
Fund shares with respect to issues such as the election of a Fund's directors,
ratification of a Fund's choice of independent auditors and other matters
required by the 1940 Act to be voted on by shareholders.
In those years in which the Funds hold a shareholder meeting, UNUM/America
will solicit from Contractholders voting instructions with respect to Fund
shares held by the Variable Investment Division. Each Contractholder will
receive a number of votes in proportion to the Contractholder's investment in
the corresponding Sub-Account as of the record date established by the Fund.
During the Accumulation Period, a Participant has the right to instruct
Contractholders as to the votes attributable to their Participant Account
balance in the Sub-Accounts. Annuitants have similar rights with respect to the
annuity amount attributable to the Sub-Accounts.
UNUM/America will furnish Contractholders with sufficient Fund proxy material
and voting instruction forms for all Participants who have voting rights under
the Contract. UNUM/America will vote those Fund shares attributable to the
Contract for which UNUM/America receives no voting instructions in the same
proportion as UNUM/America will vote shares for which UNUM/America has received
instructions. UNUM/America will vote shares attributable to amounts
UNUM/America may have in the Variable Investment Division in the same
proportion as votes that UNUM/America receives from Contractholders. If the
federal securities laws or regulations or any interpretation of
30
<PAGE>
them changes so that UNUM/America is permitted to vote shares of the Fund in
UNUM/America's own right or to restrict Participant voting, UNUM/America may do
so.
Fund shares may be held by separate accounts of insurance companies
unaffiliated with UNUM/America. Fund shares held by those separate accounts
will be voted, in most cases, according to the instruction of owners of
insurance policies and contracts issued by those other unaffiliated insurance
companies. This will dilute the effect of the voting instructions of the
Contractholders in the Variable Investment Division. UNUM/America does not
foresee any disadvantage to this. Pursuant to conditions imposed in connection
with regulatory relief, the Fund's Board of Directors has an obligation to
monitor events to identify conflicts that may arise and to determine what
action, if any, should be taken. For further information, see the prospectuses
for the Funds.
OTHER CONTRACT PROVISIONS
RIGHTS RESERVED BY UNUM/AMERICA
UNUM/America reserves the right, subject to compliance with applicable law,
including approval by the Contractholder or the Participants if required by
law, (1) to create additional Sub-Accounts in the Variable Investment Division,
(2) to combine or eliminate Sub-Accounts in the Variable Investment Division,
(3) to transfer assets from one Sub-Account in the Variable Investment Division
to another, (4) to transfer assets to the General Account and other separate
accounts, (5) to cause the deregistration and subsequent re-registration of the
Variable Investment Division under the Investment Company Act of 1940, (6) to
operate the Variable Investment Division under a committee and to discharge
such committee at any time, and (7) to eliminate any voting rights which the
Contractholder or the Participants may have with respect to the Variable
Investment Division, (8) to amend the Contract to meet the requirements of the
Investment Company Act of 1940 or other federal securities laws and
regulations, (9) to operate the Variable Investment Division in any form
permitted by law, (10) to substitute shares of another fund for the shares held
by a Sub-Account, and (11) to make any change required by the Internal Revenue
Code, ERISA or the Securities Act of 1933. Participants will be notified if any
changes are made that result in a material change in the underlying investments
of the Variable Investment Division.
ASSIGNABILITY
The Contracts are not assignable without UNUM/America's prior written
consent. In addition, a Participant, a Beneficiary or an Annuitant may not,
unless permitted by law, assign or encumber any payment due under the Contract.
MARKET EMERGENCIES
While UNUM/America may not suspend the right of redemption or delay payment
from the Variable Investment Division for more than the time period allowed
under Federal law but in no case longer than seven days, the following events
may delay payment for more than seven days: (1) any period when the New York
Stock Exchange is closed (other than customary weekend and holiday closings);
(2) any period when trading in the markets normally utilized is restricted, or
an emergency exists as determined by the Securities and Exchange Commission, so
that disposal of investments or determination of the Accumulation Unit Value or
Variable Annuity payment value is not reasonably practicable; or (3) for such
other periods as the Securities and Exchange Commission by order may permit for
the protection of the Participants.
31
<PAGE>
CONTRACT DEACTIVATION
Under certain Contracts UNUM/America may deactivate a Contract by prohibiting
new contributions and/or new Participants after the date of deactivation.
UNUM/America will give the Contractholder and the Participants not less than 90
days notice of the date of deactivation.
FREE-LOOK PERIOD
Participants under Sections 403(b), 408 and certain Non-Qualified Plans will
receive an Active Life Certificate upon UNUM/America's receipt of a duly
completed participation enrollment form. If the Participant chooses not to
participate under the Contract, the Participant may exercise the free-look
right by sending a written notice to UNUM/America that the Participant does not
wish to participate under the Contract, within 10 days after the date the
Active Life Certificate is received by the Participant. For purposes of
determining the date on which the Participant has sent written notice, the
postmark date will be used.
If a Participant exercises the free-look right in accordance with the
foregoing procedure, UNUM/America will refund in full the Participant's
aggregate Contributions less aggregate withdrawals made on behalf of the
Participant or, if greater, with respect to Contributions to the Variable
Investment Division, the Participant's Account balance in the Variable
Investment Division on the date the Participant's written notice is received by
UNUM/America.
GUARANTEED INTEREST DIVISION
GENERAL
Contributions to the Guaranteed Interest Division become part of
UNUM/America's General Account. The General Account is subject to regulation
and supervision by the Maine Insurance Department as well as the insurance laws
and regulations of the jurisdictions in which the Contracts are distributed. In
reliance on certain exemptions, exclusions and rules, UNUM/America has not
registered the interests in the General Account as a security under the
Securities Act of 1933 and has not registered the General Account as an
investment company under the 1940 Act.
Accordingly, neither the General Account nor any interests therein are
subject to regulation under the 1933 Act or the 1940 Act. UNUM/America has been
advised that the staff of the SEC has not made a review of the disclosures
which are included in this prospectus which relate to the General Account and
the Guaranteed Interest Division. These disclosures, however, may be subject to
certain generally applicable provisions of the federal securities laws relating
to the accuracy and completeness of statements made in prospectuses. This
prospectus is generally intended to serve as a disclosure document only for
aspects of the Contract involving the Variable Investment Division and contains
only selected information regarding the Guaranteed Interest Division. Complete
details regarding the Guaranteed Interest Division are in the Contract.
Amounts contributed to the Guaranteed Interest Division are guaranteed a
minimum interest rate according to contract minimums of at least 3.0%.
UNUM/America will also declare in advance a guaranteed interest rate which will
be effective for all amounts in the Participant's Account balance in the
Guaranteed Interest Division during the designated year. This rate will never
be less than the minimum rate of interest. UNUM/America may also declare in
advance separate interest rate guarantees which are in excess of the guaranteed
interest rate for some or all of the Participant's Account balance in the
Guaranteed Interest Division for specific period(s) during the designated year.
A Participant who makes a Contribution to the Guaranteed Interest Division is
credited with interest beginning on the next calendar day following the date of
receipt if all Participant data is complete.
32
<PAGE>
PARTICIPANT'S ACCOUNT BALANCE IN THE GUARANTEED INTEREST DIVISION
The Participant's Account balance in the Guaranteed Interest Division on any
Valuation Date will reflect the amount and frequency of any Contributions
allocated to the Guaranteed Interest Division, plus any transfers from the
Variable Investment Division and interest credited to the Guaranteed Interest
Division, less any withdrawals, Annual Administration Charges and loan-related
charges allocated to the Guaranteed Interest Division and any transfers to the
Variable Investment Division.
TRANSFERS, TOTAL AND PARTIAL WITHDRAWALS
Special limits apply to transfers and withdrawals from the Guaranteed
Interest Division. During any one calendar year a Participant may make one
withdrawal, OR one transfer to the Variable Investment Division, from the
Guaranteed Interest Division, in an amount not to exceed 20% of the Guaranteed
Interest Division Account balance. Participants stating their intention to
liquidate their entire Guaranteed Interest Division Account balance, or
transfer it to the Variable Investment Division, however, may make one
withdrawal or transfer request for five consecutive calendar years from their
Guaranteed Interest Division Account balance in the following percentages:
<TABLE>
<CAPTION>
PERCENTAGE OF
YEAR REQUEST GUARANTEED INTEREST
RECEIVED BY UNUM DIVISION AVAILABLE
---------------- -------------------
<S> <C>
1 20%
2 25%
3 33.33%
4 50%
5 100%
</TABLE>
The five consecutive withdrawals may not be submitted more frequently than
twelve months apart. UNUM/America also reserves the right to require that any
Participant stating their intention to liquidate their Guaranteed Interest
Division Account balance stop Contributions to the Contract. The above
liquidation schedule is subject to the same conditions as other withdrawals.
LOANS
During a Participant's Accumulation Period, a Participant, whose Plan permits
loans, may apply for a loan under the Contract by completing a loan application
available from UNUM/America. Loans are secured by the Participant's Account
balance in the Guaranteed Interest Division. The amounts and terms of a
Participant loan may be subject to the restrictions imposed under Section 72(p)
of the Code, Title I of ERISA, and any applicable Plans. With respect to Plans
subject to Title I of ERISA, the initial amount of a Participant loan may not
exceed the lesser of 50% of the Participant's vested Account balance in the
Guaranteed Interest Division or $50,000 and must be at least $1,000. A
Participant in a Plan that is not subject to ERISA may borrow up to $10,000 of
their vested Account balance without regard to the 50% limitation stated above.
A Participant may have only one loan outstanding at any time and may not
establish more than one loan in any six month period. Amounts serving as
collateral for the loan are not subject to the minimum interest rate under the
Contract and will accrue interest at a rate which is below the loan interest
rate as provided in the contract. Under certain Contracts, a one-time fee of up
to $50 may be charged to set up a loan. More information about loans, including
interest rates and applicable fees and charges, is available in the Contracts,
Active Life Certificates, and the Annuity Loan Agreement as well as from
UNUM/America.
DEFERRAL PERIODS
If a payment is to be made from the Guaranteed Interest Division,
UNUM/America may defer the payment for the period permitted by the law of the
jurisdiction in which the Contract is distributed, but in no event, for more
than 6 months after a written election is received by UNUM/America. During the
period of deferral, interest at the then current interest rate will continue to
be credited to a Participant's Account in the Guaranteed Interest Division.
33
<PAGE>
TABLE OF CONTENTS FOR
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
DEFINITIONS.................................................................
DETERMINATION OF ACCUMULATION UNIT VALUES...................................
DETERMINATION OF VARIABLE ANNUITY PAYMENTS..................................
PERFORMANCE CALCULATIONS....................................................
TAX LAW CONSIDERATIONS......................................................
DISTRIBUTION OF CONTRACTS...................................................
CUSTODIAN...................................................................
INDEPENDENT AUDITORS/ACCOUNTANTS............................................
FINANCIAL STATEMENTS........................................................
Financial Statements of UNUM/America......................................
Financial Statements of Variable Investment Division......................
</TABLE>
34
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
GROUP ANNUITY CONTRACTS
FUNDED THROUGH THE INVESTMENT DIVISIONS OF
VA-I SEPARATE ACCOUNT
OF
UNUM LIFE INSURANCE COMPANY OF AMERICA
VARIABLE ANNUITY III
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions................................................................ 2
Determination of Accumulation Unit Values.................................. 2
Determination of Variable Annuity Payments................................. 3
Performance Calculations................................................... 4
Tax Law Considerations..................................................... 8
Distribution of Contracts.................................................. 11
Custodian.................................................................. 11
Independent Auditors....................................................... 11
Financial Statements....................................................... 11
Financial Statements of UNUM/America.....................................
Financial Statements of Variable Investment Division.....................
</TABLE>
This Statement of Additional Information (SAI) is not a prospectus. It should
be read in conjunction with the prospectus for the Group Annuity Contracts
(the "Contracts"), dated May 1, 1997.
A copy of the prospectus to which this SAI relates is available at no charge
by writing to P.O. Box 9740, Portland, Maine 04104 Attention: Tax Deferred
Annuities; or by calling (800) 341-0441.
80027
<PAGE>
DEFINITIONS
ANNUITANT: The person receiving annuity payments under the terms of this
Contract.
ANNUITY COMMENCEMENT DATE: The date on which UNUM/America makes the first
annuity payment to the Annuitant as required by the Retired Life Certificate.
This date, as well as the date each subsequent annuity payment is made, will
be the first day of a calendar month.
ANNUITY CONVERSION AMOUNT: The amount applied toward the purchase of an
Annuity.
ANNUITY CONVERSION FACTOR: The factor applied to the Annuity Conversion Amount
in determining the dollar amount of an Annuitant's annuity payments for
Guaranteed Annuities or the initial payment for Variable Annuities.
ANNUITY PAYMENT CALCULATION DATE: For Guaranteed Annuities, this is the first
day of a calendar month. For Variable Annuities, this is the Valuation Date
ten (10) business days prior to the first day of a calendar month.
ANNUITY PERIOD: The period concurrent with or following the Accumulation
Period, during which an Annuitant's annuity payments are made.
ANNUITY UNIT: An accounting unit of measure that is used in calculating the
amounts of annuity payments to be made from a Sub-Account during the Annuity
Period.
ANNUITY UNIT VALUE: The dollar value of an Annuity Unit in a Sub-Account on
any Valuation Date.
CODE: The Internal Revenue Code of 1986, as amended.
PAYOUT ANNUITY: A series of payments paid out under the terms of the Contract
as either a Guaranteed Annuity or as a Variable Annuity.
PLAN: The retirement program offered by an Employer to its employees to
accumulate funds for retirement.
VARIABLE ANNUITY: An annuity with payments that increase or decrease in
accordance with the investment results of the selected Sub-Accounts.
For the purpose of determining whether a given day is a business day, as that
term is defined in the prospectus, local business holidays may include
Veteran's Day (November 11), and a Monday preceding, or Friday following, a
day on which the New York Stock Exchange is not customarily open for business.
DETERMINATION OF ACCUMULATION UNIT VALUES
As described more fully in the prospectus, Contributions are allocated to the
Divisions in accordance with directions from the Employer. A Participant who
makes Contributions which are allocated to the Variable Investment Division is
credited with Accumulation Units. The following examples illustrate the method
by which UNUM/America determines the Net Investment Factor (NIF) for the
current Valuation Period and the Accumulation Unit Value as of the end of the
current Valuation Period.
DETERMINATION OF NIF:
- --------------------
(a) Assumed Fund net asset value as of the close of the New York Stock
Exchange on June 1 = 10.45
(b) Assumed Fund net asset value as of the close of the New York Stock
Exchange on June 2 = 10.56 (no capital gains or dividend distributions
or deductions for taxes)
(c) The NIF for the current Valuation Period = (b) divided by (a) times (1-
annual M & E) to the 1/365th power
(d) 1.010526 x .999966 = 1.0104916
2
<PAGE>
DETERMINATION OF ACCUMULATION UNIT VALUE:
- ----------------------------------------
The Accumulation Unit Value as of the end of the current Valuation Period is
determined by multiplying the NIF for the current Valuation Period by the
Accumulation Unit Value as of the end of the immediately preceding Valuation
Period.
(a) Assumed Accumulation Unit Value as of the end of the immediately
preceding Valuation Period = 11.125674.
(b) Accumulation Unit Value as of the end of the current Valuation Period =
11.125674 x 1.0104916 (NIF) = 11.2424.
The number of Accumulation Units which are credited to the Participant's
Account for each Sub-Account on each Valuation Date equals the amount of
Contributions allocated to the Sub-Account on each Valuation Date divided by
the Accumulation Unit Value rounded to four decimal places. For example,
(a) Participant's assumed Contribution allocated to a Sub-Account on June 2
= $150.
(b) Number of Accumulation Units credited to Participant = $150 divided by
11.2424 = 13.3423.
DETERMINATION OF VARIABLE ANNUITY PAYMENTS
As stated in the prospectus, the amount of each Variable Annuity payment will
vary depending on the investment experience of the selected Sub-Accounts.
The initial payment amount of the Annuitant's Variable Annuity for each Sub-
Account is determined by dividing his Annuity Conversion Amount in each Sub-
Account as of the initial Annuity Payment Calculation Date by the Applicable
Annuity Conversion Factor as defined as follows:
The Annuity Conversion Factors which are used to determine the initial
payments are based on the 1983 Individual Annuity Mortality Table, set back
four (4) years, and an interest rate in an integral percentage ranging from
zero to six percent (0 to 6.00%) as selected by the Annuitant.
