<PAGE> 1
FINANCIAL STATEMENTS
PAINEWEBBER LIFE VARIABLE ANNUITY ACCOUNT
YEAR ENDED DECEMBER 31, 1998
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE> 2
PaineWebber Life Variable Annuity Account
Financial Statements
Year ended December 31, 1998
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors..................................... 1
Audited Financial Statements
Statement of Net Assets............................................ 2
Statement of Operations............................................ 5
Statements of Changes in Net Assets................................ 7
Notes to Financial Statements...................................... 9
</TABLE>
<PAGE> 3
[ERNST & YOUNG LLP LETTERHEAD]
Report of Independent Auditors
The Board of Directors
PaineWebber Life Insurance Company
We have audited the accompanying statement of net assets of PaineWebber Life
Variable Annuity Account as of December 31, 1998, the related statements of
operations for the year then ended and changes in net assets for each of the two
years in the period then ended. These financial statements are the
responsibility of the Account's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of mutual fund shares owned as of December 31, 1998, by
correspondence with the transfer agent. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PaineWebber Life Variable
Annuity Account at December 31, 1998, and the results of its operations for the
year then ended and the changes in its net assets for each of the two years in
the period then ended, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
-----------------------
Ernst & Young LLP
January 15, 1999
1
<PAGE> 4
<TABLE>
<CAPTION>
GLOBAL AGGRESSIVE GLOBAL
INCOME BALANCED GROWTH AND INCOME GROWTH GROWTH GROWTH
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
- --------------------- ------------------- ------------------- -------------------- -------------------- ------------------
<S> <C> <C> <C> <C> <C>
$ - $ - $ - $ - $ - $ -
- - - - - -
- - - - - -
8,527,068 - - - - -
- 19,862,546 - - - -
- - 15,413,856 - - -
- - - 21,257,689 - -
- - - - 18,695,596 -
- - - - - 11,617,184
- --------------------- ------------------- ------------------- -------------------- -------------------- ------------------
8,527,068 19,862,546 15,413,856 21,257,689 18,695,596 11,617,184
599,228 2,895,608 1,170,472 2,661,208 2,449,402 2,441,771
- --------------------- ------------------- ------------------- -------------------- -------------------- ------------------
$9,126,296 $22,758,154 $16,584,328 $23,918,897 $21,144,998 $14,058,955
===================== =================== =================== ==================== ==================== ==================
</TABLE>
3
<PAGE> 5
PaineWebber Life Variable Annuity Account
Statement of Net Assets (continued)
<TABLE>
<S> <C>
Net assets represented by:
CURRENTLY PAYABLE ANNUITY CONTRACTS
High Grade Fixed Income Division $ 2,292
Global Income Division 3,096
Balanced Division 23,375
Growth Division 9,059
Aggressive Growth Division 3,638
Global Growth Division 11,611
----------------------
53,071
</TABLE>
<TABLE>
<CAPTION>
CONTRACTS IN ACCUMULATION PERIOD
UNITS VALUE
------------------- ------------
<S> <C> <C> <C>
CONTRACTS SOLD SUBJECT TO EARLY WITHDRAWAL CHARGES
Money Market Division 592,229 $11.49 6,804,014
Strategic Fixed Income Division 461,643 12.89 5,952,826
High Grade Fixed Income Division 603,310 11.20 6,757,567
Global Income Division 683,793 12.39 8,475,083
Balanced Division 1,179,356 18.07 21,307,599
Growth and Income Division 724,840 21.39 15,501,558
Growth Division 1,185,203 19.41 23,009,015
Aggressive Growth Division 1,029,157 18.77 19,317,819
Global Growth Division 989,193 12.95 12,813,964
----------------------
119,939,445
CONTRACTS SOLD NOT SUBJECT TO EARLY WITHDRAWAL CHARGES
Money Market Division 28,901 11.38 328,898
Strategic Fixed Income Division 43,854 12.80 561,355
High Grade Fixed Income Division 57,914 11.10 642,974
Global Income Division 53,566 12.10 648,117
Balanced Division 79,318 17.99 1,427,180
Growth and Income Division 49,682 21.79 1,082,770
Growth Division 47,160 19.10 900,823
Aggressive Growth Division 98,014 18.60 1,823,541
Global Growth Division 104,983 11.75 1,233,380
----------------------
8,649,038
----------------------
$128,641,554
======================
</TABLE>
See accompanying notes.
