<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1999
Registration No. 33-45851
Registration No. 811-5803
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 9 [x]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 38 [x]
___________
VA-I SEPARATE ACCOUNT
of
UNUM LIFE INSURANCE COMPANY OF AMERICA
(Exact Name of Registrant)
UNUM LIFE INSURANCE COMPANY OF AMERICA
(Name of Depositor)
2211 Congress Street
Portland, Maine 04122
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, including Area Code: 800-341-0441
ROSEMARY A. MOORE, ESQUIRE
UNUM Life Insurance Company of America
2211 Congress Street
Portland, Maine 04122
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[X] on May 1, 1999, pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on , pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
Title of securities being registered:
Interests in a separate account under group variable annuity contracts.
<PAGE>
Variable Annuity III
UNUM Life Insurance Company of America
VA-I Separate Account
group variable annuity contracts
Servicing Office:
UNUM Life Insurance Company of America
P.O. Box 9740
Portland, ME 04104
Attn: Tax Deferred Annuities
(800) 341-0441
This Prospectus describes group annuity contracts and individual certificates
issued by UNUM Life Insurance Company of America (UNUM/America). They are for
use with qualified and non-qualified retirement plans. Generally, neither the
contractowner nor the individual participant pays federal income tax on the
contract's growth until it is paid out. The contract is designed to accumulate
account value and, as permitted by the plan for which the contractowner pur-
chases the contract, to provide retirement income that a participant cannot
outlive or for an agreed upon time. These benefits may be a variable or fixed
amount or a combination of both. If a participant dies before the annuity com-
mencement date, we pay the beneficiary or the plan a death benefit.
If the contractowner gives certain rights to plan participants, we issue active
life certificates to them. Participants choose whether account value accumu-
lates on a variable or a fixed (guaranteed) basis or both. If a participant al-
locates contributions to the fixed account, we guarantee principal and a mini-
mum interest rate.
All contributions for benefits on a variable basis will be placed in
UNUM/America's VA-1 Separate Account (variable annuity account [VAA]). The VAA
is a segregated investment account of UNUM/America. If a participant puts all
or some contributions into one or more of the contract's subaccounts, the par-
ticipant takes all the investment risk on the account value and the retirement
income. If the selected subaccounts make money, account value goes up; if they
do not, it goes down. How much it goes up or down depends on the performance of
the selected subaccounts. We do not guarantee how any of the subaccounts or
their funds will perform. Also, neither the U.S. Government nor any federal
agency insures or guarantees the investment in the contract.
The available subaccounts, and the funds in which they invest, are listed be-
low. The contractowner decides which of these subaccounts are available under
the contract for participant allocations. For more information about the in-
vestment objectives, policies and risks of the funds, please refer to the Pro-
spectuses for the funds.
Balanced Account -- American Century Portfolios, Inc.: VP Balanced
Growth II Account -- American Century Portfolios, Inc.: VP Capital Appreciation
Socially Responsible Account -- Calvert Variable Series: Calvert Social Bal-
anced Account
Index Account -- Dreyfus Stock Index Fund
Small Cap Account -- Dreyfus Variable Investment Fund: Small Cap Portfolio
Growth I Account -- Fidelity Variable Insurance Products Fund: Growth Portfolio
Initial Class
Equity-Income Account -- Fidelity Variable Insurance Products Fund: Equity-In-
come Portfolio Initial Class
Asset Manager Account -- Fidelity Variable Insurance Products Fund II: Asset
Manager Portfolio Initial Class
International Stock Account -- T. Rowe Price International Series, Inc.
On or about August 6, 1999, we anticipate (i) closing the Growth II Account and
replacing the VP Capital Appreciation with Fidelity VIP -- Growth Portfolio and
(ii) closing the Socially Responsible Account and replacing the Calvert Social
Balanced Portfolio with Fidelity VIP II -- Asset Manager.
This Prospectus gives you information about the contracts and certificates that
contractowners and participants should know before investing. Please review the
Prospectuses for the funds, and keep them for reference.
Neither the SEC nor any state securities commission has approved the contracts
or determined that this Prospectus is accurate and complete. Any representation
to the contrary is a criminal offense.
A Statement of Additional Information (SAI) has more information about the con-
tracts and certificates. Its terms are made part of this Prospectus. For a free
copy, write: UNUM Life Insurance Company of America, P.O. Box 9740, Portland,
ME 04104, attn: Tax Deferred Annuities, or call 1-800-341-0441. The SAI and
other information about UNUM/America and VA-I Separate Account are also avail-
able on the SEC's web site (http://www.sec.gov). There is a table of contents
for the SAI on the last page of this Prospectus.
May 1, 1999
1
<PAGE>
Table of contents
<TABLE>
<CAPTION>
Page
- --------------------------------------------
<S> <C>
Special terms 2
- --------------------------------------------
Expense tables 3
- --------------------------------------------
Summary 5
- --------------------------------------------
Condensed financial information 7
- --------------------------------------------
Investment results 8
- --------------------------------------------
Financial statements 8
- --------------------------------------------
UNUM Life Insurance Company of America 8
- --------------------------------------------
Fixed side of the contract 8
- --------------------------------------------
Variable account (VAA) 9
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Investments of the VAA 9
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Charges and other deductions 11
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The contracts 12
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</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Annuity payouts 16
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Federal tax matters 17
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Voting rights 19
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Distribution of the contracts 20
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Return privilege 20
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State regulation 20
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Records and reports 20
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Other information 20
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Statement of additional information table of contents for VA-I Separate
Account Variable Annuity III 21
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</TABLE>
Special terms
Account or variable account (VAA) -- The segregated investment account, VA-I
Separate Account, into which UNUM/America sets aside and invests the assets for
the variable side of the contract offered in this Prospectus.
Account value -- At a given time before the annuity commencement date, the to-
tal value of all accumulation units for a contract plus the value of the fixed
side of contract.
Accumulation unit -- A measure used to calculate account value for the variable
side of the contract.
Annuitant -- The person on whose life the annuity benefit payments are based
and made after the annuity commencement date.
Annuity commencement date -- The date on which Unum/America makes the first an-
nuity payout to the annuitant.
Annuity payout -- An amount paid at regular intervals after the annuity com-
mencement date under one of several options available to the annuitant and/or
any other payee. This amount may be paid on a variable or fixed basis, or a
combination of both.
Annuity unit -- A measure used to calculate the amount of each annuity payout
for the variable side of the contract after an annuity commencement date.
Beneficiary -- The person the participant chooses to receive any death benefit
paid if the participant dies before the annuity commencement date.
Contractowner -- The party named on the group annuity contract (for example, an
employer, a retirement plan trust, an association, or other entity allowed by
law).
Contributions -- Amounts paid into the contract.
Death benefit -- An amount payable to a designated beneficiary if a participant
dies before his or her annuity commencement date.
Participant -- An employee or other person affiliated with the contractowner on
whose behalf we maintain an account under the 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.
Plan -- The retirement program that an employer offers to its employees for
which a contract is used to accumulate funds.
Subaccount -- The portion of the VAA that reflects investments in accumulation
and annuity units of a class of a particular fund available under the con-
tracts. There is a separate subaccount which corresponds to each fund.
UNUM/America (we, us our) -- UNUM Life Insurance Company of America.
Valuation date -- Each day the New York Stock Exchange (NYSE) is open for trad-
ing.
Valuation period -- The period starting at the close of trading (currently 4:00
p.m. New York time) on each day that the NYSE is open for trading (valuation
date) and ending at the close of such trading on the next valuation date.
2
<PAGE>
Expense tables
Contract Fee:
Annual administration charge (per participant): $25
The annual administration charge may be paid by an employer on behalf of par-
ticipants. It is not charged during the annuity period.
We may reduce or waive this charge in certain situations. See Charges and other
deductions.
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VA-I Separate Account annual expenses for Variable Annuity III subaccounts:
(as a percentage of average account value):
<TABLE>
<S> <C>
Mortality and expense risk charge 1.20%
</TABLE>
Annual expenses of the funds for the year ended December 31, 1998:
(as a percentage of each fund's average net assets):
<TABLE>
<CAPTION>
Management Other Total
Fees + Expenses = Expenses
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. American Century -- VP Balanced/1/ 0.97% 0.00 0.97%
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2. American Century -- VP Capital
Appreciation 1.00 0.00 1.00
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3. Calvert Social Balanced/2/ 0.70 0.18 0.88
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4. Dreyfus Stock Index Fund 0.25 0.01 0.26
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5. Dreyfus VIF: Small Cap Portfolio 0.75 0.02 0.77
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6. Fidelity VIP -- Growth Portfolio
Initial Class/3/ 0.59 0.09 0.68
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7. Fidelity VIP -- Equity Income
Portfolio Initial Class/3/ 0.49 0.09 0.58
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8. Fidelity VIP II -- Asset Manager
Initial Class/3/ 0.54 0.10 0.64
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9. T. Rowe Price International Series 1.05 0.00 1.05
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</TABLE>
/1/American Century Investment Management, Inc. voluntarily waived a portion of
its management fee from October 1, 1998 through November 16, 1998. In the
absence of the waiver, the average ratio of operating expenses to average net
assets would have been 1.48% for the year ended December 31, 1998. The
annualized fee schedule for the fund, effective November 17, 1998, is as
follows: 1.50% on the first $250 million; $1.20% on the next $250 million; and
1.10% thereafter.
/2/The figures above are based on expenses for fiscal year 1998, and have been
restated to reflect the elimination of the performance adjustment in Social
Balanced as of March 1, 1999 (pursuant to Shareholder approval on February 24,
1999). The restatement includes the addition of 0.01% to both portions.
/3/A portion of the brokerage commissions that certain funds pay was used to
reduce fund expenses. In addition, certain funds, or FMR on behalf of certain
funds, have entered into arrangements with their custodian whereby credits
realized as a result of uninvested cash Balances were used to reduce custodian
expenses. Including these reductions, the total operating expenses presented in
the table would have been: VIP Equity-Income Portfolio Initial Class 0.57%, VIP
Growth Portfolio Initial Class 0.66% and VIP II Asset Manager Portfolio Initial
Class 0.63%.
3
<PAGE>
Examples
(expenses of the subaccounts and the funds):
If you surrender your contract at the end of the time period shown, you would
pay the following expenses on a $1,000 investment, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. American Century -- VP Balanced 27 83 142 301
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2. American Century -- VP Capital Appreciation 27 82 141 298
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3. Calvert Social Balanced 26 80 136 290
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4. Dreyfus Stock Index Fund 20 61 105 226
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5. Dreyfus VIF: Small Cap Portfolio 25 76 131 279
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6. Fidelity VIP -- Growth Portfolio 24 74 126 270
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7. Fidelity VIP -- Equity Income Portfolio 23 71 121 259
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8. Fidelity VIP II -- Asset Manager 24 72 124 266
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9. T. Rowe Price International Series 28 85 145 306
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</TABLE>
If you do not surrender your contract, you would pay the following expenses on
a $1,000 investment, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. American Century -- VP Balanced 27 82 141 298
- --------------------------------------------------------------------------------
2. American Century -- VP Capital Appreciation 27 83 142 301
- --------------------------------------------------------------------------------
3. Calvert Social Balanced 26 80 136 290
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4. Dreyfus Stock Index Fund 20 61 105 226
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5. Dreyfus VIF: Small Cap Portfolio 25 76 131 279
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6. Fidelity VIP -- Growth Portfolio 24 74 126 270
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7. Fidelity VIP -- Equity Income Portfolio 23 71 121 259
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8. Fidelity VIP II -- Asset Manager 24 72 124 266
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9. T. Rowe Price International Series 28 85 145 306
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</TABLE>
funds. Premium taxes may also apply,
We provide these examples, to show although they do not appear in the
the direct and indirect costs and ex- examples. These examples should not
penses of the contract. be considered a representation of
past or future expenses. Actual ex-
penses may be more or less than those
shown.
For more information, see Charges and
other deductions in this Prospectus,
and in the Prospectuses for the
4
<PAGE>
Summary
What kind of contract is this? It is a group variable annuity contract between
the contractowner and UNUM/America. It may provide for a fixed annuity and/or a
variable annuity. This Prospectus describes the variable side of the contract.
See The contracts.
What is the variable annuity account (VAA)? It is a separate account we estab-
lished under Maine insurance law, and registered with the SEC as a unit invest-
ment trust. VAA assets are allocated to one or more subaccounts, according to
your investment choices. VAA assets are not chargeable with liabilities arising
out of any other business which UNUM/America may conduct. See The variable an-
nuity account.
What are the contract's investment choices? Based on instructions, the VAA ap-
plies contributions to buy fund shares in one or more of the investment funds
of the subaccounts: American Century Variable Portfolios, Inc.: VP Balanced, VP
Capital Appreciation; Calvert Social Balanced Portfolio; Dreyfus Stock Index
Fund; Dreyfus Variable Investment Fund: Small Cap Portfolio; Fidelity Variable
Insurance Products Fund: Growth Portfolio; Fidelity Variable Insurance Products
Fund: Equity-Income Portfolio; Fidelity Variable Insurance Products Fund II:
Asset Manager Portfolio; and T. Rowe Price International Series, Inc. In turn,
each fund holds a portfolio of securities consistent with its investment poli-
cy. On or about August 6, 1999 we anticipate (i) closing the Growth II Account
and replacing the VP Capital Appreciation with Fidelity VIP--Growth Portfolio
and (ii) closing the Socially Responsible Account and replacing the Calvert So-
cial Balanced Portfolio with Fidelity VIP II--Asset Manager. See The variable
annuity account and The funds for a description of the subaccounts.
Who invests contributions? American Century Investment Management, Inc. is the
investment adviser of American Century VP Balanced and VP Capital Appreciation.
The investment adviser of the Calvert Social Balanced Portfolio is The Calvert
Asset Management Company, Inc. The investment adviser of the Dreyfus funds is
The Dreyfus Corporation, New York, NY. The investment adviser of the Fidelity
funds is Fidelity Management & Research Company, Boston, MA. Rowe Price-Fleming
International, Inc. is investment adviser of the T. Rowe Price International
Series. See The funds.
How does the contract work? If we approve the application, we will send the
contractowner a contract. When participants make contributions, they buy accu-
mulation units. If the participant decides to purchase retirement income pay-
ments, we convert accumulation units to annuity units. Retirement income pay-
ments will be based on the number of annuity units received and the value of
each annuity unit on payout days. See The contracts.
What are the charges under the contract? We charge an annual administration
charge of $25 per participant account.
We will deduct any applicable premium tax from contributions or account value
at the time the tax is incurred or at another time we choose.
We apply an annual charge totaling 1.20% to the daily net asset value of the
VAA. See Charges and other deductions.
We may charge additional fees to set up a participant loan or establish a sys-
tematic withdrawal option.
We may waive these charges in certain situations.
The funds' investment management fees, expenses and expense limitations, if ap-
plicable, are more fully described in the Prospectuses for the funds.
What contributions are necessary, and how often? Contributions by or on behalf
of participants may be in any amount unless the contractowner or the plan has a
minimum amount. See The Contracts.
How will annuity payouts be calculated? If a participant decides to annuitize,
the participant selects an annuity option and starts receiving retirement in-
come payments from the contract as a fixed option or variable option or a com-
bination of both. See Annuity payout options. Remember that participants in the
VAA benefit from any gain, and take a risk of any loss, in the value of the se-
curities in the funds' portfolios.
What happens if a participant dies before he or she annuitizes? The beneficiary
has options as to how any death benefit is paid. See Death benefits and annuity
period.
May participants transfer account value between subaccounts, and between the
VAA and the fixed account? Before the annuity commencement date, yes, subject
to certain restrictions. A participant may not transfer more than 20% of his or
her fixed account holdings to the VAA per year, unless the participant intends
to liquidate their fixed account value. This liquidation must be over a 5-year
schedule. Transfers from the VAA or the fixed account may also be subject to
the terms of the plan. See The fixed account and The contracts--Transfers be-
tween subaccounts on or before the annuity commencement date.
May a participant withdraw account value? Yes, during the accumulation period,
subject to contract requirements and to the restrictions of any plan. See Sur-
renders and withdrawals. Special limits apply to withdrawals from the fixed ac-
count. The contractowner must also approve participant withdrawals under plans
subject to Title I of ERISA, and Section 457 plans. Certain charges may apply.
See Charges and other deductions. A portion of withdrawal proceeds may be tax-
able. In addition, a 10% Internal Revenue Service (IRS) tax penalty may apply
to distributions before age 59 1/2. A
5
<PAGE>
withdrawal also may be subject to 20% withholding. See Federal tax matters.
Do participants get a free look at their certificates? A participant under a
Section 403(b) or 408 plan and certain non-qualified plans can cancel the ac-
tive life certificate within ten days (in some states longer) of the date the
participant receives the certificate. The participant needs to give notice to
our home office. We will refund the participant's contributions less withdraw-
als, or for the variable side of the contract if greater, the participant's ac-
count balance on the day we receive the written notice. See Return privilege.
6
<PAGE>
Condensed financial information
The financial data included below should be read along with the financial
statements and the related data included in the Statement of Additional Infor-
mation.
Accumulation unit values (For an accumulation unit outstanding throughout the
period)
<TABLE>
<CAPTION>
Sub-Account 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ----------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <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 $22.7054 $29.8265
End of Period.......... $9.9629 $9.4953 $12.1814 $12.8906 $13.9245 $13.8792 $18.7565 $22.7054 $29.8265 $37.7853
Growth I Account
May 1 Commencement..... $ 10.00
Beginning of period.... $12.1759 $13.1505 $15.5094 $15.3208 $20.4909 $23.2198 $28.3281
End of period.......... $12.1759 $13.1505 $15.5094 $15.3208 $20.4909 $23.2198 $28.3281 $39.0440
Growth II Account
May 1 Commencement..... $ 10.00
Beginning of Period.... $11.5975 $11.3049 $12.3212 $12.0313 $15.5840 $14.7133 $14.0633
End of Period.......... $11.5975 $11.3049 $12.3212 $12.0313 $15.5840 $14.7133 $14.0633 $13.5959
Asset Manager Account
May 1 Commencement..... $ 10.00
Beginning of period.... $10.7598 $11.8933 $14.2241 $13.1979 $15.2510 $17.2668 $20.5827
End of period.......... $10.7598 $11.8933 $14.2241 $13.1979 $15.2510 $17.2668 $20.5827 $23.3982
Balanced Account
May 1 Commencement..... $ 10.00
Beginning of Period.... $12.4515 $11.5582 $12.2957 $12.2225 $14.6286 $16.2128 $18.5504
End of Period.......... $12.4515 $11.5582 $12.2957 $12.2225 $14.6286 $16.2128 $18.5504 $21.2201
International Stock
Account
May 1 Commencement..... $ 10.00
Beginning of Period.... $ 9.8622 $10.8333 $12.2756 $12.5034
End of Period.......... $ 9.8622 $10.8333 $12.2756 $12.5034 $14.3134
Socially Responsible
Account
May 1 Commencement..... $ 10.00
Beginning of Period.... $ 9.9692 $12.7827 $14.2222 $16.8728
End of Period.......... $ 9.9692 $12.7827 $14.2222 $16.8728 $19.3844
Equity-income Account
May 1 Commencement..... $ 10.00
Beginning of Period.... $10.4780 $13.9856 $15.7898 $19.9854
End of Period.......... $10.4780 $13.9856 $15.7898 $19.9854 $22.0431
Small Cap Account
May 1 Commencement..... $ 10.00
Beginning of Period.... $10.3818 $13.2713 $15.2861 $17.6322
End of Period.......... $10.3818 $13.2713 $15.2861 $17.6322 $16.8223
Pending Allocation
Account
October 16
Commencement.......... $ 10.00
Beginning of Period.... $10.1054 $10.6938 $11.2772 $11.8940
End of Period.......... $10.1054 $10.6938 $11.2772 $11.8940 $12.4522
</TABLE>
Number of Accumulation Units Outstanding at end of Period
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <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 3,057,792 138,498 149,332
Growth I Account........ 5,166 317,275 1,340,146 3,071,862 4,459,417 5,843,047 244,513 245,139
Growth II Account....... 53,904 566,562 1,242,216 1,733,360 2,191,475 2,541,938 97,067 74,873
Asset Manager Account... 36,645 462,405 2,232,731 4,369,937 4,882,920 5,447,414 205,657 202,386
Balanced Account........ 13,453 282,439 673,424 1,041,814 1,294,883 1,545,581 58,259 48,736
Socially Responsible
Account................ 26,073 133,871 328,168 8,750 14,160
Equity-income Account... 320,659 1,529,172 2,997,007 133,230 150,004
International Stock
Account................ 354,936 803,485 1,588,914 80,413 71,388
Small Cap Account....... 400,376 1,461,575 3,032,803 166,025 162,973
Pending Allocation
Account................ 11,980 21,372 35,465 485 23
</TABLE>
7
<PAGE>
Investment results
At times, the VAA may compare its investment results to various unmanaged in-
dices or other variable annuities in reports to shareholders, sales literature
and advertisements. The results will be calculated on a total return basis for
various periods. Total returns include the reinvestment of all distributions,
which are reflected in changes in unit value. See the SAI for further informa-
tion.
Financial statements
The financial statements for the VAA and UNUM/America are located in the SAI.
For a free copy of the SAI, complete and mail the enclosed card, or call 1-
800-341-0441.
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 par-
ent company, UNUM Corporation. UNUM Corporation was organized under Delaware
law, and is a publicly owned corporation whose stock is traded on the New York
Stock Exchange.
On October 1, 1996, UNUM/America sold its tax-sheltered annuity business to
The Lincoln National Life Insurance Company (Lincoln Life). Pursuant to the
acquisition agreement, Lincoln Life assumed UNUM/America's obligations under
the contracts, and Lincoln Life & Annuity Company of New York (LLANY) assumed
UNUM/America's obligations under contracts originally issued in New York (the
New York Contracts), other than those obligations to contractowners and/or
participants who neither consented nor were deemed to have consented to the
assumption. Whether or not a contract was assumed by Lincoln Life, it is ad-
ministered by Lincoln Life. If, under a contract some participants did opt out
and some did not, the contract was bifurcated--one contract has UNUM/America
as the insurer and the other has Lincoln Life as the insurer (or, for the New
York Contracts, LLANY). Both contracts, however, are administered by Lincoln
Life.
Lincoln Life was founded in 1905 and is organized under Indiana law. It is one
of the largest stock life insurance companies in the United States. It is
owned by Lincoln National Corp. (LNC) which is also organized under Indiana
law. LNC's primary businesses are insurance and financial services.
Fixed side of the contract
Contributions allocated to the fixed account become part of UNUM/America's
general account, and do not participate in the investment experience of the
VAA. The general account is subject to regulation and supervision by the Maine
Insurance Department as well as the insurance laws and regulations of the ju-
risdictions in which the contracts are distributed.
In reliance on certain exemptions, exclusions and rules, UNUM/America has not
registered interests in the general account as a security under the Securities
Act of 1933 and has not registered the general account as an investment com-
pany under the 1940 Act. Accordingly, neither the general account nor any in-
terests in it 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 our
general account and to the fixed side of the contract. These disclosures, how-
ever, may be subject to certain provisions of the federal securities laws re-
lating to the accuracy and completeness of statements made in the Prospectus.
This Prospectus is generally intended to serve as a disclosure document only
for aspects of the contract involving the VAA, and therefore contains only se-
lected information regarding the fixed side of the contract. Complete details
regarding the fixed side of the contract can be found in the contract.
Contributions allocated to the fixed account are guaranteed to be credited
with a minimum interest rate, specified in the contract, of at least 3.0%. A
contribution allocated to the fixed side of the contract is credited with in-
terest beginning on the next calendar day following the date of receipt if all
participant data is complete. UNUM/America may vary the way in which it cred-
its interest to the fixed side of the contract from time to time.
UNUM/America will also declare in advance a guaranteed interest rate which
will be effective for all amounts in the participant's account value in the
fixed account during the designated year. This rate will never be less than
the minimum rate of interest. UNUM/America may also declare in advance sepa-
rate interest rate guarantees which are in excess of the guaranteed interest
rate for some or all of the participant's account value in the fixed account
for specific period(s) during the designated year.
ANY INTEREST IN EXCESS OF 3.0% WILL BE DECLARED IN ADVANCE AT UNUM/AMERICA'S
SOLE DISCRETION. PARTICIPANTS BEAR THE RISK THAT NO INTEREST IN EXCESS OF 3.0%
WILL BE DECLARED.