The amount of the Annuitant's subsequent Variable Annuity payment for each
Sub-Account is determined by:
(a) Dividing the Annuitant's initial Variable Annuity payment amount by the
Annuity Unit Value for that Sub-Account selected for his interest rate
option as described above as of his initial annuity Payment Calculation
Date; and
(b) Multiplying the resultant number of annuity units by the Annuity Unit
Values for the Sub-Account selected for his interest rate option for his
respective subsequent Annuity Payment Calculation Dates.
The Annuity Unit Value for all Sub-Accounts for all interest rate options will
initially be set at ten dollars ($10). Each subsequent Annuity Unit Value for
a Sub-Account for an interest rate option is determined by:
Dividing the Accumulation Unit Value for the Sub-Account as of
subsequent Annuity Payment Calculation Date (APCD) by the Accumulation
Unit Value for the Sub-Account as of the immediately preceding APCD;
Dividing the resultant factor by one (1.00) plus the interest rate
option to the n/365 power where n is the number of days from the
immediately preceding APCD to the subsequent APCD; and
Multiplying this factor times the Annuity Unit Value as of the
immediately preceding APCD.
3
<PAGE>
ILLUSTRATION OF CALCULATION OF ANNUITY UNIT VALUE
<TABLE>
<S> <C>
1. Annuity Unit Value as of immediately preceding Annuity Payment Cal-
culation Date..................................................... $11.0000
2. Accumulation Unit Value as of Annuity Payment Calculation Date..... $20.0000
3. Accumulation Unit Value as of immediately preceding Annuity Payment
Calculation Date.................................................. $19.0000
4. Interest Rate...................................................... 6.00%
5. Interest Rate Factor (30 days)..................................... 1.0048
6. Annuity Unit Value as of Annuity Payment Calculation date =
1 times 2 divided by 3 divided by 5............................... $11.5236
</TABLE>
ILLUSTRATION OF ANNUITY PAYMENTS
<TABLE>
<S> <C>
1. Annuity Conversion Amount as of Participant's initial Annuity
Payment Calculation Date........................................ $100,000.00
2. Assumed Annuity Conversion Factor per $1 of Monthly Income for a
Participant's individual age 65 selecting a Single Life Annuity
with Assumed Interest Rate of 6%................................ $138.63
3. Participant's initial Annuity Payment = 1 divided by 2........... $721.34
4. Assumed Annuity Unit Value as of Participant's initial Annuity
Payment Calculation Date........................................ $11.5236
5. Number of Annuity Units = 3 divided by 4......................... 62.5968
6. Assumed Annuity Unit Value as of Participant's second Annuity
Payment Calculation Date........................................ $11.9000
7. Participant's second Annuity Payment = 5 times 6................. $744.90
</TABLE>
PERFORMANCE CALCULATIONS
STANDARD TOTAL RETURN CALCULATION
The Variable Investment Division may advertise average annual total return
information calculated according to a formula prescribed by the Securities and
Exchange Commission ("SEC"). Average annual total return shows the average
annual percentage increase, or decrease, in the value of a hypothetical
Contribution allocated to a Sub-Account from the beginning to the end of each
specified period of time. The SEC standardized version of this performance
information is based on an assumed Contribution of $1,000 allocated to a Sub-
Account at the beginning of each period and surrender or withdrawal of the
value of that amount at the end of each specified period, giving effect to any
charges and fees applicable under the Contract. The effect of the Annual
Administration Charge for a period is determined by dividing the total amount
of such charges collected in the previous year by the total average net assets
of the accounts for the previous year, as of the previous month ended;
accounts include accounts available under Variable Annuity III of UNUM/America
and under corresponding accounts of Lincoln Life, pending assumption
reinsurance by Lincoln Life of Variable Annuity III contracts issued through
such UNUM/America accounts. This method of calculating performance further
assumes that (i) a $1,000 Contribution was allocated to a Sub-Account and (ii)
no transfers or additional payments were made. Premium taxes are not included
in the terms "charges" for purposes of this calculation. Average annual total
return is calculated by finding the average annual compounded rates of return
of a hypothetical Contribution that would compare the Accumulation Unit value
on the first day of the specified period to the ending redeemable value at the
end of the period according to the following formula:
T = (ERV/C) 1/n - 1
Where T equals average annual total return, where ERV (the ending redeemable
value) is the value at the end of the applicable period of a hypothetical
Contribution of $1,000 made at the beginning of the applicable period, where C
equals a hypothetical Contribution of $1,000, and where n equals the number of
years.
NON-STANDARDIZED CALCULATION OF TOTAL RETURN PERFORMANCE
In addition to the standardized average annual total return information
described above, we may present total return information computed on bases
different from that standardized method. The Variable Investment Division may
4
<PAGE>
present total return information computed on the same basis as the
standardized method except that charges deducted for the hypothetical
Contribution will not include any Annual Administration Charge. The total
return percentage under this method will be higher than the resulting from the
standardized method.
The Sub-Accounts also may present total return information calculated by
subtracting a Sub-Account's Accumulation Unit Value at the beginning of a
period from the Accumulation Unit Value of that Sub-Account at the end of the
period and dividing that difference (in that Sub-Account's Accumulation Unit
Value) by the Accumulation Unit Value of that Sub-Account at the beginning of
the period. This computation results in a total growth rate for the specified
period which we annualize in order to obtain the average annual percentage
change in the Accumulation Unit Value for the period used.
This method of calculating performance does not take into account the Contract
Annual Administration charge and premium taxes, and assumes no transfers. Such
percentages would be lower if these charges were included in the calculation.
In addition, the Variable Investment Division may present actual aggregate
total return figures for various periods, reflecting the cumulative change in
value of an investment in the Variable Investment Division for the specified
period.
PERFORMANCE INFORMATION
The tables below provide performance information for each Sub-Account for
specified periods ending December 31, 1996. The performance information is
based on historical performance of the underlying Funds adjusted for charges
applicable to the Variable Annuity I Separate Account. This information does
not indicate or represent future performance.
TOTAL RETURN
Total returns quoted in sales literature or advertisements reflect all aspects
of a Sub-Account's return. Average annual returns are calculated by
determining the growth or decline in value of a hypothetical historical
investment in the Sub-Account over a stated period of time, and then
calculating the annually compounded percentage rate that would have produced
the same result if the rate of growth or decline had been constant over the
period. Contractholders and participants should recognize that average annual
returns represent averaged returns rather than actual year-to-year
performance.
VA-I SUB-ACCOUNTS HAVE INCEPTION DATES AS FOLLOWS:
Index Account--12/12/89; Balanced Account, Asset Manager Account, Growth I
Account and Growth II Account--5/1/91; and Equity-Income Account, Socially
Responsible Account, International Stock Account, and Small Cap Account--
5/2/94. However, the respective underlying funds in which the Sub-Accounts
invest had performance history prior to the Sub-Accounts' inception.
Performance information covering those periods reflects a hypothetical return
as if the funds were part of the VA-I Separate Account at that time, using the
charges applicable to the Contracts.
Table 1A below assumes a hypothetical investment of $1,000 at the beginning of
the period via the Sub-Account investing in the applicable fund and withdrawal
of the investment on 12/31/96. The rates thus reflect the mortality and
expense risk charge and a pro rata portion of the Annual Administration
Charge. Table 1B shows the cumulative total return on the same basis.
5
<PAGE>
TABLE 1A -- STANDARD AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
LIFE
1 YEAR 3 YEARS 5 YEARS 10 YEARS OF ACCT
INCEPTION ENDING ENDING ENDING ENDING ENDING
DATE 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
<S> <C> <C> <C> <C> <C> <C>
Fidelity VIP Fund II: 09/06/89 13.17 6.62 9.86 N/A 10.21
Asset Manager
(Asset Manager)
Calvert Responsibly
Invested 09/02/86 11.21 10.84 9.06 9.69 8.96
Balanced Portfolio
(Socially
Responsibility)
American Century VP 05/01/91 10.78 9.60 5.36 N/A 8.82
Balanced
(Balanced)
Fidelity VIP Fund 10/09/86 12.85 16.76 16.49 12.28 11.96
Equity-Income
(Equity-Income)
Dreyfus Stock Index Fund 09/29/89 21.00 17.64 13.15 N/A 12.16
(Index)
Fidelity VIP Fund Growth 10/09/86 13.27 14.34 13.72 13.68 13.33
(Growth I)
American Century VP 11/20/87 (5.64) 6.04 4.81 N/A 9.35
Capital Appreciation
(Growth II)
T. Rowe Price
International 03/31/94 13.26 N/A N/A N/A 8.55
Stock Portfolio
(International Stock)
Dreyfus Small Cap 08/31/90 15.13 16.11 34.49 N/A 46.92
(Small Cap)
</TABLE>
TABLE 1B -- CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
LIFE
YEAR TO 1 YEAR 3 YEARS 5 YEARS 10 YEARS OF ACCT
INCEPTION QUARTER DATE ENDING ENDING ENDING ENDING ENDING
DATE 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fidelity VIP Fund II:
Asset 09/06/89 5.71 13.17 13.17 21.20 60.00 N/A 103.75
Manager
(Asset Manager)
Calvert Responsibly
Invested 09/02/86 3.25 11.21 11.21 36.18 54.28 152.10 142.76
Balanced Portfolio
(Socially Responsible)
American Century VP 05/01/91 3.35 10.78 10.78 31.65 29.82 N/A 61.52
Balanced (Balanced)
Fidelity VIP Fund 10/09/86 6.29 12.85 12.85 59.17 114.54 218.53 217.85
Equity-Income
(Equity-Income)
Dreyfus Stock Index 09/29/89 7.85 21.00 21.00 62.81 85.48 N/A 129.79
Fund (Index)
Fidelity VIP Fund Growth 10/09/86 1.71 13.27 13.27 49.48 90.15 260.51 260.10
(Growth I)
American Century VP 11/20/87 (9.22) (5.64) (5.64) 19.22 26.49 N/A 125.99
Capital Appreciation
(Growth II)
T. Rowe Price
International 03/31/94 4.31 13.26 13.26 N/A N/A N/A 25.39
Stock Portfolio
(International Stock)
Dreyfus Small Cap 08/31/90 2.15 15.13 15.13 56.51 339.93 N/A 1046.28
(Small Cap)
</TABLE>
6
<PAGE>
Table 2A and 2B show performance information on the same assumptions as Tables
1A and 1B except that Tables 2A and 2B do not reflect deductions of the pro
rata portion of the Annual Administration Charge because certain Contract and
Participants are not assessed such a charge.
TABLE 2A -- AVERAGE ANNUAL TOTAL RETURN ASSUMING NO ANNUAL ADMINISTRATION
CHARGE
<TABLE>
<CAPTION>
LIFE
1 YEAR 3 YEARS 5 YEARS 10 YEARS OF ACCT
INCEPTION ENDING ENDING ENDING ENDING ENDING
DATE 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
<S> <C> <C> <C> <C> <C> <C>
Fidelity VIP Fund II: 09/06/89 13.24 6.69 9.94 N/A 10.37
Asset Manager
(Asset Manager)
Calvert Responsibly In- 09/02/86 11.28 10.92 9.14 9.79 9.10
vested
Balanced Portfolio
(Socially Responsible)
American Century VP 05/01/91 10.81 9.67 5.44 N/A 8.92
Balanced (Balanced)
Fidelity VIP Fund Equi- 10/09/86 12.92 16.84 16.58 12.39 12.08
ty-Income
(Equity-Income)
Dreyfus Stock Index 09/29/89 21.09 17.72 13.28 N/A 12.34
Fund (Index)
Fidelity VIP Fund Growth 10/09/86 13.35 14.42 13.79 13.78 13.45
(Growth I)
American Century VP 11/20/87 (5.43) 6.15 4.91 N/A 9.50
Capital Appreciation
(Growth II)
T. Rowe Price Interna- 03/31/94 13.34 N/A N/A N/A 8.64
tional
Stock Portfolio
(International Stock)
Dreyfus Small Cap 08/31/90 15.22 16.19 34.58 N/A 47.09
(Small Cap)
</TABLE>
TABLE 2B -- CUMULATIVE TOTAL RETURN ASSUMING NO ANNUAL ADMINISTRATION CHARGE
<TABLE>
<CAPTION>
LIFE OF
YEAR TO 1 YEAR 3 YEARS 5 YEARS 10 YEARS ACCT.
INCEPTION QUARTER DATE ENDING ENDING ENDING ENDING ENDING
DATE 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fidelity VIP Fund II:
Asset Manager (Asset 09/06/89 5.76 13.24 13.24 21.44 60.62
Manager) N/A 105.91
Calvert Responsibly In- 09/02/86 3.31 11.28 11.28 36.46 54.86
vested
Balanced Portfolio (So-
cially
Responsible) 154.52 145.99
American Century VP Bal- 05/01/91 3.40 10.81 10.81 31.92 30.35
anced
(Balanced) N/A 62.41
Fidelity VIP Fund Equi- 10/09/86 6.32 12.92 12.92 59.50 115.35
ty-Income
(Equity-Income) 221.61 221.09
Dreyfus Stock Index Fund
(Index) 09/29/89 7.91 21.09 21.09 63.13 86.54 N/A 132.78
</TABLE>
7
<PAGE>
TABLE 2B -- CUMULATIVE TOTAL RETURN ASSUMING NO ANNUAL ADMINISTRATION CHARGE
(CONTINUED)
<TABLE>
<CAPTION>
LIFE OF
YEAR TO 1 YEAR 3 YEARS 5 YEARS 10 YEARS ACCT.
INCEPTION QUARTER DATE ENDING ENDING ENDING ENDING ENDING
DATE 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fidelity VIP Fund Growth 10/09/86 1.75 13.35 13.35 49.79 90.81
(Growth I) 263.78 263.71
American Century VP Cap- 11/20/87 (9.17) (5.43) (5.43) 19.60 27.09
ital
Appreciation (Growth II) N/A 128.68
T. Rowe Price Interna- 03/31/94 4.37 13.34 13.34 N/A N/A
tional Stock
Portfolio (International
Stock) N/A 25.65
Dreyfus Small Cap (Small 08/31/90 2.20 15.22 15.22 56.84 341.39
Cap) N/A 1,054.84
</TABLE>
Table 3 below shows total return information on a calendar year basis using
the same assumptions as Tables 2A and 2B. The rates of return shown reflect
the mortality and expense risk charge. Similar to Tables 2A and 2B, Table 3
does not reflect deduction of the pro rata portion of the Annual
Administration Charge because certain Contracts and Participants are not
assessed such a charge.
TABLE 3 -- CALENDAR YEAR ANNUAL RETURN ASSUMING NO WITHDRAWAL AND NO ANNUAL
ADMINISTRATION CHARGE*
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fidelity VIP Fund II:
Asset Manager (Asset
Manager) N/A N/A N/A 5.45 21.11 10.53 19.60 (7.20) 15.57 13.24
Calvert Responsibly
Invested Balanced
Portfolio (Socially
Responsible) 5.51 10.42 19.53 2.94 15.02 6.33 6.72 (4.39) 28.24 11.28
American Century VP
Balanced (Balanced) N/A N/A N/A N/A N/A (7.17) 6.38 (0.58) 19.68 10.81
Fidelity VIP Fund
Equity-Income (Equity-
Income) (2.30) 21.25 15.95 16.29 29.88 15.50 16.89 5.80 33.49 12.92
Dreyfus Stock Index Fund
(Index) N/A N/A N/A (4.69) 28.29 5.82 8.02 (0.32) 35.16 21.09
Fidelity VIP Fund Growth
(Growth I) 2.43 14.21 29.95 (12.78) 43.78 8.00 17.94 (1.21) 33.75 13.35
American Century VP
Capital Appreciation
(Growth II) N/A (3.41) 27.17 (2.40) 40.18 (2.52) 8.99 (2.34) 29.55 (5.43)
T. Rowe Price
International Stock
Portfolio (International
Stock) N/A N/A N/A N/A N/A N/A N/A N/A 9.86 13.34
Dreyfus Small Cap (Small
Cap) N/A N/A N/A N/A 156.65 69.25 66.31 6.47 27.85 15.22
</TABLE>
*The above calendar-year returns assume a hypothetical investment of $1,000 on
January 1 of the first full calendar year that the underlying fund was in
existence. The returns assume that the money will be left on account until
retirement. Returns are provided for years before the fund was an available
investment option under the contract. Returns for those periods reflect a
hypothetical return as if those funds were available under the contract, and
reflect the deduction of the mortality and expense risk charge. The returns do
not reflect deductions for the pro rata portion of the Annual Administration
charge.