4
<PAGE> 6
<TABLE>
<CAPTION>
GLOBAL AGGRESSIVE GLOBAL
HIGH GRADE FIXED INCOME BALANCED GROWTH AND GROWTH GROWTH GROWTH
INCOME DIVISION DIVISION DIVISION INCOME DIVISION DIVISION DIVISION DIVISION
- ------------------- ---------------- ------------------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
$416,693 $471,281 $ 466,389 $ 68,577 $ - $ - $ -
139,523 139,150 2,429,219 1,101,895 2,777,285 2,449,402 2,441,772
- ------------------- ---------------- ------------------ ------------------ ------------------ ------------------ ------------------
556,216 610,431 2,895,608 1,170,472 2,777,285 2,449,402 2,441,772
(123,708) (153,258) (373,719) (259,784) (362,304) (347,545) (233,598)
(18,542) (23,643) (86,328) (22,275) (49,336) (67,294) (45,345)
- ------------------- ---------------- ------------------ ------------------ ------------------ ------------------ ------------------
(142,250) (176,901) (460,047) (282,059) (411,640) (414,839) (278,943)
- ------------------- ---------------- ------------------ ------------------ ------------------ ------------------ ------------------
413,966 433,530 2,435,561 888,413 2,365,645 2,034,563 2,162,829
84,032 (50,318) 471,298 727,712 148,153 1,288,817 543,986
(137,347) 317,372 197,232 417,885 3,249,216 (489,190) (967,887)
- ------------------- ---------------- ------------------ ------------------ ------------------ ------------------ ------------------
$360,651 $700,584 $3,104,091 $2,034,010 $5,763,014 $2,834,190 $1,738,928
=================== ================ ================== ================== ================== ================== ==================
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
HIGH GRADE FIXED GLOBAL AGGRESSIVE GLOBAL
INCOME INCOME BALANCED GROWTH AND GROWTH GROWTH GROWTH
DIVISION DIVISION DIVISION INCOME DIVISION DIVISION DIVISION DIVISION
- ------------------ ----------------- ------------------ ---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
$8,476,242 $12,522,379 $21,041,165 $ 9,505,092 $23,020,219 $20,750,779 $16,580,458
282,843 410,416 3,587,277 2,030,787 4,897,147 2,997,484 (205,280)
34,026 (98,445) 412,193 368,963 235,507 1,221,361 195,247
153,470 (168,651) 524,925 750,086 (2,174,005) (671,349) 899,735
- ------------------ ----------------- ------------------ ---------------- ----------------- ----------------- -----------------
470,339 143,320 4,524,395 3,149,836 2,958,649 3,547,496 889,702
193,667 25,993 10,652 151,691 75,798 978,012 64,627
(1,288,374) (1,447,784) (2,036,631) (1,129,113) (1,557,430) (2,205,439) (1,724,575)
(116,790) (1,150,609) (199,768) 2,619,639 (1,044,504) (654,553) (479,632)
(125) (642) (1,266) - (1,001) (127) (1,995)
- ------------------ ----------------- ------------------ ---------------- ----------------- ----------------- -----------------
(1,211,622) (2,573,042) (2,227,013) 1,642,217 (2,527,137) (1,882,107) (2,141,575)
- ------------------ ----------------- ------------------ ---------------- ----------------- ----------------- -----------------
(741,283) (2,429,722) 2,297,382 4,792,053 431,512 1,665,389 (1,251,873)
- ------------------ ----------------- ------------------ ---------------- ----------------- ----------------- -----------------
7,734,959 10,092,657 23,338,547 14,297,145 23,451,731 22,416,168 15,328,585
413,966 433,530 2,435,561 888,413 2,365,645 2,034,563 2,162,829
84,032 (50,318) 471,298 727,712 148,153 1,288,817 543,986
(137,347) 317,372 197,232 417,885 3,249,216 (489,190) (967,887)
- ------------------ ----------------- ------------------ ---------------- ----------------- ----------------- -----------------
360,651 700,584 3,104,091 2,034,010 5,763,014 2,834,190 1,738,928
80,833 52,258 318,208 512,067 105,883 470,334 339,068
(951,624) (1,010,394) (4,352,343) (2,353,018) (4,693,479) (2,692,313) (2,094,276)
178,182 (707,998) 351,613 2,094,124 (706,828) (1,883,142) (1,250,720)
(168) (811) (1,962) - (1,424) (239) (2,630)
- ------------------ ----------------- ------------------ ---------------- ----------------- ----------------- -----------------
(692,777) (1,666,945) (3,684,484) 253,173 (5,295,848) (4,105,360) (3,008,558)
- ------------------ ----------------- ------------------ ---------------- ----------------- ----------------- -----------------
(332,126) (966,361) (580,393) 2,287,183 467,166 (1,271,170) (1,269,630)
- ------------------ ----------------- ------------------ ---------------- ----------------- ----------------- -----------------
$7,402,833 $ 9,126,296 $22,758,154 $16,584,328 $23,918,897 $21,144,998 $14,058,955
================== ================= ================== ================ ================= ================= =================
</TABLE>
8
<PAGE> 8
PaineWebber Life Variable Annuity Account
Notes to Financial Statements
December 31, 1998
1. INVESTMENT AND ACCOUNTING POLICIES
ORGANIZATION
PaineWebber Life Variable Annuity Account (the "Account") was organized by
PaineWebber Life Insurance Company (the "Company") in accordance with the
provisions of California Insurance laws and is a part of the total operations of
the Company. The Company is a wholly-owned subsidiary of PaineWebber Life
Holdings, Inc., which is a wholly-owned subsidiary of PaineWebber Group, Inc.
(the "Parent"). The assets and liabilities of the Account are clearly identified
and distinguished from the other assets and liabilities of the Company. The
Account invests solely in specified portfolios of Mitchell Hutchins Series Trust
(the "Series Trust"), an open-end management investment company under the
Investment Company Act of 1940, as directed by eligible contract owners.
Effective November 19, 1997, the name of the Series Trust was changed from
PaineWebber Series Trust to Mitchell Hutchins Series Trust by approval of the
Series Trust's board of trustees. The Fund receives investment advisory and
administrative services from Mitchell Hutchins Asset Management Inc. ("MHAM"),
an indirectly wholly-owned subsidiary of the Parent, and is charged fees
pursuant to an advisory and administration contract between the Fund and MHAM
which has been approved by the Fund's board of trustees. All series of shares
are diversified except Global Income Portfolio and Strategic Fixed Income
Portfolio.
The Company has elected to terminate sales efforts of the Account. As a result,
the Account is no longer available to new contract owners. Existing contract
owners may continue to allocate purchase payments to, or transfers into, the
Account.
INVESTMENT OPERATIONS
Investments are stated at the closing net asset values per share on December 31,
1998.
The average cost method is used to determine realized gains and losses.
