<PAGE> 1
[SPECTRADIRECT LOGO]
United Life & Annuity
Insurance Company
May 1, 1997 PROSPECTUS
<PAGE> 2
THE SPECTRADIRECT FIXED AND VARIABLE ANNUITY CONTRACT
ISSUED BY
UNITED LIFE & ANNUITY SEPARATE ACCOUNT ONE
(FORMERLY UNITED COMPANIES SEPARATE ACCOUNT ONE)
AND
UNITED LIFE & ANNUITY INSURANCE COMPANY
(FORMERLY UNITED COMPANIES LIFE INSURANCE COMPANY)
MAY 1, 1997
This prospectus describes the SpectraDirect Fixed and Variable Annuity
Contract offered by United Life & Annuity Insurance Company (ULA, us or we).
Until recently, United Life & Annuity Insurance Company (ULA) was known as
United Companies Life Insurance Company in the states and jurisdictions in which
it is licensed to do business. In each state in which the name change is not yet
effective, we may continue to do business as United Companies Life Insurance
Company until the name change is formally approved.
The annuity has 13 investment options -- the Portfolios listed below, a one
year Fixed Account option of ULA and the Interest Adjustment Account.
<TABLE>
<S> <C>
MFS(R) VARIABLE INSURANCE TRUST(SM) DREYFUS VARIABLE INVESTMENT FUND
MFS Emerging Growth Series Growth and Income Portfolio
MFS Total Return Series SCUDDER VARIABLE LIFE INVESTMENT FUND
FEDERATED INSURANCE SERIES Money Market Portfolio
Federated High Income Bond Fund II International Portfolio
Federated Utility Fund II VAN ECK WORLDWIDE INSURANCE TRUST
Federated Fund for U.S. Government Worldwide Hard Assets Fund (formerly,
Securities II Gold and Natural Resources Fund)
DREYFUS STOCK INDEX FUND THE ALGER AMERICAN FUND
Alger American Growth Portfolio
</TABLE>
Please read this prospectus before investing and keep it for future
reference. It contains important information about the SpectraDirect Fixed and
Variable Annuity Contract.
To learn more about the annuity offered by this prospectus, you can obtain
a copy of the Statement of Additional Information (SAI) dated May 1, 1997. The
SAI has been filed with the Securities and Exchange Commission (SEC) and is
incorporated by reference into this prospectus. The Table of Contents of the SAI
is found on the last page of this prospectus. For a free copy of the SAI, call
us at (800) 825-7568 or write us at: P.O. Box 260100, 8545 United Plaza
Boulevard, Baton Rouge, LA 70826-0100. The SEC maintains a Web site
(http://www.sec.gov) that contains the SAI, material incorporated by reference,
and other information regarding registrants that file electronically with the
SEC.
Inquiries. If you have any questions about your Contract or need more
information, please contact us at:
III United Plaza
8545 United Plaza Blvd.
Baton Rouge, Louisiana 70809-2264
(800) 825-7568
INVESTMENT IN A VARIABLE ANNUITY CONTRACT IS SUBJECT TO RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL. THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION AND ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GLOSSARY OF TERMS........................................... 1
SUMMARY..................................................... 2
FEE TABLE................................................... 5
THE SPECTRADIRECT FIXED AND VARIABLE ANNUITY CONTRACT....... 8
Owner..................................................... 8
Joint Owner............................................... 8
Annuitant................................................. 9
Beneficiary............................................... 9
Assignment................................................ 9
ANNUITY PAYMENTS (THE INCOME PHASE)......................... 9
Annuity Options........................................... 9
HOW TO PURCHASE A CONTRACT.................................. 10
Purchase Payments......................................... 10
Allocation of Purchase Payments........................... 10
Right to Examine Contract................................. 10
Accumulation Units........................................ 10
INVESTMENT OPTIONS.......................................... 11
Voting Rights............................................. 12
Substitution.............................................. 12
Transfers................................................. 12
Dollar Cost Averaging Program............................. 13
Rebalancing Program....................................... 13
Asset Allocation Programs................................. 14
PERFORMANCE................................................. 14
EXPENSES.................................................... 15
Insurance Charges......................................... 15
Mortality and Expense Risk Charge....................... 15
Administrative Charge................................... 15
Contract Maintenance Charge............................... 15
Contingent Deferred Sales Charge.......................... 15
Reduction or Elimination of the Contingent Deferred Sales
Charge.................................................. 16
Transfer Fee.............................................. 16
Premium Taxes............................................. 16
Income Taxes.............................................. 16
Portfolio Expenses........................................ 16
TAXES....................................................... 16
Annuity Contracts in General.............................. 17
Qualified and Non-Qualified Contracts..................... 17
Withdrawals -- Non-Qualified Contracts.................... 17
Withdrawals -- Qualified Contracts........................ 17
Withdrawals -- Tax-Sheltered Annuities.................... 18
Diversification........................................... 18
WITHDRAWALS................................................. 18
Systematic Withdrawal Program............................. 18
Suspension of Payments or Transfers....................... 19
DEATH BENEFIT............................................... 19
Upon Your Death........................................... 19
Death Benefit............................................. 19
Death of Annuitant........................................ 20
OTHER INFORMATION........................................... 20
ULA....................................................... 20
The Separate Account...................................... 21
Distribution.............................................. 21
Financial Statements...................................... 21
APPENDIX A.................................................. A-1
APPENDIX B.................................................. B-1
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL
INFORMATION............................................... C-1
</TABLE>
i
<PAGE> 4
GLOSSARY OF TERMS
We have tried to make this prospectus as understandable for you as
possible. We have capitalized some of the technical terms used in this
prospectus. To help you understand these terms, we have defined them below.
ACCOUNTS: The Portfolios, the Fixed Account and each Guarantee Period of
the Interest Adjustment Account.
ACCUMULATION PHASE: Until you decide to begin receiving Annuity Payments,
your annuity is in the Accumulation Phase.
ACCUMULATION UNIT: The unit of measurement we use to keep track of the
value of your Contract during the Accumulation Phase.
ANNUITANT: The natural person on whose life we base Annuity Payments.
ANNUITY OPTIONS: You can choose among income plans for your Annuity
Payments. These are referred to as Annuity Options.
ANNUITY PAYMENTS: You can receive regular income payments from your
Contract. These are referred to as Annuity Payments.
BENEFICIARY: The person or entity you name to receive any death benefits.
CONTRACT: An individual contract and the certificate issued to participants
under a group contract.
FIXED ACCOUNT: An investment option within our general account.
GUARANTEE PERIODS: The periods for which interest rates are credited in the
Interest Adjustment Account or the Fixed Account.
INCOME DATE: You can choose the month and year in which Annuity Payments
will begin. This is referred to as the Income Date.
INCOME PHASE: The period during which we make Annuity Payments to you or
someone you name to receive them.
INTEREST ADJUSTMENT ACCOUNT: An investment option within our general
account where we guarantee the rate of interest for a specified period (a
Guarantee Period).
JOINT OWNER: The Contract can be owned by you and your spouse (the Joint
Owner).
OWNER: The person or entity entitled to ownership rights under a Contract.
NON-QUALIFIED: If you do not purchase the Contract under a qualified plan,
your Contract is referred to as a Non-Qualified Contract.
PORTFOLIO: The variable investment options available under the Contract.
Each Portfolio has its own investment objective.
PURCHASE PAYMENT: The money you give us to buy the Contract.
QUALIFIED: If you purchase the Contract under a qualified plan, it is
referred to as a Qualified Contract (examples: individual retirement annuities,
tax-sheltered annuities, H.R. 10 plans, and pension and profit-sharing plans).