TAX LAW CONSIDERATIONS
RETIREMENT PROGRAMS:
Participants are urged to discuss the income tax considerations of their
retirement plan with their tax advisors. In many situations special rules may
apply to the plans and/or to the participants.
Contributions to retirement programs subject to Sections 401(a), 403(a),
403(b), 408 and 457(b) may be excludable from a Participant's reportable gross
income if the Contributions do not exceed the limitations imposed under the
Code. Certain plans allow employees to make Elective Salary Deferral
Contributions. Certain Plans allow Employers to make Contributions. The
information below is a brief summary of some of the important federal tax
considerations that apply to retirement plans. The Code requires that 401(a)
Plans and certain 403(b) Plans be in
8
<PAGE>
writing and that the Employer communicate the provisions of the Plans to
employees. When there is a written Plan, often the Contribution limits,
withdrawal rights and other provisions of the Plan may be more restrictive
than those allowed by the Code.
Elective Salary Deferral Contributions:
For calendar year 1996 the maximum elective salary deferral contributions to a
401(k) Plan which is a type of 401(a) Plan is limited to $9,500; For a 403(b)
plan the limit is $9,500 unless the employee is a qualified employee; For a
Eligible 457 Plan the limit is $7,500. When an employee is covered by two or
more of these Plans, the elective salary deferral contribution limits for all
the Plans must be coordinated.
Total Salary Deferral & Employer Contributions:
QUALIFIED RETIREMENT PLAN -- 401(a) PLAN
- ----------------------------------------
The Code limits the Contributions to a defined contribution 401(a) plan to the
lesser of $30,000 or 25% of compensation.
TAX SHELTERED ANNUITY PLAN-- 403(b) PLAN
- ----------------------------------------
Total contributions which include both salary deferral contributions and
employer contributions are also limited.
The combined limit is:
(a) the amount determined by multiplying 20 percent of the employee's
includable compensation by the number of years of service, over
(b) the aggregate of the amount contributed by the employer for annuity
contracts and excludable from the gross income of the employee for the
prior taxable year.
Therefore, if the maximum exclusion allowance is less than $9,500 a year, the
employee's elective deferrals plus any other employer Contributions cannot
exceed this lesser amount.
Section 415 of the Code imposes limitations with respect to annual
contributions to all Section 403(b) programs, qualified plans and simplified
employee pensions maintained by the Employer. A Participant's annual
contributions to these programs and defined contribution plans cannot exceed
the lesser of $30,000 or 25 percent of the employee's compensation. This
amount is subject to the maximum exclusion allowance and the salary deferral
amount limitations.
ELIGIBLE 457 PLAN--457(b) PLAN
- ------------------------------
For a 457(b) plan the contribution is the lesser of $7,500 or 33% of the
employee's compensation.
SECTION 457(f) PLANS
- --------------------
These are non-qualified deferred compensation arrangements between an Employer
and its employees. There are no stated limits in the Code regarding this type
of Plan.
INDIVIDUAL RETIREMENT ACCOUNT--IRA OR 408 PLAN
- ----------------------------------------------
For IRA's the maximum deductible contribution is the lesser of $2,000 or 100%
of taxable income. The $2,000 is increased to $4,000 when the IRA covers the
taxpayer and a non-working spouse.
TRANSFERS AND ROLLOVERS:
Participants who receive distributions from their 401(a) or 403(b) contract
may transfer the amount not representing employee contributions to an
Individual Retirement Account or Annuity (IRA) or another Section 401(a) or
403(b)
9
<PAGE>
program without including that amount in gross income for the taxable year in
which paid. Note 401(a) distributions may not be transferred to a 403(b) plan
or vice versa. If the rollover amount is paid directly to the Participant, the
amount distributed may be subject to a 20% federal tax withholding. If the
amount is paid directly to an acceptable rollover account, UNUM/America is not
required to withhold any amount. In order for the distribution to qualify for
rollover, the distribution must be made on account of the employee's death,
after the employee attains age 59 1/2, on account of the employee's separation
from service, or after the employee has become disabled. The distribution
cannot be part of a series of substantially equal payments made over the life
expectancy of the employee or the joint life expectancies of the employee and
his or her spouse or made for a specified period of 10 years or more. The
rollover must be made within sixty days of the distribution.
Pursuant to Revenue Ruling 90-24, a Participant, to the extent permitted by
any applicable Contract or Plan, may transfer funds between Section 403(b)
investment vehicles, including both Section 403(b)(1) annuity contracts and
Section 403(b)(7) custodial accounts. Any amount transferred must continue to
be subject to withdrawal restrictions at least as restrictive as that of the
transferring investment vehicle. UNUM/America considers any total or partial
transfer from a UNUM/America investment vehicle to a non-UNUM/America
investment vehicle to be a withdrawal.
Once every twelve months a participant in an IRA may roll the money from one
IRA to another IRA.
In Eligible 457 Plans and in Section 457(f) Plans, the Employer controls the
movement of assets from one funding vehicle to another.
EXCISE TAX ON EARLY DISTRIBUTIONS:
Section 72(t) of the Code provides that any distribution made to a Participant
in a 401(a), 403(b) or 408 plan other than on account of the following events
will be subject to a 10 percent excise tax on the taxable amount distributed:
a) the employee has attained age 59 1/2;
b) the employee has died;
c) the employee is disabled;
d) the employee is 55 and has separated from service (Does not apply to
IRA's).
Distributions which are received as a life annuity where payment is made at
least annually will not be subject to an excise tax. Certain amounts paid for
medical care may also not be subject to an excise tax.
MINIMUM DISTRIBUTION RULES:
The value in a contract under Sections 401(a), 403(b) and 408 are subject to
the distribution rules provided in Section 401(a)(9) of the Code. Generally,
that section requires that an employee must begin receiving distributions of
his post-1986 balance by April 1 of the calendar year following the calendar
year in which the employee attains age 70 1/2. Such distributions must not
exceed the life expectancy of the employee or the life expectancy of such
employee and the designated beneficiary (as defined under the plan). An
employee who attained age 70 1/2 before January 1, 1988 must begin receiving
distributions by April 1 of the calendar year following the later of (a) the
calendar year in which the employee attains age 70 1/2 or (b) the calendar
year in which the employee retires. There are special rules for Section 403(b)
Plans.
Amounts contributed to an Eligible 457 contract must be distributed not
earlier than the earliest of: 1) calendar year in which the Participant
attains age 70 1/2, 2) the Participant separates from service with the
Employer, or 3) when the Participant has an unforeseen emergency. However, in
no event may the distribution begin any later than described in Sections
401(a)(9) and 457(d) of the Code.
Additionally, distribution of an employee's entire account balance (including
pre-1987 funds) must satisfy the minimum distribution incidental benefit
requirement. In general, this requires that death and other non-retirement
benefits payable under the above plans be incidental to the primary purpose of
the program which is to provide deferred compensation to the employee. A payee
is subject to a penalty for failing to receive the required minimum
10
<PAGE>
annual distribution. Section 4974(a) of the Code provides that a payee will be
subject to a penalty equal to 50 percent of the amount by which the required
minimum distribution exceeds the actual amount distributed during the taxable
year.
Additional information on federal income taxation is included in the
prospectus.
DISTRIBUTION OF CONTRACTS
LNC Equity Sales Corporation ("LNC Equity"), an indirect subsidiary of Lincoln
National Corporation, is registered with the Securities and Exchange
Commission as a broker-dealer under the Securities Exchange Act of 1934 and is
a member of the National Association of Securities Dealers, Inc. LNC Equity is
the Variable Investment Division's principal underwriter and also enters into
selling agreements with other unaffiliated broker-dealers authorizing them to
offer the Contracts. LNC Equity will pay these unaffiliated broker-dealers a
distribution allowance which will be used to pay commissions to their
registered representatives. This distribution allowance will not be deducted
from Participant Contributions or Account balances but will be paid from
UNUM/America's General Account assets (including any charges collected).
UNUM Sales Corporation ("UNUM Sales"), which served as the principal
underwriter to the Variable Investment Division prior to October 1, 1996,
received underwriting commissions from UNUM/America of $4,223,000, $6,130,700,
and $4,665,000, in 1996, 1995, and 1994, respectively. LNC Equity received no
underwriting commissions from UNUM/America prior to December 31, 1996.
CUSTODIAN
UNUM/America is the custodian for the Fund's shares owned by the Variable
Investment Division. The Fund's shares are held in uncertificated form
separate and apart from UNUM/America's other assets.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., independent accountants, performs certain accounting
services for UNUM/America and has performed the same services for the Variable
Investment Division. The financial statements included in this SAI have been
audited to the extent and for the periods indicated in their reports thereon.
Those financial statements have been included herein in reliance on such
reports given on the authority of such firm as experts in auditing and
accounting.
FINANCIAL STATEMENTS
This SAI contains financial statements for the Variable Investment Division,
as of December 31, 1996 and for the two years then ended.
The financial statements of UNUM/America which are included in this SAI,
should be considered only as bearing on the ability of UNUM/America to meet
its obligations under the Contracts. The financial statements of UNUM/America
are presented in accordance with generally accepted accounting principles.
11
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
FINANCIAL STATEMENT INDEX
COMPANY FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants F-1
Statements of Income for the Years Ended December 31, 1996, 1995,
and 1994 F-2
Balance Sheets as of December 31, 1996 and 1995 F-3
Statements of Stockholders' Equity for the Years Ended December
31, 1996, 1995, and 1994 F-4
Statements of Cash Flows for the Years Ended December 31, 1996,
1995, and 1994 F-5
Notes to Financial Statements F-6 to F-25
Separate Account Financial Statements Attached
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
UNUM Life Insurance Company of America
We have audited the accompanying balance sheets of UNUM Life Insurance
Company of America as of December 31, 1996 and 1995, and the related
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. 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 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 UNUM Life Insurance
Company of America as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand LLP
Portland, Maine
February 5, 1997, except for Note 5
for which the date is March 1, 1997
F-1
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
(Dollars in millions) 1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums $2,293.3 $2,208.8 $1,943.0
Investment income 638.5 657.5 641.1
Net realized investment gains 5.9 184.7 39.5
Fees and other income 90.4 33.4 29.4
- ----------------------------------------------------------------------------
Total revenues 3,028.1 3,084.4 2,653.0
BENEFITS AND EXPENSES
Benefits to policyholders 1,803.9 1,931.1 1,712.8
Interest credited 189.8 217.9 235.9
Operating expenses 597.4 483.9 477.7
Commissions 229.2 230.9 230.8
Increase in deferred policy acquisition costs (63.6) (78.4) (123.3)
Interest expense 0.6 5.5 --
- ----------------------------------------------------------------------------
Total benefits and expenses 2,757.3 2,790.9 2,533.9
- ----------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 270.8 293.5 119.1
INCOME TAXES
Current 92.1 65.8 11.2
Deferred (13.8) 4.6 4.7
- ----------------------------------------------------------------------------
Total income taxes 78.3 70.4 15.9
- ----------------------------------------------------------------------------
NET INCOME $ 192.5 $ 223.1 $ 103.2
- ----------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
F-2
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------
(Dollars in millions) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments
Fixed maturities available for sale-at fair value
(amortized cost:
1996-$4,822.0; 1995-$6,784.2) $ 5,024.3 $ 7,204.1
Equity securities available for sale-at fair value
(cost: 1996-$8.5; 1995-$8.5) 10.4 7.4
Mortgage loans 1,042.7 1,102.1
Real estate, net 233.1 209.6
Policy loans 215.6 203.7
Other long-term investments 12.2 27.1
Short-term investments 82.0 865.7
- -----------------------------------------------------------------------------
Total investments 6,620.3 9,619.7
Cash 34.0 12.8
Accrued investment income 116.2 158.3
Premiums due 205.1 168.6
Deferred policy acquisition costs 515.9 809.3
Property and equipment, net 89.6 69.2
Reinsurance receivables 1,017.6 377.2
Deposit assets 2,797.4 --
Amounts receivable from affiliates, net 9.6 0.1
Note receivable from affiliate -- 10.0
Other assets 199.2 152.0
Separate account assets 699.1 491.2
- -----------------------------------------------------------------------------
Total assets $12,304.0 $11,868.4
- -----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Future policy benefits $ 1,559.2 $ 1,383.1
Unpaid claims and claim expenses 4,056.6 3,774.0
Other policyholder funds 3,302.1 3,642.2
Income taxes
Current 27.0 --
Deferred 201.8 257.9
Notes payable to affiliate -- 50.0
Other liabilities 683.2 422.8
Separate account liabilities 699.1 491.2
- -----------------------------------------------------------------------------
Total liabilities 10,529.0 10,021.2
Stockholders' equity
Common stock, par value $10 per share, authorized
1,000,000 shares,
issued 500,000 shares 5.0 5.0
Additional paid-in capital 350.7 347.4
Unrealized gains on available for sale securities, net 55.9 144.2
Unrealized foreign currency translation adjustment (8.3) (7.7)
Retained earnings 1,371.7 1,358.3
- -----------------------------------------------------------------------------
Total stockholders' equity 1,775.0 1,847.2
- -----------------------------------------------------------------------------
Total liabilities and stockholders' equity $12,304.0 $11,868.4
- -----------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Gains (Losses) Unrealized
Common On Available Foreign
Stock Additional for Sale Currency
$0.10 Par Paid-in Securities, Translation Retained
(Dollars in millions) Value Capital Net Adjustment Earnings Total
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1,
1994 $5.0 $341.9 $125.5 $ -- $1,110.0 $1,582.4
1994 Transactions:
Net income 103.2 103.2
Unrealized losses on
available for sale se-
curities, net (79.0) (79.0)
Unrealized foreign cur-
rency translation ad-
justment (8.7) (8.7)
Dividends to stockhold-
ers (78.0) (78.0)
Other transactions 1.8 1.8
- --------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31,
1994 5.0 343.7 46.5 (8.7) 1,135.2 1,521.7
1995 Transactions:
Net income 223.1 223.1
Unrealized gains on
available for sale se-
curities, net 97.7 97.7
Unrealized foreign cur-
rency translation ad-
justment 1.0 1.0
Other transactions 3.7 3.7
- --------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31,
1995 5.0 347.4 144.2 (7.7) 1,358.3 1,847.2
1996 Transactions:
Net income 192.5 192.5
Unrealized losses on
available for sale se-
curities, net (88.3) (88.3)
Unrealized foreign cur-
rency translation ad-
justment (0.6) (0.6)
Dividends to stockhold-
ers (179.1) (179.1)
Other transactions 3.3 3.3
- --------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31,
1996 $5.0 $350.7 $ 55.9 $(8.3) $1,371.7 $1,775.0
- --------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
(Dollars in millions) 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 192.5 $ 223.1 $ 103.2
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in future policy benefits and unpaid
claims and claim expenses 542.8 757.2 569.4
Increase in amounts receivable under reinsur-
ance agreements (640.4) (61.4) (14.8)
Increase (decrease) in income tax liability 26.0 5.7 (17.0)
(Increase) decrease in deferred policy acqui-
sition costs 293.4 (78.6) (123.4)
Increase in deposit assets (382.9) -- --
Deferred gain on sale of tax sheltered annui-
ties 77.2 -- --
Charge for individual disability reinsurance
fees 49.7 -- --
Realized investment (gains) losses 1.8 (199.3) (48.9)
Other 44.1 (25.8) 43.7
- ------------------------------------------------------------------------------
Net cash provided by operating activities 204.2 620.9 512.2
- ------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Maturities of fixed maturities held to matu-
rity -- 741.0 666.3
Maturities of fixed maturities available for
sale 684.4 61.0 23.2
Sales of fixed maturities held to maturity -- 2.8 32.4
Sales of fixed maturities available for sale 2,124.4 453.2 321.7
Sales of equity securities available for sale -- 682.0 259.5
Sales and maturities of other investments 256.3 293.6 397.1
Purchases of fixed maturities held to maturity -- (169.2) (535.8)
Purchases of fixed maturities available for
sale (1,431.2) (1,487.4) (747.9)
Purchases of equity securities available for
sale -- (104.4) (173.6)
Purchases of other investments (218.1) (310.0) (205.9)
Net increase in short-term investments (1,042.1) (607.0) (210.5)
Net additions to property and equipment (37.0) (15.2) (20.3)
Repayment of note receivable from affiliate -- 50.0 --
- ------------------------------------------------------------------------------
Net cash provided by (used in) investing ac-
tivities 336.7 (409.6) (193.8)
- ------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Deposits and interest credited to investment
contracts 536.9 601.1 544.3
Maturities and withdrawals from investment
contracts (877.0) (864.0) (782.1)
Dividends to stockholders (179.1) -- (78.0)
Proceeds from notes payable to affiliate -- 100.0 --
Repayment of notes payable to affiliate -- (50.0) --
Other -- 0.8 --
- ------------------------------------------------------------------------------
Net cash used in financing activities (519.2) (212.1) (315.8)
- ------------------------------------------------------------------------------
Effect of exchange rate changes on cash (0.5) -- --
- ------------------------------------------------------------------------------
Net increase (decrease) in cash 21.2 (0.8) 2.6
Cash at beginning of year 12.8 13.6 11.0
- ------------------------------------------------------------------------------
Cash at end of year $ 34.0 $ 12.8 $ 13.6
- ------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMA-
TION:
Cash paid during the year for:
Income taxes $ 47.4 $ 64.3 $ 26.4
Interest $ -- $ 5.5 $ --
- ------------------------------------------------------------------------------
</TABLE>
Supplemental disclosure of noncash operating and investing activities:
In conjunction with the sale of UNUM's tax sheltered annuity business, as
discussed in Note 5, fixed maturities available for sale of $588.6 million and
short-term investments of $1,825.9 million were transferred to the buyer on
October 1, 1996. Upon transfer, there was a corresponding increase in UNUM's
deposit assets.