Dividends are taken into income on an accrual basis as of the ex-dividend date.
ANNUITY RESERVES
Currently payable annuity contract reserves are computed according to the
Individual Annuity Valuation 1983 Table using an assumed interest rate of 4.0%.
If the amount paid to the contractholder is less than originally estimated,
charges paid for mortality and expense risks are reimbursed to the Company. If
additional amounts are required, the Company reimburses the Account.
USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
accompanying notes. Such estimates and assumptions could change in the future as
more information becomes known, which could impact the amounts reported and
disclosed herein.
9
<PAGE> 9
PaineWebber Life Variable Annuity Account
Notes to Financial Statements (continued)
2. EXPENSES
The Company is compensated for mortality, distribution and expense risks and
enhanced death benefits by a charge equivalent to an annual rate of 1.60% of the
asset value of each contract sold subject to early withdrawal charges and 1.77%
of the asset value of each contract sold not subject to early withdrawal
charges. These charges amounted to $2,066,133 in 1998.
An annual contract administration charge of $30 is deducted on the first
valuation date on or after each contract anniversary prior to the annuity date.
A transfer charge of $10 will be imposed on each transfer between divisions
(portfolios) of the account in excess of twelve in any one contract year.
However, the Company has waived this charge until further notice. A withdrawal
transaction charge of the lesser of $25 or 2% of the amount withdrawn will be
imposed on each withdrawal in excess of two per contract year. Contracts sold
subject to early withdrawal charges are assessed a charge equal to 5% of the
amount withdrawn for purchase payments made within a five year period following
the date the payment was received. Total administrative charges amounted to
$344,692 in 1998.
3. FEDERAL INCOME TAXES
Operations of the Account are a part of the operations of the Company. Under
current practice, no federal income taxes are allocated by the Company to the
operations of the Account.
4. PURCHASES AND SALES OF INVESTMENT SECURITIES
The aggregate cost of purchases and proceeds from sales of investments were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------------- -------------------------------------
PURCHASES SALES PURCHASES SALES
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Portfolio:
Money Market $ 5,885,259 $ 5,179,108 $ 4,085,703 $ 4,218,643
Strategic Fixed Income 1,028,899 875,168 1,298,010 1,107,294
High Grade Fixed Income 1,565,519 1,962,147 1,428,323 2,342,666
Global Income 760,010 1,963,145 1,094,551 3,084,815
Balanced 5,311,756 5,451,974 3,669,792 3,725,050
Growth and Income 6,830,190 4,608,410 4,563,931 1,723,925
Growth 7,139,611 7,423,939 4,743,713 4,005,130
Aggressive Growth 4,771,817 5,902,412 4,509,067 5,195,519
Global Growth 890,624 4,069,180 934,414 3,298,983
----------------- ----------------- ----------------- -----------------
$34,183,685 $37,435,483 $26,327,504 $28,702,025
================= ================= ================= =================
</TABLE>
10
<PAGE> 10
PaineWebber Life Variable Annuity Account
Notes to Financial Statements (continued)
5. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS
Transactions in units were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------------ ------------------------------------
PURCHASED REDEEMED PURCHASED REDEEMED
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
CONTRACTS SOLD SUBJECT TO EARLY WITHDRAWAL
CHARGE
Division:
Money Market 464,043 421,725 285,764 314,096
Strategic Fixed Income 50,083 59,852 71,027 66,466
High Grade Fixed Income 96,367 153,339 83,337 191,335
Global Income 7,989 130,404 24,085 242,210
Balanced 71,669 265,048 71,633 219,615
Growth and Income 212,562 199,835 186,833 80,436
Growth 93,584 411,616 78,448 251,911
Aggressive Growth 60,703 300,748 173,204 264,233
Global Growth 40,859 279,660 52,997 247,190
------------------ ----------------- ------------------ -----------------
1,097,859 2,222,227 1,027,328 1,877,492
================== ================= ================== =================
CONTRACTS SOLD NOT SUBJECT TO EARLY
WITHDRAWAL CHARGE
Division:
Money Market 31,016 27,755 61,096 61,502
Strategic Fixed Income 1,817 2,456 9,659 23,003
High Grade Fixed Income 7,906 15,669 12,960 26,072
Global Income 621 21,425 2,885 17,232
Balanced 9,912 40,281 2,467 16,485
Growth and Income 16,642 18,674 8,851 14,246
Growth 18,682 19,829 5,814 17,360
Aggressive Growth 17,353 5,451 20,348 65,772
Global Growth 28,248 27,899 25,232 16,414
------------------ ----------------- ------------------ -----------------
132,197 179,439 149,312 258,086
================== ================= ================== =================
</TABLE>
11
<PAGE> 11
PaineWebber Life Variable Annuity Account
Notes to Financial Statements (continued)
6. NET ASSETS
Net assets at December 31, 1998 consisted of the following:
<TABLE>
<CAPTION>
MONEY HIGH GRADE FIXED
MARKET STRATEGIC FIXED INCOME
COMBINED DIVISION INCOME DIVISION DIVISION
----------------------- -------------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
Unit transactions 74,406,594 6,554,646 4,953,850 5,910,381
Accumulated net invest-
ment income 48,198,892 578,266 1,712,730 1,576,622
Net unrealized appreciation
(depreciation) of investments 6,036,068 - (152,399) (84,170)
----------------------- -------------------- ------------------- ---------------------
128,641,554 7,132,912 6,514,181 7,402,833
======================= ==================== =================== =====================
</TABLE>
<TABLE>
<CAPTION>
GLOBAL
INCOME GROWTH AND INCOME
DIVISION BALANCED DIVISION DIVISION