TAX DEFERRAL: Tax deferral means that you are not taxed on any earnings or
appreciation on the assets in your Contract until you take money out of your
Contract.
1
<PAGE> 5
SUMMARY
The following information is a summary of some of the more important
features of your annuity Contract. More detailed information is contained in the
corresponding sections of this prospectus.
The SpectraDirect Fixed and Variable Annuity Contract. This prospectus
describes individual and group fixed and variable deferred annuity contracts and
certificates (together referred to as the "Contracts"). The Contract offered by
ULA is a contract between you, the owner, and United Life & Annuity Insurance
Company, an insurance company. The Contract provides a means for investing on a
Tax-Deferred basis in the Portfolios, the Fixed Account and the Interest
Adjustment Account. The SpectraDirect Fixed and Variable Annuity Contract is
designed for people seeking long-term Tax-Deferred accumulation of assets,
generally for retirement or other long-term purposes. The Tax-Deferred feature
is most attractive to people in high federal and state tax brackets. You should
not buy this Contract if you are looking for a short-term investment or if you
cannot accept the risk of getting back less money than you put in.
You may invest in the Fixed Account, the Interest Adjustment Account or the
following Portfolios:
MFS(R) VARIABLE INSURANCE TRUST(SM)
MFS Emerging Growth Series
MFS Total Return Series
FEDERATED INSURANCE SERIES
Federated High Income Bond Fund II
Federated Utility Fund II
Federated Fund for U.S. Government Securities II
DREYFUS STOCK INDEX FUND
DREYFUS VARIABLE INVESTMENT FUND
Growth and Income Portfolio
SCUDDER VARIABLE LIFE INVESTMENT FUND
Money Market Portfolio
International Portfolio
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Hard Assets Fund (formerly, Gold and Natural Resources Fund)
THE ALGER AMERICAN FUND
Alger American Growth Portfolio
The Portfolios are fully described in the attached Portfolio prospectuses.
You can make or lose money in the Portfolios, depending upon market conditions.
The Fixed Account offers an interest rate that is guaranteed by us. You can
also invest in the Interest Adjustment Account, which is an option within our
general account where we guarantee a specific rate of interest for certain
Guarantee Periods. There are currently three Guarantee Periods available -- 3, 5
and 7 years. If you withdraw or transfer money from the Interest Adjustment
Account prior to the end of the selected Guarantee Period, it may be subject to
an interest adjustment (see Appendix B for a discussion of the Interest
Adjustment Account).
CURRENTLY, YOU MAY SELECT TO PUT YOUR MONEY IN UP TO TEN INVESTMENT OPTIONS
(WHICH INCLUDES EACH PORTFOLIO, THE FIXED ACCOUNT AND EACH GUARANTEE PERIOD OF
THE INTEREST ADJUSTMENT ACCOUNT).
Like all deferred annuity contracts, your Contract has two phases: the
Accumulation Phase and the Income Phase. During the Accumulation Phase, your
earnings accumulate on a Tax-Deferred basis and are based on the investment
performance of the Portfolio(s) you selected and/or the interest rate earned on
the money you have in the Fixed Account and the Interest Adjustment Account.
During the Accumulation Phase,
2
<PAGE> 6
the earnings are taxed as income only when you make a withdrawal. The Income
Phase occurs when you begin receiving regular payments from your Contract. The
amount of the payments you may receive during the Income Phase depends in part
upon the amount of money you are able to accumulate in your Contract during the
Accumulation Phase.
Until recently, United Life & Annuity Insurance Company (ULA) was known as
United Companies Life Insurance Company in the states and jurisdictions in which
it is licensed to do business. In each state in which the name change is not yet
effective, we may continue to do business as United Companies Life Insurance
Company until the name change is formally approved. Prior to May 1, 1997, United
Life & Annuity Separate Account One was known as United Companies Separate
Account One.
Annuity Payments (The Income Phase). You can receive monthly Annuity
Payments from your Contract by selecting an Annuity Option. During the Income
Phase, payments will come from the Fixed Account.
How To Purchase A Contract. You can buy a Non-Qualified Contract with
$5,000 and a Qualified Contract with $2,000. You can add $500 (or $100 if you
use the automatic premium check option) or more any time you like during the
Accumulation Phase. Your registered representative can help you fill out the
proper forms.
Expenses. The Contract has insurance features and investment features, and
there are costs related to each.
The annual insurance charges total 1.67% of the average daily value of your
Contract allocated to the Portfolios. Each year we also deduct a $30 contract
maintenance charge from your Contract. ULA currently waives this charge if the
value of your Contract is at least $75,000. There are also annual Portfolio
charges which range from .30% to 1.23% of the average daily value of the
Portfolio, depending upon the Portfolio(s) you invest in.
You can transfer between Accounts up to 12 times a year without charge.
After 12 transfers, the charge is $25 or 2% of the amount transferred, whichever
is less.
If you make a withdrawal from the Contract, ULA may assess a contingent
deferred sales charge (withdrawal charge). The amount of the charge depends upon
how long ULA has had your Purchase Payment. The charge is:
<TABLE>
<CAPTION>
NUMBER OF COMPLETE YEARS SINCE
RECEIPT OF PURCHASE PAYMENT CHARGE
------------------------------ ------
<S> <C>
0...................................................... 8.5%
1...................................................... 8.0%
2...................................................... 7.5%
3...................................................... 7.0%
4...................................................... 6.5%
5...................................................... 6.0%
6...................................................... 5.0%
7...................................................... 4.0%
8...................................................... 3.0%
9...................................................... 2.0%
10 years or more....................................... 0.0%
</TABLE>
Free Withdrawal Amount -- You can make a partial withdrawal without
incurring a contingent deferred sales charge of the "free withdrawal amount."
The free withdrawal amount is equal to the greater of: (a) earnings, or (b) 10%
of remaining Purchase Payments at the beginning of the current year. If your
withdrawal is not on a Contract anniversary, the free withdrawal amount is equal
to the free withdrawal amount at the beginning of the Contract year less amounts
withdrawn without the contingent deferred sales charge during the current
Contract year. If you make a complete withdrawal, the free withdrawal amount is
not available.
3
<PAGE> 7
In addition, in certain states, you can make a total or partial withdrawal
and ULA will not deduct the contingent deferred sales charge if you are confined
to a skilled nursing home facility for 90 consecutive days after the first
Contract year.
ULA may assess a state premium tax charge which ranges from 0 - 4.0%
(depending upon the state).
Taxes. Your earnings are not taxed until you take them out. In most cases,
if you take money out, earnings come out first and are taxed as income. If you
are younger than 59 1/2 when you take money out, you may be charged a 10%
federal tax penalty on the taxable amounts withdrawn. Payments during the Income
Phase are considered partly a return of your original investment. That part of
each payment is not taxable as income. If the Contract is tax-qualified, the
entire payment may be taxable. There are limits to the amount you can withdraw
from a Qualified plan known as a 403(b) plan (or tax-sheltered annuity).
Withdrawals. You may make a withdrawal at any time during the Accumulation
Phase. Any partial withdrawal must be for at least $500 (unless it is made under
the Systematic Withdrawal Program). You may request a withdrawal or elect the
Systematic Withdrawal Program. Of course, you may also have to pay income tax
and a tax penalty on any money you take out.
Death Benefit. If you die during the Accumulation Phase, the person you
have selected as your Beneficiary will receive a death benefit.
Other Information
Free Look. If you cancel the Contract within 10 days after receiving it (or
whatever period is required in your state), we will send your money back without
assessing a contingent deferred sales charge. You will receive whatever your
Contract is worth on the day we receive your request. This may be more or less
than your original payment. (Some states require that we return your Purchase
Payment.)