See notes to financial statements.
F-5
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
- ---------------------
The accompanying financial statements of UNUM Life Insurance Company of
America ("UNUM America") have been prepared on the basis of generally accepted
accounting principles. UNUM America is jointly owned by UNUM Holding Company
and UNUM Corporation. UNUM Holding Company is wholly-owned by UNUM
Corporation. The 1995 and 1994 financial statements have been restated to
include the accounts of Commercial Life Insurance Company which was merged
with UNUM America effective December 31, 1996. 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 assets and liabilities and disclosure of contingent assets and
liabilities at the date of financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
INVESTMENTS
- -----------
INVESTMENTS ARE REPORTED AS FOLLOWS:
. Fixed maturities available for sale (certain bonds and redeemable preferred
stocks)--at fair value.
. Equity securities available for sale (common stocks and non-redeemable
preferred stocks)--at fair value.
. Mortgage loans--at amortized cost less an allowance for probable losses.
. Real estate--at cost less accumulated depreciation.
. Policy loans--at unpaid principal balance.
. Other long-term investments--at cost plus UNUM America's equity in
undistributed net earnings since acquisition.
. Short-term investments--are considered available for sale and are carried at
cost which approximates fair value.
Fixed maturities and equity securities are classified as available for sale as
they may be sold in response to changes in interest rates, resultant
prepayment risk, liquidity and capital needs, or other similar economic
factors. Unrealized gains and losses related to securities classified as
available for sale are excluded from net income and reported in a separate
component of stockholders' equity, net of applicable deferred taxes and
related adjustments to unpaid claims and claim expenses. The unrealized gains
and losses are determined based on estimated market values at the balance
sheet date and are not necessarily the amounts which would be realized upon
sale of the securities or representative of future market values. Changing
interest rates affect the level of unrealized gains and losses related to
securities classified as available for sale. While rising interest rates are
beneficial when investing current cash flows, they can also reduce the fair
value of existing fixed rate long-term investments. In addition, lower
interest rates can lead to early payoffs and refinancing of some of UNUM
America's fixed rate investments. Management generally invests in fixed rate
instruments that are structured to limit the exposure to such reinvestment
risk.
Realized investment gains and losses, which are determined on the basis of
specific identification and include adjustments for allowances for probable
losses, are reported separately in the Statements of Income.
If a decline in fair value of an invested asset is considered to be other than
temporary or if a long-lived asset is deemed to be permanently impaired, the
investment is reduced to its net realizable value and the reduction is
accounted for as a realized investment loss.
UNUM America discontinues the accrual of investment income on invested assets
when it is determined that collectability is doubtful. UNUM America recognizes
investment income on impaired loans when the income is received.
Real estate held for sale is included in other assets in the Balance Sheets
and is valued net of a valuation allowance which reduces the carrying value to
the lower of fair value less estimated costs to sell, or cost. This valuation
F-6
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INVESTMENTS (Continued)
- -----------
allowance is periodically adjusted based on subsequent changes in UNUM
America's estimate of fair value less costs to sell.
Purchases and sales of short-term financial instruments are part of investing
activities and not necessarily a part of the cash management program.
Therefore, short-term financial instruments are classified as investments in
the Balance Sheets and are included as investing activities in the Statements
of Cash Flows.
DERIVATIVE FINANCIAL INSTRUMENTS
- --------------------------------
Gains or losses on hedges of existing assets or liabilities are deferred and
included in the carrying amounts of those assets or liabilities. Gains or
losses related to qualifying hedges of firm commitments or anticipated
transactions are also deferred and recognized in the carrying amount of the
underlying asset or liability when the hedged transaction occurs.
RECOGNITION OF PREMIUM REVENUES AND RELATED EXPENSES
- ----------------------------------------------------
Group insurance premiums are recognized as income over the period to which the
premiums relate. Individual disability premiums are recognized as income when
due. Benefits and expenses are associated with earned premiums to result in
recognition of profits over the life of the contracts. This association is
accomplished by recording a provision for future policy benefits and unpaid
claims and claim expenses, and by amortizing deferred policy acquisition
costs.
For retirement and universal life products, premium and other policy fee
revenue consist of charges for the cost of insurance, policy administration
and surrenders assessed during the period. Charges related to services to be
performed in the future are deferred until earned. The amounts received in
excess of premium and fees are recorded as deposits and included in other
policyholder funds in the Balance Sheets. Benefits and expenses include
benefit claims in excess of related account balances, interest credited at
various rates, and amortization of deferred policy acquisition costs.
DEFERRED POLICY ACQUISITION COSTS
- ---------------------------------
The costs of acquiring new business that vary with and are related primarily
to the production of new business have been deferred to the extent such costs
are deemed recoverable from future profits. Such costs include commissions,
certain costs of policy issue and underwriting, and certain variable field
office expenses.
For individual disability, group disability, and group life and health
business, the costs are amortized in proportion to expected future premiums.
For universal life products and retirement products the costs are amortized in
proportion to estimated gross profits from interest margins, mortality and
other elements of performance under the contracts. Amortization is adjusted
periodically to reflect differences between actual experience and original
assumptions, with any resulting changes reflected in current operating
results. The amounts deferred and amortized were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
(Dollars in millions) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred $ 194.7 $ 196.1 $ 207.1
Less amortized (131.1) (117.7) (83.8)
- -------------------------------------------------------------------------------
Increase in deferred policy acquisition costs $ 63.6 $ 78.4 $ 123.3
- -------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RESERVES FOR FUTURE POLICY BENEFITS
- -----------------------------------
Reserves for future policy benefits are calculated by the net-level premium
method, and are based on UNUM America's expected morbidity, mortality and
interest rate assumptions at the time a policy is issued. These reserves
represent the portion of premiums received, accumulated with interest and held
to provide for claims that have not yet been incurred. The reserve assumptions
are periodically reviewed and compared to actual experience and are revised if
it is determined that future expected experience is different from the reserve
assumptions. Reserves for group insurance policies consist primarily of
unearned premiums.
The interest rates used in the calculation of reserves for future policy
benefits at December 31, 1996, and 1995, principally ranged from:
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Individual disability 6.0% to 9.5% 5.5% to 9.5%
Group annuities 5.0% to 9.0% 5.0% to 9.0%
- -------------------------------------------------------------------------------
</TABLE>
RESERVES FOR UNPAID CLAIMS AND CLAIM EXPENSES
- ---------------------------------------------
Unpaid claims and claim expense reserves represent the amount estimated to
fund claims that have been reported but not settled and claims incurred but
not reported. Reserves for unpaid claims are estimated based on UNUM America's
historical experience and other actuarial assumptions that consider the
effects of current developments, anticipated trends, risk management programs
and renewal actions. Many factors affect actuarial calculations of claim
reserves, including but not limited to interest rates and current and
anticipated incidence rates, recovery rates, and economic and societal
conditions. Reserve estimates and assumptions are periodically reviewed and
updated with any resulting adjustments to reserves reflected in current
operating results. Given the complexity of the reserving process, the ultimate
liability may be more or less than such estimates indicate.
The interest rates used in the calculation of disability claims reserves at
December 31, 1996, and 1995, were principally as follows:
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Group long term disability 7.88% 7.94%
Individual disability 7.00% to 9.46% 6.75% to 9.67%
- -------------------------------------------------------------------------------
</TABLE>
The interest rate used to discount the disability reserves is a composite of
the yields on assets specifically identified with each block of business.
Management expects the reserve discount rate for certain disability products
will further decline, since current cash flows are invested in high quality
assets at current yields, which are below the composite yield of the existing
assets purchased in prior years. UNUM America periodically adjusts prices on
both existing and new business in an effort to mitigate the impact of the
current interest rate environment.
For other accident and health business, reserves are based on projections of
historical claims run-out patterns.
F-8
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RESERVES FOR UNPAID CLAIMS AND CLAIM EXPENSES (Continued)
- ---------------------------------------------
Activity in the liability for unpaid claims and claim expenses is summarized
as follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $3,774.0 $2,939.0 $2,558.2
Less reinsurance recoverables (87.3) (53.9) (42.4)
Effect of unrealized gains on fixed maturities (203.4) -- --
- -----------------------------------------------------------------------------
Net Balance at January 1 3,483.3 2,885.1 2,515.8
Incurred related to:
Current year 1,245.4 1,403.0 1,159.5
Prior years 263.7 410.4 358.4
- -----------------------------------------------------------------------------
Total incurred 1,509.1 1,813.4 1,517.9
Paid related to:
Current year 380.6 366.5 356.5
Prior years 941.8 848.7 792.1
- -----------------------------------------------------------------------------
Total paid 1,322.4 1,215.2 1,148.6
Net Balance at December 31 3,670.0 3,483.3 2,885.1
Plus reinsurance recoverables 254.3 87.3 53.9
Effect of unrealized gains on fixed maturities 119.3 203.4 --
- -----------------------------------------------------------------------------
Balance at December 31 $4,043.6 $3,774.0 $2,939.0
- -----------------------------------------------------------------------------
</TABLE>
The components of the increase in unpaid claims and claims expenses incurred
and related to prior years were as follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Interest accrued on reserves $228.0 $214.2 $207.9
Changes in reserve estimates and assumptions 35.7 196.2 150.5
- -----------------------------------------------------------------------------
Increase in incurrals related to prior years $263.7 $410.4 $358.4
- -----------------------------------------------------------------------------
</TABLE>
The increases in incurrals related to prior years were primarily the result of
interest accrued on reserves and changes in reserve estimates and assumptions
of interest rates, morbidity, mortality and expense costs. Due to the long-
term claim payment patterns of some of UNUM America's businesses, certain
reserves, particularly disability, are discounted for interest.
The effects of changes in reserve estimates and assumptions were more
significant in 1995 and 1994, primarily as a result of increased reserves from
lower discount rates for certain disability products following the sale of the
common stock portfolio in 1995, and adjustments to strengthen certain
disability reserves in 1995 and 1994.
Beginning in 1995, as explained in Note 2, unpaid claims are adjusted to
reflect changes that would have been necessary if the unrealized gains and
losses related to fixed maturities classified as available for sale had been
realized. Where applicable, UNUM America has reflected those adjustments in
the liability balances with corresponding credits or charges, net of related
deferred taxes, reported as a component of unrealized gains on available for
sale securities in stockholders' equity.
CHANGES IN ACCOUNTING ESTIMATES
- -------------------------------
During 1995, UNUM America sold virtually all of its common stock portfolio.
The sale of the common stock portfolio, which partially supported certain
disability reserves, and the reinvestment of the proceeds primarily in
investment grade fixed income assets at yields below the average portfolio
yield, resulted in lower reserve discount
F-9
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CHANGES IN ACCOUNTING ESTIMATES (Continued)
- -------------------------------
rates for certain disability products reported in the Disability Insurance
segment. This change in accounting estimate to lower certain discount rates
resulted in an increase of $114.1 million to benefits to policyholders in the
Statement of Income, and a decrease to net income of $74.2 million.
During 1995, UNUM America increased the group long term disability reserves
for incurred but not reported ("IBNR") claims, as reported in the Disability
Insurance segment. The increased IBNR reserves were based on management's
judgment that claims incurred but not yet reported would reflect increased
levels of claims incidence and severity. This change in accounting estimate
resulted in an increase to benefits to policyholders in the Statement of
Income of $34.3 million, and a decrease to net income of $22.3 million.
During 1995, UNUM America increased reserves for unpaid claims related to the
Association Group disability business by $15.0 million to reflect management's
expectations of slower than expected claim recoveries. This change in
accounting estimate, which was reflected in the Disability Insurance segment,
decreased net income by $9.8 million.
During 1994, UNUM America increased reserves for existing claims by $78.0
million and strengthened reserves for estimated future losses by $101.5
million. These increased reserves reflected management's expectations of
morbidity trends for the existing non-cancellable individual disability
business as reported in the Disability Insurance segment. This change in
accounting estimate resulted in an increase to benefits to policyholders in
the Statement of Income of $179.5 million, and a decrease to net income of
$116.7 million.
OTHER POLICYHOLDER FUNDS
- ------------------------
Other policyholder funds are liabilities for investment-type contracts and
represent customer deposits plus interest credited to those deposits at
various rates.
LIABILITIES FOR RESTRUCTURING ACTIVITIES
- ----------------------------------------
Liabilities for restructuring activities are recorded when management, prior
to the balance sheet date, commits to execute an exit plan that will result in
the incurral of costs that have no future economic benefit, or approves a plan
of termination and communicates sufficient detail of the plan to employees.
Liabilities for restructuring activities are included in other liabilities in
the Balance Sheets.
SEPARATE ACCOUNTS
- -----------------
Certain assets from tax sheltered annuity ("TSA") contracts and UNUM America's
defined benefit plans are in separate accounts that are pooled investment
funds of securities. Investment income and realized gains and losses on these
accounts accrue directly to the contractholders. Assets, carried at market
value, and liabilities of the separate accounts are shown separately in the
Balance Sheets. The assets of the separate accounts are legally segregated and
are not subject to claims that arise out of any other business of UNUM
America.
On October 1, 1996, UNUM America closed the sale of its TSA business to The
Lincoln National Life Insurance Company, a subsidiary of Lincoln National
Corporation (see Note 5). For legal considerations, the separate account's
TSA-related assets were not transferred on October 1, 1996. TSA-related assets
will be transferred only upon receipt of a contractholder and/or participant's
consent for assumption reinsurance. Beginning in 1997, the assets of UNUM
Corporation's defined benefit plan are no longer held in the UNUM America's
separate accounts (See Note 8).
ACCOUNTING FOR PARTICIPATING INDIVIDUAL LIFE INSURANCE
- ------------------------------------------------------
Participating policies issued by the former Union Mutual Life Insurance
Company ("Union Mutual") prior to UNUM America's conversion to a stock life
insurance company on November 14, 1986, will remain participating
F-10
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ACCOUNTING FOR PARTICIPATING INDIVIDUAL LIFE INSURANCE (Continued)
- ------------------------------------------------------
as long as they remain in force. A Participation Fund Account ("PFA") was
established for the sole benefit of all of Union Mutual's individual
participating life and annuity policies and contracts.
The assets of the PFA are to provide for the benefit, dividend and certain
expense obligations of the participating individual life insurance policies
and annuity contracts. This line of business participates in the experience of
the PFA and its operations have been excluded from the Statements of Income.
The PFA represented approximately 2.9% and 3.1% of total assets and 3.4% and
3.5% of total liabilities at December 31, 1996, and 1995, respectively.
INCOME TAXES
- ------------
The provision for income taxes includes amounts currently payable and deferred
income taxes, which result from differences between financial reporting and
tax bases of assets and liabilities, and are measured using enacted tax rates
and laws.
FOREIGN CURRENCY TRANSLATION
- ----------------------------
UNUM America has several branch operations located in foreign countries, the
largest being in Canada. These branches generally maintain their balance sheet
and income statement accounts in local functional currencies. These currencies
are translated to U.S. dollars using ending and quarterly average exchange
rates, respectively. The resulting translation adjustments are reported in a
separate component of stockholders' equity.