Special limits apply to transfers and withdrawals from the fixed account. Dur-
ing any one calendar year, a participant may make one withdrawal from the
fixed account, OR one transfer to the VAA from the fixed
8
<PAGE>
account, of up to 20% of their fixed account balance. Participants who want to
liquidate their entire fixed account balance, or transfer it to the VAA, how-
ever, may make one withdrawal or transfer request for five Consecutive calen-
dar years from their fixed account, according to the following percentages:
<TABLE>
<CAPTION>
Year Request Received Percentage of Fixed
By UNUM/America Account Available
- --------------------- -------------------
<S> <C>
1 20%
2 25%
3 33.33%
4 50%
5 100%
</TABLE>
The five consecutive withdrawals may not be made more frequently than twelve
months apart. We reserve the right to require that any participant stating
their intention to liquidate their fixed account balance stop contributions to
the contract. The above liquidation schedule is also subject to the same con-
ditions as other withdrawals.
In addition, at contract termination some contracts offer lump sum payouts
which may have a market value adjustment. Lump sum payouts will never be less
than premiums less withdrawals accumulated at an annual effective rate of 3%.
Notwithstanding these limits, under certain conditions, a participant reaching
age 59 1/2, or the participant's death or disability. There may be other con-
ditions allowing the total withdrawal of a fixed account balance. See with-
drawals.
If a participant's plan permits loans, then during the participant's accumula-
tion period, the participant may apply for a loan by completing a loan appli-
cation that we provide. The participant's account balance in the fixed account
secures the loan. Loans are subject to restrictions imposed by the tax code,
Title I of the Employee Retirement Income Security Act of 1974 (ERISA), and
the participant's plan. For plans subject to Title I of ERISA, the initial
amount of a participant loan cannot exceed the lesser of 50% of the partici-
pant's vested account balance in the fixed account or $50,000 and must be at
least $1,000. For plans not subject to Title I of ERISA, a participant may
borrow up to $10,000 of his or her vested account balance. A participant may
have only one loan outstanding at a time and may not take 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 inter-
est at a rate below the loan interest rate provided in the contract. Under
certain contracts, a fee of up to $50 may be charged for a loan. More informa-
tion about loans, loan interest rates, and fees and charges are in the con-
tract, the active life certificates, the annuity loan agreement and is avail-
able from us.
Variable annuity account (VAA)
On July 8, 1988, the VAA was established as an insurance company separate ac-
count under Maine law. It is registered with the SEC as a unit investment
trust under the provisions of the 1940 Act. The SEC does not supervise the VAA
or UNUM/America. The VAA is a segregated investment account, meaning that its
assets may not be charged with liabilities resulting from any other business
that we may conduct. Income, gains and losses, whether realized or not, from
assets allocated to the VAA are, in accordance with the applicable annuity
contracts, credited to or charged against the VAA. They are credited or
charged without regard to any other income, gains or losses of UNUM/America.
The VAA satisfies the definition of separate account under the federal securi-
ties laws. We do not guarantee the investment performance of the VAA. Any in-
vestment gain or loss depends on the investment performance of the funds. You
assume the full investment risk for all amounts placed in the VAA.
The VAA is used to support other annuity contracts offered by UNUM/America in
addition to the contracts described in this Prospectus. The other annuity con-
tracts supported by the VAA invest in the same funds as the contracts de-
scribed in this Prospectus. These other annuity contracts may have different
charges that could affect the performance of the subaccount.
Investments of the variable annuity account
The contractowner decides which subaccounts will be available for participant
allocations. There is a separate subaccount, which corresponds to each fund.
Participant allocations may be changed without penalty or charges. Shares of
the funds will be sold at net asset value with no initial sales charge to the
VAA in order to fund the contracts. The funds are required to redeem fund
shares at net asset value on our request. We reserve the right to add, delete,
or substitute funds.
Each fund, described below, is an investment vehicle for insurance company
separate accounts. Certain funds offered as part of this contract have similar
investment objectives and policies to other portfolios managed by the advisor.
The investment results of the funds, however, may be higher or lower than the
results of other portfolios that are managed by the advisor. There can be no
assurance, and no representation is made, that the investment results of any
of the funds will be comparable to the investment results of any other portfo-
lio managed by the advisor.
Certain funds offered as part of this contract have similar investment objec-
tives and policies to other portfolios managed by the advisor. The investment
results of
9
<PAGE>
the funds, however, may be higher or lower than the other portfolios that are
managed by the advisor. There can be no assurance, and no representation is
made, that the investment results of any of the funds will be comparable to
the investment results of any other portfolio managed by the advisor.
Following are brief summaries of the investment objectives and policies of the
funds, and a description of their managers. Each fund is subject to certain
investment policies and restrictions which may not be changed without a major-
ity vote of shareholders of that fund. More detailed information can be ob-
tained from the current Prospectus for the funds. There is no assurance that
any of the funds will achieve its stated objective.
1. American Century Variable Portfolios, Inc.--American Century VP Balanced
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 ap-
preciation and the balance in bonds and other fixed income securities.
American Century Investment Management, Inc. is the investment manager of
this portfolio.
2. American Century Variable Portfolios, Inc.--American Century VP Capital Ap-
preciation seeks capital growth by investing primarily in common stocks
that are considered by management to have better-than-average prospects for
appreciation. American Century Investment Management, Inc. is the invest-
ment manager of this portfolio.
3. Calvert Variable Series--The Calvert Social Balanced Portfolio seek to
achieve a competitive total return through actively managed portfolio of
stock, bonds and money market instruments which offer income and capital
growth opportunity and which satisfy the investment and social criteria.
Calvert Asset Management Company, Inc. serves as the Portfolio's investment
Adviser.
4. Dreyfus Stock Index Fund is a non-diversified index fund that seeks to pro-
vide 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 acts as the Fund manager and Mellon Equity Associates, an af-
filiate of Dreyfus located at 500 Grant Street, Pittsburgh, Pennsylvania
15258, is the Fund index manager.
5. Dreyfus Variable Investment Fund--Small Cap Portfolio seeks to maximize
capital appreciation. The Small Cap Portfolio seeks out companies that have
the potential for significant growth. Under normal market conditions, the
Portfolio will invest at least 65% of its total assets in domestic and for-
eign companies with market capitalization of less than $1.5 billion, at the
time of purchase. The manager seeks companies believed 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 serves as the Funds investment adviser.
6. Fidelity Variable Insurance Products Fund (VIP)--Growth Portfolio seeks to
achieve long-term capital appreciation. The Portfolio normally purchases
common stocks. FMR is the investment manager of this portfolio.
7. Fidelity Variable Insurance Products Fund (VIP)--Equity-Income Portfolio
seeks reasonable income by investing primarily in income-producing, securi-
ties, with some potential for capital appreciation, seeking a yield that
exceeds the composite yield on the securities comprising the Standard and
Poor's 500 Index (S&P500). Fidelity Management & Research Company ("FMR")
is the manager this portfolio.
8. Fidelity Variable Insurance Products Fund II (VIP II)--Asset Manager Port-
folio seeks high total return with reduced risk over the long term by allo-
cating its assets among domestic and foreign stocks, bonds and short-term
money market instruments. FMR is the investment manager of this portfolio.
9. T. Rowe Price International Series, Inc.--T. Rowe Price International Stock
Portfolio seeks long-term growth of capital through investments primarily
in common stocks of established, non-U.S. companies. Rowe Price-Fleming In-
ternational, Inc. is the investment manager of this portfolio.
Fidelity VIP--Money Market Portfolio seeks to obtain as high a level of cur-
rent income as is consistent with preserving capital and providing liquidity.
For more information about the Portfolio, into which initial contributions are
invested pending UNUM/America's receipt of a complete order, see The con-
tracts--purchase of contracts.
On or about August 6, 1999, we anticipate (i) closing the Growth II Account
and replacing the VP Capital Appreciation with Fidelity VIP--Growth Portfolio
and (ii) closing the Socially Responsible Account and replacing the Calvert
Social Balanced Portfolio with Fidelity VIP II--Asset Manager.
With respect to a fund, the advisor and/or distributor, or an affiliate there-
of, may compensation Lincoln Life (or an affiliate) for administrative, dis-
tribution, or other services. It is anticipated that such compensation will be
based on assets of the particular fund attributable to the contracts along
with certain other variable contracts issued or administered by Lincoln Life
(or an affiliate).
Sale of shares by the funds
We will purchase shares of the funds at net asset value and direct them to the
appropriate subaccounts of the VAA. We will redeem shares of the appropriate
funds to pay annuity payouts, death benefits, surrender/with drawal proceeds
or for other purposes described in the contract. If a participant wants to
transfer all or part of
10
<PAGE>
his or her account balance from one subaccount to another, we redeem shares
held in the first and purchase shares of the other. The shares are retired,
but they may be reissued later.
Shares of the funds are not sold directly to the general public. They are sold
to UNUM/America and may be sold to other insurance companies for investment of
assets of the subaccounts established by those insurance companies to fund
variable annuity and variable life insurance contracts.
When a fund sells shares both to variable annuity and to variable life insur-
ance separate accounts, it is engaging in mixed funding. When a fund sells
shares to separate accounts of unaffiliated life insurance companies, it is
engaging in shared funding.
The funds may engage in mixed and shared funding. Due to differences in re-
demption rates or tax treatment, or other considerations, the interests of
various contractowners participating in a fund could conflict. The funds' Di-
rectors or Trustees will monitor for the existence of any material conflicts,
and determine what action, if any, should be taken. See the Prospectuses for
the funds.
Reinvestment of dividends andcapital gain distributions
All dividend and capital gain distributions of the funds are automatically re-
invested in shares of the distributing funds at their net asset value on the
date of distribution. Dividends are not paid out to contractowners as addi-
tional units, but are reflected as changes in unit values.
Addition, deletion orsubstitution of investments
We reserve the right, within the law, to make additions, deletions and substi-
tutions for the funds in which the VAA participates. (We may substitute shares
of other funds for shares already purchased, or to be purchased in the future,
under the contract. This substitution might occur if shares of a fund should
no longer be available, or if investment in any fund's shares should become
inappropriate, in the judgment of our management, for the purposes of the con-
tract.) We cannot substitute shares without approval by the SEC. We will also
notify contractowners and participants.
Charges and other deductions
We will deduct the charges described below to cover costs and expenses, serv-
ices provided, and risks assumed under the contracts. Certain costs and ex-
penses will be incurred for distribution and administration of the contracts
and for providing the benefits payable thereunder. More particularly, the ad-
ministrative services provided include: processing applications and enrollment
forms and issuing the contracts and active life certificates, processing pur-
chases and redemptions of fund shares as required, maintaining records, admin-
istering payout annuity options, furnishing accounting and valuation services
(including the calculation and monitoring of daily subaccount values), recon-
ciling and depositing cash receipts, providing contract confirmations, provid-
ing toll-free inquiry services and furnishing telephone fund transfer servic-
es. The risks assumed include: the risk that annuitants receiving payout annu-
ities under the contract will live longer than we assumed when we calculated
our guaranteed rates (these rates cannot be changed); the risk that death ben-
efits paid will exceed actual participant account balances (less outstanding
loans); and the risk that our costs in providing the services will exceed our
revenues from contract charges which we cannot change. The amount of a charge
may not necessarily correspond to the costs associated with providing the
services or benefits indicated by the description of the charge. As noted
above, Lincoln Life will now administer the contracts on our behalf.
Deductions from the VAA forVariable Annuity III
We deduct from the VAA an amount, computed daily, which is equal to a maximum
rate of 1.20% of the daily net asset value. The charge is a mortality and ex-
pense risk charge. It is assessed during the accumulation period and during
the annuity period even though during the annuity period we bear no mortality
risk on annuity options that do not have life contingencies.
Annual administration charge
During the accumulation period, we currently deduct $25 (or the balance of the
participant's account, if less) per year from each participant's account bal-
ance on the last business day of the month in which a participant anniversary
occurs. We also deduct the charge from a participant's account balance if the
participant's account is totally withdrawn. The charge may be increased or de-
creased.
Deductions for premium taxes
Any premium tax or other tax levied by any governmental entity as a result of
the existence of the contracts or the VAA will be deducted from account value
when incurred, or at another time of our choosing.
The applicable premium tax rates that states and other governmental entities
impose on the purchase of an annuity are subject to change by legislation, by
administrative interpretation or by judicial action. The tax ranges from 0.5%
to 4.0%.
Other charges and deductions
There are deductions from and expenses paid out of the assets of the under-
lying funds that are more fully described in the Prospectuses for the funds.
We impose a $50 fee under certain conditions to establish a participant loan
from the fixed account, and loans
11
<PAGE>
are subject to loan interest charges. In addition, we impose a $30 fee to set
up a systematic withdrawal option for a participant.
Additional information
The annual administration charge described previously may be reduced or elimi-
nated under a particular contract. However, these charges will be reduced only
to the extent that we anticipate lower distribution and/or administrative ex-
penses, or that we perform fewer sales or administrative services than those
originally contemplated in establishing the levels of those charges. Lower
distribution and/or administrative expenses may be the result of economies as-
sociated with (i) the size of a particular group; (ii) an existing relation-
ship with the contractowner or employer; (iii) the use of mass enrollment pro-
cedures; (iv) the performance of administrative or sales functions by the em-
ployer; or (v) the use by an employer of automated techniques in submitting
contributions or information relating to contributions on behalf of its em-
ployees. In addition, an employer may pay the annual administration charge on
behalf of participants under a contract, or by election impose this charge
only on participants with account balances in the VAA.
The contracts
Purchase of the Contracts
We designed the contracts for employers and other entities to enable partici-
pants and employers to accumulate funds for retirement programs meeting the
requirements of the following Sections of the Internal Revenue Code of 1986,
as amended (tax code): 401(a), 403(b), 408, and other related sections, as
well as for programs offering non-qualified annuities. For plans that have al-
located rights to the participant, we will issue to each participant a sepa-
rate active life certificate that describes the basic provisions of the con-
tract to each participant.
Contributions
Contractowners generally forward contributions to us for investment. Depending
on the plan, the contributions may consist of salary reduction contributions,
employer contributions or post-tax contributions. Lincoln Life administers the
contracts including, among other services, processing contributions (which may
be temporarily maintained in Lincoln Life's general account) and withdrawals.
Contributions may accumulate on either a guaranteed or variable basis selected
from those subaccounts available by the contractowner.
Contributions by participants may be in any amount unless there is a minimum
amount set by the contractowner or plan. A contract may require the
contractowner to contribute a minimum annual amount on behalf of all partici-
pants. Annual contributions under qualified plans may be subject to maximum
limits imposed by the tax 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 tax code, we will ac-
cept transfers from other contracts and qualified rollover contributions.
Section 830.205 of the Texas Education Code provides that employer or state
contributions (other than salary reduction contributions) on behalf of partic-
ipants in the Texas Optional Retirement Program ("ORP") vest after one year of
participation in the program. We will return employer contributions to the
contractowner for those employees who terminate employment in all Texas insti-
tutions of higher education before becoming vested. During this first partici-
pation year in the ORP, ORP Participants may only direct employer and state
contributions to the fixed account.
Contributions must be in U.S. funds, and all withdrawals and distributions un-
der the contract will be in U.S. funds. If a bank or other financial institu-
tion does not honor the check or other payment method used for a contribution,
we will treat the contribution as invalid. All allocation and subsequent
transfers resulting from the invalid contributions will be reversed and the
party responsible for the invalid contribution must reimburse us for any
losses or expenses resulting from the invalid contribution.
Initial contributions
When we receive a completed enrollment form and all other information neces-
sary for processing a contribution, we will price the initial contribution for
a participant to his or her account no later than two business days after we
receive the contribution.
If we receive contributions without a properly complete enrollment form, we
will notify the contractowner and deposit the contributions to the pending al-
location account. Within two business days of receipt of a properly completed
enrollment form, we will transfer the participant's account balance in the
pending allocation account in accordance with the allocation percentages
elected on the enrollment form. We will allocate all future contributions in
accordance with these percentages until the participant notifies us of a
change. If we do not receive a properly completed enrollment form after we
send three monthly notices, then we will refund the participant's account bal-
ance in the pending allocation account within 105 days of the date of the ini-
tial contribution. The pending allocation account invests in Fidelity VIP--
Money Market Portfolio, which is not available as an investment option under
the contract. We do not impose the mortality and expense risk charges or the
annual administration charge on the pending allocation account. We begin im-
posing these charges when we receive a properly completed enroll -
12
<PAGE>
ment form. The participant's participation date will be the date we deposited
the participant's contribution into the pending allocation account.
Valuation date
Accumulation units and annuity units will be valued once daily at the close of
trading (currently 4:00 p.m., New York time) on each day the New York Stock
Exchange is open (valuation date), on any date other than a valuation date,
the accumulation unit value and the annuity unit value will not change.
Allocation of contributions
The contractowner forwards contributions to us, specifying the amount being
contributed on behalf of each participant and allocation information in accor-
dance with our procedures. Contributions are placed into the VAA's
subaccounts, each of which invests in shares of a fund, and/or the fixed ac-
count, according to written participant instructions and subject to the plan.
The contribution allocation percentage to the subaccounts or the fixed account
can be in any whole percent. A participant may allocate contributions to a
maximum of nine subaccounts or the fixed account.
Upon allocation to the appropriate subaccount, contributions are converted to
accumulation units. The number of accumulation units credited is determined by
dividing the amount allocated to each subaccount by the value of an accumula-
tion unit for that subaccount on the valuation date on which the contribution
is received by us if received before 4:00 p.m., New York time. If the contri-
bution is received at or after 4:00 p.m., New York time, we will use the accu-
mulation unit value computed on the next valuation date. The number of accumu-
lation units determined in this way is not changed by any subsequent change in
the value of an accumulation unit. However, the dollar value of an accumula-
tion unit will vary depending not only upon how well the underlying fund's in-
vestments perform, but also upon the expenses of the VAA and the underlying
funds.
Subject to the terms of the plan, a participant may change the allocation of
contributions by notifying us in writing or by telephone in accordance with
our published procedures. The change is effective for all contributions re-
ceived concurrently with the allocation change form and for all future contri-
butions, unless the participant specifies a later date. Changes in the alloca-
tion of future contributions have no effect on amounts a participant may have
already contributed. Such amounts, however, may be transferred between
subaccounts and the fixed account pursuant to the requirements described in
"Transfers on or before the annuity commencement date." Allocations of em-
ployer contributions may be restricted by the applicable plan.
Valuation of accumulation units
Contributions allocated to the VAA are converted into accumulation units. This
is done by dividing each contribution by the value of an accumulation unit for
the valuation period during which the contribution is allocated to the VAA.
The accumulation unit value for each subaccount was or will be established at
the inception of the subaccount. It may increase or decrease from valuation
period to valuation period. The accumulation unit value for a subaccount for a
later valuation period is determined as follows:
(1) The total value of the fund shares held in the subaccount is calculated by
multiplying the number of fund shares owned by the subaccount at the be-
ginning of the valuation period by the net asset value per share of the
fund at end of the valuation period, and adding any dividend or other dis-
tribution of the fund if an ex-dividend date occurs during the valuation
period; minus
(2) The liabilities of the subaccount at the end of the valuation period;
these liabilities include daily charges imposed on the subaccount, and may
include a charge or credit with respect to any taxes paid or reserved for
by us that we determine result from the operations of the VAA; and
(3) The result of (2) is divided by the number of subaccount units outstanding
at the beginning of the valuation period.
The daily charges imposed on a subaccount for any valuation period are equal
to the mortality and expense risk charge multiplied by the number of calendar
days in the valuation period.
Transfers on or before the annuity commencement date
Subject to the terms of a plan, a participant may transfer all or a portion of
the participant's account balance from one subaccount to another, and between
the VAA and the fixed account.
Transfers and withdrawals from the fixed account are subject to special lim-
its. During any one calendar year, a participant may make one transfer from
the fixed account to the VAA in an amount of up to 20% of the fixed account
balance, if allowed by the terms of the contract. See The fixed account.
A transfer from a subaccount involves the surrender of accumulation units in
that subaccount, and a transfer to a subaccount involves the purchase of accu-
mulation units in that subaccount. Subaccount transfers will be done using ac-
cumulation unit values determined at the end of the valuation date on which we
receive the transfer request. There is no charge for a transfer. We do not re-
quire any minimum transfer amount, and do not limit the number of transfers.
A transfer may be made by writing to us or, if a Telephone Exchange Authoriza-
tion form (available from us) is on file with us, by a toll-free telephone
call. In order to prevent unauthorized or fraudulent telephone transfers, we
may require the caller to provide certain identifying information before we
will act upon their instructions. We may also assign the participant a Per-
sonal Identification Number (PIN) to serve as identification. We will not be
liable for following telephone in-
13
<PAGE>
structions we reasonably believe are genuine. Telephone requests may be re-
corded and written confirmation of all transfer requests will be mailed to the
participant on the next valuation date. If the participant or contractowner
determines that a transfer was made in error, the contractowner or participant
must notify us within 30 days of the confirmation date. Telephone transfers
will be processed on the valuation date that they are received when they are
received by us before 4:00 p.m. New York time.
When thinking about a transfer of account value, the participant should con-
sider the inherent risk involved. Frequent transfers based on short-term ex-
pectations may increase the risk that a transfer will be made at an inoppor-
tune time.
Transfers after the annuity commencement date
We do not permit transfers of a participant's account balance after the annu-
ity commencement date.
Death benefit before the annuity commencement date
The payment of death benefits is governed by the applicable plan and the tax
code. The participant may designate a beneficiary during the participant's
lifetime and change the beneficiary by filing a written request with us. Each
change of beneficiary revokes any previous designation.
If the participant dies before the annuity commencement date, the death bene-
fit paid to the participant's designated beneficiary will be the greater of:
(1) the net contributions; or (2) the participant's account balance less any
outstanding loan (including principal and due and accrued interest), provided
that, if we are not notified of the participant's death within six months of
such death, we pay the beneficiary the amount in (2).
We determine the value of the death benefit as of the date on which the death
claim is approved for payment. This payment will occur when we receive (1)
proof, satisfactory to us, of the death of the participant; (2) written autho-
rization for payment; and (3) all required claim forms, fully completed.
If a death benefit is payable, the beneficiary may elect to receive payment of
the death benefit either in the form of a lump sum settlement or a payout an-
nuity, or as a combination of these two.
If a lump sum settlement is requested, the proceeds will be mailed within
seven days of receipt of satisfactory claim documentation as discussed previ-
ously, subject to the laws and regulations governing payment of death bene-
fits. If no election is made within 60 days after we receive satisfactory no-
tice of the participant's death, we will pay a lump sum settlement to the ben-
eficiary at that time. This payment may be postponed as permitted by the 1940
Act.
Payment will be made in accordance with applicable laws and regulations gov-
erning payment of death benefits.
Under qualified contracts, if the beneficiary is someone other than the spouse
of the deceased participant, the tax code provides that the beneficiary may
not elect an annuity which would commence later than December 31st of the cal-
endar 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 tax
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.
If the beneficiary is the surviving spouse of the deceased participant, dis-
tributions generally are not required under the tax code to begin earlier than
December 31st of the calendar year in which the participant would have at-
tained age 70 1/2. If the surviving spouse dies before the date distributions
commence, then, for purposes of determining the date distributions to the ben-
eficiary must commence, the date of death of the surviving spouse is substi-
tuted for the date of death of the participant.
If there is no living named beneficiary on file with us at the time of a par-
ticipant's death and unless the plan directs otherwise, we 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 we re-
ceive proof of death no later than the end of the fourth calendar year follow-
ing the year of the participant's death. The value of the death benefit will
be determined as of the end of the valuation period during which we receive
due proof of death, and the lump sum death benefit generally will be paid
within seven days of that date.
Withdrawals
Before the annuity commencement date and subject to the terms of the plan,
withdrawals may be made from the subaccounts or the fixed account of all or
part of the participant's account balance 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.
Special limits apply to withdrawals (and transfers to the VAA) from the fixed
account. See The fixed account.
Notwithstanding such limits, a participant may withdraw 100% of their fixed
account balance at any time provided that we receive satisfactory proof of the
following events: (a) the participant has attained age 59 1/2; (b) the partic-
ipant has died; (c) the participant has incurred a disability as defined under
the contract; (d) the participant has separated service from their employer;
or (e) the participant has incurred a financial hardship. A contractowner has
options of (i) choosing to eliminate financial hardship as an event entitling
the
14
<PAGE>
participant to 100% withdrawal from the contract; and/or (ii) adding a re-
quirement that the participant be 55 years of age and separated from service
to be entitled to 100% withdrawal from the fixed account. Contractowners
choosing one or more of these optional provisions may receive a difference de-
clared interest rate on the fixed account than will holders of contracts with-
out these provisions.