No Probate. In most cases, when you die, your Beneficiary will receive the
death benefit without going through probate.
Additional Features. The Contract offers additional features which you
might be interested in. These include:
Dollar Cost Averaging Program -- You can arrange to have a regular amount
of money automatically transferred from the Scudder Money Market Portfolio or
the one year Fixed Account to one or more selected Portfolios monthly, quarterly
or semi-annually, theoretically giving you a lower average cost per unit over
time than a single one time purchase. However, there are no guarantees that this
will take place.
Rebalancing Program -- ULA will automatically readjust your money among the
Portfolios to maintain your specified allocation mix. This can be done
quarterly, semi-annually or annually if the value of your Contract is at least
$5,000.
Systematic Withdrawal Program -- You can elect to receive periodic payments
from your Contract. Of course, you may have to pay taxes on the money you
receive.
4
<PAGE> 8
FEE TABLE
OWNER TRANSACTION EXPENSES
Contingent Deferred Sales Charge (see Note 2 below)
<TABLE>
<CAPTION>
NUMBER OF COMPLETE
YEARS SINCE RECEIPT
OF PURCHASE PAYMENT CHARGE
- ------------------- ------
<S> <C>
0...................................................... 8.5%
1...................................................... 8.0%
2...................................................... 7.5%
3...................................................... 7.0%
4...................................................... 6.5%
5...................................................... 6.0%
6...................................................... 5.0%
7...................................................... 4.0%
8...................................................... 3.0%
9...................................................... 2.0%
10 years or more....................................... 0.0%
Transfer Fee (see Note 3 below). No charge for first 12 transfers in a
Contract year; thereafter the fee is
the lesser of $25 or 2% of the amount
transferred.
</TABLE>
CONTRACT MAINTENANCE CHARGE (see Note 4 below) $30 per Contract per Year.
SEPARATE ACCOUNT ANNUAL EXPENSES
(as a percentage of average account value)
<TABLE>
<S> <C>
Mortality and Expense Risk Charge........................... 1.52%
Administrative Charge....................................... .15%
----
Total Separate Account Annual Expenses...................... 1.67%
</TABLE>
NOTES TO FEE TABLE
Note 1. The purpose of the Fee Table is to show you the various expenses
you will incur directly or indirectly with the Contract. The Fee Table reflects
expenses of the Separate Account as well as the Portfolios.
Note 2. Under certain circumstances, you can make a withdrawal without
incurring the contingent deferred sales charge.
Note 3. ULA will not charge you the transfer fee even if there are more
than 12 transfers in a year if the transfer is part of the Dollar Cost Averaging
or Rebalancing Programs.
Note 4. ULA will not charge the contract maintenance charge if the value of
your Contract is at least $75,000 or more. However, if you make a complete
withdrawal, ULA will charge the contract maintenance charge. There is no
contract maintenance charge assessed during the Income Phase.
5
<PAGE> 9
ANNUAL EXPENSES OF THE PORTFOLIOS
(as a percentage of the average daily net assets of a Portfolio)
<TABLE>
<CAPTION>
TOTAL ANNUAL
OTHER EXPENSES EXPENSES
MANAGEMENT (AFTER EXPENSE (AFTER EXPENSE
FEES REIMBURSEMENT) REIMBURSEMENT)
---------- -------------- --------------
<S> <C> <C> <C>
MFS(R) Variable Insurance Trust(SM)
MFS Emerging Growth Series(a).................... .75% .25% 1.00%
MFS Total Return Series(a)....................... .75% .25% 1.00%
FEDERATED INSURANCE SERIES
Federated High Income Bond Fund II(b)............ .01% .79% .80%
Federated Utility Fund II(c)..................... .24% .61% .85%
Federated Fund for U.S. Government
Securities II(d).............................. .00% .80% .80%
DREYFUS STOCK INDEX FUND........................... .245% .055% .30%
DREYFUS VARIABLE INVESTMENT FUND
Growth and Income Portfolio...................... .75% .08% .83%
SCUDDER VARIABLE LIFE INVESTMENT FUND
Money Market Portfolio........................... .37% .09% .46%
International Portfolio(e)....................... .863% .187% 1.05%
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Hard Assets Fund....................... 1.00% .23% 1.23%
THE ALGER AMERICAN FUND
Alger American Growth Portfolio.................. .75% .04% .79%
</TABLE>
- ---------------
(a) The adviser has agreed to bear expenses for each Series, subject to
reimbursement by each Series, so that each Series' "Other Expenses" do not
exceed .25% of the average daily net assets of the Series during the current
fiscal year. Otherwise, "Other Expenses" would be .41% and 1.35% for the MFS
Emerging Growth Series and the MFS Total Return Series, respectively, and
"Total Annual Expenses" would be 1.16% and 2.10% respectively for these
Series. Each Series has an expense offset arrangement which reduces the
Series' custodian fee based upon the amount of cash maintained by the Series
with its custodian and dividend disbursing agent, and may enter into other
such arrangements and directed brokerage arrangements (which would also have
the effect of reducing the Series' expenses). Any such fee reductions are
not reflected under "Other Expenses."
(b) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
.60%. The total operating expenses were 1.39% absent the voluntary waiver of
the management fee and the voluntary reimbursement of certain other
operating expenses.
(c) The management fee has been reduced to reflect the voluntary waiver of a
portion of the management fee. The adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
.75%. The total operating expenses were 1.36% absent the voluntary waiver of
the management fee and the voluntary reimbursement of certain other
operating expenses.
(d) The management fee has been reduced to reflect the voluntary waiver of the
management fee. The adviser can terminate this voluntary waiver at any time
at its sole discretion. The maximum management fee is .60%. The total
operating expenses were 1.81% absent the voluntary waiver of the management
fee and the voluntary reimbursement of certain other operating expenses.
(e) For any calendar month during which the average daily net assets of the
International Portfolio exceed $500,000,000, the fee payable for that month,
with respect to the excess over $500,000,000, is calculated at an annual
rate of .775%. As a result, the adviser received compensation at an annual
rate of .863% for the fiscal year ended December 31, 1996.
6
<PAGE> 10
EXAMPLES
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on your money if: (a) you surrender your Contract at the end of
each time period and (b) if your Contract is not surrendered or annuitized:
<TABLE>
<CAPTION>
TIME PERIODS
-----------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
MFS(R) VARIABLE INSURANCE TRUST(SM)
MFS Emerging Growth Series....................... a) $114 a) $162 a) $217 a) $365
b) $ 29 b) $ 87 b) $152 b) $345
MFS Total Return Series.......................... a) $114 a) $162 a) $217 a) $365
b) $ 29 b) $ 87 b) $152 b) $345
FEDERATED INSURANCE SERIES
Federated High Income Bond Fund II............... a) $112 a) $156 a) $206 a) $340
b) $ 27 b) $ 81 b) $141 b) $320
Federated Utility Fund II........................ a) $112 a) $158 a) $209 a) $346
b) $ 27 b) $ 83 b) $144 b) $326
Federated Fund for U.S. Government Securities
II............................................ a) $112 a) $156 a) $206 a) $340
b) $ 27 b) $ 81 b) $141 b) $320
DREYFUS STOCK INDEX FUND........................... a) $106 a) $140 a) $178 a) $275
b) $ 21 b) $ 65 b) $113 b) $255
DREYFUS VARIABLE INVESTMENT FUND
Growth and Income Portfolio...................... a) $112 a) $157 a) $208 a) $344
b) $ 27 b) $ 82 b) $143 b) $324
SCUDDER VARIABLE LIFE INVESTMENT FUND
Money Market Portfolio........................... a) $108 a) $145 a) $187 a) $296
b) $ 23 b) $ 70 b) $122 b) $276
International Portfolio.......................... a) $114 a) $164 a) $220 a) $372
b) $ 29 b) $ 89 b) $155 b) $352
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Hard Assets Fund....................... a) $116 a) $170 a) $230 a) $395
b) $ 31 b) $ 95 b) $165 b) $375
THE ALGER AMERICAN FUND
Alger American Growth Portfolio.................. a) $111 a) $156 a) $206 a) $338
b) $ 26 b) $ 81 b) $141 b) $318
</TABLE>
THE ANNUAL EXPENSES OF THE PORTFOLIOS AND THE EXAMPLES ARE BASED ON DATA
PROVIDED BY THE RESPECTIVE FUND GROUPS. WE HAVE NOT INDEPENDENTLY VERIFIED SUCH
DATA.