REINSURANCE
- -----------
UNUM America is involved in both the cession and assumption of reinsurance
with other companies. Risks are reinsured with other companies to reduce UNUM
America's exposure to large losses and permit recovery of a portion of direct
losses. UNUM America remains liable to the insured for the payment of policy
benefits if the reinsurers cannot meet their obligations under the reinsurance
agreements. Deferred policy acquisition costs, premiums, benefits and expenses
are stated net of reinsurance ceded to other companies. UNUM America evaluates
the financial condition of its reinsurers and monitors concentrations of
credit risk to minimize exposure to significant losses from reinsurer
insolvencies.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
establishes accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. The statement provides
guidance for recognition or derecognition of assets and liabilities, focusing
on the concepts of control and extinguishment. UNUM America is required to
adopt FAS 125 effective January 1, 1997. The adoption of FAS 125 is not
expected to have a material effect on UNUM America's results of operations or
financial position.
In March 1997, the FASB issued FAS No. 129, "Disclosures of Information About
Capital Structure," which clarifies disclosure requirements related to the
type, and nature, of securities contained in an entity's capital structure.
UNUM America is required to adopt FAS 129 effective December 31, 1997.
NOTE 2. INVESTMENTS
In November 1995, the FASB issued "A Guide to Implementation of Statement 115
on Accounting for Certain Investments in Debt and Equity Securities," which
provided a one-time opportunity to reassess the appropriateness of the
classifications of securities described in FAS 115, and to reclassify fixed
maturities from the held to maturity category without calling into question
the intent to hold other debt securities to maturity in the future. On
December 31, 1995, UNUM America reassessed its fixed maturity portfolio and as
allowed under the implementation guidance, reclassified fixed maturities with
an amortized cost of $5,073.3 million and a related unrealized gain of
F-11
<PAGE>
NOTE 2. INVESTMENTS (Continued)
$304.9 million from the held to maturity category to available for sale. The
unrealized gain on the total available for sale fixed maturity portfolio was
$419.9 million at December 31, 1995. In connection with the reclassification
of the held to maturity fixed maturities to available for sale, on December
31, 1995, UNUM America adjusted its unpaid claims by $203.4 million to reflect
the changes that would have been necessary if the unrealized gains and losses
related to fixed maturities classified as available for sale had been
realized. At December 31, 1996, the unrealized gain on available for sale
fixed maturities was $202.3 million and the related unpaid claims adjustment
was $119.3 million.
The following tables summarize the components of investment income, net
realized investment gains, and changes in unrealized investment gains on
available for sale securities:
INVESTMENT INCOME
- -----------------
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
(Dollars in millions) 1996 1995 1994
- -------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Available for sale $ 496.1 $ 390.3 $ 453.7
Held to maturity -- 145.9 65.7
Equity securities available for sale -- 4.3 8.3
Mortgage loans 104.6 113.4 129.9
Real estate 19.0 13.8 14.9
Policy loans 9.0 7.6 9.3
Other long-term investments 6.5 1.6 0.8
Short-term investments 42.5 20.3 4.9
- -------------------------------------------------------------------
Gross investment income 677.7 697.2 687.5
Less investment expenses (14.7) (15.1) (21.3)
Less investment income on participating
individual life insurance policies and
annuity contracts (24.5) (24.6) (25.1)
- -------------------------------------------------------------------
Investment income $ 638.5 $ 657.5 $ 641.1
- -------------------------------------------------------------------
NET REALIZED INVESTMENT GAINS
- -----------------------------
<CAPTION>
Year Ended December 31,
-------------------------
(Dollars in millions) 1996 1995 1994
- -------------------------------------------------------------------
<S> <C> <C> <C>
Gross realized investment gains:
Fixed maturities:
Available for sale $ 19.1 $ 9.7 $ 7.4
Held to maturity -- 0.1 --
Equity securities available for sale -- 210.8 80.0
Mortgage loans, real estate and other 17.2 17.9 11.4
- -------------------------------------------------------------------
Gross realized investment gains $ 36.3 $ 238.5 $ 98.8
- -------------------------------------------------------------------
Gross realized investment losses:
Fixed maturities:
Available for sale (23.5) (10.0) (25.1)
Held to maturity -- (0.8) (3.0)
Equity securities available for sale -- (14.8) ( 9.5)
Mortgage loans, real estate and other (6.9) (28.2) (21.7)
- -------------------------------------------------------------------
Gross realized investment losses (30.4) (53.8) (59.3)
- -------------------------------------------------------------------
Net realized investment gains $ 5.9 $ 184.7 $ 39.5
- -------------------------------------------------------------------
</TABLE>
F-12
<PAGE>
NOTE 2. INVESTMENTS (Continued)
CHANGE IN UNREALIZED GAINS (LOSSES) ON AVAILABLE FOR SALE SECURITIES
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
(Dollars in millions) 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities available for sale $ (217.6) $ 465.7 $ (45.7)
Equity securities available for sale 3.0 (113.0) (74.3)
Unpaid claims adjustment 84.1 (203.4) --
Deferred taxes 42.2 (51.6) 41.0
- ------------------------------------------------------------------------------
Total change in unrealized gains (losses) on
available for sale securities, as included
in stockholders' equity $ (88.3) $ 97.7 $ (79.0)
- ------------------------------------------------------------------------------
</TABLE>
FIXED MATURITIES
- ----------------
The amortized cost and fair values of fixed maturities available for sale at
December 31, 1996, were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in millions) Cost Gains Losses Value
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government $ 25.8 $ 1.8 $ -- $ 27.6
States and municipalities 402.4 9.2 (0.7) 410.9
Foreign governments 137.9 10.5 (0.2) 148.2
Public utilities 983.3 47.7 (1.4) 1,029.6
Corporate bonds 3,267.2 147.6 (12.0) 3,402.8
Redeemable preferred stocks 2.0 -- (0.4) 1.6
Mortgage-backed securities 3.4 0.2 -- 3.6
- ----------------------------------------------------------------------------
Total $4,822.0 $217.0 $(14.7) $5,024.3
- ----------------------------------------------------------------------------
The amortized cost and fair values of fixed maturities available for sale at
December 31, 1995, were as follows:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
(Dollars in millions) Cost Gains Losses Value
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government $ 338.8 $ 6.9 $ (0.1) $ 345.6
States and municipalities 519.0 15.5 (0.6) 533.9
Foreign governments 22.2 1.9 -- 24.1
Public utilities 1,306.0 95.9 (0.1) 1,401.8
Corporate bonds 4,576.5 302.0 (1.9) 4,876.6
Redeemable preferred stocks 16.6 0.8 (0.8) 16.6
Mortgage-backed securities 5.1 0.4 -- 5.5
- ----------------------------------------------------------------------------
Total $6,784.2 $423.4 $ (3.5) $7,204.1
- ----------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of fixed maturities available for sale at
December 31, 1996, by contractual maturity date, are shown below. Expected
maturities will differ from contractual maturities since certain borrowers
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
(Dollars in millions) Cost Value
- -----------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 207.5 $ 213.4
Due after one year through five years 1,669.0 1,748.3
Due after five years through ten years 2,580.2 2,674.1
Due after ten years 361.9 384.9
- -----------------------------------------------------------------------------
4,818.6 5,020.7
Mortgage-backed securities (primarily due after 10 years) 3.4 3.6
- -----------------------------------------------------------------------------
Total $4,822.0 $5,024.3
- -----------------------------------------------------------------------------
</TABLE>
F-13
<PAGE>
NOTE 2. INVESTMENTS (Continued)
FIXED MATURITIES (Continued)
- ----------------
During 1995, UNUM America sold fixed maturities of two issuers classified as
held to maturity with an amortized cost of $4.0 million due to evidence of
significant deterioration of the issuers' creditworthiness, as evidenced by
bankruptcy filings. These sales resulted in a net realized loss of $1.2
million in 1995.
During 1994, UNUM America sold fixed maturities of two issuers classified as
held to maturity with an amortized cost of $32.4 million due to evidence of
significant deterioration of the issuers' creditworthiness. These sales
resulted in a net realized loss of $2.6 million.
EQUITY SECURITIES
- -----------------
The fair values, which also represent carrying amounts, and the cost of equity
securities available for sale were as follows at December 31, 1996:
<TABLE>
<CAPTION>
Fair
(Dollars in millions) Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Common stocks:
Industrial, miscellaneous and all other $8.5 $10.4
- --------------------------------------------------------------------------------
</TABLE>
Gross unrealized investment gains on equity securities available for sale
totaled $1.9 million at December 31, 1996 and there were no gross unrealized
investment gains at December 31, 1995. There were no gross unrealized
investment losses at December 31, 1996, and gross unrealized investment losses
totaled $1.1 million at December 31, 1995.
MORTGAGES
- ---------
Effective January 1, 1995, UNUM America adopted Financial Accounting Standard
("FAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and FAS
No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition
and Disclosures," which defined the principles to measure and record an
impaired loan. When it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of a loan agreement, the
loan is deemed impaired. Once a loan is determined to be impaired, an
allowance for probable losses is established for the difference between the
carrying amount of the loan and its estimated value. The estimated value is
based on either the present value of expected future cash flows discounted
using the loan's effective interest rate, the loan's observable market price,
or the fair value of the collateral. The adoption of FAS 114 and FAS 118 did
not have a material effect on UNUM America's results of operations or
financial position.
At December 31, 1996, and 1995, impaired loans totaled $48.9 million and $48.0
million, respectively. Included in the $48.9 million were $37.4 million of
loans which had a related allowance for probable losses of $5.5 million, and a
loan of $11.5 million which had no related allowance for probable losses.
Included in the $48.0 million of impaired loans at December 31, 1995, were
$36.3 million of loans which had a related allowance for probable losses of
$6.8 million, and a loan of $11.7 million which had no related allowance for
probable losses.
Mortgage loans that were restructured prior to the adoption of FAS 114
amounted to $50.1 million and $55.0 million at December 31, 1996, and 1995,
respectively. Troubled debt restructurings represent loans that are refinanced
with terms more favorable to the borrower. Interest lost on restructured loans
was not material for the years ended December 31, 1996, 1995 or 1994.
REAL ESTATE AND OTHER
- ---------------------
Effective January 1, 1996, UNUM America adopted FAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which established accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for
F-14
<PAGE>
NOTE 2. INVESTMENTS (Continued)
REAL ESTATE AND OTHER (Continued)
- ---------------------
long-lived assets and certain identifiable intangibles to be disposed of. FAS
121 applies to both real estate held for investment and real estate held for
sale. The adoption of FAS 121 did not have a material effect on UNUM America's
results of operations or financial position.
Real estate acquired in satisfaction of debt cumulatively amounts to $83.3
million at December 31, 1996. Real estate held for sale amounted to $9.8
million at December 31, 1996, and $33.5 million at December 31, 1995.
Real estate with a depreciated cost of $7.7 million and no bonds or mortgages
were non-income producing for the twelve months ended December 31, 1996.
Interest lost on these investments was not material in 1996, 1995 or 1994.
UNUM America was committed at December 31, 1996, to purchase fixed maturities
and other invested assets in the amount of $94.0 million.
NOTE 3. ALLOWANCE FOR PROBABLE LOSSES ON INVESTED ASSETS AND REAL ESTATE HELD
FOR SALE
Changes in the allowance for probable losses on invested assets and real
estate held for sale were as follows:
<TABLE>
<CAPTION>
Balance at Balance
beginning at end
(Dollars in millions) of year Additions Deductions of year
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
Mortgage loans $37.3 $ 1.0 $ (2.3) $36.0
Real estate held for sale 18.0 (0.4) (3.3) 14.3
- ------------------------------------------------------------------------------
Total $55.3 $ 0.6 $ (5.6) $50.3
- ------------------------------------------------------------------------------
Year Ended December 31, 1995
Mortgage loans $41.7 $ 8.9 $(13.3) $37.3
Real estate held for sale 12.7 5.7 (0.4) 18.0
- ------------------------------------------------------------------------------
Total $54.4 $14.6 $(13.7) $55.3
- ------------------------------------------------------------------------------
Year Ended December 31, 1994
Fixed maturities held to maturity and
available for sale $ 0.2 $ -- $ (0.2) $ --
Mortgage loans 46.8 8.5 (13.6) 41.7
Real estate held for sale 19.2 0.9 (7.4) 12.7
- ------------------------------------------------------------------------------
Total $66.2 $ 9.4 $(21.2) $54.4
- ------------------------------------------------------------------------------
</TABLE>
Additions represent charges to net realized investment gains less recoveries,
and deductions represent reserves released upon disposal or restructuring of
the related asset.
NOTE 4. DERIVATIVE FINANCIAL INSTRUMENTS
UNUM America periodically uses common derivative financial instruments such as
options, futures and forward exchange contracts to hedge certain risks
associated with anticipated purchases and sales of investments and certain
payments denominated in foreign currencies, primarily Canadian dollar and
Japanese yen. These derivative financial instruments are used to protect UNUM
America from the effect of market fluctuations in interest and exchange rates
between the contract date and the date on which the hedged transaction occurs.
In using these instruments, UNUM America is subject to the off-balance-sheet
risk that the counterparties of the transactions will fail to perform as
contracted. UNUM America manages this risk by only entering into contracts
with highly rated institutions and listed exchanges. UNUM America does not
hold derivative financial instruments for the purpose of trading.
At December 31, 1996, UNUM America had open interest rate futures contracts
with notional amounts of $159.7 million to hedge anticipated sales of
investments in 1997. These contracts had a related net unrealized gain of $1.3
million. At December 31, 1995, UNUM America had no open derivative financial
instruments.
F-15
<PAGE>
NOTE 5. SALE OF TAX SHELTERED ANNUITY BUSINESS
On October 1, 1996, UNUM America closed the sale of its group tax-sheltered
annuity ("TSA") business to The Lincoln National Life Insurance Company
("Lincoln"), a subsidiary of Lincoln National Corporation. The sale involved
approximately 1,650 group contractholders and assets under management of
approximately $3.2 billion. The contracts have initially been reinsured on an
indemnity basis. Upon consent of the TSA contractholders and/or participants,
the contracts will be considered reinsured on an assumption basis, legally
releasing UNUM America from future contractual obligation to the respective
contractholders and/or participants.
To effect the sale of the TSA business, UNUM America transferred into a trust
account held for the benefit of Lincoln approximately $2,641 million of
assets. The assets transferred consisted of approximately $1,826 million of
short-term investments, $589 million of fixed maturities, and $226 million of
cash. The amount of assets in the trust will increase or decrease in
conjunction with the on-going activity in participant accounts, and assets
will be released from the trust to Lincoln upon consents for assumption
reinsurance. UNUM America has recorded a deposit asset in its Balance Sheet
representing the assets remaining in the trust, which supports the TSA
contracts of those contractholders and/or participants that have not given
consent for assumption reinsurance. At December 31, 1996, the deposit asset
related to the TSA transaction was approximately $2,602 million.
The sale resulted in a deferred pretax gain of $77.2 million, which will be
recognized in income in proportion to contractholder and/or participant
consents for assumption reinsurance, the majority of which management believes
will occur during 1997. The purchase price (ceding commission) paid upon
closing was approximately $69 million, and the transaction generated statutory
capital of approximately $157 million. As of March 1, 1997, consent for
assumption reinsurance has been provided by TSA contractholders and/or
participants owning approximately 60% of assets under management.
Historical results of the TSA business included in UNUM America's Statements
of Income were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
(Dollars in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $203.1 $244.4 $236.7
Net income $ 12.2 $ 30.1 $ 29.2
- --------------------------------------------------------------------------------
</TABLE>
NOTE 6. REINSURANCE
UNUM America is involved in both the cession and assumption of reinsurance
with other companies.
UNUM America and its affiliate, First UNUM Life Insurance Company ("First
UNUM"), a New York corporation, entered into a 100% coinsurance reinsurance
agreement covering the active life reserves of First UNUM's non-cancellable
individual disability business. The agreement was effective December 31, 1996,
for disabilities occurring on or after January 1, 1996.