The account balance available for withdrawal is determined at the end of the
valuation period during which we receive the written withdrawal request. Un-
less a request for withdrawal specifies otherwise, withdrawals will be made
from all subaccounts within the VAA and from the fixed account in the same
proportion that the amount of withdrawal bears to the total participant ac-
count balance. Unless prohibited, withdrawal payments will be mailed within
seven days after we receive a valid written request. The payment may be post-
poned as permitted by the 1940 Act.
The tax consequences of a withdrawal are discussed later in this booklet. See
Federal tax matters.
Total Withdrawals. Only participants with no outstanding loans can make a to-
tal withdrawal. A total withdrawal of a participant's account will occur when
(a) the participant or contractowner requests the liquidation of the partici-
pant's entire account balance, or (b) the amount requested results in a re-
maining participant account balance of an amount less than or equal to the an-
nual administration charge, in which case we treat the request as a request
for liquidation of the participant's entire account balance.
Any active life certificate must be surrendered to us when a total withdrawal
occurs. If the contractowner resumes contributions on behalf of a participant
after a total withdrawal, the participant will receive a new participation
date and active life certificate.
Partial Withdrawals. A partial withdrawal of a participant's account balance
will occur when less than a total withdrawal is made from a participant's ac-
count.
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 eli-
gible for a Systematic Withdrawal Option ("SWO") under the contract. Payments
are made only from the fixed account. 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 with-
drawn on a periodic basis. A participant must have a vested pre-tax account
balance of at least $10,000 in the fixed account in order to select the SWO. A
participant may transfer amounts from the VAA to the fixed account in order to
support SWO payments. These transfers, however, are subject to the transfer
restrictions imposed by any applicable plan. A one-time fee of up to $30 will
be charged to set up the SWO. This charge is waived for total vested pre-tax
account balances of $25,000 or more. More information about SWO, including ap-
plicable fees and charges, is available in the contracts and active life cer-
tificates and from us.
Maximum conservation option. Under certain contracts participants who are at
least age 70 1/2 may ask us to calculate and pay to them the minimum annual
distribution required by Sections 401 (a)(9), 403(b)(10), or 408 of the tax
code. The participant must complete the forms we require to elect this option.
We will base our calculation solely on the participant's account value with
us. 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 sub-
ject to the limitations under Section 403(b)(11) of the tax code and regula-
tions thereof and in any applicable plan document. That section provides that
withdrawals of salary reduction contributions deposited and earnings credited
on any salary reduction contributions after December 31, 1988 can only be made
if the participant has (1) died; (2) become disabled; (3) attained age 59 1/2;
(4) separated from service; or (5) incurred a hardship. If amounts accumulated
in a Section 403(b)(7) custodial account are deposited in a contract, these
amounts will be subject to the same withdrawal restrictions as are applicable
to post-1988 salary reduction contributions under the contracts. For more in-
formation on these provisions see Federal tax matters.
Withdrawal requests for a participant under Section 401(a) plans and plans
subject to Title I of ERISA must be authorized by the contractowner on behalf
of a participant. All withdrawal requests will require the contractowner's
written authorization and written documentation specifying the portion of the
participant's account balance which is available for distribution to the par-
ticipant.
As required by Section 830.105 of the Texas Education Code, withdrawal re-
quests by participants in the Texas Optional Retirement Program ("ORP") are
only permitted in the event of (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 certifi-
cate of termination from the participant's employer before a withdrawal re-
quest 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-401(a) Plans,
the participant must certify to us that one of the permitted distribution
events listed in the tax code has occurred (and provide supporting informa-
tion, if requested) and that we may rely on this representation in granting
the withdrawal request. See Federal tax matters. A participant
15
<PAGE>
should consult his or her tax adviser as well as review the provisions of
their plan before requesting a withdrawal.
A plan and applicable law may contain additional withdrawal or transfer re-
strictions.
Withdrawals may have Federal tax consequences. In addition, early withdrawals,
as defined under Section 72(q) and 72(t) of the tax code, may be subject to a
ten percent excise tax.
Amendment of the contract
We reserve the right to amend the contract to meet the requirements of the
1940 Act or other applicable federal or state laws or regulations. The
contractowner will be notified in writing of any changes, modifications or
waivers.
Commissions
We pay commissions of up to 3.5% of contributions to dealers. In some instanc-
es, we may lower commissions on contributions by as much as 3.5% and include a
commission of up to .50% of annual contract values (or an equivalent sched-
ule). These commissions are not deducted from contributions or account value;
they are paid by us.
Ownership
Contractowners have all rights under the contract except those allocated to
participants. According to Maine law, the assets of the VAA are held for the
exclusive benefit of all contractowners, participants, and their designated
beneficiaries; and the assets of the VAA are not chargeable with liabilities
arising from any other business that we may conduct. Qualified contracts and
active life certificates may not be assigned or transferred except as permit-
ted by ERISA and on written notification to us. In addition, a participant,
beneficiary, or annuitant may not, unless permitted by law, assign or encumber
any payment due under the contract.
Contractowner questions
The obligations to purchasers under the contracts are those of UNUM/America.
Questions about the contract should be directed to us at 1-800-341-0441.
Annuity payouts
As 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 an annuity payout. The contract provides op-
tional forms of payouts of annuities (annuity payout options), each of which
is payable on a variable basis, a fixed basis or a combination of both as
specified. If the contractowner does not give us instructions, we will apply
the participant's account value in the fixed account to a fixed annuity, and
account balance in the VAA to a variable annuity.
If the participant's account balance or the beneficiary's death benefit is
less than $2,000 or if the amount of the first payout is less than $20, we
have the right to cancel the annuity and pay the participant or beneficiary
the entire amount in a lump sum.
We may maintain variable payout annuities in the VAA in a separate account of
Lincoln Life (the variable payout division). We do not impose a charge when
the annuity conversion amount is applied to a variable payout on a variable
basis. The contract benefits and charges for an annuity payout option, whether
maintained in the VAA or in a variable payout division, are as described in
this Prospectus. The selection of funds available through a variable payout
division may be different from the funds available through the VAA. If we
maintain a participant's variable annuity payout in a variable payout divi-
sion, we will provide a Prospectus for the variable payout division before the
annuity commencement date.
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 benefi-
ciary. If the beneficiary is not 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 payout to be made to the participant and the beneficiary.
If an annuitant dies before the end of a designated annuity period, the bene-
ficiary, if any, or the annuitant's estate will receive any remaining payments
due under the annuity option in effect.
Annuity payout options
Note Carefully: Under the Single Life Annuity and Joint Life Annuity options
it would be possible for only one annuity payout to be made if the
annuitant(s) were to die before the due date of the second annuity payout;
only two annuity payouts if the annuitant(s) were to die before the due date
of the third annuity payout; and so forth.
Single Life Annuity. Payouts are made monthly during the lifetime of the annu-
itant, and the annuity terminates with the last payout preceding death.
Life Annuity With Guaranteed Periods of 10, 15 or 20 Years. Payouts are made
monthly during the lifetime of the annuitant with a monthly payout guaranteed
to the beneficiary for the remainder of the selected number of years, if the
annuitant dies before the end of the period selected. Payouts under this annu-
ity option are smaller than a single life annuity without a guaranteed payout
period.
Joint Life Annuity. Payouts are made monthly during the joint lifetime of the
annuitant and a designated second person.
Non-Life Annuities. Annuity payouts are guaranteed monthly for the selected
number of years. While there is no right to make any total or partial with-
drawals during the annuity period, an annuitant or beneficiary who has se-
lected this annuity option as a variable annuity may request at any time dur-
ing the payout period that the present value of any remaining installments be
paid in one lump sum. This lump sum payout will be treated as a total with-
drawal during the accumulation pe-
16
<PAGE>
riod. See Charges and deductions and Federal tax matters.
Additional information
Annuity payout options are only available if consistent with the contract, the
plan, the tax code, and ERISA.
The annuity commencement date is the date on which we make the first annuity
payout to an annuitant. For plans subject to Section 401(a)(9)(B) of the tax
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
contractowner may select an annuity commencement date for the annuitant, which
is shown in the retired life certificate. Selection of an annuity commencement
date may be affected by the distribution restrictions under the tax code and
the minimum distribution requirements under Section 401(a)(9) of the tax code.
See Federal tax matters.
You must send us written notice of the selected annuity commencement date, the
annuity payout option (including whether fixed or variable), and the annuity
conversion amount to be converted on behalf of a participant or beneficiary,
at least 30 days before the selected annuity commencement date. If proceeds
become available to a beneficiary in a lump sum, the beneficiary may choose
any annuity payout option.
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 payout
calculation date. For a fixed annuity, the annuity commencement date is usu-
ally one month after the annuity payout calculation date; subsequent payout
annuity payments are at one-month intervals from the annuity commencement
date. For a variable annuity, the annuity commencement date is ten business
days after the initial annuity payout calculation date; subsequent monthly
payouts have annuity payout calculation dates which are ten business days pri-
or.
Annuity payout calculation
Fixed annuity payouts are determined by dividing the participant's annuity
conversion amount in the fixed account as of the initial annuity payout calcu-
lation date by the applicable annuity conversion factor (in the contract) for
the annuity payout option selected.
Variable annuity payouts will be determined using:
1. The participant's annuity conversion amount in the VAA as of the initial
annuity payout calculation date;
2. The annuity conversion factor in the contract;
3. The annuity payout option selected; and
4. The investment performance of the funds selected.
To determine the amount of annuity payouts, we make this calculation:
1. Determine the dollar amount of the first payout; then
2. Credit the retired life certificate with a specific number of annuity units
equal to the first payout divided by the annuity unit value; and
3. Calculate the value of the annuity units each period thereafter.
We assume an investment return of a specified percentage per year, as applied
to the applicable mortality table. The amount of each annuity payout after the
initial payout will depend upon how the underlying fund(s) perform, relative
to the assumed rate. If the actual net investment rate (annualized) exceeds
the specified percentage, the payment will increase at a rate equal to the
amount of such excess. Conversely, if the actual rate is less than the speci-
fied percentage, annuity payouts will decrease. There is a more complete ex-
planation of this calculation in the SAI.
Federal tax matters
Introduction
The Federal income tax treatment of the contract is complex and sometimes un-
certain. The Federal income tax rules may vary with your particular circum-
stances. This discussion does not include all the Federal income tax rules
that may affect the contractowner, participant and contract. This discussion
also does not address other consequences, or state or local tax consequences,
associated with the contract. As a result, contractowners and participants
should always consult a tax advisor about the application of tax rules to
their individual situation.
Qualified retirement plans
We have designed the contracts for use in connection with certain types of re-
tirement plans that receive favorable treatment under the tax code. Contracts
issued to or in connection with a qualified retirement plan are called "quali-
fied contracts." We issue contracts for use with different types of qualified
plans. The Federal income tax rules applicable to those plans are complex and
varied. As a result, this Prospectus does not attempt to provide more than
general information about use of the contract with the various types of quali-
fied plans. Persons planning to use the contract in connection with a quali-
fied plan should obtain advice from a competent tax advisor.
Types of qualified contracts and terms of contracts
Contracts may be used in connection with the following types of qualified
plans:
. Individual Retirement Accounts and Annuities ("Traditional IRAs")
. Public school system and tax-exempt organization annuity plans ("403(b)")
17
<PAGE>
. Qualified corporate employee pension and profit-sharing plans ("401(a)
plans") and qualified annuity plans ("403(a) plans")
We will amend contracts to be used with a qualified plan as generally neces-
sary to conform to tax law requirements for the type of plan. However, the
rights of a person to any qualified plan benefits may be subject to the plan's
terms and conditions, regardless of the contract's terms and conditions. In
addition, we are not bound by the terms and conditions of qualified plans to
the extent such terms and conditions contradict the contract, unless we con-
sent.
Tax deferral on earnings
The Federal income tax law generally does not tax any increase in the contract
value until the contractowner or participant receives a contract distribution.
However, for this general rule to apply, certain requirements must be satis-
fied:
. The investments of the VAA must be "adequately diversified" in accordance
with the IRS regulations;
. The right to choose particular investments for a contract must be limited.
Investments in the VAA must be diversified
For a contract to be treated as an annuity for Federal income tax purposes,
the investments of the VAA must be "adequately diversified." IRS regulations
define standards for determining whether the investments of the VAA are ade-
quately diversified. If the VAA fails to comply with the diversification stan-
dards, the participant could be required to pay tax currently on the excess of
the contract value over the contract contributions. Although we do not control
the investments of the underlying investment options, we expect that the un-
derlying investment options will comply with the IRS regulations so that the
VAA will be considered "adequately diversified."
Restrictions
Federal income tax limits the contractowner's and participant's rights to
choose particular investments for the contract. Because the IRS has not issued
guidance specifying those limits, the limits are uncertain and your right to
allocate contract values among the subaccounts may exceed those limits. If so,
contractowner and/or participant would be treated as the owner of the assets
of the VAA and thus subject to current taxation on the income and gains from
those assets. We do not know what limits may be set by the I.R.S. in any guid-
ance that it may issue and whether any such limits will apply to existing con-
tracts. We reserve the right to modify the contract without contractowner's or
participant's consent to try to prevent the tax law from considering them as
the owner of the assets of the VAA.
Taxation of withdrawals and surrenders
Contractowner and/or participant will pay tax on withdrawals to the extent
their contract value exceeds contributions in the contract. This income (and
all other income from the contract) is considered ordinary income. A higher
rate of tax is paid on ordinary income than on capital gains. Contractowner
and/or participant will pay tax on a surrender to the extent the amount re-
ceived exceeds contributions. In certain circumstances contributions are re-
duced by amounts received from the contract that were not included in income.
Tax treatment of qualified plans
The Federal income tax rules applicable to qualified plans and qualified con-
tracts vary with the type of plan and contract. For example,
. Federal tax rules limit the amount of contributions that can be made, and
the tax deduction or exclusion that may be allowed for the contributions.
These limits vary depending on the type of qualified plan and the plan par-
ticipant's specific circumstances, e.g., the participant's compensation.
. Under most qualified plans, e.g., 403 (b) plans and Traditional IRAs, the
participant must begin receiving payments from the contract in certain mini-
mum amounts by a certain age, typically age 70 1/2. However, these "minimum
distribution rules" do not apply to a Roth IRA.
. Loans are allowed under certain types of qualified plans but Federal income
tax rules prohibit loans under other types of qualified plans. For example,
Federal income tax rules permit loans under some section 403(b) loans, but
prohibit loans under Traditional and Roth IRAs. If allowed, loans are sub-
ject to a variety of limitations, including restrictions as to the loan
amount, the loan's duration, and the manner of repayment. Your contract or
plan may not permit loans.
Tax treatment of payments
Federal income tax rules generally include distributions from a qualified con-
tract in the participant's income as ordinary income. These taxable distribu-
tions will include contributions that were deductible or excludible from in-
come. Thus, under many qualified contracts the total amount received is in-
cluded in income since a deduction or exclusion from income was taken for con-
tributions. There are exceptions. For example, the participant does not in-
clude amounts received from a Roth IRA in income if certain conditions are
satisfied.
Failure to comply with the minimum distribution rules applicable to certain
qualified plans, such as Traditional IRAs, will result in the imposition of an
excise tax. This excise tax generally equals 50% of the amount by which a min-
imum required distribution exceeds the actual distribution from the qualified
plan.
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<PAGE>
Federal penalty taxes on distributions
The tax code may impose a 10% penalty tax on the amount received from the
qualified contract that must be included in income. The tax code does not im-
pose the penalty tax if one of several exceptions applies. The exceptions vary
depending on the type of qualified contract purchased. For example, in the
case of an IRA, exceptions provide that the penalty tax does not apply to a
withdrawal, surrender, or annuity payout:
. received on or after the participant reaches age 59 1/2,
. received on or after the participant's death or because of participant's
disability (as defined in the tax law),
. received as a series of substantially equal periodic payments for the par-
ticipant's life (or life expectancy), or
. received as reimbursement for certain amounts paid for medical care.
These exceptions, as well as certain others not described here, generally ap-
ply to taxable distributions from other qualified plans. However, the specific
requirements of the exception may vary.
Transfers and direct rollovers
In many circumstances, money may be moved between qualified contracts and
qualified plans by means of a rollover or a transfer. Special rules apply to
such rollovers and transfers. If the applicable rules are not followed, par-
ticipant may suffer adverse Federal income tax consequences, including paying
taxes which might not otherwise have had to be paid. A qualified advisor
should always be consulted before contractowner or participant move or attempt
to move funds between any qualified plan or contract and another qualified
plan or contract.
The direct rollover rules apply to certain payments (called "eligible rollover
distributions") from section 410(a) plans, section 403(a) or (b) plans, HR 10
plans, and contracts used in connection with these types of plans. (The direct
rollover rules do not apply to distributions from IRAs). The direct rollover
rules require that we withhold Federal income tax equal to 20% of the eligible
rollover distribution from the distribution amount, unless participant elects
to have the amount directly transferred to certain qualified plans or con-
tracts. Before we send a rollover distribution, we will provide the partici-
pant with a notice explaining these requirements and how the 20% withholding
can be avoided by electing a direct rollover.
Federal income tax withholding
We will withhold and remit to the IRS a part of the taxable portion of each
distribution made under a contract unless the participant notifies us at or
before the time of the distribution that tax is not to be withheld. In certain
circumstances, Federal income tax rules may require us to withhold tax. At the
time a withdrawal, surrender, or annuity payout is requested, we will give the
participant an explanation of the withholding requirements.
Tax status of UNUM/America
Under existing Federal income tax laws, UNUM/America does not pay tax on in-
vestment income and realized capital gains of the VAA. UNUM/America does not
expect that it will incur any Federal income tax liability on the income and
gains earned by the VAA. We, therefore, do not impose a charge for Federal in-
come taxes. If Federal income tax law changes and we must pay tax on some or
all of the income and gains earned by the VAA, we may impose a charge against
the VAA to pay the taxes.
Changes in the law
The above discussion is based on the tax code, IRS regulations, and interpre-
tations existing on the date of this Prospectus. However, Congress, the IRS,
and the courts may modify these authorities, sometimes retroactively.
Voting rights
As required by law, we will vote the fund shares held in the VAA at meetings
of shareholders of the funds. The voting will done according to the instruc-
tions of participants that have interests in any subaccounts which invest in
the funds. If the 1940 Act or any regulation under it should be amended or if
present interpretations should change, and if as a result we determine that we
are permitted to vote the fund shares in our own right, we may elect to do so.
The number of votes which the participant has the right to cast will be deter-
mined by applying the participants percentage interest in a subaccount to the
total number of votes attributable to the subaccount. In determining the num-
ber of votes, fractional shares will be recognized.
Shares held in a subaccount for which no timely instructions are received will
be voted by us in proportion to the voting instructions which are received for
all contracts participating in that subaccount. Voting instructions to abstain
on any item to be voted on will be applied on a pro-rata basis to reduce the
number of votes eligible to be cast.
Whenever a shareholders meeting is called, we will furnish participants with a
voting interest in a subaccount with proxy voting materials, reports, and vot-
ing instruction forms. Since the funds engage in shared funding, other persons
or entities besides UNUM/America may vote fund shares. See Sale of fund
shares.
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<PAGE>
Distribution of the contracts
Lincoln Financial Advisors Corporation (LFA), 1300 South Clinton Street, Fort
Wayne, Indiana 46802, is the distributor and principal underwriter of the con-
tracts. LFA in turn has entered into selling agreements with independent bro-
ker-dealers licensed by state insurance departments to represent us. LFA is
registered with the SEC under the Securities Exchange Act of 1934 as a broker-
dealer and is a member of the National Association of Securities Dealers
(NASD). UNUM/America no longer offers new contracts.
Return privilege
Participants under Sections 403(b), 408 and certain non-qualified plans will
receive an active life certificate. Within the free-look period (ten days) af-
ter the participant receives the active life certificate, the participant may
cancel it for any reason by giving us written notice. The postmark date of the
notice is the date of notice for these purposes. An active life certificate
canceled under this provision will be void. With respect to the fixed side of
the contract, we will return the participant's contributions less withdrawals
made on behalf of the participant. With respect to the VAA, we will return the
greater of the participant's contributions less withdrawals made on behalf of
the participant, or the participant's account balance in the VAA on the date we
receive the written notice.
State regulation
As a life insurance company organized and operated under Maine law, we are sub-
ject to provisions governing life insurers and to regulation by the Maine Com-
missioner of Insurance.
Our books and accounts are subject to review and examination by the Maine In-
surance Department at all times. A full examination of our operations is con-
ducted by that department at least every five years.
Records and reports
As presently required by the 1940 Act and applicable regulations, Lincoln Life
is responsible for maintaining all records and accounts relating to the VAA.
Lincoln Life has entered into an agreement with the Delaware Management Compa-
ny, 2005 Market Street, Philadelphia, PA 19203, to provide accounting services
to the VAA. We will mail to the contractowner, at its last known address of
record at our offices, at least semiannually after the first contract year, re-
ports containing information required by that Act or any other applicable law
or regulation.
Other information
Contract deactivation. Under certain contracts, we may deactivate a contract by
prohibiting new contributions and/or new participants after the date of deacti-
vation. We will give the contractowner and participants at least ninety days
notice of the deactivation date.
Delay in payments. We may delay payments from the fixed account for up to six
months. During this period, we will continue to credit the current declared in-
terest rate to a participant's account in the fixed account. Contract proceeds
from the VAA will be paid within seven days, except (i) when the NYSE is closed
(except weekends and holidays); (ii) times when the market trading is re-
stricted or the SEC declares a an emergency , and we cannot value units or the
funds cannot redeem shares; or (iii) when the SEC so orders to protect
contractowners.
IMSA. We are a member of the Insurance Marketplace Standards Association
("IMSA") and may include IMSA logo and information about IMSA membership in our
advertisements. Companies that belong to IMSA subscribe to a set of ethical
standards covering the various aspects of sales and services for individually
sold life insurance and annuities.
Preparing for Year 2000
Lincoln Life, as noted above, is responsible for administering the contracts
and the VAA on behalf of UNUM/America. Lincoln Life's responsibilities include
the operation of the computer systems related to the VAA, which are distinct
from those used by UNUM/America in its other operations. Many existing computer
programs use only two digits in the date filed to identify the year. If left
uncorrected, these programs, which were designed and developed without consid-
ering the impact of the upcoming change in the century, could fail to operate
or could produce erroneous results when processing dates after December 31,
1999. For example, for a bond with a stated maturity date of July 1, 2000, a
computer program could read and store the maturity date as July 1, 1900. This
problem is known by many names, such as the "Year 2000 Problem", "Y2K", and the
"Millennium Bug".
The Year 2000 Problem affects virtually all computer programs worldwide. It can
cause a computer system to suddenly stop operating. It can also result in a
computer corrupting vital company records, and the problem could go undetected
for a long time. For our products, if left unchecked it could cause such prob-
lems as purchase payment collection and deposit errors; claim payment difficul-
ties; accounting errors; erroneous unit values; and difficulties or delays in
processing transfers, surrenders and withdrawals. In a worst case scenario,
this could result in a material disruption to the operations both of Lincoln
Life and of Delaware Service Com-
20
<PAGE>
pany Inc. (Delaware), the provider of the accounting and valuation services for
the VAA.
However, both companies are wholly owned by Lincoln National Corporation (LNC),
which has had Year 2000 processes in place since 1996. LNC projects aggregate
expenditures in excess of $92 million for its Y2K efforts through the year
2000. Both Lincoln Life and Delaware have dedicated Year 2000 teams and steer-
ing committees that are answerable to their counterparts in LNC.
In light of the potential problems discussed above, Lincoln Life, as part of
its Year 2000 updating process, has assumed responsibility for correcting all
high-priority Information Technology (IT) systems which service the VAA. Dela-
ware is responsible for updating all its high-priority IT systems to support
these vital services. The Year 2000 effort, for both IT and non-IT systems, is
organized in four phases:
. awareness-raising and inventory of all assets (including third-party agent
and vendor relationships)
. assessment and high-level planning and strategy
. remediation of affected systems and equipment; and
. testing to verify Year 2000 readiness.