Premium taxes are not reflected. They may apply.
The assumed average contract size is $25,000. The $30 contract maintenance
charge is reflected in the examples as $1.20.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
7
<PAGE> 11
THE SPECTRADIRECT FIXED AND VARIABLE ANNUITY CONTRACT
This prospectus describes individual and group fixed and variable deferred
annuity contracts and certificates (together referred to as the "Contracts")
offered by ULA.
An annuity is a contract between you, the owner, and an insurance company
(in this case ULA), where the insurance company promises to pay you (or someone
else you choose) an income, in the form of Annuity Payments, beginning on a
designated date that is at least three years in the future. Until you decide to
begin receiving Annuity Payments, your annuity is in the Accumulation Phase.
Once you begin receiving Annuity Payments, your Contract switches to the Income
Phase.
The Contract benefits from Tax Deferral. Tax Deferral means that you are
not taxed on earnings or appreciation on the assets in your Contract until you
take money out of your Contract.
The Contract is called a variable annuity because you can choose among the
available Portfolios and, depending upon market conditions, you can make or lose
money in any of these Portfolios. If you select the variable annuity portion of
the Contract, the amount of money you are able to accumulate in your Contract
during the Accumulation Phase depends in part upon the investment performance of
the Portfolio(s) you select. The Annuity Payments you will receive during the
Income Phase will come from the Fixed Account.
The Contract contains a Fixed Account. The Fixed Account offers an interest
rate that is guaranteed by ULA. There is a one year Guarantee Period available
for the Fixed Account. ULA guarantees that the interest credited to the Fixed
Account will not be less than 3% per year. If you select the Fixed Account, your
money will be placed with our other general assets. If you select the Fixed
Account, the amount of money you are able to accumulate in your Contract during
the Accumulation Phase depends in part upon the total interest credited to your
Contract.
The Contract also has an Interest Adjustment Account with three Guarantee
Periods currently available: 3 years, 5 years and 7 years. Each allocation to a
Guarantee Period locks in a fixed annual interest rate declared by ULA.
Withdrawals, transfers or annuitization of amounts from a Guarantee Period prior
to the end of that Guarantee Period may be subject to an interest adjustment.
See Appendix B to this prospectus for information relating to the Interest
Adjustment Account.
We may make changes to your Contract in order to comply with applicable
law.
Owner. The SpectraDirect Fixed and Variable Annuity is a group deferred
annuity contract. A group contract is issued to a contractholder, for the
benefit of the participants in the group. You are a participant in the group and
will receive a certificate evidencing your ownership. You, as the Owner of a
certificate, are entitled to all the rights and privileges of ownership. In some
states an individual fixed and variable deferred annuity contract is issued
instead, which is identical to the group contract described in this prospectus
except that it is issued directly to the Owner. As used in this prospectus, the
term Contract refers to your certificate or individual contract. The Owner is as
designated at the time the Contract is issued, unless changed. You may change
Owners at any time prior to the Income Date. This may be a taxable event. You
should consult with your tax adviser before doing this.
Joint Owner. The Contract can be owned by Joint Owners. Any Joint Owner
must be the spouse of the other Owner. Upon the death of either Joint Owner, the
surviving spouse will be the primary Beneficiary. Any other Beneficiary
designation will be treated as a contingent Beneficiary unless otherwise
indicated. Unless otherwise specified, if there are Joint Owners, both
signatures will be required for all transactions except telephone transfers.
Annuitant. The Annuitant is the person whose life we look to when we make
Annuity Payments. You choose the Annuitant at the time the Contract is issued.
You may change the Annuitant at any time before the Income Date unless the
Contract is owned by a non-individual (for example, a corporation). Any change
of Annuitant is subject to our underwriting rules then in effect. On or after
the Income Date, the Annuitant will include any Joint Annuitant.
8
<PAGE> 12
Beneficiary. The Beneficiary is the person(s) or entity you name to receive
any death benefit. The Beneficiary is named at the time the Contract is issued
unless changed at a later date. Unless an irrevocable Beneficiary has been
named, you can change the Beneficiary or contingent Beneficiary.
Assignment. You can assign the Contract at any time during your lifetime.
ULA will not be bound by the assignment until it receives the written notice of
the assignment. ULA will not be liable for any payment or other action we take
in accordance with the Contract before we receive notice of the assignment. Any
assignment made after the death benefit has become payable can only be done with
our consent. AN ASSIGNMENT MAY BE A TAXABLE EVENT.
If the Contract is issued pursuant to a Qualified plan, there may be
limitations on your ability to assign the Contract.
ANNUITY PAYMENTS (THE INCOME PHASE)
You can receive regular monthly income payments under your Contract. You
can choose the month and year in which those payments begin. We call that date
the Income Date. Your Income Date must be at least three years after you buy the
Contract. The Income Date may not be later than when the Annuitant reaches age
85 or 10 years after the Contract is issued for Annuitants older than 75. You
can also choose among income plans. We call those Annuity Options.
We ask you to choose your Income Date when you purchase the Contract. You
can change it at any time before the Income Date with thirty (30) days notice to
us. You (or someone you designate) will receive the Annuity Payments.
If you do not choose an Annuity Option prior to the Income Date, we will
assume that you selected Option B which provides a life annuity with 120 monthly
payments guaranteed. Prior to the Income Date, you can change the Annuity
Option. Any change must be requested at least thirty (30) days prior to the
Income Date.
Annuity Payments are paid in monthly installments. Annuity Payments will be
made on a fixed basis only (which means they will come from the Fixed Account
and will not be based on the investment performance of the Portfolios). If the
value of your Contract to be applied to an Annuity Option is less than $2,000,
we reserve the right to pay you a lump sum amount instead of Annuity Payments.
Also, if the Annuity Payments would be or become less than $200, we reserve the
right to reduce the frequency of payments so that they will be at least $200.
ANNUITY OPTIONS
You can choose one of the following Annuity Options or any other Annuity
Option you want and that ULA agrees to provide. After Annuity Payments begin,
you cannot change the Annuity Option.
Option A. Life Annuity. Under this option, we will make monthly Annuity
Payments so long as the Annuitant is alive. After the Annuitant dies, we stop
making Annuity Payments.
Option B. Life Annuity With 60, 120, 180 or 240 Monthly Payments
Guaranteed. Under this option, we will make monthly Annuity Payments so long as
the Annuitant is alive. However, if, when the Annuitant dies, we have made
Annuity Payments for less than the selected guaranteed period, we will continue
to make Annuity Payments to you for the rest of the guaranteed period. If you do
not want to receive Annuity Payments, you can ask us for a single lump sum.
Option C. Joint And Survivor Annuity. Under this option, we will make
monthly Annuity Payments during the joint lifetime of the Annuitant and the
joint Annuitant. When the Annuitant dies, if the joint Annuitant is still alive,
we will continue to make Annuity Payments, so long as the joint Annuitant
continues to live. The monthly Annuity Payments will end when the last surviving
Annuitant dies.