On October 23, 1996, UNUM America announced the execution of a definitive
reinsurance agreement between UNUM America and Centre Life Reinsurance Limited
("Centre Re"), a Bermuda based reinsurance specialist, for reinsurance
coverage of the active life reserves of UNUM America's existing United States
non-cancellable individual disability ("ID") block of business, including
those ceded under the aforementioned agreement with First UNUM. This agreement
does not reinsure any claims incurred prior to January 1, 1996. The agreement
follows UNUM America's announcement in late 1994 that it would no longer
market the non-cancellable form of ID coverage in the United States.
The agreement is a finite reinsurance arrangement that transfers liabilities
to Centre Re based on the level of statutory reserves. At December 31, 1996,
active life reserves of $427 million and reserves established for claims in
1996 of $137 million were ceded to Centre Re. Under the agreement, Centre Re
has an obligation to fund a defined risk layer, while UNUM America will retain
the earnings risk related to potential adverse claims experience up to a
certain threshold. This threshold amount represents the existence of an
experience layer with a value of $195 million
F-16
<PAGE>
NOTE 6. REINSURANCE (Continued)
at December 31, 1996. UNUM America has recorded the value of the experience
layer on its Balance Sheet as a deposit asset. UNUM America funded its
obligation under the agreement by transferring assets totaling approximately
$403 million into a trust account in late December 1996. The assets
transferred were equal to the experience layer plus reserves, determined under
generally accepted accounting principles, net of related deferred acquisition
costs. Future net cash flows of the block will be transferred to/from the
trust account and, together with changes in reserve levels, will determine the
value of UNUM America's deposit asset. Changes in the deposit asset will flow
through UNUM America's results of operations. The agreement generated slightly
more than $200 million of statutory capital.
In fourth quarter 1996, UNUM America recognized a pretax charge of $49.7
million, which represents the present value of the anticipated minimum amount
of fees to be paid to Centre Re under the agreement. UNUM America has the
right, but no obligation, to recapture the business after five years, with
certain penalties.
The effect of reinsurance on premiums earned and written for the years ended
December 31, 1996, 1995 and 1994 was as follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums earned:
Direct $2,112.2 $2,024.3 $1,877.1
Assumed 251.2 239.5 169.8
Ceded (70.1) (55.0) (103.9)
- -------------------------------------------------------------------------------
Premiums earned $2,293.3 $2,208.8 $1,943.0
- -------------------------------------------------------------------------------
Premiums written:
Direct $2,114.9 $2,025.0 $1,890.5
Assumed 285.8 248.4 169.8
Ceded (95.6) (56.1) (105.2)
- -------------------------------------------------------------------------------
Premiums written $2,305.1 $2,217.3 $1,955.1
- -------------------------------------------------------------------------------
</TABLE>
For the years ended December 31, 1996, 1995 and 1994, recoveries recognized
under reinsurance agreements reduced benefits to policyholders by $65.7
million, $50.7 million and $44.4 million, respectively.
NOTE 7. BUSINESS RESTRUCTURING AND OTHER CHARGES
BUSINESS RESTRUCTURING
- ----------------------
Charges of $7.2 million, $8.4 million and $13.6 million were recorded in 1996,
1995 and 1994, respectively. The charge in 1996 was related to the merger of
Commercial Life Insurance Company ("Commercial Life") into UNUM America, and
consisted of $2.8 million of severance costs for 120 employees and $4.4
million of lease exit costs. The charges in 1995 and 1994 relate to the
acceleration of organizational changes within UNUM America and the decision to
discontinue the individual disability non-cancellable product. Partially
offsetting the charge recorded in 1995 was a $3.4 million curtailment gain,
related to workforce reductions in UNUM Corporation's noncontributory defined
benefit pension plan which includes UNUM America. As of December 31, 1996, the
liability carried in the Balance Sheet for all three charges was $5.3 million.
INTANGIBLE ASSET WRITE-OFFS AND FUTURE LOSS RESERVES
- ----------------------------------------------------
In connection with the merger of Commercial Life into UNUM America, the sale
of the tax-sheltered annuity business (see Note 5), as well as UNUM America's
continued efforts to strengthen its focus on its core products, the company
initiated a review of certain products, which resulted in the recognition of
pretax charges totaling $37.5 million during 1996. These charges reduced
income before income taxes by $13.1 million in the Disability Insurance
segment, $9.4 million in the Special Risk Insurance segment, and $15.0 million
in the Retirement Products segment. On an after-tax basis the charges reduced
net income by $25.1 million.
F-17
<PAGE>
NOTE 7. BUSINESS RESTRUCTURING AND OTHER CHARGES (Continued)
INTANGIBLE ASSET WRITE-OFFS AND FUTURE LOSS RESERVES (Continued)
- ----------------------------------------------------
The charges include the write-off of certain intangible assets, primarily
deferred acquisition costs, totaling $12.7 million. These intangible assets
have been deemed unrecoverable primarily due to the expectation of continued
losses in the Association Group disability business. Additionally, in
conjunction with the completion of a review of UNUM America's discontinued
product portfolio, a $22.4 million charge was taken to establish a reserve for
the present value of expected future losses on certain discontinued products.
Future losses for these products will be charged to the reserve at the time
the losses are realized. The products incorporated in the charge consist of
certain discontinued special risk, retirement and medical products. UNUM
America is pursuing the sale of some of these discontinued product lines.
NOTE 8. EMPLOYEE BENEFIT PLANS
PENSION PLANS
- -------------
UNUM America participates in UNUM Corporation and subsidiaries'
noncontributory defined benefit pension plan covering substantially all
domestic employees. The plan provided benefits based on the employee's years
of service and compensation during the highest five consecutive years out of
the last ten years of employment. Plan assets, which were held in UNUM
America's separate accounts, consisted primarily of group annuity contracts
and 224,392 shares of UNUM Corporation common stock. UNUM America funds its
pension plan in accordance with the requirements of the Employee Retirement
Income Security Act of 1974, as amended. Net pension cost for 1996 was $6.0
million. Net pension cost for 1995 was $2.1 million which included the $3.4
million pension curtailment gain from the business restructuring activities
described in Note 7. Net pension cost for 1994 was $6.7 million.
Effective January 1, 1997, UNUM Corporation replaced its existing pension
plans with a new noncontributory defined benefit pension plan ("Lifecycle
Plan") covering substantially all domestic employees. Under the Lifecycle
Plan, a new benefit formula is used, resulting in benefits being earned more
consistently over an employee's career, and is based on the employee's age at
retirement, years of service, and earnings during the highest five of the last
ten years of employment. Beginning in 1997, plan assets were transferred from
UNUM America's separate accounts into a trust for the exclusive benefit of
plan participants.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
- ------------------------------------------------------
UNUM America provides certain health care and life insurance benefits for
retired employees and covered dependents. Substantially all domestic employees
of UNUM America may become eligible for these benefits if they meet minimum
age and service requirements, if they are eligible for retirement benefits and
if they agree to contribute a portion of the cost. UNUM America has the right
to modify or terminate these benefits. The underlying plans are not currently
funded. The cost of these plans was $8.0 million, $8.5 million and $6.8
million for the years ended December 31, 1996, 1995 and 1994, respectively. At
December 31, 1996, and 1995 the liability associated with these plans was
$64.8 million and $63.2 million, respectively.
RETIREMENT SAVINGS PLANS
- ------------------------
UNUM America participates in UNUM Corporation and subsidiaries' retirement
savings plan for substantially all full-time and part-time employees who work
1,000 hours a year and have been employed for at least one year. Eligible
employees may contribute up to 10% of their annual base salary, and UNUM
America matches a portion of each employee's contribution up to 4% of the
employee's compensation. Employees become 100% vested immediately upon
becoming eligible to participate in the plan. Expense for this plan amounted
to $5.6 million, $6.3 million and $6.2 million in 1996, 1995 and 1994,
respectively.
Effective January 1, 1997, UNUM Corporation introduced a single retirement
savings plan for all domestic employees who meet the eligibility requirement
of one year of service, including all employees eligible under the former
plans. Dependent upon the employee's annual earnings, eligible employees may
contribute up to 15% of
F-18
<PAGE>
NOTE 8. EMPLOYEE BENEFIT PLANS (CONTINUED)
RETIREMENT SAVINGS PLANS (Continued)
- ------------------------
their annual compensation, including incentive payouts. UNUM America will
match 100% of the employee's contribution up to 3% of the employee's
compensation, plus 50% of the employee's contribution on the next 2% of the
employee's compensation, to a maximum of 4%. Employees become 100% vested
immediately upon becoming eligible to participate.
ANNUAL INCENTIVE PLANS
- ----------------------
UNUM America has an annual incentive plan for certain employees and executive
officers that provide additional compensation based on achievement of
predetermined annual corporate financial and non-financial goals. In 1996,
1995 and 1994, expense for these plans was $31.1 million, $14.7 million and
$2.7 million, respectively.
NOTE 9. INCOME TAXES
A reconciliation of income taxes computed by applying the federal income tax
rate to income before income taxes and the income tax expense charged to
operations follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
(Dollars in millions) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at federal statutory rate of 35% $ 94.8 $ 102.7 $ 41.7
Tax-exempt income (15.4) (24.6) (26.0)
Prior years' taxes (0.3) (6.6) (0.7)
State income tax 1.6 1.1 0.4
Realized investment gains -- (3.6) --
Other (2.4) 1.4 0.5
- -------------------------------------------------------------------------------
Income taxes $ 78.3 $ 70.4 $ 15.9
- -------------------------------------------------------------------------------
</TABLE>
Deferred income tax liabilities and assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------
(Dollars in millions) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs $146.6 $247.0
Policy reserve adjustments 89.1 --
Net unrealized gains 70.7 142.3
Value of business acquired 1.2 1.4
Invested assets -- 10.4
Other -- 5.6
- -------------------------------------------------------------------------------
Gross deferred tax liabilities 307.6 406.7
- -------------------------------------------------------------------------------
Deferred tax assets:
Alternative minimum tax credit carryforwards -- 17.4
Policy reserve adjustments -- 88.6
Net realized losses 16.8 22.5
Postretirement benefits 24.4 20.3
Deferred gains 27.0 --
Accrued liabilities 26.6 --
Other 11.0 --
- -------------------------------------------------------------------------------
Gross deferred tax assets 105.8 148.8
- -------------------------------------------------------------------------------
Net deferred tax liability $201.8 $257.9
- -------------------------------------------------------------------------------
</TABLE>
F-19
<PAGE>
NOTE 9. INCOME TAXES (Continued)
UNUM America's operations are included with those of UNUM Corporation and
subsidiaries in a consolidated income tax return. Under provisions of a tax-
sharing agreement among the members of the consolidated tax return group, tax
is allocated based on the separate return taxable income of each company with
companies being reimbursed currently for their capital and ordinary losses.
Deferred income taxes relating to cumulative net unrealized gains on available
for sale fixed maturity and equity securities were $70.7 million, $142.3
million and $23.8 million at December 31, 1996, 1995 and 1994, respectively.
UNUM America's Statement of Income for 1996, 1995 and 1994, included the
following amounts of foreign income and related income tax expense:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
(Dollars in millions) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign Income $11.5 -- --
- -------------------------------------------------------------------------------
Income tax expense (credit):
Current (1.5) -- --
Deferred 5.6 -- --
- -------------------------------------------------------------------------------
Total $ 4.1 -- --
- -------------------------------------------------------------------------------
</TABLE>
NOTE 10. DIVIDEND RESTRICTIONS
UNUM America is subject to various state insurance regulatory restrictions
that limit the maximum amount of dividends available to UNUM Corporation
without prior approval. The amount available under current law for payment of
dividends during 1997 to UNUM Corporation from UNUM America without state
insurance regulatory approval is approximately $113 million. Dividends in
excess of this amount may only be paid with state insurance regulatory
approval. The aggregate statutory capital and surplus of UNUM America was
approximately $961 million and $905 million, at December 31, 1996, and 1995,
respectively. The aggregate statutory net operating income, which excludes
realized investment gains net of tax, of UNUM America was approximately $113
million, $227 million and $45 million for 1996, 1995 and 1994, respectively.
State insurance regulatory authorities prescribe statutory accounting
practices that differ in certain respects from generally accepted accounting
principles. The significant differences relate to deferred acquisition costs,
deferred income taxes, non-admitted asset balances, required investment risk
reserves and reserve calculation assumptions.
NOTE 11. AFFILIATED COMPANIES AND RELATED PARTY TRANSACTIONS
UNUM America provides management and administrative services to affiliates,
which are wholly owned by UNUM Corporation. UNUM America allocates,
principally at cost, the related expenses based on direct association whenever
possible. If however expenses cannot be readily associated, the costs are
allocated based on ratios of the relative time spent, extent of usage or
varying volume of work performed.
On February 28, 1995, UNUM Corporation borrowed $100 million under its
revolving credit facility, which was infused into UNUM America in exchange for
surplus debentures which mature on August 31, 1996, and accrue interest at
5.66% annually. Repayment of principal and interest on the surplus debentures
is subject to state insurance regulatory approval. On December 31, 1995, UNUM
America repaid $50 million of the surplus debentures, plus accrued interest of
$5.5 million to UNUM Corporation. In April, 1996, UNUM America received
approval from the Maine Bureau of Insurance to repay the remaining $50 million
in surplus debentures. The company repaid the principal and interest in April
1996.
During December, 1993, UNUM America loaned $60 million to UNUM Corporation.
These notes mature on December 20, 1996, and accrue interest at 5.66%
annually. On December 31, 1995, UNUM Corporation repaid $50 million of these
notes to UNUM America. UNUM Corporation repaid the $10 million outstanding
note to UNUM America in April 1996.
F-20
<PAGE>
NOTE 12. LITIGATION
In the normal course of its business operations, UNUM America is involved in
litigation from time to time with claimants, beneficiaries and others, and a
number of lawsuits were pending at December 31, 1996. In some instances, these
proceedings include claims for punitive damages and similar types of relief in
unspecified or substantial amounts, in addition to amounts for alleged
contractual liability or other compensatory damages. In the opinion of
management, the ultimate liability, if any, arising from this litigation is
not expected to have a material adverse effect on the financial position or
the operating results of UNUM America.
On December 29, 1993, UNUM America filed a suit in the United States District
Court for the District of Maine, seeking a federal income tax refund. The suit
is based on a claim for a deduction in certain prior tax years, for $652
million in cash and stock distributed to policyholders in connection with the
1986 conversion of Union Mutual Life Insurance Company to a stock company.
UNUM America has fully paid, and provided for in prior years' financial
statements, the tax at issue in this litigation. On May 23, 1996, the District
Court issued its decision that the distribution in question was not a
deductible expenditure. UNUM America believes its claims are meritorious, and
has appealed the decision to the United States Court of Appeals for the First
Circuit. The ultimate recovery, if any, cannot be determined at this time.
NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values are based on quoted market prices, when available. In cases where
quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. These valuation techniques
require management to develop a significant number of assumptions, including
discount rates and estimates of future cash flow. Derived fair value estimates
cannot be substantiated by comparison to independent markets or to disclosures
by other companies with similar financial instruments. These fair value
disclosures do not purport to be the amount that could be realized in
immediate settlement of the financial instrument.
The following table summarizes the carrying amounts and fair values of UNUM
America's financial instruments at December 31, 1996, and 1995:
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
Carrying Fair Carrying Fair
(Dollars in millions) Amount Value Amount Value
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Fixed maturities available for sale $5,024.3 $5,024.3 $7,204.1 $7,204.1
Equity securities available for sale 10.4 10.4 7.4 7.4
Mortgage loans 1,042.7 1,119.7 1,102.1 1,207.2
Policy loans 215.6 215.6 203.7 203.7
Short-term investments 82.0 82.0 865.7 865.7
Cash 34.0 34.0 12.8 12.8
Accrued investment income 116.2 116.2 158.3 158.3
Deposit assets 2,797.4 2,797.4 -- --
Note receivable from affiliate -- -- 10.0 10.0
Financial liabilities:
Other policyholder funds:
Investment-type insurance contracts:
With defined maturities $ 191.0 $ 216.0 $ 400.0 $ 440.0
With no defined maturities 2,848.0 2,787.0 2,982.0 2,919.0
Individual annuities and
supplementary contracts not
involving life contingencies 69.1 69.1 74.4 74.4
Note payable to affiliate -- -- 50.0 50.0
- --------------------------------------------------------------------------
</TABLE>
F-21
<PAGE>
NOTE 13. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
FIXED MATURITIES AVAILABLE FOR SALE: Fair values for fixed maturities are
based on quoted market prices, where available. If quoted market prices are
not available, 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.