Both companies are currently on schedule to have their high-priority IT systems
remediated and tested to demonstrate readiness by June 30, 1999. During the
third and fourth quarters of 1999, additional testing of the environment will
continue. Both companies are currently on schedule to have their high-priority
non-IT systems (elevators, heating and ventilation, security systems, etc.)
remediated and tested by October 31, 1999.
The work on Year 2000 issues has not suffered significant delays; however, some
uncertainty remains. Specific factors that give rise to this uncertainty in-
clude (but are certainly not limited to) a possible loss of technical resources
to perform the work; failure to identify all susceptible systems; and non-com-
pliance by third parties whose systems and operations impact Lincoln Life. In a
report dated February 26, 1999, entitled, Investigating the Impact of Year 2000
Technology Problem, S. Prt. 106-10, the U.S. Senate Special Committee on the
Year 2000 Technology Problem expressed its concern that "Financial services
firms...are particularly vulnerable to...the risk that a material customer or
business partner will fail, as a result of the computer problems, to meet its
obligations".
One important key source of uncertainty is the extent to which the key trading
partners of Lincoln Life and Delaware will be successful in their own
remediation and testing efforts. Lincoln Life and Delaware have been monitoring
the process of their partners; however, the efforts of these partners are be-
yond our control.
Lincoln Life and Delaware expect to have completed their necessary remediation
and testing efforts prior December 31, 1999. However, given the nature and com-
plexity of the problem, there can be no guarantee by either company that there
will not be significant computer problems after December 31, 1999.
Table of contents for statement of additional information
<TABLE>
<CAPTION>
Page
- ------------------------------------------------
<S> <C>
Definitions 2
- ------------------------------------------------
Determination of Variable Annuity Payments 3
- ------------------------------------------------
Performance Calculations 4
- ------------------------------------------------
Tax Law Considerations 7
- ------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Page
- -------------------------------
<S> <C>
Distribution of Contracts 9
- -------------------------------
Custodian 9
- -------------------------------
Experts 9
- -------------------------------
Financial Statements 9
- -------------------------------
</TABLE>
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STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1999
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 Variable Annuity Payments................................. 3
Performance Calculations................................................... 4
Tax Law Considerations..................................................... 7
Distribution of Contracts.................................................. 9
Custodian.................................................................. 9
Experts.................................................................... 9
Financial Statements....................................................... 9
</TABLE>
This Statement of Additional Information (SAI) is not a prospectus. It should
be read along with the prospectus for the Group Annuity Contracts (the
"Contracts"), dated May 1, 1999.
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.
2
<PAGE>
DETERMINATION OF VARIABLE ANNUITY PAYMENTS
As stated in the prospectus, the amount of each Variable Annuity payment will
vary depending on investment experience.
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 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.
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.
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>
3
<PAGE>
PERFORMANCE CALCULATIONS
Standard Total Return Calculation
The VAA 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 corresponding 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 term "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.
For Sub-Account average annual total return information calculated according to
the formula prescribed by the SEC, see "Sub-Account Performance."
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. Such non-standard performance
information may be based on the historical performance of a Fund and adjusted
to reflect some or all of the fees and charges imposed under a Contract.
The VAA may also present total return information computed on the same basis as
the standardized method except that charges deducted from the hypothetical
Contribution will not include the Annual Administration Charge. The total
return percentage under this non-standardized method will be higher than that
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 Annual Administration
charge or premium taxes, and assumes no transfers. Such percentages would be
lower if these charges were included in the calculation.
In addition, the VAA may present actual aggregate total return figures for
various periods, reflecting the cumulative change in value of an investment in
the VAA for the specified period.
4
<PAGE>
For information regarding the historical performance of the Funds adjusted for
the fees and charges imposed under a Contract, see "Historical Fund Performance
Adjusted for Variable Annuity Account and Contract Fees and Charges."
Performance Information
The tables below provide performance information for each Sub-Account for
specified periods ending December 31, 1998. 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.
Sub-Account Performance
Table A below assumes a hypothetical investment of $1,000 at the beginning of
the period in the Sub-Account investing in the applicable Fund and withdrawal
of the investment on 12/31/98. The rates reflect the mortality and expense risk
charge, the withdrawal charge and a pro rata portion of the Annual
Administration Charge. Table A shows Sub-Account average annual total return
information calculated according to the formula prescribed by the SEC. This
information does not indicate or represent future performance.
Table A--SUB-ACCOUNT STANDARDIZED AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
SUB- LIFE OF SUB-
ACCOUNT 1 YEAR 3 YEARS 5 YEARS ACCOUNT
INCEPTION ENDING ENDING ENDING ENDING
DATE 12/31/98 12/31/98 12/31/98 12/31/98
--------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Asset Manager
(Fidelity VIP II: Asset
Manager) 05/01/91 13.63% 15.28% 10.40% 11.64%
Socially Responsible
(Calvert Social Balanced
Portfolio) 05/02/94 14.83 14.83 N/A 15.16
Balanced
(American Century VP Bal-
anced) 05/01/91 14.34 13.14 11.47 10.22
Equity-Income
(Fidelity VIP Equity-In-
come) 05/02/94 10.25 16.32 N/A 18.38
Index Account
(Dreyfus Stock Index) 12/12/89 26.63 26.24 22.03 15.83
Growth I
(Fidelity VIP Growth) 05/01/91 37.77 23.91 20.21 19.34
Growth II
(American Century VP Capi-
tal Appreciation) 05/01/91 -3.37 -4.50 1.93 4.01
International Stock
(T. Rowe Price Interna-
tional Stock Portfolio) 05/02/94 14.42 9.67 N/A 7.92
Small Cap
(Dreyfus Small Cap) 05/02/94 -4.64 8.17 N/A 11.72
</TABLE>
5
<PAGE>
Historical Fund Performance Adjusted for Variable Annuity Account and Contract
Fees and Charges
Performance information for the periods prior to the date the Sub-Accounts
commenced operations will be calculated based on the performance of the Funds
and the assumption that the Sub-Accounts were in existence for the same periods
as those indicated for the Funds, with the Contract charges that were in effect
during the time periods shown. This performance information is referred to as
"adjusted" performance information. This information does not indicate or
represent future performance.
Table B below assumes a hypothetical investment of $1,000 at the beginning of
the period in the Sub-Account investing in the applicable fund and withdrawal
of the investment on 12/31/98. The rates reflect the mortality and expense risk
charge but do not reflect the deduction of the pro rata portion of the Annual
Administration Charge because certain contracts and participants are not
assessed such a charge.
TABLE B -- SUB-ACCOUNT ADJUSTED AVERAGE ANNUAL TOTAL RETURN ASSUMING NO ANNUAL
ADMINISTRATION CHARGE
<TABLE>
<CAPTION>
LIFE
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS OF FUND
INCEPTION ENDING ENDING ENDING ENDING ENDING
DATE 12/31/98 12/31/98 12/31/98 12/31/98 12/31/98
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Asset Manager 09/06/89 13.68% 15.34% 10.47% N/A 11.58%
(Fidelity VIP II: Asset
Manager)
Socially Responsible 09/02/86 14.89 14.89 13.20 11.52 10.27
(Calvert Social Balanced
Portfolio)
Balanced 05/01/91 14.39 13.20 11.53 N/A 10.30
(American Century VP
Balanced)
Equity-Income 10/09/86 10.30 16.38 17.35 14.24 13.04
(Fidelity VIP Equity-
Income)
Index Account 09/29/89 26.68 26.30 22.10 N/A 15.67
(Dreyfus Stock Index)
Growth I 10/09/86 37.83 23.97 20.28 17.98 15.94
(Fidelity VIP Growth)
Growth II 11/20/87 -3.32 -4.45 1.99 7.37 6.93
(American Century VP
Capital Appreciation)
International Stock 03/31/94 14.48 9.73 N/A N/A 8.35
(T. Rowe Price
International Stock
Portfolio)
Small Cap 08/31/90 -4.59 8.22 11.52 N/A 35.59
(Dreyfus Small Cap)
</TABLE>
Table C below shows total return information on a calendar year basis. The
rates of return shown reflect the mortality and expense risk charge but do not
reflect the deduction of the pro rata portion of the Annual Administration
Charge because certain contracts and participants are not assessed such a
charge.
TABLE C -- SUB-ACCOUNT ADJUSTED YEAR ANNUAL RETURN ASSUMING NO ANNUAL
ADMINISTRATION CHARGE*
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
----- ------ ------ ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Asset Manager N/A 5.45 21.11 10.53 19.60 -7.20 15.57 13.24 19.20 13.68
Socially Responsible 19.53 2.94 15.02 6.33 6.72 -4.39 28.24 11.28 18.64 14.89
Balanced N/A N/A N/A -7.17 6.38 -0.58 19.68 10.81 14.42 14.39
Equity-Income 15.95 16.29 29.88 15.50 16.89 5.80 33.49 12.92 26.57 10.30
Index N/A -4.69 28.29 5.82 8.02 -0.32 35.16 21.09 31.36 26.68
Growth I 29.95 -12.78 43.78 8.00 17.94 -1.21 33.75 13.35 22.00 37.83
Growth II 27.17 -2.40 40.18 -2.52 8.99 -2.34 29.55 -5.43 -4.42 -3.32
International Stock N/A N/A N/A N/A N/A N/A 9.86 13.34 1.86 14.48
Small Cap N/A N/A 156.65 69.25 66.31 6.47 27.85 15.22 15.35 -4.59
</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
6
<PAGE>
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.
SEC regulations require that any product performance data be accompanied by
standard performance data.
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. See the Prospectus for a more
complete discussion of tax considerations and for limitations on the following
discussion.
Contributions to retirement programs subject to Sections 401(a), 403(b) and 408
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. 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 years 1998 and 1999 the maximum elective salary deferral
contributions to a 401(k) Plan which is a type of 401(a) Plan is limited to
$10,000; for a 403(b) plan the limit is $10,000 unless the employee is
qualified employee.
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 con-
tracts and excludable from the gross income of the employee for the prior
taxable year.
Therefore, if the maximum exclusion allowance is less than $10,000 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 generally 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.
7
<PAGE>
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) 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 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 to avoid taxation.
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.
If the rollover amount is paid directly to the Participant, the amount
distributed may be subject to a 20% federal tax withholding.
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. Distributions from 408
Plans may qualify for additional exceptions.
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). For 403(b)
and 401(a) Plans, an employee 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 (other than a more-than-5% owner).
8
<PAGE>
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 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
Lincoln Financial Advisors Corporation (LFA), an indirect subsidiary of LNC, 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. LFA is the VAA's principal underwriter.
UNUM Sales Corporation, which served as the principal underwriter to the VAA
prior to October 1, 1996, received underwriting commissions from UNUM/America
of $4,223,000 in 1996. LFA, which became principal underwriter on October 1,
1996, received no underwriting commissions from UNUM/America prior to December
31, 1998.
CUSTODIAN
UNUM/America is the custodian for the Fund's shares owned by the VAA. The
Fund's shares are held in uncertificated form separate and apart from
UNUM/America's other assets.
EXPERTS
The financial statements as of December 31, 1998 and 1997 and for each of the
three years in the period ended December 31, 1998 of UNUM/America and the
financial statements as of December 31, 1998 and for each of the two years in
the period ended December 31, 1998 of VAA included in this SAI have been
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
FINANCIAL STATEMENTS
This SAI contains financial statements for the VAA, as of December 31, 1998 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.
9
<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,
1997, 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, 1997. 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, 1997, and the results of its
operations and changes in net assets for each of the two years in the period
then ended in conformity with generally accepted accounting principles.
Coopers & Lybrand, LLP
Portland, Maine
April 10, 1998
10
<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
In our opinion, the accompanying statement of assets and liabilities and the
related statements of operations and changes in net assets present fairly, in
all material respects, the financial position of UNUM Life Insurance Company
of America VA-1 Separate Account at December 31, 1998, and the results of
their operations for each of the years in the two year period then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our responsi-
bility is to express an opinion on these financial statements based on our au-
dits. We conducted our audits of these statements in accordance with generally
accepted auditing standards, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evi-
dence supporting the amounts and disclosures in the financial statements, as-
sessing the accounting principles used and significant estimates made by man-
agement, and evaluating the overall financial statement presentation. We be-
lieve that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Portland, Maine
April 12, 1999
S-1
<PAGE>
VA-1 Separate Account of UNUM Life Insurance Company of America
Statement of assets and liabilities
December 31, 1998
<TABLE>
<CAPTION>
American
Century
Dreyfus Dreyfus VP Capital
Stock Index Small Cap Appreciation
Combined Fund Portfolio Portfolio
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
. Investments at market $29,347,061 $5,642,728 $2,741,670 $1,017,998
- ------------------------------
Liabilities
. Contract charge payable to
UNUM Life Insurance Company
of America 958 186 87 33
- ------------------------------ ----------- ---------- ---------- ----------
Net Assets $29,346,103 $5,642,542 $2,741,583 $1,017,965
- ------------------------------ =========== ========== ========== ==========
Percent of Net Assets 100.00% 19.23% 9.34% 3.47%
- ------------------------------ =========== ========== ========== ==========
</TABLE>
See notes to financial statements.
S-2
<PAGE>
<TABLE>
<CAPTION>
Calvert
American VIPF II VIPF Responsibility VIPF
Century VIPF Asset Equity- Invested T. Rowe Price Money
VP Balanced Growth Manager Income Balanced International Market
Portfolio Portfolio Portfolio Portfolio Portfolio Series Portfolio
- ----------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <S>
$1,034,226 $9,571,512 $4,735,629 $3,306,665 $274,495 $1,021,846 $ 292
34 313 155 108 9 33 0
---------- ---------- ---------- ---------- -------- ---------- ------
$1,034,192 $9,571,199 $4,735,474 $3,306,557 $274,486 $1,021,813 $ 292
========== ========== ========== ========== ======== ========== ======
3.52% 32.61% 16.14% 11.27% 0.94% 3.48% 0.00%
========== ========== ========== ========== ======== ========== ======
</TABLE>
S-3
<PAGE>
VA-1 Separate Account of UNUM Life Insurance Company of America
Statement of operations and changes in net assets
<TABLE>
<CAPTION>
Dreyfus
Combined Stock Index Fund
------------------------- -----------------------
Year Ended December 31, Year Ended December 31,
------------------------- -----------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income:
. Dividends from
investment income $ 2,001,739 $ 11,609,334 $ 75,638 $ 400,268
- ---------------------------
Less contract charges--
mortality and expense fees
to UNUM Life Insurance
Company of America 315,622 1,460,336 57,509 244,439
- --------------------------- ----------- ------------- ---------- ------------
Net investment income 1,686,117 10,148,998 18,129 155,829
--------------------------
Net realized and unrealized
gain (losses) on
investments
. Net realized gains
(losses) 932,046 84,288,163 296,293 21,005,485
. Net change in unrealized
gains (losses) 2,021,335 (72,388,590) 788,189 (14,602,042)
- --------------------------- ----------- ------------- ---------- ------------
2,953,381 11,899,573 1,084,482 6,403,443
- --------------------------- ----------- ------------- ---------- ------------
Net increase (decrease) in
net assets resulting from
operations 4,639,498 22,048,571 1,102,611 6,559,272
- ---------------------------
Net increase (decrease) in
net assets from principal
transactions 221,395 (477,437,974) 409,030 (71,856,754)
- --------------------------- ----------- ------------- ---------- ------------
Net increase (decrease) in
net assets 4,860,893 (455,389,403) 1,511,641 (65,297,482)
- ---------------------------
Net assets at beginning of
year 24,485,210 479,874,613 4,130,901 69,428,383
- --------------------------- ----------- ------------- ---------- ------------
Net assets end of year $29,346,103 $ 24,485,210 $5,642,542 $ 4,130,901
- --------------------------- =========== ============= ========== ============
</TABLE>
See notes to financial statements.
S-4
<PAGE>
<TABLE>
<CAPTION>
American
Century American
Dreyfus VP Capital Century
Small Cap Appreciation VP Balanced
Portfolio Portfolio Portfolio
------------------------ ------------------------ ------------------------
Year Ended December 31, Year Ended December 31, Year Ended December 31,
------------------------ ------------------------ ------------------------
1998 1997 1998 1997 1998 1997
- ----------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <S>
$ 55,632 $ 172,089 $ 64,048 $ 298,444 $ 133,045 $ 532,348
34,037 149,081 13,865 106,495 11,983 65,726
---------- ------------ ---------- ------------ ---------- ------------
21,595 23,008 50,183 191,949 121,062 466,622
76,149 5,584,265 (64,757) 961,039 53,953 4,334,554
(263,969) (5,348,017) (43,246) (1,947,468) (38,701) (3,828,054)
---------- ------------ ---------- ------------ ---------- ------------
(187,820) 236,248 (108,003) (986,429) 15,252 506,500
---------- ------------ ---------- ------------ ---------- ------------
(166,225) 259,256 (57,820) (794,480) 136,314 973,122
(19,586) (43,691,589) (289,298) (35,240,733) (182,852) (24,950,585)
---------- ------------ ---------- ------------ ---------- ------------
(185,811) (43,432,333) (347,118) (36,035,213) (46,538) (23,977,463)
2,927,394 46,359,727 1,365,083 37,400,296 1,080,730 25,058,193
---------- ------------ ---------- ------------ ---------- ------------
$2,741,583 $ 2,927,394 $1,017,965 $ 1,365,083 $1,034,192 $ 1,080,730
========== ============ ========== ============ ========== ============
</TABLE>
S-5
<PAGE>
VA-1 Separate Account of UNUM Life Insurance Company of America
Statement of operations and changes in net assets (continued)
<TABLE>
<CAPTION>
VIPF II
VIPF Asset
Growth Manager
Portfolio Portfolio
------------------------ ------------------------
Year Ended December 31, Year Ended December 31,
------------------------ ------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income:
. Dividends from
investment income $ 932,283 $ 2,199,358 $ 537,026 $ 5,413,065
- ---------------------------
Less contract charges--
mortality and expense fees
to UNUM Life Insurance
Company of America 93,969 387,877 53,331 272,946
- --------------------------- ---------- ------------- ---------- ------------
Net investment income 838,314 1,811,481 483,695 5,140,119
- ---------------------------
Net realized and unrealized
gain (losses) on
investments
. Net realized gains
(losses) 371,031 31,805,007 68,559 11,950,401
. Net change in unrealized
gains (losses) 1,395,418 (25,720,364) 24,192 (12,947,511)
- --------------------------- ---------- ------------- ---------- ------------
1,766,449 6,084,643 92,751 (997,110)
---------- ------------- ---------- ------------
Net increase (decrease) in
net assets resulting from
operations 2,604,763 7,896,124 576,446 4,143,009
- ---------------------------
Net increase (decrease) in
net assets from principal
transactions 39,833 (136,643,911) (73,959) (93,969,435)
- --------------------------- ---------- ------------- ---------- ------------
Net increase (decrease) in
net assets 2,644,596 (128,747,787) 502,487 (89,826,426)
- ---------------------------
Net assets at beginning of
year 6,926,603 135,674,390 4,232,987 94,059,413
- --------------------------- ---------- ------------- ---------- ------------
Net assets end of year $9,571,199 $ 6,926,603 $4,735,474 $ 4,232,987
- --------------------------- ========== ============= ========== ============
</TABLE>
See notes to financial statements.
S-6
<PAGE>
<TABLE>
<CAPTION>
Calvert
Responsibly T. Rowe VIPF
VIPF Invested Price Money
Equity-Income Balanced International Market
Portfolio Portfolio Series Portfolio
----------------------- -------------------- ------------------------ ------------------------
Year Ended December
Year Ended December 31, 31, Year Ended December 31, Year Ended December 31,
----------------------- -------------------- ------------------------ ------------------------
1998 1997 1998 1997 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <S>
$ 168,088 $ 2,554,416 $ 19,829 $ 10,786 $ 16,038 $ 23,140 $ 112 $ 5,420
36,164 158,087 2,697 13,776 12,067 61,909 0 0
---------- ------------ -------- ----------- ---------- ------------ ---------- ------------
131,924 2,396,329 17,132 (2,990) 3,971 (38,769) 112 5,420
91,631 6,413,527 3,283 168,338 35,904 2,065,547 0 0
60,326 (5,861,037) 7,320 (38,059) 91,806 (2,096,038) 0 0
---------- ------------ -------- ----------- ---------- ------------ ---------- ------------
151,957 552,490 10,603 130,279 127,710 (30,491) 0 0
---------- ------------ -------- ----------- ---------- ------------ ---------- ------------
283,881 2,948,819 27,735 127,289 131,681 (69,260) 112 5,420
360,009 (47,608,285) 99,109 (4,646,914) (115,309) (18,430,166) (5,582) (399,602)
---------- ------------ -------- ----------- ---------- ------------ ---------- ------------
643,890 (44,659,466) 126,844 (4,519,625) 16,372 (18,499,426) (5,470) (394,182)
2,662,667 47,322,133 147,642 4,667,267 1,005,441 19,504,867 5,762 399,944
---------- ------------ -------- ----------- ---------- ------------ ---------- ------------
$3,306,557 $ 2,662,667 $274,486 $ 147,642 $1,021,813 $ 1,005,441 $ 292 $ 5,762
========== ============ ======== =========== ========== ============ ========== ============
</TABLE>
S-7
<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 as-
sets are held for the exclusive benefit of the variable annuity contract own-
ers 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 not-for-profit organizations lo-
cated 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 ("Lin-
coln Life") and Lincoln Life & Annuity Company of New York ("Lincoln Life 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 are 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 are then transferred to separate accounts of Lin-
coln Life and Lincoln New York. Assets attributable to contracts of partici-
pants with respect to which such consent is not obtained will remain in the
Separate Account. During 1998 and 1997, the net assets of the Separate Account
decreased by approximately $1,300,000 and $502,568,000, respectively, from no-
vations of assets to the Separate Accounts of Lincoln Life and Lincoln Life
New York. Lincoln Financial Advisors Corporation, a non-affiliate, acted as
distributor and principal underwriter of the Separate Account.
Investments: In accordance with the terms of the variable annuity contracts,
all payments transferred to the Separate Account by contract owners are allo-
cated to purchase shares of either Dreyfus Stock Index Fund, Dreyfus Variable
Investment Fund: Small Cap Portfolio (Dreyfus Small Cap Portfolio), American
Century Variable Portfolios: American Century VP Capital Appreciation (Ameri-
can Century VP Capital Appreciation Portfolio) and American Century VP Bal-
anced (American Century VP Balanced Portfolio), Fidelity's Variable Insurance
Products Fund: Growth Portfolio (VIPF Growth Portfolio) and Equity-Income
Portfolio (VIPF Equity-Income Portfolio). Fidelity's Variable Insurance Prod-
ucts II: Asset Manager Portfolio (VIPF II Asset Manager Portfolio), Calvert
Responsibly Invested Balanced Portfolio or T. Rowe Price International Series,
Inc. (T. Rowe Price International Series) (the Funds). Fidelity's Variable In-
surance Product Funds: Money Market Portfolio (VIPF Money Market Portfolio) is
used only for investments of initial contributions for which the Company has
not received complete order instructions. Upon receipt of complete order in-
structions, the payments transferred to VIPF Money Market Portfolio are allo-
cated 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, American Century VP Capital Appreciation Portfo-
lio, American Century VP Balanced Portfolio, VIPF Growth Portfolio, VIPF II
Asset Manager Portfolio, VIPF Equity-Income Portfolio, Calvert Responsibly In-
vested 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 Ac-
count are in the accumulation phase. Dividends are fully reinvested and imme-
diately credited to participant accounts with the exception of the VIPF Money
Market Portfolio which is invested monthly. Unrealized gains and losses repre-
sent the difference between the cost and market value of invested assets. Re-
alized gains and losses are reported on an average cost basis. Gross
unrealized gains for all investments were $7,001,829 and $4,936,088 as of De-
cember 31, 1998 and 1997, respectively. Gross unrealized losses for all in-
vestments were $50,717 and $7,471 as of December 31, 1998 and 1997, respec-
tively.