9
<PAGE> 13
HOW TO PURCHASE A CONTRACT
PURCHASE PAYMENTS
A Purchase Payment is the money you give us to buy the Contract. The
minimum payment ULA will accept is $5,000 when the Contract is bought as a
Non-Qualified Contract. If you are buying the Contract as part of an IRA
(Individual Retirement Annuity), 401(k) or other Qualified plan, the minimum
amount we will accept is $2,000. The maximum amount we will accept without our
prior approval is $500,000. You can make additional Purchase Payments of $500
(or as low as $100 if you have selected the automatic premium check option) or
more to either type of Contract. We reserve the right to reject any Purchase
Payment or application. At the time you buy the Contract, you and the Annuitant
cannot be older than 80 years old for a Non-Qualified Contract and 75 years old
for a Qualified Contract.
ALLOCATION OF PURCHASE PAYMENTS
When you purchase a Contract, we will allocate your Purchase Payment to the
Fixed Account, one or more Guarantee Periods of the Interest Adjustment Account
and/or one or more of the Portfolios you have selected. We ask that you allocate
your money in whole percentages with a minimum allocation of 5% of each Purchase
Payment or transfer or $500 (whichever is greater). You can instruct us how to
allocate additional Purchase Payments you make. If you do not instruct us, we
will allocate them in the same way as your previous instructions to us. Under
certain circumstances, we will allocate your initial Purchase Payment to the
Scudder Money Market Portfolio until the end of the right to examine contract
period (see below). CURRENTLY, YOU CAN SELECT UP TO TEN INVESTMENT OPTIONS
(WHICH INCLUDES EACH PORTFOLIO, THE FIXED ACCOUNT AND EACH GUARANTEE PERIOD OF
THE INTEREST ADJUSTMENT ACCOUNT).
Once we receive your Purchase Payment, the necessary information and
federal funds (federal funds means monies credited to a bank's account with its
regional federal reserve bank), we will issue your Contract and allocate your
first Purchase Payment within 2 business days. If you do not give us all of the
information we need, we will contact you to get it. If for some reason we are
unable to complete this process within 5 business days, we will either send back
your money or get your permission to keep it until we get all of the necessary
information. If you make additional Purchase Payments, we will credit these
amounts to your Contract within one business day. Our business day closes when
the New York Stock Exchange closes, which is usually at 4:00 p.m. Eastern time.
RIGHT TO EXAMINE CONTRACT
If you change your mind about owning the Contract, you can cancel it within
10 days after receiving it (or the period required in your state). When you
cancel the Contract within this time period, ULA will not assess a contingent
deferred sales charge. You will receive back whatever your Contract is worth on
the day we receive your request. In certain states or if you have purchased the
Contract as an IRA, we may be required to give you back your Purchase Payment if
you decide to cancel your Contract within 10 days after receiving it (or
whatever period is required in your state). If that is the case, we will
allocate your Purchase Payment to the Scudder Money Market Portfolio (except for
any portion of your Purchase Payment which you selected to be allocated to the
Fixed Account and/or the Interest Adjustment Account) for 15 days after we issue
your Contract (right to examine contract period). (In some states, the period
may be longer.) At the end of the right to examine contract period, we will
re-allocate your Purchase Payment as you selected.
ACCUMULATION UNITS
The value of the portion of your Contract allocated to the Portfolios will
go up or down depending upon the investment performance of the Portfolio(s) you
choose. The value of your Contract will also depend on the expenses of the
Contract. In order to keep track of the value of your Contract, we use a
measurement called an Accumulation Unit (which is like a share of a mutual
fund).
10
<PAGE> 14
Every business day we determine the value of an Accumulation Unit by
multiplying the Accumulation Unit value for the previous period by a factor for
the current period. The factor is determined by:
1. dividing the value of a Portfolio share at the end of the current
period by the value of a Portfolio share for the previous period; and
2. subtracting from that amount any insurance charges.
The value of an Accumulation Unit may go up or down from day to day.
When you make a Purchase Payment, we credit your Contract with Accumulation
Units. The number of Accumulation Units credited is determined by dividing the
amount of the Purchase Payment allocated to a Portfolio by the value of the
Accumulation Unit for that Portfolio.
We calculate the value of an Accumulation Unit for each Portfolio after the
New York Stock Exchange closes each day and then credit your Contract
accordingly.
EXAMPLE:
On Tuesday we receive an additional Purchase Payment of $4,000 from you.
You have told us you want this to go to the Alger American Growth Portfolio.
When the New York Stock Exchange closes on that Tuesday, we determine that the
value of an Accumulation Unit for investment in the Alger American Growth
Portfolio is $11.25. We then divide $4,000 by $11.25 and credit your Contract on
Tuesday night with 355.56 Accumulation Units for the Alger American Growth
Portfolio.
INVESTMENT OPTIONS
When you buy the Contract you have the opportunity to allocate your money
to: (1) the Fixed Account; (2) the Interest Adjustment Account; and (3) the
Portfolios set forth below. Additional Portfolios may be available in the
future.
YOU SHOULD READ THE PROSPECTUSES FOR THE PORTFOLIOS CAREFULLY BEFORE
INVESTING. THE PROSPECTUSES FOR THE PORTFOLIOS ACCOMPANY THIS PROSPECTUS.
MFS(R) VARIABLE INSURANCE TRUST(SM)
Massachusetts Financial Services Company is the investment adviser to each
Series. The Trust is comprised of twelve Series, the following two of which are
available under the Contracts:
MFS Emerging Growth Series
MFS Total Return Series
FEDERATED INSURANCE SERIES
Federated Advisers is the investment adviser to each Fund. The Trust has
eight separate Funds, the following three of which are available under the
Contracts:
Federated High Income Bond Fund II
Federated Utility Fund II
Federated Fund for U.S. Government Securities II
DREYFUS STOCK INDEX FUND
The Dreyfus Corporation serves as the Fund's manager and Mellon Equity
Associates serves as the Fund's index fund manager.
DREYFUS VARIABLE INVESTMENT FUND
The Dreyfus Corporation serves as the investment adviser. The Fund is
comprised of thirteen Portfolios, the following one of which is available under
the Contracts:
Growth and Income Portfolio
11
<PAGE> 15
SCUDDER VARIABLE LIFE INVESTMENT FUND
Scudder, Stevens & Clark, Inc. is the investment adviser to the Fund. The
Fund is comprised of seven Portfolios, the following two of which are available
under the Contracts:
Money Market Portfolio
International Portfolio
VAN ECK WORLDWIDE INSURANCE TRUST
Van Eck Associates Corporation is the investment adviser to the Fund. The
Trust is comprised of five funds, the following one of which is available under
the Contracts:
Worldwide Hard Assets Fund (formerly, Gold and Natural Resources Fund)
THE ALGER AMERICAN FUND
Fred Alger Management, Inc. is the investment manager. The Trust is
comprised of six Portfolios, the following one of which is available under the
Contracts:
Alger American Growth Portfolio
Shares of the Portfolios are issued and redeemed in connection with
investments in and payments under certain variable annuity contracts and (with
respect to certain of the Portfolios) variable life insurance policies of
various life insurance companies which may or may not be affiliated. The
Portfolios do not believe that offering their shares in this manner will be
disadvantageous to you. Nevertheless, the Board of Trustees or the Boards of
Directors, as applicable, intend to monitor events in order to identify any
material irreconcilable conflicts which may possibly arise and to determine what
action, if any, should be taken. If such a conflict were to occur, one or more
insurance company separate accounts might withdraw its investments in a
Portfolio. An irreconcilable conflict might result in the withdrawal of a
substantial amount of a Portfolio's assets which could adversely affect such
Portfolio's net asset value per share.