--------------------- -------------------------- ---------------------
<S> <C> <C> <C>
Unit transactions 7,167,149 11,712,045 8,871,417
Accumulated net investment
income 2,295,196 10,420,989 5,635,522
Net unrealized appreciation
(depreciation) of investments (336,049) 625,120 2,077,389
--------------------- -------------------------- ---------------------
9,126,296 22,758,154 16,584,328
===================== ========================== =====================
</TABLE>
<TABLE>
<CAPTION>
AGGRESSIVE GLOBAL
GROWTH GROWTH GROWTH
DIVISION DIVISION DIVISION
--------------------- --------------------- ----------------------
<S> <C> <C> <C>
Unit transactions 8,705,664 8,924,651 11,606,791
Accumulated net investment
income 13,701,731 9,541,543 2,736,293
Net unrealized appreciation
(depreciation) of investments 1,511,502 2,678,804 (284,129)
--------------------- --------------------- ----------------------
23,918,897 21,144,998 14,058,955
===================== ===================== ======================
</TABLE>
12
<PAGE> 12
PaineWebber Life Variable Annuity Account
Notes to Financial Statements (continued)
7. YEAR 2000 (UNAUDITED)
The Company has performed an assessment of its direct and indirect exposures due
to the processing of the Year 2000 by information systems. Based on this
assessment, the Company developed a plan to modify its information technology to
be ready for the Year 2000 and began efforts to modify its systems in 1996. This
project is expected to be substantially completed early in 1999. While
additional testing will be conducted on its systems through the Year 2000, the
Company does not expect this project to have a significant effect on the
Account's operations. To mitigate the effect of outside influences and other
dependencies relative to the Year 2000, the Company has developed a process for
contacting significant customers, suppliers and other third parties to obtain an
understanding of their Year 2000 readiness efforts. To the extent these third
parties would be unable to transact business in the Year 2000 and thereafter,
the Account's operations could be adversely affected.
While the Company believes that it is addressing its Year 2000 concerns, it has
initiated a project to develop contingency/recovery plans to ensure the
continuity of critical business functions in the event of a disruption to
operations due to internal and external problems due to the Year 2000. This
project is expected to be substantially complete by July 1999. The Company
believes these contingency plans and existing disaster recovery plans will
reduce the impact Year 2000 issues may have on the Company.
13
<PAGE> 13
FINANCIAL STATEMENTS
PAINEWEBBER LIFE INSURANCE COMPANY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE> 14
PaineWebber Life Insurance Company
Financial Statements
Years ended December 31, 1998, 1997 and 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors....................................... 1
Audited Financial Statements
Balance Sheets....................................................... 2
Statements of Operations............................................. 3
Statements of Changes in Stockholder's Equity........................ 4
Statements of Cash Flows............................................. 5
Notes to Financial Statements........................................ 6
</TABLE>
<PAGE> 15
[ERNST & YOUNG LLP LETTERHEAD]
Report of Independent Auditors
The Board of Directors
PaineWebber Life Insurance Company
We have audited the accompanying balance sheets of PaineWebber Life Insurance
Company as of December 31, 1998 and 1997, and the related statements of
operations, changes in stockholder's equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PaineWebber Life Insurance
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.
/s/ ERNST & YOUNG LLP
--------------------------
Ernst & Young LLP
March 19, 1999
1
<PAGE> 16
PaineWebber Life Insurance Company
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Held to maturity, at amortized cost (market: 1998 -
$5,533,121; 1997 - $7,821,060) $ 5,450,208 $ 7,755,294
Available for sale, at market (amortized cost: 1998 -
$55,671; 1997 - $66,725) 59,400 70,515
Short-term investments 10,696,834 7,509,600
-------------------------------------
Total investments 16,206,442 15,335,409
Cash and cash equivalents 212,970 201,621
Accrued investment income 223,443 245,607
Deferred policy acquisition costs 61,769,920 48,688,814
Goodwill, less accumulated amortization (1998 -
$720,000; 1997 - $600,000) 480,000 600,000
Expense allowance receivable on reinsurance assumed - 331,291
Due from affiliate under tax allocation agreement 240,766 -
Other assets 163,678 39,857
Separate account assets 128,641,553 129,309,639
-------------------------------------
Total assets $207,938,772 $194,752,238
=====================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Net funds held on reinsurance assumed $ 32,128,624 $ 27,267,752
Expense allowance payable on reinsurance assumed 487,133 -
Deferred income taxes 5,418,448 2,364,036
Other liabilities 1,033,679 805,870
Separate account liabilities 128,641,553 129,309,639
-------------------------------------
Total liabilities 167,709,437 159,747,297
Commitments and contingencies (Note 8)
Stockholder's equity:
Common Stock, $100 par value - 25,000 shares
authorized, issued and outstanding 2,500,000 2,500,000
Additional paid-in capital 26,757,295 26,757,295
Accumulated other comprehensive income 2,424 2,464
Retained earnings 10,969,616 5,745,182
-------------------------------------
Total stockholder's equity 40,229,335 35,004,941
-------------------------------------
Total liabilities and stockholder's equity $207,938,772 $194,752,238
=====================================
</TABLE>
See accompanying notes.