The market value and cost of investments at December 31, 1998, was distributed
as follows:
<TABLE>
<CAPTION>
Market Value
Shares Share Price Cost
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Dreyfus Stock Index Fund..................... 173,515.630 $32.52 3,867,646
Dreyfus Small Cap Portfolio.................. 50,856.427 53.91 2,669,753
American Century VP Capital Appreciation
Portfolio................................... 112,860.099 9.02 1,058,495
American Century VP Balanced Portfolio....... 124,007.862 8.34 866,184
VIPF Growth.................................. 213,316.506 44.87 6,323,068
VIPF II Asset Manager Portfolio.............. 260,772.520 18.16 3,995,919
VIPF Equity-Income Portfolio................. 130,081.223 25.42 2,773,033
Calvert Responsibly Invested Balanced
Portfolio................................... 128,448.873 2.14 266,375
T. Rowe Price International Series........... 70,375.074 14.52 854,131
VIPF Money Market Portfolio.................. 291.540 1.00 292
</TABLE>
S-8
<PAGE>
VA-1 Separate Account of UNUM Life Insurance Company of America
Notes to Financial Statements (continued)
Contract Charges: UNUM America is the depositor for the Separate Account. Ad-
ministrative 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 annui-
tant 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 provi-
sions established at the time the contracts are issued. UNUM America also as-
sumes 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 Ac-
count with the exception of VIPF Money Market Portfolio. For 1998 and 1997, the
mortality and expense risk charges totaled $315,622 and $1,460,336, respective-
ly.
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, 1998
and 1997, 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 un-
der the applicable provisions of the Internal Revenue Code.
Note 2. Capital Share Transactions
During 1998 and 1997, the total amount of units sold was $7,136,397 and
$36,716,146, respectively, and the total amount of units redeemed was
$6,915,002 and $514,154,120, respectively. The following transactions in capi-
tal stock occurred:
The Separate Account funds that invest in Dreyfus Stock Index Fund held
149,331.641 units at a net asset value of $37.7853 and 138,497.598 units at a
net asset value of $29.8265 at December 31, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
1998 1997
----------------------- ----------------------------
Units Amount Units Amount
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units sold 49,008.7400 $1,585,308 306,229.699 $ 8,293,413
Units redeemed 38,174.6970 1,176,278 3,225,523.771 80,150,167
------------ ---------- -------------- ------------
Net increase (decrease) 10,834.0430 $ 409,030 (2,919,294.072) $(71,856,754)
============ ========== ============== ============
</TABLE>
The Separate Account funds that invest in Dreyfus Small Cap Portfolio held
162,973.272 units at a net asset value of $16.8223 and 166,025.199 units at a
net asset value of $17.6322 at December 31, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
1998 1997
----------------------- ----------------------------
Units Amount Units Amount
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units sold 59,873.9830 $1,053,947 387,818.030 $ 6,473,568
Units redeemed 62,925.9100 1,073,533 3,254,595.602 50,165,157
----------- ---------- -------------- ------------
Net increase (decrease) (3,051.9270) $ (19,586) (2,866,777.572) $(43,691,589)
=========== ========== ============== ============
</TABLE>
The Separate Account funds that invest in American Century VP Capital Apprecia-
tion Portfolio held 74,873.115 units at a net asset value of $13.5959 and
97,066.981 units at a net asset value of $14.0633 at December 31, 1998 and
1997, respectively.
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------------
Units Amount Units Amount
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units sold 28,694.393 $ 328,714 63,187.406 $ 992,285
Units redeemed 50,888.259 618,012 2,508,058.422 36,233,018
----------- --------- -------------- ------------
Net increase (decrease) (22,193.866) $(289,298) (2,444,871.016) $(35,240,733)
=========== ========= ============== ============
</TABLE>
S-9
<PAGE>
VA-1 Separate Account of UNUM Life Insurance Company of America
Notes to Financial Statements (continued)
Note 2. Capital Share Transactions (continued)
The Separate Account funds that invest in American Century VP Balanced Portfo-
lio held 48,736.320 units at a net asset value of $21.2201 and 58,258.861 units
at a net asset value of $18.5505 at December 31, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
1998 1997
---------------------- -----------------------------
Units Amount Units Amount
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units sold 8,852.359 $ 173,336 75,086.437 $ 1,300,063
Units redeemed 18,374.900 356,188 1,562,408.410 26,250,648
---------- ---------- -------------- -------------
Net increase
(decrease) (9,522.541) $ (182,852) (1,487,321.973) $ (24,950,585)
========== ========== ============== =============
The Separate Account funds that invest in VIPF Growth Portfolio held
245,138.549 units at a net asset value of $39.0440 and 244,512.689 units at a
net asset value of $28.3282 at December 31, 1998 and 1997, respectively.
<CAPTION>
1998 1997
---------------------- -----------------------------
Units Amount Units Amount
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units sold 55,237.700 $1,754,726 227,035.794 $ 6,391,522
Units redeemed 54,611.840 1,714,893 5,825,570.399 143,035,433
---------- ---------- -------------- -------------
Net increase
(decrease) 625.860 $ 39,833 (5,598,534.605) $(136,643,911)
========== ========== ============== =============
The Separate Account funds that invest in VIPF II Asset Manager held
202,386.172 units at a net asset value of $23.3982 and 205,657.459 units at a
net asset value of $20.5827 at December 31, 1998 and 1997, respectively.
<CAPTION>
1998 1997
---------------------- -----------------------------
Units Amount Units Amount
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units sold 35,435.798 $ 690,853 150,312.551 $ 2,958,712
Units redeemed 38,707.085 764,812 5,392,069.425 96,928,147
---------- ---------- -------------- -------------
Net increase
(decrease) (3,271.287) $ (73,959) (5,241,756.874) $ (93,969,435)
========== ========== ============== =============
</TABLE>
The Separate Account funds that invest in VIPF Equity-Income Portfolio held
150,003.921 units at a net asset value of $22.0431 and 133,230.486 units at a
net asset value of $19.9854 at December 31, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
1998 1997
--------------------- ----------------------------
Units Amount Units Amount
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units sold 56,044.221 $1,165,657 343,776.944 $ 6,533,006
Units redeemed 39,270.786 805,648 3,207,552.976 54,141,291
---------- ---------- -------------- ------------
Net increase (decrease) 16,773.435 $ 360,009 (2,863,776.032) $(47,608,285)
========== ========== ============== ============
The Separate Account funds that invest in Calvert Responsibly Invested Balanced
Portfolio held 14,160.142 units at a net asset value of $19.3844 and 8,750.320
units at a net asset value of $16.8728 at December 31, 1998 and 1997, respec-
tively.
<CAPTION>
1998 1997
--------------------- ----------------------------
Units Amount Units Amount
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units sold 7,818.262 $ 141,493 42,602.096 $ 690,446
Units redeemed 2,408.440 42,384 362,019.559 5,337,360
---------- ---------- -------------- ------------
Net increase (decrease) 5,409.822 $ 99,109 (319,417.463) $ (4,646,914)
========== ========== ============== ============
</TABLE>
S-10
<PAGE>
VA-1 Separate Account of Unum Life Insurance Company of America
Notes to Financial Statements (continued)
Note 2. Capital Share Transactions (continued)
The Separate Account funds that invest in T. Rowe Price International Series
held 71,388.412 units at a net asset value of $14.3134 and 80,412.837 units at
a net asset value of $12.5035 at December 31, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------------
Units Amount Units Amount
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units sold 16,391.219 $ 222,122 213,162.838 $ 2,766,405
Units redeemed 25,415.644 337,431 1,721,663.531 21,196,571
---------- ---------- -------------- ------------
Net increase (decrease) (9,024.425) $ (115,309) (1,508,500.693) $(18,430,166)
========== ========== ============== ============
The Separate Account funds that invest in VIPF Money Market Portfolio held
23.412 units at a net asset value of $12.4522 and 484.780 units at a net asset
value of $11.8940 at December 31, 1998 and 1997, respectively.
<CAPTION>
1998 1997
---------------------- ----------------------------
Units Amount Units Amount
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units sold 1,423.690 $ 20,241 27,201.262 $ 316,726
Units redeemed 1,885.058 25,823 62,181.449 716,328
---------- ---------- -------------- ------------
Net increase (decrease) (461.368) $ (5,582) (34,980.187) $ (399,602)
========== ========== ============== ============
</TABLE>
Note 3. Fund Substitution
On or about September 30, 1998, UNUM Life Insurance Company of America and the
Separate Account filed an application with the Securities and Exchange Commis-
sion (the "SEC") seeking an order approving the substitution of shares of the
VIP II Asset Manager Portfolio for shares of the Calvert Responsibly Invested
Balanced Portfolio and shares of the VIPF Growth Portfolio for shares of the
American Century VP Capital Appreciation Portfolio. In December 1998, the SEC
approved the above application.
The effect of the share substitution will be to replace the Calvert Responsi-
bly Invested Balanced Portfolio with the VIP II Asset Manager Portfolio, and
the American Century VP Capital Appreciation Portfolio with the VIPF Growth
Portfolio, as investment options under the variable annuity contracts. Unum
Life Insurance Company of America will carry out the substitution once the
systems needed to perform the substitution are in place by redeeming the Cal-
vert Responsibly Invested Balanced Portfolio shares in cash and purchasing
with the proceeds shares of the VIP II Asset Manager Portfolio, and by redeem-
ing the American Century VP Capital Appreciation Portfolio shares in cash and
purchasing with the proceeds shares of the VIPF Growth Portfolio. The substi-
tution will result in the involuntary reinvestment of participants cash value
invested in the Calvert Responsibly Invested Balanced Portfolio and the Ameri-
can Century VP Capital Appreciation Portfolio.
S-11
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
Financial Statement Index
<TABLE>
<CAPTION>
Company Financial Statements Page
- ---------------------------- -----------
<S> <C>
Report of Independent Accountants.................................. F-1
Statements of Income for the Years Ended December 31, 1998, 1997,
and 1996.......................................................... F-2
Balance Sheets as of December 31, 1998 and 1997.................... F-3
Statements of Stockholders' Equity for the Years Ended December 31,
1998, 1997, and 1996.............................................. F-4
Statements of Cash Flows for the Years Ended December 31, 1998,
1997, and 1996.................................................... F-5
Statements of Comprehensive Income December 31, 1998, 1997, and
1996.............................................................. F-6
Notes to Financial Statements...................................... F-7 to F-29
Separate Account Financial Statements.............................. Attached
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Unum Life Insurance Company of America
In our opinion, the accompanying balance sheets and the related statements of
income, stockholders' equity, cash flows, and comprehensive income present
fairly in all material respects, the financial position of Unum Life Insurance
Company of America (the "Company") at December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Portland, Maine
February 2, 1999
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(Dollars in millions)
<S> <C> <C> <C>
Revenues
Premiums.......................................... $2,710.1 $2,304.9 $2,293.3
Investment income................................. 466.7 486.8 638.5
Net realized investment gains (losses)............ 34.0 (1.5) 5.9
Fees and other income............................. 59.8 184.9 90.4
-------- -------- --------
Total revenues.................................. 3,270.6 2,975.1 3,028.1
Benefits and expenses
Benefits to policyholders......................... 2,139.6 1,831.8 1,803.9
Interest credited................................. 28.8 70.0 189.8
Salaries and Related Expenses..................... 340.6 307.8 304.0
Operating expenses................................ 239.5 200.0 293.4
Commissions....................................... 257.1 225.1 229.2
Increase in deferred policy acquisition costs..... (148.4) (103.4) (63.6)
Interest expense (income)......................... -- (1.2) 0.6
-------- -------- --------
Total benefits and expenses..................... 2,857.2 2,530.1 2,757.3
-------- -------- --------
Income before income taxes........................ 413.4 445.0 270.8
Income taxes
Current........................................... (8.8) 35.4 92.1
Deferred.......................................... 135.2 98.4 (13.8)
-------- -------- --------
Total income taxes.............................. 126.4 133.8 78.3
-------- -------- --------
Net income........................................ $ 287.0 $ 311.2 $ 192.5
======== ======== ========
</TABLE>
See notes to financial statements.
F-2
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1997
--------- --------
(Dollars in
millions)
<S> <C> <C>
Assets
Investments
Fixed maturities available for sale-at fair value
(amortized cost: 1998-$4,959.8, 1997-$4,898.2)......... $ 5,278.1 $5,174.1
Equity securities available for sale-at fair value
(cost: 1998-$6.6, 1997-$7.2) 6.0 8.7
Mortgage loans.......................................... 1,163.6 1,023.4
Real estate, net........................................ 232.4 219.0
Policy loans............................................ 106.6 111.8
Other long-term investments............................. 1.6 1.2
Short-term investments.................................. 100.4 63.1
--------- --------
Total investments................................... 6,888.7 6,601.3
Cash...................................................... 13.5 21.1
Accrued investment income................................. 104.0 107.7
Premiums due.............................................. 271.7 232.7
Deferred policy acquisition costs......................... 763.0 616.8
Property and equipment, net............................... 115.0 97.4
Reinsurance receivables................................... 1,798.6 1,313.3
Deposit assets............................................ 710.9 670.4
Amounts receivable from affiliates, net................... 81.3 17.3
Current income taxes...................................... 23.0 3.6
Other assets.............................................. 171.0 160.8
Separate account assets................................... 29.3 24.5
--------- --------
Total assets........................................ $10,970.0 $9,866.9
========= ========
Liabilities and Stockholders' Equity
Liabilities
Future policy benefits.................................. $ 1,699.3 $1,636.1
Unpaid claims and claim expenses........................ 5,072.9 4,514.8
Other policyholder funds................................ 558.8 714.3
Deferred Income taxes................................... 484.9 350.0
Other liabilities....................................... 657.4 615.7
Separate account liabilities............................ 29.3 24.5
--------- --------
Total liabilities................................... 8,502.6 7,855.4
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.............................. 532.1 359.9
Retained earnings....................................... 1,761.3 1,502.8
Accumulated other comprehensive income:
Unrealized gains, net................................. 188.3 156.2
Unrealized foreign currency translation adjustment.... (19.3) (12.4)
--------- --------
Total accumulated other comprehensive income........ 169.0 143.8
--------- --------
Total stockholders' equity.......................... 2,467.4 2,011.5
--------- --------
Total liabilities and stockholders' equity.......... $10,970.0 $9,866.9
========= ========
</TABLE>
See notes to financial statements
F-3
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Accumulated
Stock Additional Other
$0.10 Par Paid-in Comprehensive Retained
Value Capital Income Earnings Total
--------- ---------- ------------- -------- --------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... $5.0 $347.4 $136.5 $1,358.3 $1,847.2
1996 Transactions:
Net income............ 192.5 192.5
Other comprehensive
income............... (88.9) (88.9)
Dividends to
stockholders......... (179.1) (179.1)
Other transactions.... 3.3 3.3
---- ------ ------ -------- --------
Balance at December 31,
1996................... 5.0 350.7 47.6 1,371.7 1,775.0
1997 Transactions:
Net income............ 311.2 311.2
Other comprehensive
income............... 96.2 96.2
Dividends to
stockholders......... (180.1) (180.1)
Other transactions.... 9.2 9.2
---- ------ ------ -------- --------
Balance at December 31,
1997................... 5.0 359.9 143.8 1,502.8 2,011.5
1998 Transactions:
Net income............ 287.0 287.0
Other comprehensive
income............... 25.2 25.2
Dividends to
stockholders......... (28.5) (28.5)
Capital Infusion...... 160.0 160.0
Other transactions.... 12.2 12.2
---- ------ ------ -------- --------
Balance at December 31,
1998................... $5.0 $532.1 $169.0 $1,761.3 $2,467.4
==== ====== ====== ======== ========
</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,
--------------------------
1998 1997 1996
------ ------- ---------
(Dollars in millions)
<S> <C> <C> <C>
Operating activities:
Net income........................................ $287.0 $ 311.2 $ 192.5
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in future policy benefits and unpaid
claims and claim expenses....................... 544.8 485.4 542.8
Increase in amounts receivable under reinsurance
agreements...................................... (473.8) (277.4) (640.4)
Increase in income tax liability................. 102.0 67.0 26.0
(Increase) decrease in deferred policy
acquisition costs............................... (146.2) (100.9) 293.4
(Increase) decrease in deposit assets............ 15.2 (45.7) (382.9)
Deferral (recognition) of gain on sale of tax-
sheltered annuities............................. (3.3) (69.6) 77.2
Charge for individual disability reinsurance
fees............................................ -- -- 49.7
Other............................................ (41.0) (35.6) 45.9
------ ------- ---------
Net cash provided by operating activities...... 284.7 334.4 204.2
------ ------- ---------
Investing activities:
Maturities of fixed maturities available for sale. 319.9 392.7 684.4
Sales of fixed maturities available for sale...... 631.2 489.7 2,124.4
Sales and maturities of other investments......... 139.0 215.9 256.3
Purchases of fixed maturities available for sale.. (988.0) (947.0) (1,431.2)
Purchases of other investments.................... (316.4) (181.3) (218.1)
Net (increase) decrease in short-term investments. (37.3) 18.9 (1,042.1)
Net additions to property and equipment........... (22.1) (12.0) (37.0)
------ ------- ---------
Net cash provided by (used in) investing
activities.................................... (273.7) (23.1) 336.7
------ ------- ---------
Financing activities:
Deposits and interest credited to investment
contracts........................................ 36.5 165.1 536.9
Maturities and withdrawals from investment
contracts........................................ (179.7) (305.1) (877.0)
Dividends to stockholders......................... (28.5) (180.1) (179.1)
Capital Infusion.................................. 160.0 -- --
------ ------- ---------
Net cash used in financing activities.......... (11.7) (320.1) (519.2)
------ ------- ---------
Effect of exchange rate changes on cash........... (6.9) (4.1) (0.5)
------ ------- ---------
Net increase (decrease) in cash................... (7.6) (12.9) 21.2
Cash at beginning of year......................... 21.1 34.0 12.8
------ ------- ---------
Cash at end of year............................... $ 13.5 $ 21.1 $ 34.0
====== ======= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes..................................... $ 10.4 $ 56.5 $ 47.4
====== ======= =========
</TABLE>
Supplemental disclosure of noncash operating and investing activities:
For the year ended December 31, 1997, in connection with contractholder and
participant consents for assumption reinsurance related to the tax-sheltered
annuity business UNUM America sold in 1996, UNUM America reduced its deposit
assets by $2,282 million, policy loan assets by $103.5 million, other
policyholder fund liabilities by $2,447.8 million and separate account assets
and liabilities by $502.6 million. Also, during 1996, 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 America's deposit assets.
See notes to financial statements.
F-5
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997 1996
------- ------- -------
(Dollars in millions)
<S> <C> <C> <C>
Net income.......................................... $ 287.0 $ 311.2 $ 192.5
Other comprehensive income:
Unrealized holding gains (losses) arising during
the period, net.................................. 51.1 103.2 (91.2)
Reclassification adjustments for realized (gains)
losses included in net income, net............... (19.0) (2.9) 2.9
------- ------- -------
Changes in unrealized gains (losses), net....... 32.1 100.3 (88.3)
Foreign currency translation adjustments.......... (6.9) (4.1) (0.6)
------- ------- -------
Total other comprehensive income.............. 25.2 96.2 (88.9)
------- ------- -------
Comprehensive income................................ $ 312.2 $ 407.4 $ 103.6
======= ======= =======
Supplemental disclosures of comprehensive income
information:
Tax (expense) benefit related to unrealized holding
(gains) losses..................................... $ (23.8) $ (52.3) $ 43.7
Tax (expense) benefit related to reclassification
adjustment for realized (gains) losses............. $ (10.3) $ (1.6) $ 1.5
======= ======= =======
</TABLE>
See notes to financial statements.
F-6
<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 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 the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification
Certain 1997 and 1996 amounts have been reclassified in 1998 for comparative
purposes.
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.
F-7
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
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.
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, the costs are amortized in proportion to
estimated gross profits from interest margins, mortality and other elements of
performance under the contracts. Amortization may be 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,
-----------------------
1998 1997 1996
------ ------ -------
(Dollars in millions)
<S> <C> <C> <C>
Deferred................................................ $288.4 $211.9 $ 194.7
Less amortized.......................................... (140.0) (108.5) (131.1)
------ ------ -------
Increase in deferred policy acquisition costs......... $148.4 $103.4 $ 63.6
====== ====== =======
</TABLE>
Separate Accounts
Certain assets from tax-sheltered annuity ("TSA") contracts 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.
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 as long as
they remain in force. A Participation Fund Account ("PFA") was established for
the benefit of all of Union Mutual's individual participating life and annuity
policies and contracts.
The assets of the PFA 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
F-8
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
PFA and its operations have been excluded from the Statements of Income. The
PFA represented approximately 3.4% and 3.7% of total assets and 4.2% and 4.6%
of total liabilities at December 31, 1998, and 1997, respectively.
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.
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. A valuation allowance is established for deferred tax assets when it
is more likely than not that an amount will not be realized.
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.
Recognition of Premium Revenues and Related Expenses
Group insurance and individual disability premiums are recognized as income
when due. Benefits and expenses are matched with earned premiums to result in
recognition of profits over the life of the contracts. This association is
accomplished by recording a provision of future policy benefit's 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.
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
F-9
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
Changes in Accounting Estimates
During fourth quarter 1997, certain reinsurance pools managed by UNUM
Corporation's wholly-owned subsidiary, Duncanson & Holt Inc., received new
claim information from ceding insurance enterprises about certain older pool
years and completed an analysis of recent claims experience deterioration. As
a result of these factors, certain pools have strengthened claim reserves. The
impact to UNUM America in fourth quarter 1997 from these pool claim reserve
increases was a $6.7 million increase in benefits to policyholders reported in
the Special Risk Insurance segment, reducing net income by $4.4 million in the
Statement of Income.
Accounting Pronouncements Adopted
Effective January 1, 1998, UNUM America adopted Financial Accounting Standards
("FAS") No. 130, "Reporting Comprehensive Income," which established standards
for reporting and display of comprehensive income and its components in a
financial statement with the same prominence as other financial statements.
Comprehensive income is defined as net income adjusted for changes in
stockholders' equity resulting from events other than net income or
transactions related to an entity's capital instruments. UNUM America has
reclassified financial statements for earlier years as required by FAS 130.
Effective January 1, 1998, UNUM America adopted FAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which established
standards for reporting information about operating segments. Generally, FAS
131 requires that financial information about operating segments be reported
on the basis that is used internally for evaluation performance. UNUM America
has determined that is current segment reporting structure meets the
requirements of FAS 131 and no restatement of financial information is needed.
Additional segment information has been disclosed as required under FAS 131.
Effective January 1, 1998, UNUM America adopted FAS No. 132, "Employers'
Disclosures about Pensions and Other Post retirement Benefits," which revised
disclosure requirements for employers' pension and other retiree benefits. FAS
132 did not change the measurement or recognition of pension or other post
retirement benefit plans. UNUM America has restated disclosures for earlier
years presented, as required under FAS 132.
Effective January 1, 1998, UNUM America implemented Statement of Position
("SOP") 98-1, "Accounting for Costs of Computer Software Developed or Obtained
for Internal Use," which provided guidance on accounting for the costs of
developing or obtaining computer software for internal use. The adoption of
SOP 98-1 did not have a material effect on UNUM America's results of
operations or financial position.
Effective December 31, 1997, UNUM America adopted FAS No. 129, "Disclosures of
Information About Capital Structure," which consolidates disclosure
requirements related to the type and nature of securities contained in an
entity's capital structure. FAS 129 does not add to or change any of UNUM
America's disclosures.
Effective January 1, 1997, UNUM America adopted FAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which established 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. The adoption of FAS 125 did not have a material effect on UNUM
America's results of operations or financial position.
F-10
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
New Accounting Pronouncements
In October 1998, the Accounting Standards Executive Committee ("AcSEC") issued
SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance
Contracts That Do Not Transfer Insurance Risk," which provides guidance on
applying the deposit method of accounting to insurance and reinsurance
contracts that do not transfer insurance risk. UNUM America is required to
adopt SOP 98-7 effective January 1, 2000. Previously issued financial
statement should not be restated unless the SOP is adopted prior to the
effective date and during an interim period. The adoption of SOP 98-7 is not
expected to have a material impact on UNUM America's results of operations,
liquidity or financial position.
In June 1998, the Financial Accounting Standards Board ("FASB") issued FAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
established accounting and reporting standards for derivative instruments,
including certain derivatives embedded in other contracts, and for hedging
activities. FAS 133 requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The accounting for changes in the
fair value of a derivative under FAS 133 depends on the intended use of the
derivative and its hedging designation. UNUM America is required to adopt FAS
133 effective January 1, 2000. UNUM America has not yet determined the impact
FAS 133 will have on its results of operations, liquidity or financial
position.