VOTING RIGHTS
ULA is the legal owner of the Portfolio shares. However, ULA believes that
when a Portfolio solicits proxies in conjunction with a shareholder vote, it is
required to obtain from you and other Contract owners instructions as to how to
vote those shares. When we receive those instructions, we will vote all of the
shares we own in proportion to those instructions. This will also include any
shares that ULA owns on its own behalf. Should ULA determine that it is no
longer required to comply with the above, we will vote the shares in our own
right.
SUBSTITUTION
ULA may be required to substitute one of the Portfolios you have selected
with another Portfolio. We would not do this without the prior approval of the
Securities and Exchange Commission. We will give you notice of our intention to
do this.
TRANSFERS
During the Accumulation Phase, you can transfer money among the Portfolios,
the Fixed Account and the Interest Adjustment Account, after the right to
examine contract period is over. During the Accumulation Phase, ULA currently
allows you to make as many transfers as you want to each year. However, this
product is not designed for professional market timing organizations or other
individuals using programmed and frequent transfers. Such activity may be
disruptive to a Portfolio. We reserve the right to stop or prohibit these types
of transfers if we determine that they could harm a Portfolio.
12
<PAGE> 16
If you make more than 12 transfers in a year, there is a transfer fee
deducted. The fee is the lesser of $25 per transfer or 2% of the amount
transferred. The following applies to any transfer:
1. The minimum amount which you can transfer is $250 from an Account
or your entire value in the Account. This requirement is waived if the
transfer is in connection with the Dollar Cost Averaging Program (which is
described below).
2. You cannot make transfers during the right to examine contract
period.
3. The minimum amount which must remain in an Account after a transfer
is $500, or $0 if the entire amount in the Account is transferred.
4. The maximum amount which can be transferred from the Fixed Account
to the Portfolios is 25% of the value of your Contract in the Fixed Account
in any one Contract year. This requirement is waived if the transfer is
made pursuant to the Dollar Cost Averaging or Rebalancing Programs.
5. The maximum amount which can be transferred from each Guarantee
Period in the Interest Adjustment Account to the Portfolios, the Fixed
Account or another Guarantee Period of the Interest Adjustment Account is
25% of the value of your Contract in the Interest Adjustment Account as of
the beginning of the current Contract year. If there was no Contract value
in the Interest Adjustment Account at the beginning of the year, then the
transfer is limited to 25% of the Purchase Payment allocated to the
Interest Adjustment Account.
6. We reserve the right, at any time, to terminate, suspend or modify
the transfer privileges described above.
7. You cannot make transfers during the Income Phase.
You can make transfers by telephone during the Accumulation Phase. We may
allow you to authorize someone else to make transfers by telephone on your
behalf. If you own the Contract with a Joint Owner, unless ULA is instructed
otherwise, ULA will accept telephone instructions from either one of you. ULA
will use reasonable procedures to confirm that instructions given us by
telephone are genuine. If we do not use such procedures, we may be liable for
any losses due to unauthorized or fraudulent instructions. We may tape record
all telephone instructions. The telephone privilege may be discontinued at any
time.
DOLLAR COST AVERAGING PROGRAM
The Dollar Cost Averaging Program allows you to systematically transfer a
set amount of money on a monthly, quarterly or semi-annual basis from the
Scudder Money Market Portfolio or the Fixed Account to one or more Portfolios.
Transfers to the Fixed Account or Interest Adjustment Account are not permitted
under Dollar Cost Averaging. By allocating amounts on a regularly scheduled
basis, as opposed to allocating the total amount at one particular time, you may
be less susceptible to the impact of market fluctuations. You may only
participate in this program during the Accumulation Phase. The minimum amount
which may be transferred is $50 (per Portfolio). We will notify you for
instructions if at any time the value of the Scudder Money Market Portfolio or
the Fixed Account is not sufficient to make the requested transfer.
All Dollar Cost Averaging transfers will be made at any time prior to the
25th of a calendar month. If you choose this Program, you must participate in it
for at least one year.
If you participate in the Dollar Cost Averaging Program, the transfers made
under the Program are not taken into account in determining any transfer fee.
You may not participate in the Dollar Cost Averaging Program and the Rebalancing
Program at the same time.
We reserve the right to terminate, suspend or modify the Dollar Cost
Averaging Program.
REBALANCING PROGRAM
Once your money has been invested, the performance of the Portfolios and
the earnings from the Fixed Account and Guarantee Periods of the Interest
Adjustment Account may cause your allocation to shift. The
13
<PAGE> 17
Rebalancing Program is designed to help you maintain your specified allocation
mix among the different Portfolios. You can direct us to readjust your money
quarterly, semi-annually or annually to return to your particular percentage
allocations. The value of your Contract must be at least $5,000 to have
transfers made under this Program. You may not rebalance your money in the Fixed
Account or the Interest Adjustment Account. If you participate in the
Rebalancing Program, the transfers made under the Program are not taken into
account in determining any transfer fee. You may not participate in the
Rebalancing Program and the Dollar Cost Averaging Program at the same time.
ASSET ALLOCATION PROGRAMS
ULA understands the importance of having available on a continuous basis
advice from a financial adviser regarding your investments in the Contract
(asset allocation program). Certain investment advisers have made arrangements
with us to make their services available to you. ULA has not made any
independent investigation of these advisers and is not endorsing such programs.
You may be required to enter into an advisory agreement with your investment
adviser. You are responsible for the compensation of the adviser you choose.
Under certain asset allocation programs, if you are under age 59 1/2, you
will be billed for the services of the investment adviser. If you are 59 1/2 or
older, ULA will, pursuant to an agreement with you, make a partial withdrawal
from the value of your Contract to pay for the services of the investment
adviser. If the Contract is Non-Qualified, the withdrawal will be treated like
any other distribution and will be includible in gross income for federal tax
purposes and, under certain circumstances, may be subject to a tax penalty.
PERFORMANCE
ULA may periodically advertise performance of the various Portfolios. ULA
will calculate performance by determining the percentage change in the value of
an Accumulation Unit by dividing the increase (decrease) for that unit by the
value of the Accumulation Unit at the beginning of the period. This performance
number reflects the deduction of the insurance charges, the contract maintenance
charge and the expenses of the Portfolio. It does not reflect the deduction of
any applicable contingent deferred sales charge. The deduction of any applicable
contingent deferred sales charge would reduce the percentage increase or make
greater any percentage decrease. Any advertisement will also include average
annual total return figures which reflect the deduction of the insurance
charges, contract maintenance charge, contingent deferred sales charges and the
expenses of the Portfolios.
The Portfolios have been in existence for some time and have investment
performance history. However, the Contracts are relatively new. In order to
demonstrate how the actual investment experience of the Portfolios may affect
your Accumulation Unit values, ULA prepares hypothetical performance
information. The performance is based on the performance of the Portfolios,
modified to reflect the charges and expenses of your Contract as if it had been
in existence for the time periods shown. ULA will also provide standardized
total return performance figures for the Accumulation Unit values for the
applicable time periods, where available. The information is based upon the
historical experience of the Portfolios and does not necessarily represent what
your investment would earn in those Portfolios.
From time to time, we may advertise the Scudder Money Market Portfolio's
yield and effective yield. ULA may also in the future advertise yield
information for one or more of the other Portfolios. If it does, it will provide
you with information regarding how yield is calculated. More detailed
information regarding how performance is calculated is found in the SAI.
Any performance advertised will be based on historical data and does not
guarantee future results of the Portfolios.