2
<PAGE> 17
PaineWebber Life Insurance Company
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Annuity product charges $15,674,503 $11,922,506 $ 7,934,933
Investment income, net of related expenses 812,070 687,963 797,083
Realized loss on investments (795) (156) (346)
-------------------------------------------------------
Total revenues 16,485,778 12,610,313 8,731,670
Expenses:
Commissions 12,798,511 8,037,598 18,631,019
General expenses 8,503,368 5,526,993 4,575,441
Insurance taxes 106,904 78,188 319,353
Policy acquisition costs deferred (16,133,100) (8,482,896) (19,509,928)
Amortization of deferred policy
acquisition costs 3,051,994 2,376,746 1,532,285
Amortization of goodwill 120,000 120,000 120,000
-------------------------------------------------------
Total expenses 8,447,677 7,656,629 5,668,170
-------------------------------------------------------
Income before income taxes 8,038,101 4,953,684 3,063,500
Income tax expense (benefit):
Current (240,766) 50,000 -
Deferred 3,054,433 2,362,710 -
-------------------------------------------------------
2,813,667 2,412,710 -
-------------------------------------------------------
Net income $ 5,224,434 $ 2,540,974 $ 3,063,500
=======================================================
</TABLE>
See accompanying notes.
3
<PAGE> 18
PaineWebber Life Insurance Company
Statements of Changes in Stockholder's Equity
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE RETAINED STOCKHOLDER'S
STOCK CAPITAL INCOME EARNINGS EQUITY
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1996 $2,500,000 $26,757,295 $1,934 $ 140,708 $29,399,937
Comprehensive income:
Net income - - - 3,063,500 3,063,500
Change in net unrealized
appreciation of invest-
ments, net of tax - - 77 - 77
------------------
Total comprehensive income 3,063,577
----------------------------------------------------------------------------------
Balances at December 31, 1996 2,500,000 26,757,295 2,011 3,204,208 32,463,514
Comprehensive income:
Net income - - - 2,540,974 2,540,974
Change in net unrealized
appreciation investments,
net of tax - - 453 - 453
------------------
Total comprehensive income 2,541,427
----------------------------------------------------------------------------------
Balances at December 31, 1997 2,500,000 26,757,295 2,464 5,745,182 35,004,941
Comprehensive income:
Net income - - - 5,224,434 5,224,434
Change in net unrealized
appreciation of
investments, net of tax - - (40) - (40)
------------------
Total comprehensive income 5,224,394
----------------------------------------------------------------------------------
Balances at December 31, 1998 $2,500,000 $26,757,295 $2,424 $10,969,616 $40,229,335
==================================================================================
</TABLE>
See accompanying notes.
4
<PAGE> 19
PaineWebber Life Insurance Company
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,224,434 $2,540,974 $ 3,063,500
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of goodwill 120,000 120,000 120,000
Net amortization of fixed maturities (25,781) (46,082) 8,002
Deferral of policy acquisition costs (16,133,100) (8,482,896) (19,509,928)
Amortization of deferred acquisition costs 3,051,994 2,376,746 1,532,285
Change in expense allowance payable and net funds
held on reinsurance assumed 5,445,790 1,023,568 14,593,989
Payments to ceding companies on reinsurance assumed (1,346,268) (1,734,647) (5,585,066)
Payments received from ceding companies on reinsurance
assumed 1,579,774 2,939,412 907,224
Provision for deferred income taxes 3,054,433 2,362,710 -
Realized loss on investments 795 156 346
Changes in operating assets and liabilities, net of
reinsurance assumed:
Decrease (increase) in accrued investment income 22,164 (81,067) (93,794)
Increase in due from affiliate under tax allocation
agreement (240,766) - -
Decrease (increase) in other assets (123,821) 63,589 368,550
Decrease in policy and contract claims - - (384,312)
Increase in other liabilities 227,809 187,113 154,510
--------------------------------------------------
Net cash provided by (used in) operating activities 857,457 1,269,576 (4,824,694)
INVESTING ACTIVITIES
Proceeds from investments sold, matured or repaid:
Fixed maturities - held to maturity 6,235,000 1,360,000 2,160,000
Fixed maturities - available for sale 10,000 5,000 10,000
Short-term investments - net - - 10,307,954
--------------------------------------------------
6,245,000 1,365,000 12,477,954
Cost of investments acquired:
Fixed maturities - held to maturity (3,903,874) (1,368,226) (7,166,369)
Short-term investments - net (3,187,234) (1,558,391) -
--------------------------------------------------
(7,091,108) (2,926,617) (7,166,369)
--------------------------------------------------
Net cash provided by (used in) investing activities (846,108) (1,561,617) 5,311,585
--------------------------------------------------
Increase (decrease) in cash and cash equivalents 11,349 (292,041) 486,891
Cash and cash equivalents at beginning of year 201,621 493,662 6,771
--------------------------------------------------
Cash and cash equivalents at end of year $ 212,970 $ 201,621 $ 493,662
==================================================
</TABLE>
See accompanying notes.
5
<PAGE> 20
PaineWebber Life Insurance Company
Notes to Financial Statements
December 31, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
PaineWebber Life Insurance Company (the "Company") is a wholly-owned subsidiary
of PaineWebber Life Holdings, Inc., which is a wholly-owned subsidiary of
PaineWebber Group, Inc. (the Parent). The Company offers separate account
variable annuity products. These products are marketed through the Parent's
licensed brokers.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect amounts reported in the financial statements and accompanying notes. Such
estimates and assumptions could change in the future as more information becomes
known, which could impact the amounts reported and disclosed herein.
INVESTMENTS
Fixed maturity securities that the Company has the positive intent and ability
to hold to maturity are designated as "held to maturity". Held to maturity
securities are reported at cost adjusted for amortization of premiums and
discounts. Changes in the fair value of these securities, except for declines
that are other than temporary, are not reflected in the Company's financial
statements. Fixed maturity securities which may be sold are designated as
"available for sale". Available for sale securities are reported at fair value
and unrealized gains and losses on these securities are included directly in
stockholder's equity as accumulated other comprehensive income. Securities that
are determined to have a decline in value that is other than temporary are
written down to estimated fair value, which becomes the security's new cost
basis, by a charge to realized losses in the Company's statements of operations.