In December 1997, the AcSEC issued Statement of Position ("SOP") 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments," which provides guidance on accounting for insurance-related
assessments. UNUM America is required to adopt SOP 97-3 effective January 1,
1999. Previously issued financial statements should not be restated unless the
SOP is adopted prior to the effective date and during an interim period. The
adoption of SOP 97-3 is not expected to have a material impact on UNUM
America's results of operations, liquidity or financial position.
F-11
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 2. INVESTMENTS
The following tables summarize the components of investment income, net
realized investment gains (losses) and changes in unrealized gains, net:
Investment Income
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1998 1997 1996
------ ------ ------
(Dollars in
millions)
<S> <C> <C> <C>
Fixed maturties available for sale..................... $373.4 $386.2 $496.1
Mortgage loans......................................... 95.3 101.5 104.6
Real estate............................................ 23.3 21.7 19.0
Policy loans........................................... 4.8 5.2 9.0
Other long-term investments............................ 0.1 2.4 6.5
Short-term investments................................. 5.5 6.4 42.5
------ ------ ------
Gross investment income............................ 502.4 523.4 677.7
Less investment expenses............................... (11.6) (12.2) (14.7)
Less investment income on participating individual life
insurance policies and annuity contracts.............. (24.1) (24.4) (24.5)
------ ------ ------
Investment income.................................. $466.7 $486.8 $638.5
====== ====== ======
</TABLE>
Net Realized Investment Gains (Losses)
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1998 1997 1996
----- ----- -----
(Dollars in
millions)
<S> <C> <C> <C>
Gross realized investment gains:
Fixed maturities available for sale...................... $32.0 $15.1 $19.1
Equity securities available for sale..................... -- 0.6 --
Mortgage loans, real estate and other.................... 9.9 6.1 17.2
----- ----- -----
Gross realized investment gains........................ 41.9 21.8 36.3
----- ----- -----
Gross realized investment losses:
Fixed maturities available for sale...................... (2.7) (11.2) (23.5)
Mortgage loans, real estate and other.................... (5.2) (12.1) (6.9)
----- ----- -----
Gross realized investment losses....................... (7.9) (23.3) (30.4)
----- ----- -----
Net realized investment gains (losses)............... $34.0 $(1.5) $ 5.9
===== ===== =====
</TABLE>
Change in Unrealized Gains, Net
<TABLE>
<CAPTION>
Year Ended December
31,
-----------------------
1998 1997 1996
------ ------ -------
(Dollars in millions)
<S> <C> <C> <C>
Fixed maturities available for sale................... $ 42.4 $ 73.6 $(217.6)
Equity securities available for sale.................. (2.0) (0.3) 3.0
Marketable securities held in trust................... 83.9 127.7 --
Unpaid claims adjustment.............................. (78.7) (49.7) 84.1
Deferred taxes........................................ (13.5) (51.0) 42.2
------ ------ -------
Total change in unrealized gains, net, as included in
stockholders' equity................................. $ 32.1 $100.3 $ (88.3)
</TABLE>
F-12
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
UNUM America's fixed maturities are reported at fair value as a result of
being classified as available for sale. Accordingly, the related liability for
unpaid claims and claims expenses is adjusted to reflect the changes that
would have been necessary if the related fixed maturities were sold at their
fair value and the proceeds were reinvested at current yields. At December 31,
1998, 1997, and 1996, the unrealized gain on available for sale fixed
maturities was $318.3 million, $275.9 million, and $202.3 respectively, and
the related unpaid claims adjustment was $248.0 million, $169.1 million, and
$119.4 respectively.
The marketable securities held in trust relate to the individual disability
reinsurance agreement (see Note 6 "Reinsurance"). Changes in fair value of the
assets and the related adjustment to unpaid claims are reflected in the equity
section of UNUM America's Balance Sheet.
Fixed Maturities
The amortized cost and fair values of fixed maturities available for sale at
December 31, 1998, were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
(Dollars in millions)
<S> <C> <C> <C> <C>
U.S. Government........................ $ 5.8 $ 0.2 $ -- $ 6.0
U.S. States and municipalities......... 929.1 42.7 -- 971.8
Foreign governments.................... 132.7 15.6 -- 148.3
Public utilities....................... 934.1 72.1 (0.6) 1,005.6
Corporate bonds........................ 2,870.7 188.5 (2.3) 3,056.9
Redeemable preferred stocks............ 0.2 -- -- 0.2
Mortgage-backed securities............. 87.2 2.1 -- 89.3
-------- ------ ----- --------
Total................................ $4,959.8 $321.2 $(2.9) $5,278.1
======== ====== ===== ========
</TABLE>
The amortized cost and fair values of fixed maturities available for sale at
December 31, 1997, were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
(Dollars in millions)
<S> <C> <C> <C> <C>
U.S. Government........................ $ 25.3 $ 0.4 $ -- $ 25.7
U.S. States and municipalities......... 707.5 25.7 -- 733.2
Foreign governments.................... 142.2 13.7 -- 155.9
Public utilities....................... 981.6 65.2 (0.1) 1,046.7
Corporate bonds........................ 2,870.7 170.1 (0.9) 3,039.9
Redeemable preferred stocks............ 2.0 -- (0.1) 1.9
Mortgage-backed securities............. 168.9 1.9 -- 170.8
-------- ------ ----- --------
Total................................ $4,898.2 $277.0 $(1.1) $5,174.1
======== ====== ===== ========
</TABLE>
F-13
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
The amortized cost and fair value of fixed maturities available for sale at
December 31, 1998, 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
Cost Fair Value
--------- ----------
(Dollars in
millions)
<S> <C> <C>
Due in one year or less.................................... $ 282.3 $ 286.4
Due after one year through five years...................... 1,760.2 1,878.8
Due after five years through ten years..................... 2,503.9 2,682.6
Due after ten years........................................ 326.2 341.0
-------- --------
4,872.6 5,188.8
Mortgage-backed securities............................... 87.2 89.3
-------- --------
Total.................................................. $4,959.8 $5,278.1
======== ========
</TABLE>
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, 1998:
<TABLE>
<CAPTION>
Cost Fair Value
---- ----------
(Dollars in
millions)
<S> <C> <C>
Common stocks:
Industrial, miscellaneous and all other....................... $6.6 $6.0
==== ====
</TABLE>
Gross unrealized investment losses on equity securities available for sale
totaled $0.6 million at December 31, 1998, and were immaterial at December 31,
1997. There were no gross unrealized investment gains at December 31, 1998,
and at December 31, 1997 the amount was $1.5 million.
Mortgages
At December 31, 1998, and 1997, impaired loans totaled $16.8 million and $40.7
million, respectively. Included in the $16.8 million of impaired loans at
December 31, 1998, were $9.0 million of loans which had a related allowance
for probable losses of $2.4 million, and loans of $7.8 million which had no
related allowance for probable losses. Included in the $40.7 million of
impaired loans at December 31, 1997, were $20.8 million of loans which had a
related allowance for probable losses of $3.5 million, and loans of $19.9
million which had no related allowance for probable losses.
Restructured mortgage loans amounted to $13.9 million and $36.5 million at
December 31, 1998, and 1997, 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, 1998, 1997 or 1996.
Real Estate and Other
Real estate acquired in satisfaction of debt cumulatively amounted to $59.7
million at December 31, 1998. Real estate held for sale amounted to $13.8
million at December 31, 1998, and $22.4 million at December 31, 1997.
Real estate with a depreciated cost of $5.2 million and no bonds or mortgages
were non-income producing for the twelve months ended December 31, 1998.
Interest lost on these investments was not material in 1998, 1997 or 1996.
F-14
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
UNUM America was committed at December 31, 1998, to purchase fixed maturities
and other invested assets in the amount of $40.9 million.
NOTE 3. ALLOWANCE FOR PROBABLE LOSSES ON INVESTED ASSETS AND REAL ESTATE
HELD FOR SALE
Changes in the allowance for probable losses on mortgage loans and real estate
held for sale were as follows:
<TABLE>
<CAPTION>
Balance at Balance
beginning at end
of year Additions Deductions of year
---------- --------- ---------- -------
(Dollars in millions)
<S> <C> <C> <C> <C>
Year Ended December 31, 1998
Mortgage loans........................ $32.0 $ 2.3 $(3.0) $31.3
Real estate held for sale............. 17.0 (0.9) -- 16.1
----- ----- ----- -----
Total............................... $49.0 $ 1.4 $(3.0) $47.4
===== ===== ===== =====
Year Ended December 31, 1997
Mortgage loans........................ $36.0 $ 3.1 $(7.1) $32.0
Real estate held for sale............. 14.3 2.7 -- 17.0
----- ----- ----- -----
Total............................... $50.3 $ 5.8 $(7.1) $49.0
===== ===== ===== =====
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
===== ===== ===== =====
</TABLE>
Additions represent charges to net realized investment gains (losses) less
recoveries and deductions represent reserves released upon disposal or
restructuring of the related asset.
NOTE 4. RESERVES
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 with actual experience and may be
revised if it is determined that future expected experience is worse than the
reserve assumptions. Reserves for group insurance policies consist primarily
of prepaid premiums. The interest rates used in the calculation of reserves
for future policy benefits at December 31, 1998, and 1997, principally ranged
from 4.5% to 9.5% and from 5.0% to 9.5%, respectively. Certain reserve
calculations are based on variable interest rates within these ranges.
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. Management periodically performs a review of reserve estimates
F-15
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
and assumptions. If management determines reserve assumptions need to be
updated, any resulting adjustment to reserves is reflected in current
operations. Given that insurance products contain inherent risks and
uncertainties, 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, 1998, and 1997, were principally as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Group long term disability.......................... 7.76% 7.84%
Individual disability............................... 5.5% to 8.95% 7.0% to 9.50%
</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. The
discount rate may decline further depending on the interest rate environment.
UNUM America periodically adjusts prices on both existing and new business in
an effort to mitigate the impact of the current interest rate environment. See
Note 17 "Proposed Merger with Provident (Unaudited)," for a discussion of
potential impacts to reserve discount rates subsequent to the proposed merger.
For other accident and health business, reserves are based on projections of
historical claims run-out patterns.
Activity in the liability for unpaid claims and claim expenses is summarized
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(Dollars in millions)
<S> <C> <C> <C>
Balance at January 1.............................. $4,514.8 $4,056.6 $3,774.0
Reinsurance receivables........................... (456.1) (254.3) (87.3)
Effect of unrealized gains........................ (169.1) (119.4) (203.4)
-------- -------- --------
Net balance at January 1.......................... 3,889.6 3,682.9 3,483.3
Incurred related to:
Current year.................................... 1,705.2 1,373.1 1,260.0
Prior years..................................... 76.4 314.3 262.1
-------- -------- --------
Total incurred.................................... 1,781.6 1,687.4 1,522.1
Paid related to:
Current year.................................... 562.9 441.3 380.6
Prior years..................................... 1,162.1 1,039.4 941.9
-------- -------- --------
Total paid........................................ 1,725.0 1,480.7 1,322.5
Net balance at December 31........................ 3,946.2 3,889.6 3,682.9
Reinsurance receivables........................... 879.1 456.1 254.3
Effect of unrealized gains........................ 247.6 169.1 119.4
-------- -------- --------
Balance at December 31............................ $5,072.9 $4,514.8 $4,056.6
======== ======== ========
</TABLE>
F-16
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
The components of the unpaid claims and claims expenses incurred and related
to prior years were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
(Dollars in millions)
<S> <C> <C> <C>
Interest accrued on reserves............................ $ 223.3 $230.1 $228.0
Changes in reserve estimates and assumptions............ 115.8 84.2 34.1
Reinsurance transaction with related party.............. (262.7) -- --
------- ------ ------
Incurred related to prior year........................ $ 76.4 $314.3 $262.1
======= ====== ======
</TABLE>
The additional reserves for amounts incurred related to prior years were
primarily the result of interest accrued on reserves, changes in reserve
estimates and assumptions of interest rates, morbidity, mortality and expense
costs. Due to the long term claims payment pattern of some of UNUM America's
businesses, certain reserves, particularly disability, are discounted for
interest.
In connection with UNUM Corporation entering into the merger agreement with
Provident in fourth quarter 1998 (see Note 17 "Proposed Merger with
Provident,") UNUM America anticipates that as a result of integrating its
claim operations with Provident there will be a temporary increase in claim
costs. UNUM America expects that few claims will be resolved or closed during
the period when the two companies are planning and implementing the
integraiton of their claims organizations. The average length of duration for
claims will increase resulting, resulting in more beneift payments being paid
for a relatively short time until the consolidation of operations is complete.
During the fourth quarter of 1998, UNUM America increase its unpaid reserve by
$54.9 million related to the expected increase in disability claim duration on
existing claims. This reserve increase was reflected as a $45.3 million
increase in benefits to policyholders and a $9.6 million reduction in fee
income in the Disability Insurance segment. A portion of these reserve
increases are associated with prior year incurrals. The reduction in fee
income represents increased reserves for the United States non-cancellable
individual disability business that is reinsured with Centre Life Reinsurance
Limited ("Centre Re"). See Note 6 "Reinsurance" for further information on the
reinsurance transaction. Management will continue to evaluate the impacts of
the merger on disability claims experience and the assumptions around expected
disability claims duration that were used in the determination of the claims
reserve increase.
NOTE 5. SALE OF TAX-SHELTERED ANNUITY BUSINESS
On October 1, 1996, UNUM America closed the sale of its group tax-sheltered
annuity ("TSA") businesses 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 were initially reinsured on an
indemnity basis. Upon consent of the TSA contractholders and participants, the
contracts are considered reinsured on an assumption basis, legally releasing
UNUM America from future contractual obligation to the respective
contractholders and 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. UNUM America has recorded a deposit asset in its Balance Sheet
representing the assets which support the TSA contracts of those
contractholders and participants that have not given consent for assumption
reinsurance. At December 31, 1998, the deposit asset related to the TSA
transaction was approximately $245.0 million.
The sale resulted in a deferred pretax gain of $77.2 million of which $69.6
million was recognized in income in 1997, reported as fees and other income,
in proportion to contractholders and participant consents for assumption
reinsurance. Through December 31, 1998, consent for assumption reinsurance has
been provided by TSA contractholders and participants owning substantially all
assets under management.
F-17
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 6. REINSURANCE
UNUM America is involved in both the cession and assumption of reinsurance
with other companies.
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-cancelable individual disability ("ID") block of business. Also subject to
this reinsurance coverage is our affiliate First UNUM Life Insurance Company
of New York. 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. Under the agreement, Centre
Re has an obligation to absorb losses within a defined risk layer. UNUM
America retains the risk for all experience up to Centre Re's defined risk
layer, or attachment point. Once the attachment point is reached, Centre Re
assumes the risk for all experience up to a contractually defined risk limit.
Any experience above Centre Re's defined risk limit reverts back to UNUM
America. As of December 31, 1998, the attachment point had not been reached.
The following discloses the various layers in the agreement at December 31,
1998:
<TABLE>
<CAPTION>
(Dollars in millions)
<S> <C>
Net GAAP reserves......................................... $486
UNUM's experience layer................................... 249
----
Attachment point........................................ 735
Centre Re's defined risk layer............................ 235
----
Defined risk limit...................................... $970
====
</TABLE>
Under the agreement, UNUM America funds a trust account equal to the amount of
UNUM America's exposure (i.e., up to the attachment point). These trust assets
provide security (i.e., collateral) to Centre Re for amounts due by UNUM
America prior to reaching the attachment point. UNUM America acts as the
investment manager for 80% of the assets in the trust with Centre Re managing
the remaining 20%.
The actual operating results of the non-cancellable ID block of business are
accounted for under FAS No. 113 "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts." This reinsurance agreement
transfers risk and is accounted for as reinsurance in accordance with the
requirements of FAS 113 for reinsurance of long-duration contracts. The
underlying operating results of the reinsured block are reflected in fees and
other income and realized gains and losses from sales of assets are reflected
as realized investment gains (losses) in UNUM America's Statements of Income.
UNUM America has a deposit asset at December 31, 1998, of approximately $419
million reflected in its Balance Sheet. The deposit asset is comprised of UNUM
America's experience layer and unrealized gains or losses on the marketable
securities held in the trust. Unrealized gains or losses on marketable
securities held in the trust and the related effects on claim reserves are
reflected as unrealized gains or losses in the equity section of UNUM
America's Balance Sheets.
UNUM America controls the management of the business, including premium
collection and claims management, under this agreement. All premiums, less
amounts for management expenses and claim payments, are transferred to the
trust account on a quarterly basis.
In 1994 UNUM America recorded a premium deficiency reserve strengthening
related to the non-cancellable ID block of business in conjunction with its
announcement to exit the non-cancellable form of ID coverage in the
F-18
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
United States. The reinsurance fees due Centre Re are expenses that were not
contemplated when reserves were strengthened in 1994. Since these fees would
have caused the non-cancellable ID block of business to be in a loss
situation, UNUM America recognized a pretax charge of $49.7 million in the
fourth quarter of 1996. The charge represented the present value of the
anticipated minimum amount of fees to be paid to Centre Re under the agreement
for a period of six years. UNUM has the right, but no obligation, to recapture
the business after six years without penalty. UNUM America paid $9.4 million
in fees to Centre Re during 1998 and 1997.
The effect of all reinsurance on premiums earned and written for the years
ended December 31, 1998, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(Dollars in millions)
<S> <C> <C> <C>
Premiums earned:
Direct.......................................... $2,753.6 $2,366.7 $2,112.2
Assumed......................................... 320.3 294.4 251.2
Ceded........................................... (363.8) (356.2) (70.1)
-------- -------- --------
Premiums earned............................... $2,710.1 $2,304.9 $2,293.3
======== ======== ========
Premiums written:
Direct.......................................... $2,701.2 $2,365.6 $2,114.9
Assumed......................................... 373.0 315.9 285.8
Ceded........................................... (362.0) (367.1) (95.6)
-------- -------- --------
Premiums written.............................. $2,712.2 $2,314.4 $2,305.1
======== ======== ========
</TABLE>
For the years ended December 31, 1998, 1997 and 1996, recoveries recognized
under reinsurance agreements offset benefits to policyholders by $325.5
million, $270.9 million and $65.7 million, respectively.
NOTE 7. BUSINESS RESTRUCTURING AND OTHER CHARGES
Business Restructuring
Charges of $7.2 million were recorded in 1996. The charge in 1996 was related
to the merger of Commercial Life into UNUM America.
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 "Sale of Tax-Sheltered
Annuity Business"), 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.
NOTE 8. EMPLOYEE BENEFIT AND INCENTIVE PLANS
Pension Plans
At December 31, 1998, UNUM Corporation had a noncontributory defined benefit
pension plan ("Lifecycle Plan") covering substantially all domestic employees,
including employees of UNUM America. At December 31, 1998, the plan assets
included 448,784 shares of UNUM Corporation common stock with a fair value of
$26.2 million. The amount of dividends paid on these shares in 1998 was not
material.
F-19
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
In 1997, UNUM Corporation changed the measurement date for the valuation of
its pension plan and postretirement benefit plan assets and actuarially
determined obligations from December 31, to September 30. The change in
measurement date had no effect on 1997 or prior years' net pension and
periodic postretirement benefit costs.
Postretirement Health Care and Life Insurance Benefits
UNUM America provides certain health care and life insurance benefits for
retired employees and covered dependents. The underlying plans are not
currently funded. The cost of these plans was $3.1 million, $3.0 million and
$8.0 million for the years ended December 31, 1998, 1997 and 1996,
respectively. At December 31, 1998, and 1997, the liability associated with
these plans was $75.1 million and $71.3 million, respectively.
Retirement Savings Plans
UNUM America participates in UNUM Corporation's Retirement Savings Plan.
Effective January 1, 1997, UNUM Corporation introduced a single retirement
savings plan for all domestic employees. Dependent upon the employee's annual
earnings, eligible employees may contribute up to 15% of their annual
compensation, including incentive payouts. UNUM America matches 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% after eligibility requirements of one year is met. Employees
become 100% vested immediately upon becoming eligible. Expense for the
retirement savings plans amounted to $7.9 million, $7.3 million and $5.6
million in 1998, 1997 and 1996, respectively.
Annual Incentive Plans
UNUM America has several annual incentive plans for certain employees and
executive officers that provide additional compensation based on achievement
of predetermined annual corporate and affiliate financial and non-financial
goals. In 1998, 1997 and 1996, expense for these plans was $24.0 million,
$26.1 million and $31.1 million, respectively.
Stock Options
The 1996 Long-Term Stock Incentive Plan ("1996 Incentive Plan") provides for
granting options to officers, nonemployee directors of UNUM America, and key
employees to purchase UNUM Corporation common stock over ten years. The 1996
Incentive Plan also provides for granting to key officers restricted stock
awards whose vesting is contingent upon achieving prescribed financial
performance objectives or upon the grantee remaining in UNUM's employ for a
specified period of time. Options and restricted stock may be granted annually
at the discretion of the Committee.
The 1998 Goals Stock Option Plan ("1998 Option Plan") provides for granting to
all eligible employees up to 300 options to purchase UNUM Corporation common
stock. The options will vest to the employee nine years from the date of
grant. Vesting may be accelerated to an earlier date at the discretion of the
plan administrator.
In connection with the pending merger (see Note 17 "Proposed Merger with
Provident (Unaudited)") outstanding options which have otherwise not vested
will do as a result of a change in control as defined by the plans. For
outstanding options related to the 1998 Option Plan, a change in control will
occur at the time shareholders vote in favor of the merger. Outstanding
options related to the 1996 Incentive Plan will vest upon the consummation of
the merger.
F-20
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 9. DIVIDEND RESTRICTIONS
UNUM America is subject to various state insurance regulatory restrictions
that limit the maximum amount of dividends available from its United States
domiciled insurance subsidiaries without prior approval. The amount available
under current law for payment of dividends during 1999 to UNUM Corporation
from UNUM America without state insurance regulatory approval is approximately
$109 million. Dividends in excess of this amount may only be paid with state
insurance regulatory approval. The statutory capital and surplus of UNUM
America was approximately $1,087 million and $946 million, at December 31,
1998, and 1997, respectively. The statutory net operating income, which
excludes realized investment gains and losses net of tax, of UNUM America was
approximately $12 million, $182 million and $113 million for 1998, 1997 and
1996, 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 10. INCOME TAXES
A reconciliation of income taxes computed by applying the federal income tax
rate to income before income taxes and the consolidated income tax expense
charged to operations follows:
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1998 1997 1996
------ ------ ------
(Dollars in
millions)
<S> <C> <C> <C>
Tax at federal statutory rate of 35%.................... $144.7 $155.8 $ 94.8
Tax-exempt income....................................... (21.4) (15.7) (15.4)
Other................................................... 3.1 (6.3) (1.1)
------ ------ ------
Income taxes.......................................... $126.4 $133.8 $ 78.3
====== ====== ======
</TABLE>
Deferred income tax liabilities and assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------
1998 1997
------ ------
(Dollars in
millions)
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs.............................. $222.8 $171.4
Policy reserve adjustments..................................... 192.5 117.7
Net unrealized gains........................................... 127.3 94.5
Value of business acquired..................................... 0.9 1.0
Invested assets................................................ 28.1 0.6
Other.......................................................... 10.8 2.9
------ ------
Gross deferred tax liabilities............................... 582.4 388.1
------ ------
Deferred tax assets:
Alternative Minimum Tax Credits................................ 20.5 --
Net realized losses............................................ 16.6 6.0
Postretirement benefits........................................ 25.8 25.4
Deferred gains................................................. 1.5 2.0
Accrued liabilities............................................ 29.7 3.7
Other.......................................................... 3.4 1.0
------ ------
Gross deferred tax assets.................................... 97.5 38.1
------ ------
Net deferred tax liability....................................... $484.9 $350.0
====== ======
</TABLE>
F-21
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(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.