EQUITY SECURITIES AVAILABLE FOR SALE: Fair values for equity securities
available for sale are based on quoted market prices and are reported in the
Balance Sheets at these values.
MORTGAGE LOANS: Fair values for mortgage loans are estimated based on
discounted cash flow analyses using interest rates currently being offered for
similar mortgage loans to borrowers with similar credit ratings and
maturities. Mortgage loans with similar characteristics are aggregated for
purposes of the calculations.
POLICY LOANS, SHORT-TERM INVESTMENTS, CASH, ACCRUED INVESTMENT INCOME, NOTE
RECEIVABLE FROM AFFILIATE, NOTE PAYABLE TO AFFILIATE AND DEPOSIT ASSETS: Fair
values for these instruments approximate the carrying amounts reported in the
Balance Sheets.
INVESTMENT-TYPE INSURANCE CONTRACTS: Fair values for liabilities under
investment-type insurance contracts with defined maturities are estimated
using discounted cash flow calculations based on interest rates that would be
offered currently for similar contracts with maturities consistent with those
remaining for the contracts being valued. Fair values for liabilities under
investment-type insurance contracts with no defined maturities are the amounts
payable on demand after surrender charges at the balance sheet date.
The estimated fair values of liabilities under all insurance contracts
(investment-type and other than investment-type) are taken into consideration
in UNUM America's overall management of interest rate risk, which minimizes
exposure to changing interest rates through the matching of investment
maturities with amounts due under insurance contracts.
INDIVIDUAL ANNUITIES AND SUPPLEMENTARY CONTRACTS NOT INVOLVING LIFE
CONTINGENCIES: Fair values approximate the carrying amounts reported in other
policyholder funds in the Balance Sheets.
NOTE 14. SEGMENT INFORMATION
UNUM America's principal market for its disability insurance, special risk and
retirement income products is the United States. UNUM America and First UNUM
Life Insurance Company combined are the leading provider of group long term
disability insurance in the United States. Products are marketed through sales
personnel and brokers. UNUM America targets sales of its disability products
to executive, administrative and management personnel, and other professionals
such as doctors, attorneys, accountants and engineers.
To more clearly reflect UNUM America's management of its businesses and to
more appropriately group its product portfolios, UNUM America began reporting
its operations, effective January 1, 1995, principally in three business
segments: Disability Insurance, Special Risk Insurance, and Retirement
Products. For comparative purposes, prior period information has been restated
to reflect reporting in these segments.
The Disability Insurance segment includes disability products offered in North
America and Japan including: group long term disability, group short term
disability, individual disability, association group disability, disability
reinsurance operations and long term care insurance. The Special Risk
Insurance segment includes group life, special risk accident insurance, non-
disability reinsurance operations and other special risk insurance products.
The Retirement Products segment includes tax sheltered annuities, guaranteed
investment contracts, deposit administration accounts, 401(k) plans,
individual life and group medical products, all of which are no longer
actively marketed by UNUM America. Corporate includes transactions that are
generally non-insurance related.
F-22
<PAGE>
NOTE 14. SEGMENT INFORMATION (Continued)
Investment income and net realized investment gains are allocated to the
segments based on designation of ownership of assets identified to the
products in each segment. Operating expenses are allocated to the segments
based on direct association with a product whenever possible. If the expense
cannot be readily associated with a particular product, the costs are
allocated based on ratios of the relative time spent, extent of usage or
varying volume of work performed for each segment.
Summarized financial information for the three business segments and Corporate
is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
(Dollars in millions) 1996 1995 1994
- -------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Disability Insurance $ 2,008.2 $ 2,056.7 $ 1,730.4
Special Risk Insurance 732.3 671.8 561.2
Retirement Products 277.8 353.0 366.5
Corporate 9.8 2.9 (5.1)
- -------------------------------------------------------------------
Total revenues $ 3,028.1 $ 3,084.4 $ 2,653.0
- -------------------------------------------------------------------
Income (loss) before income taxes:
Disability Insurance $ 195.7 $ 192.5 $ 21.3
Special Risk Insurance 77.9 55.9 59.0
Retirement Products 1.3 45.0 42.2
Corporate (4.1) 0.1 (3.4)
- -------------------------------------------------------------------
Income before income taxes 270.8 293.5 119.1
Income taxes 78.3 70.4 15.9
- -------------------------------------------------------------------
Net income $ 192.5 $ 223.1 $ 103.2
- -------------------------------------------------------------------
<CAPTION>
Year Ended December 31,
------------------------------
(Dollars in millions) 1996 1995 1994
- -------------------------------------------------------------------
<S> <C> <C> <C>
Identifiable Assets:
Disability Insurance $ 6,164.6 $ 5,777.5 $ 4,825.7
Special Risk Insurance 1,082.6 894.9 673.9
Retirement Products 4,427.4 4,626.4 4,438.0
Corporate 275.4 206.7 330.8
Individual Participating
Life and Annuity 354.0 362.9 347.0
- -------------------------------------------------------------------
Total assets $12,304.0 $11,868.4 $10,615.4
- -------------------------------------------------------------------
</TABLE>
F-23
<PAGE>
NOTE 15. SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
(1) (2)
Future policy (4) (5)
Deferred benefits and Net Benefits to
policy unpaid claims (3) investment policyholders
Segment acquisition and claim Premium income and interest
(Dollars in millions) costs expenses revenue (expense) credited
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31,
1996
Disability Insurance $396.0 $4,414.1 $1,637.4 $370.8 $1,257.4
Special Risk Insurance 119.0 588.7 682.3 50.0 484.6
Retirement Products 0.9 613.0 64.0 213.8 251.7
Corporate 0.0 0.0 0.0 9.8 0.0
- --------------------------------------------------------------------------------------
Total $515.9 $5,615.8 $2,383.7 $644.4 $1,993.7
- --------------------------------------------------------------------------------------
Year Ended December 31,
1995
Disability Insurance $681.7 $4,114.8 $1,580.5 $476.1 $1,412.4
Special Risk Insurance 94.0 451.8 628.6 44.2 465.6
Retirement Products 33.6 590.5 33.3 319.7 271.0
Corporate 0.0 0.0 (0.2) 2.2 0.0
- --------------------------------------------------------------------------------------
Total $809.3 $5,157.1 $2,242.2 $842.2 $2,149.0
- --------------------------------------------------------------------------------------
Year Ended December 31,
1994
Disability Insurance $629.2 $3,322.8 $1,416.3 $314.2 $1,298.2
Special Risk Insurance 77.8 253.0 525.3 36.1 363.9
Retirement Products 30.6 576.5 30.8 335.7 286.6
Corporate 0.0 (0.6) 0.0 (5.4) 0.0
- --------------------------------------------------------------------------------------
Total $737.6 $4,151.7 $1,972.4 $680.6 $1,948.7
- --------------------------------------------------------------------------------------
<CAPTION>
Amortization
of deferred (5)
policy Other (6)
Segment acquisition operating Premiums
(Dollars in millions) costs expenses written
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year Ended December 31,
1996
Disability Insurance $ 90.2 $ 465.1 $1,596.1
Special Risk Insurance 40.9 129.0 214.0
Retirement Products 0.0 24.6 14.9
Corporate 0.0 13.8 0.0
- --------------------------------------------------------------------------------------
Total $131.1 $ 632.5 $1,825.0
- --------------------------------------------------------------------------------------
Year Ended December 31,
1995
Disability Insurance $ 83.0 $ 368.7 $1,554.3
Special Risk Insurance 33.9 115.5 231.7
Retirement Products 0.8 36.3 23.3
Corporate 0.0 3.7 0.0
- --------------------------------------------------------------------------------------
Total $117.7 $ 524.2 $1,809.3
- --------------------------------------------------------------------------------------
Year Ended December 31,
1994
Disability Insurance $ 63.4 $ 347.5 $1,408.7
Special Risk Insurance 18.2 120.2 163.6
Retirement Products 2.2 35.5 21.6
Corporate 0.0 (1.8) 0.0
- --------------------------------------------------------------------------------------
Total $ 83.8 $ 501.4 $1,593.9
- --------------------------------------------------------------------------------------
</TABLE>
F-24
<PAGE>
NOTE 15. SUPPLEMENTARY INSURANCE INFORMATION (Continued)
(1) Excludes other policyholder funds, as follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 1994
---------------------------------------------------------------------------
<S> <C> <C> <C>
Disability Insurance $ 5.7 $ 2.8 $ 1.8
Special Risk Insurance 10.9 13.3 6.6
Retirement Products 3,285.5 3,626.1 3,896.0
---------------------------------------------------------------------------
Total $3,302.1 $3,642.2 $3,904.4
---------------------------------------------------------------------------
</TABLE>
(2) Includes unearned premiums, other policy claims and benefits payable.
(3) Includes fees and other income (expense).
(4) Includes investment income (expense) and net realized investment gains.
(5) Investment income and net realized investment gains are allocated to the
segments based on designation of ownership of assets identified to the
segments. Operating expenses are allocated to segments based on direct
association with a product whenever possible. If, however, the expense
cannot be readily associated with a particular product, the costs are
allocated based on ratios of the relative time spent, extent of usage or
varying volume of work performed for each segment.
(6) Premiums written for health and disability income policies.
F-25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
UNUM Life Insurance Company of America and Contract owners of UNUM Life
Insurance Company of America VA-1 Separate Account
We have audited the accompanying statement of assets and liabilities of UNUM
Life Insurance Company of America VA-1 Separate Account as of December 31,
1996, and the related statements of operations and changes in net assets for
each of the two years in the period then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of investments held by the custodian as of
December 31, 1996. 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 UNUM Life Insurance
Company of America VA-1 Separate Account at December 31, 1996, and the results
of its operations and changes in net assets for each of the two years in the
period then ended in confirmity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Portland, Maine
April 7, 1997
14
<PAGE>
VA-1 SEPARATE ACCOUNT OF UNUM LIFE INSURANCE COMPANY OF AMERICA
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
DREYFUS DREYFUS TCI TCI VIPF
STOCK SMALL CAP GROWTH BALANCED GROWTH
COMBINED INDEX FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------ ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Investments at market $480,063,896 $69,455,958 $46,378,052 $37,415,198 $25,068,184 $135,727,863
Liabilities
Contract charges
payable to UNUM Life
Insurance Company of
America 189,283 27,575 18,325 14,902 9,991 53,473
------------ ----------- ----------- ----------- ----------- ------------
Net assets $479,874,613 $69,428,383 $46,359,727 $37,400,296 $25,058,193 $135,674,390
============ =========== =========== =========== =========== ============
Percent of net assets 100.0% 14.4% 9.6% 7.8% 5.2% 28.3%
============ =========== =========== =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
CALVERT
VIPF II VIPF RESPONSIBLY T. ROWE VIPF
ASSET EQUITY- INVESTED PRICE MONEY
MANAGER INCOME BALANCED INTERNATIONAL MARKET
PORTFOLIO PORTFOLIO PORTFOLIO SERIES PORTFOLIO
----------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Assets
Investments at market $94,096,633 $47,340,632 $4,669,029 $19,512,403 $399,944
Liabilities
Contract charges pay-
able to UNUM Life In-
surance Company of
America 37,220 18,449 1,762 7,536 --
----------- ----------- ---------- ----------- --------
Net assets $94,059,413 $47,322,133 $4,667,267 $19,504,867 $399,944
=========== =========== ========== =========== ========
Percent of net assets 19.6% 9.9% 1.0% 4.1% 0.1%
=========== =========== ========== =========== ========
</TABLE>
See notes to financial statements.
15
<PAGE>
VA-1 SEPARATE ACCOUNT OF UNUM LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
DREYFUS STOCK
COMBINED INDEX FUND
------------------------- ------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------- ------------------------
1996 1995 1996 1995
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net investment income
Dividends from investment
income $ 22,369,654 $ 4,210,276 $ 2,312,264 $ 1,121,517
Less contract charges--
mortality and expense
fees to UNUM Life
Insurance Company of
America 4,927,857 3,020,144 689,522 440,924
------------ ------------ ----------- -----------
Net investment income
(loss) 17,441,797 1,190,132 1,622,742 680,593
Net realized and
unrealized gains (losses)
on investments
Net realized gains 1,584,234 529,207 310,151 48,200
Net change in unrealized
gains (losses) 27,245,960 52,595,346 8,880,241 9,620,468
------------ ------------ ----------- -----------
28,830,194 53,124,553 9,190,392 9,668,668
------------ ------------ ----------- -----------
Net increase (decrease) in
net assets resulting from
operations 46,271,991 54,314,685 10,813,134 10,349,261
Net increase in net assets
from principal
transactions 118,301,806 84,483,498 13,683,201 7,803,607
------------ ------------ ----------- -----------
Net increase in net
assets 164,573,797 138,798,183 24,496,335 18,152,868
Net assets at beginning of
year 315,300,816 176,502,633 44,932,048 26,779,180
------------ ------------ ----------- -----------
Net assets at end of year $479,874,613 $315,300,816 $69,428,383 $44,932,048
============ ============ =========== ===========
<CAPTION>
DREYFUS SMALL CAP
PORTFOLIO TCI GROWTH PORTFOLIO
------------------------- ------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------- ------------------------
1996 1995 1996 1995
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net investment income
Dividends from investment
income $ 1,409,239 $ 436,176 $ 4,132,202 $ 24,157
Less contract charges--
mortality and expense
fees to UNUM Life
Insurance Company of
America 396,340 138,786 492,841 342,765
------------ ------------ ----------- -----------
Net investment income
(loss) 1,012,899 297,390 3,639,361 (318,608)
Net realized and
unrealized gains (losses)
on investments
Net realized gains 102,971 34,387 195,252 118,135
Net change in unrealized
gains (losses) 3,324,631 2,382,357 (5,940,416) 6,901,049
------------ ------------ ----------- -----------
3,427,602 2,416,744 (5,745,164) 7,019,184
------------ ------------ ----------- -----------
Net increase (decrease) in
net assets resulting from
operations 4,440,501 2,714,134 (2,105,803) 6,700,576
Net increase in net assets
from principal
transactions 22,522,224 12,526,244 5,354,160 6,596,791
------------ ------------ ----------- -----------
Net increase in net
assets 26,962,725 15,240,378 3,248,357 13,297,367
Net assets at beginning of
year 19,397,002 4,156,624 34,151,939 20,854,572
------------ ------------ ----------- -----------
Net assets at end of year $ 46,359,727 $ 19,397,002 $37,400,296 $34,151,939
============ ============ =========== ===========
</TABLE>
See notes to financial statements.
16
<PAGE>
VA-1 SEPARATE ACCOUNT OF UNUM LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS--(CONTINUED)
<TABLE>
<CAPTION>
TCI BALANCED PORTFOLIO VIPF GROWTH PORTFOLIO
----------------------- ------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------- ------------------------
1996 1995 1996 1995
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net investment income
Dividends from investment
income $ 976,670 $ 416,885 $ 6,781,982 $ 270,826
Less contract charges--
mortality and expense fees
to UNUM Life Insurance
Company of America 274,016 193,030 1,418,576 871,499
----------- ----------- ------------ -----------
Net investment income
(loss) 702,654 223,855 5,363,406 (600,673)
Net realized and gains
(losses) on investments
Net realized gains 178,468 53,908 376,660 125,948
Net change in unrealized
gains (losses) 1,418,087 2,527,661 8,126,147 18,518,723
----------- ----------- ------------ -----------
1,596,555 2,581,569 8,502,807 18,644,671
----------- ----------- ------------ -----------
Net increase (decrease) in
net assets resulting from
operations 2,299,209 2,805,424 13,866,213 18,043,998
Net increase in net assets
from principal transactions 3,816,661 3,403,330 30,430,707 26,270,087
----------- ----------- ------------ -----------
Net increase in net assets 6,115,870 6,208,754 44,296,920 44,314,085
Net assets at beginning of
year 18,942,323 12,733,569 91,377,470 47,063,385
----------- ----------- ------------ -----------
Net assets at end of year $25,058,193 $18,942,323 $135,674,390 $91,377,470
=========== =========== ============ ===========
<CAPTION>
VIPF II ASSET VIPF EQUITY-
MANAGER PORTFOLIO INCOME PORTFOLIO
----------------------- ------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------- ------------------------
1996 1995 1996 1995
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net investment income
Dividends from investment
income $ 4,987,786 $ 1,224,098 $ 1,084,893 $ 532,318
Less contract charges--
mortality and expense fees
to UNUM Life Insurance
Company of America 1,023,895 804,364 422,194 143,334
----------- ----------- ------------ -----------
Net investment income
(loss) 3,963,891 419,734 662,699 388,984
Net realized and gains
(losses) on investments
Net realized gains 350,985 78,788 38,616 44,530
Net change in unrealized
gains (losses) 6,245,079 9,161,873 3,590,870 2,759,848
----------- ----------- ------------ -----------
6,596,064 9,240,661 3,629,486 2,804,378
----------- ----------- ------------ -----------
Net increase (decrease) in
net assets resulting from
operations 10,559,955 9,660,395 4,292,185 3,193,362
Net increase in net assets
from principal transactions 9,030,051 7,135,021 21,643,563 14,833,158
----------- ----------- ------------ -----------
Net increase in net assets 19,590,006 16,795,416 25,935,748 18,026,520
Net assets at beginning of
year 74,469,407 57,673,991 21,386,385 3,359,865
----------- ----------- ------------ -----------
Net assets at end of year $94,059,413 $74,469,407 $ 47,322,133 $21,386,385
=========== =========== ============ ===========
</TABLE>
See notes to financial statements.