Premiums and discounts are amortized utilizing the interest method which results
in a constant yield over the securities' expected life. Realized gains and
losses are determined on the basis of specific identification of investments.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
GOODWILL
Goodwill includes the costs of various insurance licenses acquired in
conjunction with the purchase of the Company. These costs are being amortized on
a straight-line basis over 10 years.
6
<PAGE> 21
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED POLICY ACQUISITION COSTS
Commissions and other costs of acquiring new business which vary with and are
primarily related to the production of new business have been deferred. The
deferred costs are being amortized in relation to the present value of expected
gross profits. This amortization is adjusted periodically to reflect differences
in actual and assumed gross profits and changes in assumptions regarding future
gross profits.
DEFERRED INCOME TAXES
Deferred income tax assets or liabilities are computed based on the difference
between the financial statement and income tax basis of assets and liabilities
using the enacted marginal tax rate. Deferred income tax expenses or credits are
based on the changes in the asset or liability from period to period.
DIVIDEND RESTRICTIONS
Prior approval of insurance regulatory authorities is required for payment of
dividends to the Company's parent which exceed an annual limitation. During
1999, the Company will be able to pay dividends to its parent of approximately
$1,360,000 without prior approval of statutory authorities.
SEPARATE ACCOUNT
The separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered, principally for the
benefit of certain variable annuity contractholders who bear the underlying
investment risk. The separate account assets and liabilities are carried at fair
value. Fees are received for administrative expenses and for assuming mortality,
distribution and expense risks. Operations of the separate account are not
included in these financial statements.
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 130, Reporting Comprehensive Income, and restated prior
years' financial statements to conform to the new reporting standard. SFAS No.
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had no impact on the
Company's net income or stockholder's equity.
Other comprehensive income excludes realized investment losses included in net
income which merely represent transfers from unrealized to realized losses.
These amounts totaled $517, net of deferred income tax benefit of $278 in 1998.
7
<PAGE> 22
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires
disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparisons to independent
markets and, in many cases, could not be realized in immediate settlement of the
instruments. SFAS No. 107 also excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented herein are limited by each of these
factors and do not purport to represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Fixed maturities: The fair values for fixed maturities are based on quoted
market prices, where available. For fixed maturities not actively traded,
fair values are estimated using values obtained from independent pricing
services.
Cash and cash equivalents, short-term investments and separate account
assets: The carrying amounts reported in the balance sheet for these
financial instruments approximate their fair values.
Separate account liabilities: Fair values for the Company's liabilities
under investment-type insurance contracts are based on cash surrender value
of the underlying contracts.
8
<PAGE> 23
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following sets forth a comparison of the carrying amounts and fair values of
the Company's financial instruments subject to provisions of SFAS No. 107:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
----------------------------------- -----------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities:
Held to maturity $ 5,450,208 $ 5,533,121 $ 7,755,294 $ 7,821,060
Available for sale 59,400 59,400 70,515 70,515
----------------------------------- -----------------------------------
5,509,608 5,592,521 7,825,809 7,891,575
Short-term investments 10,696,834 10,696,834 7,509,600 7,509,600
Cash and cash equivalents 212,970 212,970 201,621 201,621
Separate account assets 128,641,553 128,641,553 129,309,639 129,309,639
LIABILITIES
Separate account liabilities 128,641,553 128,371,364 129,309,639 128,347,917
</TABLE>
3. BASIS OF PRESENTATION
The financial statements prepared on the basis of generally accepted accounting
principles differ from those prepared on a statutory basis primarily as follows:
(a) revenues on investment products consist of policy charges for the cost of
issuance, policy administration charges, amortization of policy initiation fees
and surrender charges assessed rather than premiums received; (b) acquisition
costs such as commissions and other costs related to acquiring new business are
being deferred and amortized over the life of the policy rather than being
charged to current operations as incurred; (c) policy reserves on investment
products are based on full account values rather than discounted methodologies
utilizing statutory interest rates; (d) a portion of fixed maturity investments
is designated as "available for sale" and valued at fair value with unrealized
appreciation/depreciation credited/charged directly to stockholder's equity
rather than valued at amortized cost; (e) deferred federal income taxes are
provided for temporary differences between the financial statements and the tax
returns; (f) certain assets designated as "non-admitted assets" have been
reported as assets rather than being charged to stockholder's equity; (g) the
carrying value of investments is reduced to fair value by the recognition of a
realized loss in the statement of operations when declines in carrying value and
judged to be other than temporary rather than recording an asset
9
<PAGE> 24
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
3. BASIS OF PRESENTATION (CONTINUED)
valuation reserve, in the nature of a contingency reserve which is recorded as a
liability through a charge to stockholder's equity; (h) net realized capital
gains (losses) attributable to changes in the level of market interest rates are
recognized in the statement of operations in the year of disposition rather than
being deferred and amortized over the remaining life of the bonds disposed of;
(i) assets and liabilities are restated to fair values, with provision for
goodwill and other intangible assets, when a change in ownership occurs rather
than retaining their historical value; and (j) reinsurance reserve credits are
recorded as reinsurance recoverable assets rather than recorded as a reduction
to aggregate policy reserves.
Net income (loss) for the Company as reported in accordance with statutory
accounting practices was approximately $(87,000) in 1998, $1,679,000 in 1997 and
$(2,890,000) in 1996. Total statutory capital and surplus, as reported, was
$16,127,000 at December 31, 1998 and $16,218,000 at December 31, 1997.