14
<PAGE> 18
EXPENSES
There are charges and other expenses associated with the Contract that will
reduce your investment return. These charges and expenses are:
INSURANCE CHARGES
We deduct insurance charges each day. We do this as part of the calculation
of the value of the Accumulation Units. The insurance charges are: 1) the
mortality and expense risk charge and 2) the administrative charge.
Mortality and Expense Risk Charge. This charge is equal, on an annual
basis, to 1.52% of the average daily value of the Contract invested in a
Portfolio, after the deduction of expenses. This charge compensates us for all
the insurance benefits provided by your Contract (for example, the guarantee of
annuity rates, the death benefits, certain expenses related to the Contract, and
for assuming the risk (expense risk) that the current charges will be
insufficient in the future to cover the cost of administering the Contract).
Approximately 1.25% of the mortality and expense risk charge is for the standard
death benefit and approximately .27% is for the enhanced death benefit (see the
"Death Benefits" section of this prospectus). The portion of the charge which is
to pay for the enhanced death benefit will be charged to all Contracts issued,
whether or not your state permits us to offer the enhanced death benefit (which
means that you may pay for a benefit you do not receive).
Administrative Charge. This charge is equal, on an annual basis, to .15% of
the average daily value of the Contract invested in a Portfolio, after the
deduction of expenses. This charge, together with the contract maintenance
charge (which is explained below), is for all the expenses associated with the
administration of the Contract. Some of these expenses include: preparation of
the Contract, confirmations, annual reports and statements, maintenance of
Contract records, personnel costs, legal and accounting fees, filing fees, and
computer and systems costs. Because this charge is taken out of every
Accumulation Unit value, you may pay more in administrative costs than those
that are associated solely with your Contract. ULA does not intend to profit
from this charge. However, if this charge and the contract maintenance charge
are not enough to cover the costs of the Contracts in the future, ULA will bear
the loss.
CONTRACT MAINTENANCE CHARGE
Every year on the anniversary of the date when your Contract was issued,
ULA deducts $30 from your Contract as a contract maintenance charge. During the
Accumulation Phase, if the value of your Contract is at least $75,000 when the
deduction for the charge is to be made, ULA will not deduct this charge. If you
make a complete withdrawal from your Contract, the contract maintenance charge
will also be deducted. During the Income Phase, no contract maintenance charge
will be deducted. This charge is for administrative expenses (see above) and
cannot be increased.
CONTINGENT DEFERRED SALES CHARGE
Withdrawals may be subject to a contingent deferred sales charge. During
the Accumulation Phase, you can make withdrawals from your Contract (see the
"Withdrawals" section). ULA keeps track of each Purchase Payment you make. The
amount of the contingent deferred sales charge depends upon how long ULA has had
your payment. The charge is calculated at the time of each withdrawal and will
be deducted from the value remaining in your Contract. The charge is:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Number of complete years from receipt of 10 years
Purchase Payment: 0 1 2 3 4 5 6 7 8 9 or more
Contingent Deferred Sales Charge: 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.0% 4.0% 3.0% 2.0% 0%
</TABLE>
However, after ULA has had a Purchase Payment for 10 years, there is no
charge when you withdraw that Purchase Payment. For purposes of the contingent
deferred sales charge, ULA treats withdrawals as coming from the oldest Purchase
Payments first. ULA does not assess the contingent deferred sales charge on any
payments paid out as Annuity Payments or as death benefits.
15
<PAGE> 19
NOTE: For tax purposes, withdrawals are considered to have come from the
last money you put into the Contract. Thus, for tax purposes, earnings are
considered to come out first.
Free Withdrawal Amount -- You can make a partial withdrawal without
incurring a contingent deferred sales charge of the "free withdrawal amount."
The free withdrawal amount is equal to the greater of: (a) earnings, or (b) 10%
of remaining Purchase Payments at the beginning of the current year. If your
withdrawal is not on a Contract anniversary, the free withdrawal amount is equal
to the free withdrawal amount at the beginning of the Contract year less amounts
withdrawn without the contingent deferred sales charge during the current
Contract year. If you make a complete withdrawal, the free withdrawal amount is
not available. Any amounts withdrawn as the free withdrawal amount will not be
subject to an Interest Adjustment.
In addition, in certain states, you can make a total or partial withdrawal
and ULA will not deduct the contingent deferred sales charge if you are confined
to a skilled nursing home facility for 90 consecutive days after the first
Contract year.
REDUCTION OR ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE
ULA will reduce or eliminate the amount of the contingent deferred sales
charge when the Contract is sold under circumstances which reduce its sales
expenses. Some examples are: if there is a large group of individuals that will
be purchasing the Contract or a prospective purchaser already had a relationship
with ULA. ULA will not deduct a contingent deferred sales charge under a
Contract issued to an officer, director or employee of ULA or any of its
affiliates. Any circumstances resulting in the reduction or elimination of the
contingent deferred sales charge requires our prior approval.
TRANSFER FEE
You can make 12 free transfers every year. We measure a year from the day
we issue your Contract. If you make more than 12 transfers a year, we will
deduct a transfer fee of $25 or 2% of the amount that is transferred, whichever
is less, for each additional transfer.
If the transfer is part of the Dollar Cost Averaging or Rebalancing
Programs, it will not count in determining the transfer fee.
PREMIUM TAXES
Some states and other governmental entities (e.g., municipalities) charge
premium taxes or similar taxes. ULA is responsible for the payment of these
taxes and will make a deduction from the value of your Contract for them. Some
of these taxes are due when the Contract is issued, others are due when Annuity
Payments begin. It is ULA's current practice to pay any premium taxes when they
become payable to the states. Premium taxes generally range from 0% to 4.0%,
depending on the state.
INCOME TAXES
ULA will deduct from the Contract any income taxes which it may incur
because of the Contract. Currently, ULA is not making any such deductions.
PORTFOLIO EXPENSES
There are deductions from and expenses paid out of the assets of the
various portfolios which are described in the prospectuses for the Portfolios.
TAXES
NOTE: ULA HAS PREPARED THE FOLLOWING INFORMATION ON TAXES AS A GENERAL
DISCUSSION OF THE SUBJECT. IT IS NOT INTENDED AS TAX ADVICE. YOU SHOULD CONSULT
YOUR OWN TAX ADVISER ABOUT YOUR OWN CIRCUMSTANCES. ULA HAS INCLUDED ADDITIONAL
INFORMATION REGARDING TAXES IN THE STATEMENT OF ADDITIONAL INFORMATION.
16
<PAGE> 20
ANNUITY CONTRACTS IN GENERAL
Annuity contracts are a means of setting aside money for future
needs -- usually retirement. Congress recognized how important saving for
retirement was and provided special rules in the Internal Revenue Code (Code)
for annuities.
Basically, these rules provide that you will not be taxed on the earnings
on the money held in your annuity Contract until you take the money out. This is
referred to as Tax Deferral. There are different rules regarding how you will be
taxed depending upon how you take the money out and the type of
Contract -- Qualified or Non-Qualified (see following sections).
You, as the Owner, will not be taxed on increases in the value of your
Contract until a distribution occurs -- either as a withdrawal or as Annuity
Payments. When you make a withdrawal you are taxed on the amount of the
withdrawal that is earnings. For Annuity Payments, different rules apply. A
portion of each Annuity Payment you receive will be treated as a partial return
of your Purchase Payments and will not be taxed. The remaining portion of the
Annuity Payment will be treated as ordinary income. How the Annuity Payment is
divided between taxable and non-taxable portions depends upon the period over
which the Annuity Payments are expected to be made. Annuity Payments received
after you have received all of your Purchase Payments are fully includible in
income.
When a Non-Qualified Contract is owned by a non-natural person (e.g., a
corporation or certain other entities other than tax-qualified trusts), the
Contract will generally not be treated as an annuity for tax purposes. This
means that the Contract may not receive the benefits of Tax-Deferral. Income may
be taxed as ordinary income every year.