17
<PAGE>
VA-1 SEPARATE ACCOUNT OF UNUM LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS--(CONTINUED)
<TABLE>
<CAPTION>
CALVERT RESPONSIBLY T. ROWE PRICE VIPF MONEY
INVESTED BALANCED PORTFOLIO INTERNATIONAL SERIES MARKET PORTFOLIO
--------------------------- ------------------------ -----------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------- ------------------------ -----------------------
1996 1995 1996 1995 1996 1995
------------- ------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net investment income
Dividends from
investment income $ 348,555 $ 152,564 $ 324,206 $ 20,506 $ 11,857 $ 11,229
Less contract charges--
mortality and expense
fees to UNUM Life
Insurance Company of
America 38,017 10,132 172,456 75,310 -- --
------------- ------------- ------------ ----------- ----------- -----------
Net investment income
(loss) 310,538 142,432 151,750 (54,804) 11,857 11,229
Net realized and
unrealized gains
(losses) on
investments
Net realized gains 5,529 17,360 25,602 7,951 -- --
Net change in
unrealized gains
(losses) 35,140 18,874 1,566,181 704,493 -- --
------------- ------------- ------------ ----------- ----------- -----------
40,669 36,234 1,591,783 712,444 -- --
------------- ------------- ------------ ----------- ----------- -----------
Net increase (decrease)
in net assets
resulting from
operations 351,207 178,666 1,743,533 657,640 11,857 11,229
Net increase in net
assets from principal
transactions 2,604,832 1,272,631 9,056,936 4,546,310 159,471 96,319
------------- ------------- ------------ ----------- ----------- -----------
Net increase in net
assets 2,956,039 1,451,297 10,800,469 5,203,950 171,328 107,548
Net assets at beginning
of year 1,711,228 259,931 8,704,398 3,500,448 228,616 121,068
------------- ------------- ------------ ----------- ----------- -----------
Net assets at end of
year $ 4,667,267 $ 1,711,228 $ 19,504,867 $ 8,704,398 $ 399,944 $ 228,616
============= ============= ============ =========== =========== ===========
</TABLE>
See notes to financial statements.
18
<PAGE>
VA-1 SEPARATE ACCOUNT OF UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES
Organization:
VA-1 Separate Account of UNUM Life Insurance Company of America ("UNUM
America") is registered under the Investment Company Act of 1940. The Separate
Account was established in accordance with the laws of the State of Maine. Its
registration statement became effective in December 1989. The assets are held
for the exclusive benefit of the variable annuity contract owners and may not
be used to satisfy any obligations that may arise from any other business
conducted by UNUM America. Any excess of assets over reserves and other
contract liabilities may be transferred to UNUM America's General Account.
Principal markets are hospitals and non-profit organizations located
throughout the United States of America, with specific concentrations in the
states of New York and California.
On October 1, 1996, UNUM America completed the sale of its group tax-sheltered
annuity ("TSA") business to The Lincoln National Life Insurance Company
("Lincoln Life") and Lincoln Life & Annuity Company of New York ("Lincoln New
York"), a wholly owned subsidiary of Lincoln Life. The sale involved Separate
Account assets of approximately $436,590,000. The contracts have initially
been reinsured on an indemnity basis. Upon consent of the TSA contractholders
and/or participants, the contracts will be considered reinsured on an
assumption basis, legally releasing UNUM America from future contractual
obligation to the respective contractholders and/or participants. Assets
attributable to such participants' contracts will be transferred to separate
accounts of Lincoln Life and Lincoln New York. Assets attributable to
contracts of participants with respect to which such consent is not obtained
will remain in the Separate Account.
Investments:
In accordance with the terms of the variable annuity contracts, all payments
transferred to the Separate Account by the contract owners are allocated to
purchase shares of either Dreyfus Stock Index Fund, Dreyfus Variable
Investment Fund: Small Cap Portfolio ("Dreyfus Small Cap Portfolio"),
Twentieth Century's TCI Portfolios, Inc.: TCI Growth ("TCI Growth Portfolio")
and TCI Balanced ("TCI Balanced Portfolio"), Fidelity's Variable Insurance
Products Fund: Growth Portfolio ("VIPF Growth Portfolio"), Fidelity's Variable
Insurance Products Fund II: Asset Manager Portfolio ("VIPF II Asset Manager
Portfolio"), Fidelity's Variable Insurance Products Fund: Equity-Income
Portfolio ("VIPF Equity-Income Portfolio"), Calvert Responsibly Invested
Balanced Portfolio or T. Rowe Price International Series, Inc. ("T. Rowe Price
International Series"). Fidelity's Variable Insurance Products Funds: Money
Market Portfolio ("VIPF Money Market Portfolio") is used only for investment
of initial contributions for which UNUM America has not received complete
order instructions. Upon receipt of complete order instructions, the payments
transferred to VIPF Money Market Portfolio are allocated to purchase shares of
one of the above funds.
The Separate Account is fully invested in shares of Dreyfus Stock Index Fund,
Dreyfus Small Cap Portfolio, TCI Growth Portfolio, TCI Balanced Portfolio,
VIPF Growth Portfolio, VIPF II Asset Manager Portfolio, VIPF Equity-Income
Portfolio, Calvert Responsibly Invested Balanced Portfolio, T. Rowe Price
International Series and VIPF Money Market Portfolio, which are carried at
market value. Security transactions are recorded on the trade date. All
contracts participating in the Separate Account are in the accumulation phase.
Dividends are fully reinvested and immediately credited to participant
accounts with the exception of VIPF Money Market Portfolio which is invested
monthly. Unrealized gain and loss represent the difference between the cost
and market value of invested assets. Realized gain and loss are reported on an
average cost basis. Gross unrealized gains for all investments were
$122,283,976 as of December 31, 1996 and $76,893,903 as of December 31, 1995.
Gross unrealized losses for all investments were $44,966,769 as of December
31, 1996 and $26,822,656 as of December 31, 1995.
19
<PAGE>
VA-1 SEPARATE ACCOUNT OF UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The market value and cost of investments at December 31, 1996, was distributed
as follows:
<TABLE>
<CAPTION>
MARKET VALUE
--------------------------------------
SHARES SHARE PRICE COST
-------------- ----------- -----------
<S> <C> <C> <C>
Dreyfus Stock Index Fund 3,424,850.0090 $20.28 $53,721,665
Dreyfus Small Cap Portfolio 890,515.5850 52.08 40,664,734
TCI Growth Portfolio 3,653,827.9700 10.24 35,475,201
TCI Balanced Portfolio 3,324,692.8500 7.54 21,028,630
VIPF Growth Portfolio 4,358,634.0000 31.14 108,054,222
VIPF II Asset Manager Portfolio 5,557,981.8950 16.93 80,404,799
VIPF Equity-Income Portfolio 2,251,099.9630 21.03 41,022,846
Calvert Responsibly Invested Balanced
Portfolio 2,631,921.8250 1.774 4,622,794
T. Rowe Price International Series 1,543,702.7960 12.64 17,351,856
VIPF Money Market Portfolio 399,943.8100 1.00 399,944
</TABLE>
Contract Charges:
UNUM America is the depositor for the Separate Account. Administrative
services necessary for the operation of the Separate Account and the variable
annuity contracts are provided by UNUM America. Although UNUM America deducts
for sales and administrative expenses under the contracts, UNUM America
assumes an expense risk that these deductions may prove insufficient to cover
the cost of those expenses.
In addition, UNUM America assumes a mortality risk under the contracts in that
it agrees to make annuity payments regardless of how long a particular
annuitant or their payee lives and how long all annuitants or other payees in
a class live, if payment options involving life contingencies are chosen.
Those annuity payments are determined in accordance with annuity purchase rate
provisions established at the time the contracts are issued. UNUM America also
assumes a mortality risk in providing a death benefit under the contracts.
To compensate UNUM America for assuming these mortality and expense risks, an
effective annual mortality and expense risk charge of 1.20% of each
portfolio's average daily net assets is imposed on each portfolio within the
Separate Account with the exception of VIPF Money Market Portfolio. For 1996
and 1995, the mortality and expense risk charges totaled $4,927,857 and
$3,020,144, respectively.
Federal Income Taxes:
For purposes of federal income taxes, the Separate Account is considered to be
part of UNUM America for the years ended December 31, 1996 and 1995, and its
operations are not taxed separately. The liability for any federal income
taxes generated by the Separate Account is attributable to UNUM America. UNUM
America is taxed as a property and casualty insurance company under the
applicable provisions of the Internal Revenue Code.
Premium Taxes:
Applicable state premium taxes are paid by UNUM America and deducted from the
account balances of contract owners at the time of an annuity purchase.
20
<PAGE>
VA-1 SEPARATE ACCOUNT OF UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2. CAPITAL SHARE TRANSACTIONS
During 1996 and 1995, the following transactions in capital stock occurred:
The Separate Account funds that invest in Dreyfus Stock Index Fund held
3,057,791.6697 units at a net asset value of $22.7054 and 2,395,545.4406 units
at a net asset value of $18.7565 at December 31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
1996 1995
------------------------ -----------------------
UNITS AMOUNT UNITS AMOUNT
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
Units sold 729,318.8159 $15,112,646 505,864.5836 $8,445,355
Units redeemed 67,072.5868 1,429,445 39,765.9760 641,748
------------ ----------- ------------ ----------
Net increase 662,246.2291 $13,683,201 466,098.6076 $7,803,607
============ =========== ============ ==========
</TABLE>
The Separate Account funds that invest in Dreyfus Small Cap Portfolio held
3,032,802.7702 units at a net asset value of $15.2861 and 1,461,574.8990 units
at a net asset value of $13.2713 at December 31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
UNITS AMOUNT UNITS AMOUNT
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Units sold 1,630,716.9673 $23,438,013 1,080,522.3668 $12,786,970
Units redeemed 59,489.0961 915,789 19,323.4514 260,726
-------------- ----------- -------------- -----------
Net increase 1,571,227.8712 $22,522,224 1,061,198.9154 $12,526,244
============== =========== ============== ===========
</TABLE>
The Separate Account funds that invest in TCI Growth Portfolio held
2,541,937.9972 units at a net asset value of $14.7133 and 2,191,474.5278 units
at a net asset value of $15.5840 at December 31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
UNITS AMOUNT UNITS AMOUNT
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Units sold 444,571.1658 $6,869,563 491,599.7304 $7,065,251
Units redeemed 94,107.6964 1,515,403 33,484.9815 468,460
------------ ---------- ------------ ----------
Net increase 350,463.4694 $5,354,160 458,114.7489 $6,596,791
============ ========== ============ ==========
</TABLE>
The Separate Account funds that invest in TCI Balanced Portfolio held
1,545,580.8344 units at a net asset value of $16.2128 and 1,294,882.9012 units
at a net asset value of $14.6286 at December 31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
UNITS AMOUNT UNITS AMOUNT
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Units sold 329,338.1231 $5,034,023 293,210.1829 $3,936,485
Units redeemed 78,640.1899 1,217,362 40,141.1930 533,155
------------ ---------- ------------ ----------
Net increase 250,697.9332 $3,816,661 253,068.9899 $3,403,330
============ ========== ============ ==========
</TABLE>
The Separate Account funds that invest in VIPF Growth Portfolio held
5,843,047.2941 units at a net asset value of $23.2198 and 4,459,417.0777 units
at a net asset value of $20.4909 at December 31, 1996 and 1995, respectively.
21
<PAGE>
VA-1 SEPARATE ACCOUNT OF UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
UNITS AMOUNT UNITS AMOUNT
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Units sold 1,448,572.4268 $31,961,921 1,408,315.0268 $26,646,045
Units redeemed 64,942.2104 1,531,214 20,760.0224 375,958
-------------- ----------- -------------- -----------
Net increase 1,383,630.2164 $30,430,707 1,387,555.0044 $26,270,087
============== =========== ============== ===========
</TABLE>
The Separate Account funds that invest in VIPF II Asset Manager Portfolio held
5,447,414.3329 units at a net asset value of $17.2668 and 4,882,919.6584 units
at a net asset value of $15.2510 at December 31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
UNITS AMOUNT UNITS AMOUNT
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Units sold 776,904.8813 $12,476,352 772,704.8532 $10,804,649
Units redeemed 212,410.2068 3,446,301 259,722.2139 3,669,628
------------ ----------- ------------ -----------
Net increase 564,494.6745 $ 9,030,051 512,982.6393 $ 7,135,021
============ =========== ============ ===========
</TABLE>
The Separate Account funds that invest in VIPF Equity-Income Portfolio held
2,997,006.5180 units at a net asset value of $15.7898 and 1,529,171.7672 units
at a net asset value of $13.9856 at December 31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
UNITS AMOUNT UNITS AMOUNT
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Units sold 1,505,157.0265 $22,213,213 1,281,538.6369 $15,768,284
Units redeemed 37,322.2757 569,650 73,025.8659 935,126
-------------- ----------- -------------- -----------
Net increase 1,467,834.7508 $21,643,563 1,208,512.7710 $14,833,158
============== =========== ============== ===========
</TABLE>
The Separate Account funds that invest in Calvert Responsibly Invested
Balanced Portfolio held 328,167.7828 units at a net asset value of $14.2222
and 133,870.5801 units at a net asset value of $12.7827 at December 31, 1996
and 1995, respectively.
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
UNITS AMOUNT UNITS AMOUNT
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Units sold 207,778.4639 $2,784,761 124,412.3448 $1,474,505
Units redeemed 13,481.2612 179,929 16,615.2632 201,874
------------ ---------- ------------ ----------
Net increase 194,297.2027 $2,604,832 107,797.0816 $1,272,631
============ ========== ============ ==========
</TABLE>
The Separate Account funds that invest in T. Rowe Price International Series
held 1,588,913.5294 units at a net asset value of $12.2756 and 803,484.7277
units at a net asset value of $10.8333 at December 31, 1996 and 1995,
respectively.
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
UNITS AMOUNT UNITS AMOUNT
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Units sold 804,268.0124 $9,291,422 504,969.4785 $5,127,746
Units redeemed 18,839.2107 234,486 56,420.6745 581,436
------------ ---------- ------------ ----------
Net increase 785,428.8017 $9,056,936 448,548.8040 $4,546,310
============ ========== ============ ==========
</TABLE>
22
<PAGE>
VA-1 SEPARATE ACCOUNT OF UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Separate Account funds that invest in VIPF Money Market Portfolio held
35,464.9671 units at a net asset value of $11.2772 and 21,371.9053 units at a
net asset value of $10.6987 at December 31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
UNITS AMOUNT UNITS AMOUNT
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Units sold 169,399.3668 $1,863,371 208,957.5381 $2,170,365
Units redeemed 155,306.3050 1,703,900 199,566.0400 2,074,046
------------ ---------- ------------ ----------
Net increase 14,093.0618 $ 159,471 9,391.4981 $ 96,319
============ ========== ============ ==========
</TABLE>
NOTE 3. RELATED PARTY TRANSACTIONS
UNUM Sales Corporation, an affiliate, acted as the distributor and principal
underwriter of the Separate Account prior to October 1, 1996. Effective
October 1, 1996, LNC Equity Sales Corporation, a non-affiliate, acted as a
distributor and principal underwriter of the Separate Account.
NOTE 4. SUBSEQUENT EVENT
Through March 1, 1997, the net assets of the Separate Account have decreased
by approximately $327,621,000 from novations of assets to the separate
accounts of Lincoln Life and Lincoln New York.
23