In 1998, the National Association of Insurance Commissioners (NAIC) adopted
codified statutory accounting principles (Codification). Codification will
likely change, to some extent, prescribed statutory accounting practices and may
result in changes to the accounting practices that the Company uses to prepare
its statutory-basis financial statements. Codification will require adoption by
the various states before it becomes the prescribed statutory basis of
accounting for insurance companies domesticated within those states.
Accordingly, before Codification becomes effective for the Company, the State of
California must adopt Codification as the prescribed basis of accounting on
which domestic insurers must report their statutory-basis results to the
California Insurance Department. At this time it is unclear whether the State of
California will adopt Codification. Management has not yet determined the impact
of Codification to the Company's statutory-basis financial statements.
10
<PAGE> 25
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
4. INVESTMENTS
At December 31, 1998 and 1997, the amortized cost, gross unrealized gains and
losses, and estimated fair value of investments in fixed maturity securities are
as follows:
HELD FOR INVESTMENT
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Bonds - United States Government and
agencies $ 5,450,208 $86,491 $3,578 $ 5,533,121
Short-term investments - United States
Government and agencies 10,696,834 - - 10,696,834
------------------------------------------------------------
$16,147,042 $86,491 $3,578 $16,229,955
============================================================
DECEMBER 31, 1997
Bonds - United States Government and
agencies $ 7,755,294 $67,363 $1,597 $ 7,821,060
Short-term investments - United States
Government and agencies 7,509,600 - - 7,509,600
------------------------------------------------------------
$15,264,894 $67,363 $1,597 $15,330,660
============================================================
</TABLE>
AVAILABLE FOR SALE
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Bonds - state, municipal and other
government $55,671 $3,729 $ - $59,400
============================================================
DECEMBER 31, 1997
Bonds - state, municipal and other
government $66,725 $3,790 $ - $70,515
============================================================
</TABLE>
11
<PAGE> 26
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
4. INVESTMENTS (CONTINUED)
The unrealized appreciation or depreciation on available-for-sale fixed maturity
securities is included in stockholder's equity as accumulated other
comprehensive income, reduced by a provision for deferred income taxes. Net
unrealized appreciation of available-for-sale fixed maturity securities as
reported were comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Unrealized appreciation on available-for-sale fixed
maturity securities $3,729 $3,790 $2,011
Related net deferred income taxes 1,305 1,326 -
----------- ----------- -----------
Net unrealized appreciation of available-for-sale fixed
maturity securities $2,424 $2,464 $2,011
=========== =========== ===========
</TABLE>
The amortized cost and estimated fair value of investments in fixed maturity
securities, by contractual maturity at December 31, 1998, are shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
HELD FOR INVESTMENT AVAILABLE FOR SALE
------------------------------ --------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------------------------ --------------------------
<S> <C> <C> <C> <C>
Due in one year or less $1,247,526 $1,257,450 $ - $ -
Due after one year through five years 4,142,859 4,209,071 55,671 59,400
Due after five years through ten years 59,823 66,600 - -
------------------------------ --------------------------
$5,450,208 $5,533,121 $55,671 $59,400
============================== ==========================
</TABLE>
Major categories of net investment income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Held for investment $412,981 $478,639 $317,782
Available for sale 4,000 4,534 4,383
Short-term investments 473,963 308,140 568,342
Other 3,775 3,019 924
-----------------------------------------------
894,719 794,332 891,431
Less investment expenses 82,649 106,369 94,348
-----------------------------------------------
$812,070 $687,963 $797,083
===============================================
</TABLE>
At December 31, 1998, investments with an aggregate carrying value of $7,556,679
(1997 - $7,755,294) were on deposit with regulatory authorities or were
restrictively held in bank custodial accounts for the benefit of such regulatory
authorities as required by statute.
12
<PAGE> 27
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
5. FEDERAL INCOME TAXES
The effective tax rate on income before taxes is different from the prevailing
federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C>
Income before income taxes $8,038,101 $4,953,684 $3,063,500
==================================================
Tax effect of federal statutory rate (35%) $2,813,335 $1,733,789 $1,072,225
Tax effect (decrease) of:
Dividends received deduction, including
revisions to prior year estimates in 1997 (23,596) 67,857 (605,807)
Change in valuation allowance - (147,872) (401,700)
Other, including revisions to prior year
estimates in 1997 23,928 758,936 (64,718)
--------------------------------------------------
Income tax expense $2,813,667 $2,412,710 $ -
==================================================
</TABLE>
The tax effect of temporary differences giving rise to the Company's deferred
income taxes is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
-------------------------------------
<S> <C> <C>
Deferred income tax assets:
Net operating loss and credit carryovers $ 4,474,012 $ 4,474,012
Reinsurance 11,245,018 9,543,713
Deferred front-end load 256,538 150,064
Other 178,955 456,419
-------------------------------------
16,154,523 14,624,208
Deferred income tax liabilities:
Unrealized appreciation of fixed maturity 1,305 1,326
Deferred policy acquisition costs 21,520,549 16,748,194
Fixed maturity discounts 733 26,619
Other 50,384 212,105
-------------------------------------
21,572,971 16,988,244
-------------------------------------
Net deferred income tax liability $ 5,418,448 $ 2,364,036
=====================================
</TABLE>
In 1997, the Company filed a separate federal income tax return. In 1998, it is
anticipated that the Company will file a consolidated federal income tax return
with its Parent. Each entity within the consolidated tax group reports current
income tax expense as allocated under the consolidated tax allocation agreement.