UNUM America's Statements of Income for 1998, 1997 and 1996, included the
following amounts of foreign income and related income tax expense:
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------
1998 1997 1996
----- ----- -----
(Dollars in
millions)
<S> <C> <C> <C>
Foreign income.............................................. $14.7 $10.4 $11.5
===== ===== =====
Income tax expense (credit):
Current................................................... $ -- $ 0.6 $(1.5)
Deferred.................................................. 5.5 3.1 5.6
----- ----- -----
Total................................................... $ 5.5 $ 3.7 $ 4.1
===== ===== =====
</TABLE>
Note 11. 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, 1998, and 1997:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(Dollars in millions)
<S> <C> <C> <C> <C>
Financial assets:
Fixed maturities available for sale...... $5,278.1 $5,278.1 $5,174.1 $5,174.1
Equity securities available for sale..... 6.0 6.0 8.7 8.7
Mortgage loans........................... 1,163.6 1,274.0 1,023.4 1,127.4
Policy loans............................. 106.6 106.6 111.8 111.8
Short-term investments................... 100.4 100.4 63.1 63.1
Cash..................................... 13.5 13.5 21.1 21.1
Accrued investment income................ 104.0 104.0 107.7 107.7
Deposit assets........................... 710.9 710.9 670.4 670.4
Financial liabilities:
Other policyholder funds:
Investment-type insurance contracts:
With defined maturities.............. $ 69.3 $ 84.6 $ 141.6 $ 159.3
With no defined maturities........... 247.3 245.4 319.2 315.4
Individual annuities and supplementary
contracts not involving life
contingencies......................... 57.1 57.1 63.5 63.5
Off-balance sheet financial instruments:
Interest rate futures contracts.......... -- 110.7 -- --
</TABLE>
F-22
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(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 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.
Off-Balance Sheet Financial Instruments: Fair value for off-balance sheet
financial instruments are based on current settlement values.
NOTE 12. DERIVATIVE FINANCIAL INSTRUMENTS
UNUM America periodically uses options, futures, forward exchange contracts
and interest rate swaps which are common derivative financial instruments, to
hedge certain risks associated with anticipated purchases and sales of
investments, anticipated debt issuance and certain payments denominated in
foreign currencies, primarily Canadian dollars. 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
credit 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 or issue derivative financial instruments for the purpose of trading.
Historically, all positions UNUM America has taken in derivative contracts
have qualified for hedge accounting in accordance with the criteria
established by FAS 52, "Foreign Currency Translation," and FAS 80,
F-23
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
"Accounting for Futures Contracts." Upon entering a derivative contract, UNUM
America uses this criteria to evaluate the correlation of risk protection
provided by a derivative contract to the risk created by market fluctuations
to ensure hedge accounting is appropriate for the contract. Accordingly, gains
or losses related to qualifying hedges of firm commitments or anticipated
transactions involving investment purchases and debt issuance are deferred and
recognized as an adjustment to the carrying amount of the underlying asset or
liability when the hedged transaction occurs. Gains or losses related to
qualifying hedges of anticipated transactions involving the sale of
investments are deferred and recognized in income when the hedged transaction
occurs. No gains or losses related to qualifying hedges of anticipated
transactions involving payments denominated in foreign currencies are recorded
if the hedged transaction is likely to occur.
The amount of any deferred gains or losses on outstanding interest rate
futures contracts, which require daily cash settlement, are included in fixed
maturities in UNUM America's Balance Sheets. The fair values of any
outstanding forward exchange rate contracts and options which do not require
daily cash settlement, are not recognized in UNUM America's Balance Sheets.
Any resulting gains or losses from early termination of a derivative
designated as a hedge are deferred and recognized in income or as an
adjustment of the carrying amount of the underlying asset or liability when
the hedged transaction occurs. Any gains or losses that result when the
designated item is extinguished, such as maturity, sale, or termination, or
when the hedged transaction is no longer likely to occur, are included in
income in the period in which the extinguishment takes place or it is known
that the hedged anticipated transaction will not occur.
UNUM America had open interest rate futures contract at December 31, 1998,
with notional amounts of $111.0 million to hedge anticipated cash flows in
1999. These futures contracts had a related net unrealized loss of $0.3
million at December 31, 1998. UNUM America had no open derivative financial
instruments at December 31, 1997.
NOTE 13. 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, 1998. 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,
operating results or liquidity 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
was 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. On December 2, 1997, the United States Court of
Appeals affirmed the decision of the District Court denying UNUM America's
claim for refund. UNUM America filed a petition requesting that the United
States Supreme Court review the decision of the United States Court of
Appeals, which was denied October 5, 1998; no further appeal is available.
NOTE 14. 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 the 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.
F-24
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
On December 31, 1997, UNUM America entered into a 100% indemnity coinsurance
agreement with UNUM International Limited ("UNUM International"), an
affiliated company organized under the laws of the Islands of Bermuda. Under
the agreement, UNUM America transferred group long term disability ("group
LTD") claim reserves to UNUM International with respect to disabilities which
occurred prior to December 31, 1992. UNUM America will continue to transfer
group LTD claim reserves to UNUM International each quarter with respect to
disabilities which occurred during the quarter ending nineteen quarters prior
to the ceding date. Either party may terminate this agreement as to risks not
yet ceded upon ninety days notice in writing to the other party. Claim
liabilities of $297.3 and $56.5 million were ceded to UNUM International under
this agreement at December 31, 1998, and 1997, respectively.
NOTE 15. SEGMENT INFORMATION
UNUM's America's three reportable operating segments include: Disability
Insurance, Special Risk Insurance, and Retirement Products. Each operating
segment represents a product grouping based on the similarity of the products
in such areas as risk-relief, economic characteristics, market potential and
the specific markets being targeted for these products. The Disability
Insurance segment includes disability products offered in North America, the
United Kingdom and Japan including: group long term disability, group short
term disability, long term care, individual disability and disability
reinsurance operations. The Special Risk Insurance segment includes group
life, accidental death and dismemberment, travel and voluntary accident
insurance, special risk reinsurance operations and other special risk
insurance products. The Retirement Products segment includes products no
longer actively marketed by UNUM America including: tax-sheltered annuities,
guaranteed investment contracts, deposit administration accounts, 401(k)
plans, individual life and group medical insurance. In addition, UNUM America
records transactions that are generally non-insurance related in Corporate.
UNUM America's markets for its insurance products are the United States and
its principal market, Canada. UNUM America and First UNUM Life Insurance
Company combined are the leading provider of group long term disability
insurance, its principal product, in the United States. Products are marketed
through sales personnel, independent contractors and brokers, and specialty
agents. UNUM targets sales of its disability products to executive,
administrative and management personnel, and other professionals such as
educators, consultants, health care providers, accountants and engineers.
UNUM America evaluates and allocates resources based on pretax operating
income, which is defined as income (loss) before income taxes exclusive of
realized investment gains (losses) and special items. Realized investment
gains (losses) are excluded from management's evaluation of segment
performance as management believes the volatility in gains and losses
associated with the selling of invested assets in the financial markets is not
representative of ongoing operations. Special items are excluded from
management's evaluation of segment performance as management considers them as
being not representative of ongoing operations and believes a discussion of
the results on a pretax operating income basis provides a better understanding
of the results of ongoing operations. The accounting policies of the operating
segments are the same as those described in Note 1, "Summary of Significant
Accounting Policies."
Investment income and net realized investment gains and losses 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.
F-25
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Summarized financial information for the three reportable operating segments
and Corporate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 1997 1996
-------- -------- --------
(Dollars in millions)
<S> <C> <C> <C>
Premiums:
Disability Insurance............................. $1,787.2 $1,523.4 $1,593.6
Special Risk Insurance........................... 919.3 775.7 680.7
Retirement Products.............................. 3.6 5.8 19.0
-------- -------- --------
Total premiums................................. $2,710.1 $2,304.9 $2,293.3
======== ======== ========
Investment Income:
Disability Insurance............................. $ 362.1 $ 369.3 $ 369.1
Special Risk Insurance........................... 64.0 59.1 49.6
Retirement Products.............................. 38.5 54.5 210.9
Corporate........................................ 2.1 3.9 8.9
-------- -------- --------
Total investment income........................ $ 466.7 $ 486.8 $ 638.5
======== ======== ========
Deferred acquisition cost amortization:
Disability Insurance............................. $ 54.3 $ 44.2 $ 78.5
Special Risk Insurance........................... 85.7 64.2 40.9
Retirement Products.............................. 0.0 0.1 0.0
-------- -------- --------
Total amortization............................. $ 140.0 $ 108.5 $ 119.4
======== ======== ========
Pretax operating Income (loss):
Disability Insurance............................. $ 296.4 $ 285.2 $ 277.5
Special Risk Insurance........................... 135.1 117.5 73.3
Retirement Products.............................. 2.4 4.7 16.4
Corporate........................................ 0.4 (0.7) (5.0)
-------- -------- --------
Total pretax operating income.................. 434.3 383.6 362.2
Taxes on pretax operating income................... 133.7 112.3 110.3
-------- -------- --------
Operating Income............................... 300.6 271.3 251.9
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
--------- -------- ---------
(Dollars in millions)
<S> <C> <C> <C>
Identifiable Assets:
Disability Insurance............................ $ 7,834.9 $6,927.5 $ 6,164.6
Special Risk Insurance.......................... 1,487.7 1,332.3 1,082.6
Retirement Products............................. 921.2 1,070.7 4,427.4
Corporate....................................... 355.3 169.1 275.4
Individual Participation Life & Annuity......... 370.9 367.3 354.0
--------- -------- ---------
Total Assets.................................. $10,970.0 $9,866.9 $12,304.0
========= ======== =========
</TABLE>
F-26
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Information concerning principal geographic areas is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997 1996
-------- -------- --------
(Dollars in millions)
<S> <C> <C> <C>
Geographic information on premiums:
United States..................................... $2,570.8 $2,201.1 $2,197.0
Foreign countries................................. 139.3 103.8 96.3
-------- -------- --------
Total premiums.................................. $2,710.1 $2,304.9 $2,293.3
======== ======== ========
</TABLE>
UNUM America's long-lived assets are not material to the total consolidated
assets and are not presented by geographic region.
The following is provided to reconcile certain financial information for the
reportable segment totals to consolidated totals and provide a description of
the reconciling items:
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1998 1997 1996
------ ------ ------
(Dollars in
millions)
<S> <C> <C> <C>
Deferred acquisition cost amortization:
Total amortization for reportable segments........... $140.0 $108.5 $119.4
Special item--deferred acquisition cost write-offs
(a)................................................. -- -- 11.7
------ ------ ------
Total consolidated amortization.................... $140.0 $108.5 $131.1
====== ====== ======
Income before income taxes:
Total pretax operating income for reportable segments
and Corporate....................................... $434.3 $383.6 $362.2
Realized investment gains (losses)................... 34.0 (1.5) 5.9
Special items:
Disability claims reserve increase (b)............. (54.9) -- --
TSA deferred gain recognition (c).................. -- 69.6 --
Reinsurance pool results (d)....................... -- (6.7) --
Individual disability reinsurance fees (e)......... -- -- (49.7)
Write-offs and future loss reserves (a)............ -- -- (37.5)
Merger and integration costs (f)................... -- -- (10.1)
------ ------ ------
Total consolidated income before income taxes...... $413.4 $445.0 $270.8
====== ====== ======
</TABLE>
As previously discussed, management's evaluation of segment performance
excludes realized investment gains (losses) and special items. The following
describes or references the special items that reconcile total segment amounts
to total consolidated amounts:
(a) See Note 7 "Business Restructuring and Other Charges." The $13.1 million
charge in the Disability Insurance segment included an $11.7 million
write-off of deferred acquisition costs. Additionally, $0.5 million of
direct costs, primarily relocation expenses, were recognized during fourth
quarter 1997.
(b) See Note 4 "Reserves."
(c) See Note 5 "Sale of Tax-Sheltered Annuity Business."
(d) See the Changes in Accounting Estimates section of Note 1 "Summary of
Significant Accounting Policies."
(e) See Note 6 "Reinsurance."
(f) During third quarter 1996, actions related to the merger of Commercial
Life into UNUM America resulted in a $10.1 million increase in operating
expenses for Corporate.
F-27
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 16. SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
(1) (2)
Future policy Amortization
Deferred benefits and (4) (5) Benefits to of deferred (5)
policy unpaid claims (3) Net policyholders policy Other (6)
acquisition and claim Premium investment and interest acquisition operating Premiums
Segment costs expenses revenue income credited costs expenses written
- ------- ----------- ------------- -------- ---------- ------------- ------------ --------- --------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1998
Disability Insurance....... $577.8 $5,399.0 $1,823.6 $394.7 $1,469.1 $ 54.3 $422.6 $1,787.3
Special Risk Insurance..... 185.2 751.9 921.5 65.8 650.6 $ 85.7 108.6 924.1
Retirement Products........ -- 621.3 24.8 38.1 48.7 -- 14.6 0.8
Corporate.................. -- -- -- 2.1 -- -- 1.8 --
------ -------- -------- ------ -------- ------ ------ --------
Total.................... $763.0 $6,772.2 $2,769.9 $500.7 $2,168.4 $140.0 $547.6 $2,712.2
====== ======== ======== ====== ======== ====== ====== ========
Year Ended December 31, 1997
Disability Insurance....... $469.0 $4,834.4 $1,583.2 $368.3 $1,248.7 $ 44.2 $401.0 $1,525.6
Special Risk Insurance..... 147.8 706.9 780.5 60.4 552.0 64.2 108.6 782.7
Retirement Products........ 0.0 609.6 126.1 53.4 101.1 0.1 5.6 6.1
Corporate.................. -- -- -- 3.2 -- -- 5.7 --
------ -------- -------- ------ -------- ------ ------ --------
Total.................... $616.8 $6,150.9 $2,489.8 $485.3 $1,901.8 $108.5 $520.9 $2,314.4
====== ======== ======== ====== ======== ====== ====== ========
Year Ended December 31, 1996
Disability Insurance....... $396.0 $4,414.1 $1,637.4 $370.8 $1,257.4 $ 90.2 $465.1 $1,596.1
Special Risk Insurance..... 119.0 588.7 682.3 50.0 484.6 40.9 129.0 214.0
Retirement Products........ 0.9 613.0 64.0 213.8 251.7 -- 24.6 14.9
Corporate.................. -- -- -- 9.8 -- -- 13.8 --
------ -------- -------- ------ -------- ------ ------ --------
Total.................... $515.9 $5,615.8 $2,383.7 $644.4 $1,993.7 $131.1 $632.5 $1,825.0
====== ======== ======== ====== ======== ====== ====== ========
</TABLE>
- --------
(1) Excludes other policyholder funds, as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ --------
(Dollars in millions)
<S> <C> <C> <C>
Segment:
Disability Insurance................................... $ 5.7 $ 2.0 $ 5.7
Special Risk Insurance................................. 11.8 12.0 10.9
Retirement Products.................................... 541.3 700.3 3,285.5
------ ------ --------
Total................................................ $558.8 $714.3 $3,302.1
====== ====== ========
</TABLE>
(2) Includes unearned premiums, other policy claims and benefits payable.
(3) Includes fees and other income (expenses).
(4) Includes investment income (expense) and net realized investment gains
(losses).
(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-28
<PAGE>
UNUM LIFE INSURANCE COMPANY OF AMERICA
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 17. PROPOSED MERGER WITH PROVIDENT (UNAUDITED)
On November 22, 1998, UNUM entered into an agreement with Provident, pursuant
to which UNUM and Provident will merge under the name UNUMProvident. Under the
merger agreement, each outstanding share of Provident common stock will be
reclassified and converted into 0.73 of a share of UNUMProvident common stock
and each outstanding share of UNUM common stock will be converted into one
share of UNUMProvident common stock. The merger will be accounted for as a
pooling of interests. The merger is subject to regulatory and UNUM stockholder
and Provident stockholder approval.
On the date the merger is completed or on an earlier date if required by
generally accepted accounting principles, UNUMProvident will record an expense
for merger related costs of approximately $210 million ($148 million net of
income taxes). These costs include amounts for severance and related costs,
early retirement, exit costs for duplicate facilities and asset impairments,
and merger related costs such as investment banker, legal and accountant fees.
The estimated merger related expenses represent management's best estimates
based on available information at this time. Actual charges may differ from
these estimates.
UNUM Corporation and Provident are in the process of reviewing their
accounting policies and financial statement classifications. One aspect of
this preliminary review has indicated that UNUM's process and assumptions used
to calculate the discount rate for claim reserves of certain disability
businesses differs from that used by Provident. It has been determined that
Provident's process and assumptions are more appropriate in the context of a
combined entity. Upon completion of the merger, UNUM America will reduce the
rates used to discount unpaid claims-reserves for long term disability and
individual disability. The preliminary estimates of discount rate reductions
will result in an estimated increase to UNUM America's unpaid claims reserve
upon consummation of the merger of approximately $179.2 million ($116.5
million after tax).
F-29
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial statements and Exhibits
(a) The following financial statements are included in Part B:
Financial Statements of Registrant - VA-I Separate Account of UNUM Life
Insurance Company of America.
Audited statement of assets and liabilities as of December 31, 1998
and statement of operations and changes in net assets for the two
years ended December 31, 1998.
Financial Statements of Depositor - UNUM Life Insurance Company of America.
Audited balance sheets as of December 31, 1998 and 1997 and audited
statements of income, stockholder's equity, cash flows and
comprehensive income for each of the three years in the period ended
December 31, 1998.
(b) Exhibits
1(a) Resolution adopted by the Board of Directors of UNUM Life Insurance
Company on July 8, 1988 establishing the TSAVA Separate Account of
UNUM Life Insurance Company is incorporated herein by reference to
Post-effective Amendment No. 10 on Form N-4 filed by VA-I Separate
Account of UNUM Life Insurance Company of America on May 1, 1998
(File No. 33-47786).
1(b) Resolution adopted by the Board of Directors of UNUM Life Insurance
Company on February 7, 1991 changing the name and broadening the scope
of the VA-I Separate Account is incorporated herein by reference to
Post-effective Amendment No. 10 on Form N-4 filed by VA-I Separate
Account of UNUM Life Insurance Company of America on May 1, 1998
(File No. 33-47786).
2. Not applicable.
3(a) Principal underwriting agreement between UNUM Life Insurance Company
of America and LNC Equity Sales Corporation is incorporated herein by
reference to Post-effective Amendment No. 9 on Form N-4 filed by VA-I
Separate Account of UNUM Life Insurance Company of America on April
30, 1997 (File No. 33-47786).
3(b) Form of broker-dealer sales agreement is incorporated herein by
reference to Post-effective Amendment No. 9 on Form N-4 filed by VA-I
Separate Account of UNUM Life Insurance Company of America on April
30, 1997 (File No. 33-47786).
4(a) Form of Group Annuity Contracts for UNUM Life Insurance Company of
America is incorporated by reference to Post-effective Amendment No. 8
on Form N-4 filed by VA-I Separate Account of UNUM Life Insurance
Company of America on May 1, 1998 (File No. 33-45851)
4(b) Form of Contract Rider providing for automatic assumption of
certain contracts by The Lincoln National Life Insurance Company is
incorporated herein by reference to Post-effective Amendment No. 6 on
Form N-4 filed by VA-I Separate Account of UNUM Life Insurance Company
of America on May 1, 1996 (File No. 33-45851).
5(a) Form of application for Group Annuity Contract is incorporated herein
by reference to Post-effective Amendment No. 10 on Form N-4 filed by
VA-I Separate Account of UNUM Life Insurance Company of America on
May 1, 1998 (File No. 33-47786).
5(b) Form of Participant enrollment form (including acknowledgement of
restrictions on redemption imposed by I.R.C. Section 403(b)) is
incorporated herein by reference to Post-effective Amendment No. 10 on
Form N-4 filed by VA-I Separate Account of UNUM Life Insurance Company
of America on May 1, 1998 (File No. 33-47786).
1
<PAGE>
6(a) Articles of incorporation of UNUM Life Insurance Company of America
(including Articles of Merger filed December 30, 1991, for merger of
UNUM Life Insurance Company and UNUM Pension and Insurance Company
into UNUM Life Insurance Company of America; and Articles of Merger
filed November 4, 1996, for merger of Commercial Life Insurance
Company into UNUM Life Insurance Company of America) are incorporated
herein by reference to Post-effective Amendment No. 10 on Form N-4
filed by VA-I Separate Account of UNUM Life Insurance Company of
America on May 1, 1998 (File No. 33-47786).
6(b) Bylaws of UNUM Life Insurance Company of America are incorporated
herein by reference to Post-effective Amendment No. 10 on Form N-4
filed by VA-I Separate Account of UNUM Life Insurance Company of
America on May 1, 1998 (File No. 33-47786).
6(c) Plan and Agreement of Merger of UNUM Life Insurance Company and UNUM
Pension and Insurance Company into UNUM Life Insurance Company dated
September 13, 1991, and certain supporting resolutions and consents of
directors and stockholders of UNUM Life Insurance Company and UNUM
Life Insurance Company of America are incorporated herein by reference
to Post-effective Amendment No. 10 on Form N-4 filed by VA-I Separate
Account of UNUM Life Insurance Company of America on May 1, 1998
(File No. 33-47786).
7(a) Assumption Reinsurance Agreement by and between UNUM Life
Insurance Company of America and The Lincoln National Life Insurance
Company is incorporated herein by reference to Post-effective
Amendment No. 9 on Form N-4 filed by VA-I Separate Account of UNUM
Life Insurance Company of America on April 30, 1997 (File No. 33-
47786).
7(b) Assumption Reinsurance Agreement by and between UNUM Life Insurance
Company of America and Lincoln Life & Annuity Company of New York is
incorporated herein by reference to Post-effective Amendment No. 9 on
Form N-4 filed by VA-I Separate Account of UNUM Life Insurance Company
of America on April 30, 1997 (File No. 33-47786).
7(c) Coinsurance and Assumption Agreement by and between UNUM Life
Insurance Company of America and The Lincoln National Life Insurance
Company is incorporated herein by reference to Post-effective
Amendment No. 9 on Form N-4 filed by VA-I Separate Account of UNUM
Life Insurance Company of America on April 30, 1997 (File No. 33-
47786).
7(d) Indemnity Reinsurance Agreement by and between UNUM Life
Insurance Company of America and The Lincoln National Life Insurance
Company is incorporated herein by reference to Post-effective
Amendment No. 9 on Form N-4 filed by VA-I Separate Account of UNUM
Life Insurance Company of America on April 30, 1997 (File No. 33-
47786).
7(e) Indemnity Reinsurance Agreement by and between UNUM Life Insurance
Company of America and Lincoln Life & Annuity Company of New
York is incorporated herein by reference to Post-effective
Amendment No. 9 on Form N-4 filed by VA-I Separate Account of UNUM
Life Insurance Company of America on April 30, 1997 (File No.
33-47786).
8(a) Participation Agreement between UNUM Life Insurance Company and
Dreyfus Life & Annuity Index Fund, Inc. is incorporated herein by
reference to Post-effective Amendment No. 10 on Form N-4 filed by VA-I
Separate Account of UNUM Life Insurance Company of America on May 1,
1998 (File No. 33-47786).
8(b) Participation Agreement between UNUM Life Insurance Company and
Variable Insurance Products Fund I and Fidelity Distributors
Corporation is incorporated herein by reference to Post-effective
Amendment No. 10 on Form N-4 filed by VA-I Separate Account of UNUM
Life Insurance Company of America on May 1, 1998 (File No. 33-47786).
8(c) Participation Agreement between UNUM Life Insurance Company and
Variable Insurance Products Fund II and Fidelity Distributors
Corporation is incorporated herein by reference to Post-effective
Amendment No. 10 on Form N-4 filed by VA-I Separate Account of UNUM
Life Insurance Company of America on May 1, 1998 (File No. 33-47786).
8(d) Participation Agreement between UNUM Life Insurance Company and
Twentieth Century Management Company is incorporated herein by
reference to Post-effective Amendment No. 10 on Form N-4 filed by VA-I
Separate Account of UNUM Life Insurance Company of America on May 1,
1998 (File No. 33-47786).
8(e) Participation Agreement between UNUM Life Insurance Company of
America and Dreyfus Variable Investment Fund and Dreyfus Corporation
is incorporated herein by reference to Post-effective Amendment No. 10
on Form N-4 filed by VA-I Separate Account of UNUM Life Insurance
Company of America on May 1, 1998 (File No. 33-47786).
8(f) Participation Agreement between UNUM Life Insurance Company of America
and Acacia Capital Corporation is incorporated herein by reference to
Post-effective Amendment No. 10 on Form N-4 filed by VA-I Separate
Account of UNUM Life Insurance Company of America on May 1, 1998
(File No. 33-47786).
8(g) Participation Agreement between UNUM Life Insurance Company of America
and T. Rowe Price is incorporated herein by reference to Post-
effective Amendment No. 10 on Form N-4 filed by VA-I Separate Account
of UNUM Life Insurance Company of America on May 1, 1998 (File No.