Generally, this allocation results in profitable companies recognizing a tax
provision as if the individual company filed a separate return and loss
companies recognizing benefits to the extent their current year
13
<PAGE> 28
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
5. FEDERAL INCOME TAXES (CONTINUED)
losses contribute to reduce consolidated taxes. Under the tax sharing agreement,
the Company will not recognize a current benefit for any loss and credit
carryforwards until the time they will be able to utilize the loss or credit on
a separate company basis. Deferred income taxes have been established by each
member of the consolidated group based upon the temporary differences, the
reversal of which will result in taxable or deductible amounts in future years
when the related asset or liability is recovered or settled, within each entity.
At December 31, 1998, the Company had net operating loss carryforwards of
$12,800,000 for which they have not received a current benefit. The net
operating loss carryforwards expire beginning 2008 through 2011.
6. REINSURANCE
The Company has reinsurance agreements with various insurance companies to
assume a specified percentage of their variable annuity contracts. Under these
agreements, the Company receives from the ceding company the account balances of
the reinsured contracts. The Company in return pays to the ceding companies an
expense allowance for commissions and other expenses associated with the
reinsured contracts. In addition, the Company pays or receives an amount equal
to the change in the statutory reserve held by the ceding companies on the
reinsured contracts, adjusted for investment earnings credits. For the years
ended December 31, 1998, 1997 and 1996, the Company recorded annuity product
charges of $13,412,175, $10,361,869 and $6,828,830, respectively, related to
contracts assumed under these agreements. At December 31, 1998 and 1997, the
assets on deposit with ceding companies and funds held on reinsurance assumed
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------- --------------------
<S> <C> <C>
Assets on deposit with ceding companies $817,857,660 $703,970,716
Funds held on reinsurance assumed (849,986,284) (731,238,468)
------------------- --------------------
Net funds held on reinsurance assumed $ (32,128,624) $ (27,267,752)
=================== ====================
</TABLE>
The Company also has a reinsurance agreement with American Republic Insurance
Company (American Republic) (see Note 7) to cede a specified percentage of the
risks associated with the variable annuity contracts. Under this agreement, the
Company pays American Republic the reinsurance percentage of charges and
deductions collected on the reinsured policies. American Republic in return pays
the Company an expense allowance for certain developmental, new business and
maintenance costs on the reinsured contracts. The Company has also entered into
a separate reinsurance agreement to reinsure the enhanced death benefit
provision of the contracts. During 1998, 1997 and 1996, the Company incurred
reinsurance premiums of $1,519,246, $1,465,655 and $1,459,270, respectively, and
had benefit recoveries of $107,933, $48,087 and $120,199, respectively, in
connection with these agreements.
14
<PAGE> 29
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
7. SERVICE AGREEMENTS WITH RELATED PARTIES
The Company has a third-party and corporate administrative agreements with
American Republic to provide services for new business processing and account
maintenance of the variable annuity contracts. The Company paid American
Republic $398,000, $552,000 and $817,000 for these services in 1998, 1997 and
1996, respectively.
Commissions relating to the sale of all variable annuity contacts are paid to an
affiliated company.
8. COMMITMENTS AND CONTINGENCIES
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance companies
for the benefit of policyholders and claimants in the event of insolvency of
other insurance companies. Potential obligations, if any, are not presently
determinable by the Company; accordingly, no accrual has been made on these
financial statements.
9. YEAR 2000 (UNAUDITED)
The Company uses a wide variety of computer programs and devices, some of which
use only the last two digits of each year to represent the calendar year portion
of dates. As a result, calculations performed with these abbreviated date fields
may misinterpret the Year 2000 as 1900, resulting in erroneous calculations or
program failures that could cause significant disruptions in the Company's
operations. The Company is now executing a comprehensive plan in an attempt to
achieve Year 2000 compliance. The plan has been organized into five phases:
awareness, inventory/assessment, remediation, implementation and testing. The
Company has completed the awareness and inventory/assessment phases, covering
both information technology ("IT") hardware and software, and other non-IT
assets. The remediation and implementation phases of the Company's plan specify
a strategy for each asset type and assign remediation tasks to either third
party resources, Company personnel or in some cases, original manufacturers.
Certain assets may be replaced or retired. Remediation of the Company's
application software is complete and all changes have been implemented.
Remediation of hardware, office equipment and facilities assets, including
desktop computers and services, and implementation of necessary changes is
substantially complete and will be completed in the second quarter of 1999. The
testing phase of the plan, including testing of external interfaces, is
scheduled to be completed in the second quarter of 1999.
15
<PAGE> 30
PaineWebber Life Insurance Company
Notes to Financial Statements (continued)
9. YEAR 2000 (UNAUDITED) (CONTINUED)
Nearly every aspect of the Company's business depends on the accurate processing
of date-related information. As a result, failure by the Company or one or more
of its third-party relationships to successfully remediate systems for Year 2000
issues poses the risk of material disruption to operations and material
financial loss. A failure on the part of the Company to identify and implement
solutions to all Year 2000 issues could result in systems failures or outages,
inaccuracies in processing and other business disruptions. In addition, third
parties with whom the Company has a relationship could fail in some element of
their Year 2000 efforts. The Company has ongoing communications with important
third party relationships regarding third party Year 2000 risks. The success of
such third parties achieving Year 2000 compliance cannot be adequately gauged at
this time.
The Company is in the process of developing contingency plans to be executed
should a Year 2000 failure affect the Company's own operations or those of a
significant third party. The contingency planning effort is scheduled to be
completed by the end of the second quarter of 1999. There can be no assurance
that alternative arrangements will be identified for all material risks or
contingencies, or that these contingency plans will be effective.
16