33-47786).
8(i) Administrative Services Agreement by and between UNUM Life
Insurance Company of America and The Lincoln National Life Insurance
Company is incorporated herein by reference to Post-effective
Amendment No. 9 on Form N-4 filed by VA-I Separate Account of UNUM
Life Insurance Company of America on April 30, 1997 (File No. 33-
47786).
9. Consent and opinion of Kevin J. Tierney, General Counsel of UNUM Life
Insurance Company of America, as to the legality of the securities
being registered is incorporated herein by reference to Post-effective
Amendment No. 6 on Form N-4 filed by VA-I Separate Account of UNUM
Life Insurance Company of America on May 1, 1996 (File No. 33-45851).
10(a) Consent of PricewaterhouseCoopers LLP, Independent Accountants.
10(b) Powers of Attorney for Kevin P. O'Connell and Robert W. Crispin are
incorporated herein by reference to Amendment No. 27 to the
registration statement of the VA-I Separate Account of UNUM Life
Insurance Company on Form N-4 (File No. 33-47786), filed on May 1,
1996.
10(c) Powers of Attorney for Thomas G. Brown, Diane M. Garofalo, Peter J.
Moynihan, James F. Orr III, Elaine D. Rosen, and Eileen C. Farrar are
incorporated herein by reference to Post-effective Amendment No. 10 on
Form N-4 filed by VA-I Separate Account of UNUM Life Insurance Company
of America on May 1, 1998 (File No. 33-47786).
2
<PAGE>
11. No financial statements are omitted from Item 23.
12. Not Applicable.
13(a) Schedule for computation of Performance Quotations is incorporated
herein by reference to Amendment No. 8 filed by Lincoln National
Variable Annuity Account L of The Lincoln National Life Insurance
Company on April 30, 1997 (File No. 333-05815).
13(b) Supplement to Schedule for Computation of Performance Quotations is
incorporated by reference to Post-effective Amendment No. 8 on Form
N-4 filed by VA-I Separate Account of UNUM Life Insurance Company of
America on May 1, 1998 (File No. 33-45801).
14. Not Applicable.
15(b) Books and Records
3
<PAGE>
Item 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The following list contains the officers and directors of UNUM Life Insurance
Company of America who are engaged directly or indirectly in activities relating
to the VA-I Separate Account as well as the Contracts. The list also shows UNUM
Life Insurance Company of America's executive officers.
Name and Address Positions and Offices with UNUM/America
James F. Orr III* Chairman of the Board of Directors
Chief Executive Officer
Elaine D. Rosen* Director and President
Robert W. Crispin* Director and Executive Vice President
Kevin P. O'Connell* Director and Executive Vice President
Eileen C. Farrar* Director and Senior Vice President
Peter J. Moynihan* Director and Senior Vice President
Diane M. Garofalo* Senior Vice President
Nicholas J. Desiderio* Vice President and Chief Financial Officer
Kevin J. Tierney* Director, Senior Vice President,
General Counsel and Secretary
* Principal business address of each person is 2211 Congress Street,
Portland, Maine 04122.
Item 26. Persons Controlled by or Under Common Control with UNUM Life Insurance
Company of America ("UNUM/America") or the VA-I Separate Account
The VA-I Separate Account is a separate account of UNUM/America and may be
deemed to be controlled by UNUM/America although UNUM/America will follow voting
instructions of Contractholders with respect to voting on certain important
matters requiring a vote of Contractholders.
4
<PAGE>
The following chart indicates the persons controlled by or under common control
with UNUM/America and the VA-I Separate Account:
<TABLE>
<CAPTION>
Federal I.D.# Company NAIC#
<C> <S> <C>
01-0405657 UNUM Corporation
01-0285069 UNUM Holding Company
01-0278678 UNUM Life Insurance Company of America, ME 62235
01-0490889 UA Holdings 1994-1
01-0490891 UA Holdings 1994-3
95-4526249 SP Administrator, LLC
13-1898173 First UNUM Life Insurance Company, NY 64297
01-0495196 NY Holdings 1994-1
01-0495197 NY Holdings 1994-2
01-0495198 NY Holdings 1994-3
01-0495199 NY Holdings 1994-4
01-0285776 UNUM Sales Corporation
01-0284946 Claims Service International, Inc.
01-0285617 UNUM Development Corporation
UNUM International Underwriters Inc.
UNUM European Holding Company Limited
UNUM General Company Limited
UNUM Management Company Limited
UNUM Limited
Claims Service International Limited
AA-1120014 Open Door VAC Limited
Mindtask Limited
13-2588770 Duncanson & Holt, Inc.
01-0358803 Duncanson & Holt Services, Inc.
91-1306242 Group Management Services, Inc.
Duncanson & Holt Administrative Services, Inc.
Duncanson & Holt Europe Ltd.
Duncanson & Holt Underwriters Ltd.
Duncanson & Holt Agencies, Ltd.
Duncanson & Holt Syndicate Management Ltd.
LRG Services Limited
Trafalgar Underwriting Agencies Ltd.
Duncanson & Holt Canada Ltd.
TRI-CAN Reinsurance Inc.
Duncanson & Holt Asia PTE Ltd.
01-0477936 Colonial Companies, Inc.
57-0144607 Colonial Life & Accident Insurance Company, SC 62049
01-0491221 CLA Holdings 1994-1
01-0491220 CLA Holdings 1994-2
57-0856575 BenefitAmerica, Inc.
UNUM Japan Accident Insurance Company Limited
Duncanson & Holt (Bermuda) Ltd.
UNUM International Ltd.
13-3178143 Continental National Life Insurance Company, DE 61026
13-3178146 Continental International Life Insurance Company, DE 61000
Boston Compania Argentina de Seguros S.A.
52-2060453 UNUM Partners, L.P.
52-2060461 UNUM Finance Company
52-2060465 UNUM Delaware Company
Options and Choices, Inc.
</TABLE>
5
<PAGE>
Item 27. Number of Contractholders
As of March 31, 1999, Registrant had 73 Contractholders.
Item 28. Indemnification
Under the Participation Agreements entered into between UNUM/America and the
Dreyfus Life & Annuity Index Fund, Inc., Dreyfus Variable Investment Fund and
Dreyfus Corporation, Variable Insurance Products Funds I and II and Fidelity
Distributors Corporation, Twentieth Century Management Company, Acacia Capital
Corporation, and T. Rowe Price (the "Funds"), UNUM/America and its directors,
officers, employees, agents and control persons have been indemnified by the
Fund against any losses, claims or liabilities that arise out of any untrue
statement or alleged untrue statement or omission of a material fact in the
Funds' registration statements, prospectuses or sales literature. In addition,
the Funds will indemnify UNUM/America against any liability, loss, damages,
costs or expenses which UNUM/America may incur as a result of the Funds'
incorrect calculations, incorrect reporting and/or untimely reporting of the
Funds' net asset values, dividend rates or capital gain distribution rates.
UNUM/America's by-laws provide that UNUM/America "may indemnify any person made
or threatened to be made a party of any action or proceeding, including an
action by or in the right of any other corporation of any type or kind, domestic
or foreign, which any director, officer or employee of the Corporation served in
any capacity at the request of the Corporation, by reason of the fact that he,
his testator or intestate, was a director, officer or employee of the
Corporation or served such other corporation in any capacity, against judgments,
fines, amounts paid in settlement and reasonable expenses, including attorneys'
fees, actually and necessarily incurred as a result of such action or
proceeding, or any appeal therein, if such director, officer, or employee acted,
in good faith, for a purpose which he or she reasonably believed to be in the
best interests of the corporation."
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
Item 29. Principal Underwriter
(a) Lincoln Financial Advisors Corporation also acts as the principal
underwriter for the VA-I Separate Account of First UNUM Life Insurance
Company, Lincoln National Variable Annuity Account L, and Lincoln Life
& Annuity Variable Annuity Account L.
6
<PAGE>
(b)(1) The following table sets forth certain information regarding the
officers and directors of Lincoln Financial Advisors Corporation.
POSITIONS AND OFFICERS
WITH LINCOLN FINANCIAL ADVISORS
NAME AND ADDRESS CORPORATION
- ---------------- --------------------------------
J. Michael Hemp***** President and Director
Priscilla S. Brown* Vice President
John M. Behrendt* Vice President and Director
Richard C. Boyles*** Chief Financial Officer and
Administrative Officer
Carolyn P. Brody* Vice President and Director
Gary D. Giller**** Director
Janet C. Chrzan Vice President and Treasurer
Cynthia A. Rose** Secretary
Michael McMath***** Senior Vice President
Todd R. Stephenson*** Senior Vice President
* Principal business address of each person is 1300 S. Clinton
Street, Fort Wayne, Indiana 46802-2706.
** Principal business address of each person is 200 East Berry Street,
Fort Wayne, Indiana 46802-2706.
*** Principal business address of each person is 3811 Illinois Road,
Suite 205, Fort Wayne, Indiana 46804-1202.
**** 7650 Rivers Edge Dr., Suite 250, Columbus, Oh 43235.
***** 350 Church Street, Hartford, CT 06103.
<TABLE>
<CAPTION>
Name of Principal Net Underwriting Compensation on Brokerage Compensation
Underwriter Discounts and Redemption Commissions
Commissions
<S> <C> <C> <C> <C>
Lincoln Financial Advisors $0 N/A N/A N/A
Corporation
</TABLE>
Item 30. Location of Accounts and Records
Exhibit 15(b) is hereby expressly incorporated herein by this reference.
Item 31. Management Services
None
7
<PAGE>
Item 32. Undertakings and Representations
The Registrant hereby undertakes:
(a) to file a post-effective amendment to this registration statement as
frequently as is necessary to ensure that the audited financial statements
in this registration statement are never more than 16 months old for so long
as payments under the variable annuity contracts may be accepted, unless
otherwise permitted.
(b) to include either (1) as part of any application to purchase a contract
offered by the prospectus, a space that an applicant can check to request a
Statement of Additional Information, or (2) a post card or similar written
communication affixed to or included in the prospectus that the applicant
can remove to send for a Statement of Additional Information.
(c) to deliver any Statement of Additional Information and any financial
statements required to be made available under this Form promptly upon
written or oral request.
(d) The Registrant intends to rely on the no-action response dated November 28,
1988, from Ms. Angela C. Goelzer of the Commission staff to the American
Council of Life Insurance concerning the redeemability of Section 403(b)
annuity contracts and the Registrant has complied with the provisions of
paragraphs (1)-(4) thereof.
(e) The Registrant intends to offer Contracts to Participants in the Texas
Optional Retirement Program. In connection with that offering, Rule 6c-7 of
the Investment Company Act of 1940 is being relied upon and paragraphs (a)-
(d) of that Section will be complied with.
(f) UNUM Life Insurance Company of America hereby represents that the fees and
charges deducted under the Contract, in the aggregate, are reasonable in
relation to the Services rendered, the expenses expected to be incurred, and
the risks assumed by UNUM Life Insurance Company of America.
8
<PAGE>
SIGNATURES
(a) As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this Amendment and has caused this Amendment to
the Registration Statement to be signed on its behalf, in the City of Portland,
and the State of Maine on this 29th day of April 1999.
VA-I Separate Account of
UNUM Life Insurance Company of America
(Registrant)
By: /s/ Elaine D. Rosen
----------------------
Elaine D. Rosen
President
UNUM Life Insurance Company of America
UMUM Life Insurance Company of America
(Depositor)
By: /s/Elaine D. Rosen
--------------------
Elaine D. Rosen
President
<PAGE>
(b) As required by the Securities Act of 1933, this Amendment to the
Registration Statement has been signed for the Depositors by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Elaine D. Rosen President & Director April 29, 1999
- ------------------------- (Principal Executive Officer)
Elaine D. Rosen
/s/ Nicholas J. Desiderio Vice President and April 29, 1999
- ------------------------- Chief Financial Officer
Nicholas J. Desiderio (Principal Financial Officer)
/s/ Denise P. Jewell Second Vice President April 29, 1999
- ------------------------- and Controller
Denise P. Jewell (Principal Accounting Officer)
* Director April 29, 1999
- -------------------------
James F. Orr III
* Director April 29, 1999
- -------------------------
Robert W. Crispin
* Director April 29, 1999
- -------------------------
Eileen C. Farrar
* Director April 29, 1999
- -------------------------
Peter J. Moynihan
* Director April 29, 1999
- -------------------------
Kevin P. O'Connell
/s/ Kevin J. Tierney Director April 29, 1999
- -------------------------
Kevin J. Tierney
*By: /s/ Kevin J. Tierney
- --------------------------
Kevin J. Tierney
Attorney-in-fact
</TABLE>
10
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Amendment No. 38 in the Registration Statement on
Form N-4 (File No. 33-45846) of our report dated April 12, 1999, on our audits
of the statement of assets and liabilities as of December 31, 1998, and the
related statements of operations and changes in net assets for each of the two
years in the period then ended of the VA-III Separate Account of UNUM Life
Insurance Company of America, and our report dated February 2, 1999, on our
audits of the financial statements as of and for the years ended December 31,
1998 and 1997 of UNUM Life Insurance Company of America. We also consent to the
reference to our Firm under the caption "Experts" in the Statement of Additional
Information.
/s/ PricewaterhouseCoopers LLP
Portland, Maine
April 28, 1999
<PAGE>
BOOKS AND RECORDS
VA-1 SEPARATE ACCOUNT OF UNUM LIFE INSURANCE COMPANY OF AMERICA
RULES UNDER SECTION 31 OF THE INVESTMENT COMPANY ACT OF 1940
Records to Be Maintained by Registered Investment Companies, Certain
Majority-Owned Subsidiaries Thereof, and Other Persons Having Transactions
with Registered Investment Companies.
Reg. 270.31a-1. (a) Every registered investment company, and every underwriter,
broker, dealer, or investment advisor which is a majority-owned subsidiary of
such a company, shall maintain and keep current the accounts, books, and other
documents relating to its business which constitute the record forming the basis
for financial statements required to be filed pursuant to Section 30 of the
Investment Company Act of 1940 and of the auditor's reports relating thereto.
<TABLE>
<CAPTION>
LN-Record Location Person to Contact Retention
- ------------------------- ----------------------------- ----------------- -----------------------------
<S> <C> <C> <C>
Annual Reports Finance Eric Jones Permanently, the first two
To Shareholders years in an easily accessible
place
Semi-Annual Finance Eric Jones Permanently, the first two
Reports years in an easily accessible
place
Form N-SAR Finance Eric Jones Permanently, the first two
years in an easily accessible
place
</TABLE>
(b) Every registered investment company shall maintain and keep current the
following books, accounts, and other documents:
Type of Record
- --------------
(1) Journals (or other records of original entry) containing an itemized daily
record in detail of all purchases and sales of securities (including sales and
redemptions of its own securities), all receipts and deliveries of securities
(including certificate numbers if such detail is not recorded by custodian or
transfer agent), all receipts and disbursements of cash and all other debits and
credits. Such records shall show for each such transaction the name and quantity
of securities, the unit and aggregate purchase or sale price, commission paid,
the market on which effected, the trade date, the settlement date, and the name
of the person through or from whom purchased or received or to whom sold or
delivered.
<PAGE>
<TABLE>
<CAPTION>
Purchases and Sales Journals
- -----------------------------
<S> <C> <C> <C>
Daily reports CSRM Kathleen Adamson Permanently, the first two
of securities (Portland) years in an easily accessible
transactions Finance Eric Jones place
Portfolio Securities
- --------------------
C-Port Purchase/ Finance Eric Jones Permanently, the first two
Sales Reports years in an easily accessible
place
</TABLE>
<PAGE>
LN-Record Location Person to Contact Retention
- ------------ --------- ------------------- ----------
Receipts and Deliveries of Securities (units)
- ---------------------------------------------
Not Applicable.
Portfolio Securities
- --------------------
Not Applicable.
Receipts and Disbursements of Cash and other Debits and Credits
- ---------------------------------------------------------------
Daily Journals CSRM Kathleen Adamson Permanently, the first
(Portland) two years in an easily
Finance Eric Jones accessible place
(2) General and auxiliary ledgers (or other record) reflecting all asset,
liability, reserve, capital, income and expense accounts, including:
(i) Separate ledger accounts (or other records) reflecting the
following:
(a) Securities in transfer;
(b) Securities in physical possession;
(c) Securities borrowed and securities loaned;
(d) Monies borrowed and monies loaned (together with a record of the
collateral therefore and substitutions in such collateral);
(e) Dividends and interest received;
(f) Dividends receivable and interest accrued.
Instructions. (a) and (b) shall be stated in terms of securities quantities
only; (c) and (d) shall be stated in dollar amounts and securities quantities as
appropriate; (e) and (f) shall be stated in dollar amounts only.
General Ledger
- --------------
LNL trial Finance Eric Jones Permanently, the first two
Balance (5000 series) years in an easily
accessible place
Securities in Transfer
- ----------------------
Not Applicable.
Securities in Physical Possession
- ---------------------------------
Not Applicable.
Securities Borrowed and Loaned
- ------------------------------
Not Applicable.
Monies Borrowed and Loaned
- --------------------------
<PAGE>
Not Applicable.
Dividends and Interest Received
- -------------------------------
LNL Trial Finance Eric Jones Permanently, the first
Balance two years in an easily
(5000 series) accessible place
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Dividends Receivable and Interest Accrued
- -----------------------------------------
LNL Trial Finance Eric Jones Permanently, the first
Balance two years in an easily
(5000 series) accessbile place
(ii) Separate ledger accounts (or other records) for each portfolio security,
showing (as of trade dates), (a) the quantity and unit and aggregate price for
each purchase, sale, receipt, and delivery of securities and commodities for
such accounts, and (b) all other debits and credits for such accounts.
Securities positions and money balances in such ledger accounts (or other
records) shall be brought forward periodically but not less frequently than at
the end of fiscal quarters. Any portfolio security, the salability of which is
conditioned, shall be so noted. A memorandum record shall be available setting
forth, with respect to each portfolio security accounts, the amount and
declaration, ex-dividend, and payment dates of each dividend declared thereon.
Ledger Account for each portfolio Security
- ------------------------------------------
Daily Report Finance Eric Jones Permanently, the first two
Of Securities years in an easily
Transactions accessible place
(Daily Trade File)
(iii) Separate ledger accounts (or other records) for each broker-dealer, bank
or other person with or through which transactions in portfolio securities are
affected, showing each purchase or sale of securities with or through such
persons, including details as to the date of the purchase or sale, the quantity
and unit and aggregate prices of such securities, and the commissions or other
compensation paid to such persons. Purchases or sales effected during the same
day at the same price may be aggregated.
Not Applicable.
(iv) Separate ledger accounts (or other records), which may be maintained by a
transfer agent or registrar, showing for each shareholder of record of the
investment company the number of shares of capital stock of the
<PAGE>
company held. In respect of share accumulation accounts (arising from periodic
investment plans, dividend reinvestment plans, deposit of issued shares by the
owner thereof, etc.), details shall be available as to the dates and number of
shares of each accumulation, and except with respect to already issued shares
deposited by the owner thereof, prices of each such accumulation.
Shareholder Accounts
- --------------------
Master file Finance Eric Jones Permanently, the first
Record (Daily CSRM (Portland) Kathleen Adamson two years in an easily
Trade File & Leg accessible place
Syst Client Rpt)
(3) A securities record or ledger reflecting separately for each portfolio
security as of trade date all "long" and "short" positions carried by the
investment company for its own account and showing the location of all
securities long and the off-setting position to all securities short. The record
called for by this paragraph shall not be required in circumstances under which
all portfolio securities are maintained by a bank or banks or a member or
members of a national securities exchange as custodian under a custody agreement
or as agent for such custodian.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Not Applicable
</TABLE>
(4) Corporate charters, certificates of incorporation or trust agreements, and
bylaws, and minute books of stockholders' and directors' or trustees' meetings;
and minute books of directors' or trustees' committee and advisory board or
advisory committee meetings.
<TABLE>
<CAPTION>
Corporate Documents
- -------------------
<S> <C> <C> <C>
Memorandum Legal Janet Lindenberg Permanently, the first
Establishing SA two years in an easily
accessible place
</TABLE>
(5) A record of each brokerage order given by or in behalf of the investment
company for, or in connection with, the purchase or sale of securities, whether
executed or unexecuted. Such record shall include the name of the broker, the
terms and conditions of the order and of any modification or cancellation
thereof, the time of entry or cancellation, the price at which executed, and the
time of receipt of report of execution. The record shall indicate the name of
the person who placed the order in behalf of the investment company.
<TABLE>
<CAPTION>
Order Tickets
- -------------
<S> <C> <C> <C>
UIT applica- CSRM (Portland) Kathleen Adamson Six years, the first
tions and Finance Eric Jones two years in an easily
daily reports accessible place
of securities
transactions
</TABLE>
(6) A record of all other portfolio purchase or sales showing details
comparable to those prescribed in paragraph 5 above.
Commercial Paper
- ----------------
Not Applicable.
(7) A record of all puts, calls, spreads, straddles, and other options in which
the investment company has any direct or indirect interest or which the
investment company has granted or guaranteed; and a record of any contractual
commitments to purchase, sell, receive or deliver securities or other property
(but not including open orders placed with broker-dealers for the purchase or
sale of securities, which may be cancelled by the company on notices without
penalty or cost of any kind); containing at least an identification of the
security, the number of units involved, the option price, the date of maturity,
the date of issuance, and the person to whom issued.
Record of Puts, Calls, Spreads, Etc.
- ------------------------------------
Not Applicable.
(8) A record of the proof of money balances in all ledger accounts (except
shareholder accounts), in the form of trial balances. Such trial balances shall
be prepared currently at least once a month.
<PAGE>
LN-Record Location Person to Contact Retention
- --------- -------- ----------------- ---------
Trial Balance
- -------------
LNL Trial Finance Eric Jones Permanently, the first
Balance (5000 two years in an easily
series) accessible place
(9) A record for each fiscal quarter, which shall be completed within 10 days
after the end of such quarter, showing specifically the basis or bases upon
which the allocation of orders for the purchase and sale of portfolio
securities to named brokers or dealers and the division of brokerage
commissions or other compensation on such purchase and sale orders among named
persons were made during such quarter. The record shall indicate the
consideration given to (a) sales of shares of the investment company by brokers
or dealers, (b) the supplying of services or benefits by brokers or dealers to
the investment company, its investment advisor or principal underwriter or any
persons affiliated therewith, and (c) any other considerations other than the
technical qualifications of the brokers and the dealers as such. The record
shall show the nature of their services or benefits made available, and shall
describe in detail the application of any general or specific formula or other
determinant used in arriving at such allocation of purchase and sales orders
and such division of brokerage commissions or other compensation. The record
shall also include the identifies of the person responsible for the
determination of such allocation and such division of brokerage commissions or
other compensation.
Not Applicable.
(10) A record in the form of an appropriate memorandum identifying the person or
persons, committees, or groups authorizing the purchase or sale of portfolio
securities. Where an authorization is made by a committee or group, a record
shall be kept in the names of its members who participated in the authorization.
There shall be retained a part of the record required by this paragraph any
memorandum, recommendation, or instruction supporting or authorizing the
purchase or sale of portfolio securities. The requirements of this paragraph
are applicable to the extent they are not met by compliance with the
requirements of paragraph 4 of this Rule 31a1(b).
Advisory Legal Janet Lindenberg Six years, the first
Agreements two years in an easily
accessible place
(11) Files of all advisory material received from the investment advisor, any
advisory board or advisory committee, or any other persons from whom the
investment company accepts investment advice publications distributed generally.
Not Applicable.
(12) The term "other records" as used in the expressions "journals (or other
records of original entry)" and "ledger accounts (or other records)" shall be
construed to include, where appropriate, copies of voucher checks,
confirmations, or similar documents which reflect the information required by
the applicable rule or rules in appropriate sequence and in permanent form,
including similar records developed by the use of automatic data processing
systems.
Correspondence CSRM (Portland) Kathleen Adamson Six years, the first
two years in an easily
accessible place
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
LN-Record Location Person to Contact Retention
- ------------------- ---------------------- ----------------- ------------------------------
Proxy State- CSRM (Portland) Kathleen Adamson Six years, the first two
ments and years in an easily accessible
Proxy Cards place
Pricing Sheets Finance Eric Jones Permanently, the first two
years in an easily accessible
place
Bank Statements Treasurers Rusty Summers Six years, the first two years
in an easily accessible place
</TABLE>
March 24, 1999