QUALIFIED AND NON-QUALIFIED CONTRACTS
If you purchase the Contract under a Qualified plan, your Contract is
referred to as a Qualified Contract. Examples of Qualified plans are: Individual
Retirement Annuities (IRAs), Tax-Sheltered Annuities (sometimes referred to as
403(b) Contracts), H.R. 10 Plans (sometimes referred to as Keogh Plans), pension
and profit-sharing plans, which include 401(k) plans and Section 457 Deferred
Compensation Plans.
If you do not purchase the Contract under a Qualified plan, your Contract
is referred to as a Non-Qualified Contract.
WITHDRAWALS -- NON-QUALIFIED CONTRACTS
If you make a withdrawal from your Contract, the Code treats such a
withdrawal as first coming from earnings and then from your Purchase Payments.
In most cases, such withdrawn earnings are includible in income.
The Code also provides that any amount received under an annuity contract
which is included in income may be subject to a tax penalty. The amount of the
penalty is equal to 10% of the amount that is includible in income. Some
withdrawals will be exempt from the penalty. They include any amounts: (1) paid
on or after the taxpayer reaches age 59 1/2; (2) paid after you die; (3) paid if
the taxpayer becomes totally disabled (as that term is defined in the Code); (4)
paid in a series of substantially equal payments made annually (or more
frequently) for the life or life expectancy of the taxpayer; (5) paid under an
immediate annuity; or (6) which come from purchase payments made prior to August
14, 1982.
WITHDRAWALS -- QUALIFIED CONTRACTS
The above information describing the taxation of Non-Qualified Contracts
does not apply to Qualified Contracts. There are special rules that govern
Qualified Contracts. A more complete discussion of withdrawals from Qualified
Contracts is contained in the Statement of Additional Information.
17
<PAGE> 21
WITHDRAWALS -- TAX-SHELTERED ANNUITIES
The Code limits the withdrawal of purchase payments made by owners from
certain Tax-Sheltered Annuities. Withdrawals can only be made when an owner: (1)
reaches age 59 1/2; (2) leaves his/her job; (3) dies; (4) becomes disabled (as
that term is defined in the Code); or (5) in the case of hardship. However, in
the case of hardship, the owner can only withdraw the purchase payments and not
any earnings.
DIVERSIFICATION
The Code provides that the underlying investments for a variable annuity
must satisfy certain diversification requirements in order to be treated as an
annuity contract. ULA believes that the Portfolios are being managed so as to
comply with the requirements.
Neither the Code nor the Internal Revenue Service Regulations issued to
date provide guidance as to the circumstances under which you, because of the
degree of control you exercise over the underlying investments, and not ULA
would be considered the owner of the shares of the Portfolios. If this occurs,
it will result in the loss of the favorable tax treatment for the Contract. It
is unknown to what extent under federal tax law Contract Owners are permitted to
select Portfolios, to make transfers among the Portfolios or the number and type
of Portfolios Owners may select from. If any guidance is provided which is
considered a new position, then the guidance would generally be applied
prospectively. However, if such guidance is considered not to be a new position,
it may be applied retroactively. This would mean that you, as the Owner of the
Contract, could be treated as the owner of the Portfolios.
Due to the uncertainty in this area, ULA reserves the right to modify the
Contract in an attempt to maintain favorable tax treatment.
WITHDRAWALS
You can have access to the money in your Contract: (1) by making a
withdrawal (either a partial or a total withdrawal); (2) by receiving Annuity
Payments; or (3) when a death benefit is paid to your Beneficiary. Withdrawals
can only be made during the Accumulation Phase.
When you make a complete withdrawal you will receive the value of the
Contract on the day you made the withdrawal less any applicable contingent
deferred sales charge, less any premium tax and less any contract maintenance
charge. (See "Expenses" for a discussion of the charges.) A partial withdrawal
is taken first from the value of the Contract for which the free withdrawal
provision applies and then from the value for which there is no waiver.
Any partial withdrawal must be for at least $500 (unless it is made under
the Systematic Withdrawal Program, see below). Unless you tell us otherwise,
partial withdrawals will be made pro-rata from the Portfolios. ULA requires that
after you make a partial withdrawal the value of your Contract must be at least
$2,000 and the value of any Account must be at least $500. A partial withdrawal
from the Fixed Account or the Interest Adjustment Account is made first from the
one year Fixed Account Guarantee Period and then next from the Guarantee Period
of the shortest remaining duration and then from the Guarantee Period with the
earliest effective date where the Guarantee Periods are of the same duration. A
withdrawal from the Interest Adjustment Account may be subject to an adjustment
(see Appendix B for information regarding the Interest Adjustment Account).
INCOME TAXES, TAX PENALTIES AND CERTAIN RESTRICTIONS MAY APPLY TO ANY
WITHDRAWAL YOU MAKE.
There are limits to the amount you can withdraw from a Qualified plan
referred to as a 403(b) plan. For a more complete explanation see -- Taxes and
the discussion in the SAI.
SYSTEMATIC WITHDRAWAL PROGRAM
If the value of your Contract is at least $12,000, ULA offers a Program
which provides automatic periodic payments to you each year. Systematic
withdrawals can be made at any time, including during the
18
<PAGE> 22
first year. You can instruct us how much you want to withdraw under the Program
as long as each payment is at least $100. You may terminate systematic
withdrawals by giving us thirty (30) days prior written notice. We do not
currently charge for systematic withdrawals but reserve the right to charge for
them in the future. The contingent deferred sales charge may apply to systematic
withdrawals (see "Expenses"). Systematic withdrawals are available for Qualified
and Non-Qualified Contracts.
INCOME TAXES AND TAX PENALTIES MAY APPLY TO SYSTEMATIC WITHDRAWALS.
SUSPENSION OF PAYMENTS OR TRANSFERS
ULA may be required to suspend or postpone payments for withdrawals or
transfers for any period when:
1. the New York Stock Exchange is closed (other than customary weekend and
holiday closings);
2. trading on the New York Stock Exchange is restricted;
3. an emergency exists as a result of which disposal of the Portfolio
shares is not reasonably practicable or ULA cannot reasonably value the
Portfolio shares;
4. during any other period when the Securities and Exchange Commission, by
order, so permits for the protection of owners.
ULA has reserved the right to defer payment for a withdrawal or transfer
from the Fixed Account or the Interest Adjustment Account for the period
permitted by law but not for more than six months.
DEATH BENEFIT
Upon Your Death
If you die during the Accumulation Phase, ULA will pay a death benefit to
your Beneficiary (see below). No death benefit is paid during the Income Phase.
If you have a Joint Owner, and the Joint Owner dies, the surviving Owner will be
considered the primary Beneficiary. Any other Beneficiary designation on record
at the time of death will be treated as a contingent Beneficiary. Joint Owners
must be spouses.
Death Benefit
The death benefit will be the value of your Contract in the Fixed Account
and the Interest Adjustment Account plus the greater of:
(a) the value of your Contract invested in the Portfolios as of the
date ULA receives proof of death and an election for the method of payment;
or
(b) the Purchase Payments you have made which are invested in the
Portfolios, less any money taken out and transfers from the Portfolios (and
related contingent deferred sales charges and transfer fees) (referred to
as "net purchase payments"), increased by 6% per year up to the first
Contract anniversary after your 75th birthday (up to a maximum of two times
the net purchase payment); or
(c) the highest reset value up to the date of death. The reset value
is the value of your Contract invested in the Portfolios on each 10th
Contract anniversary prior to your 85th birthday, plus Purchase Payments
you have made after such Contract anniversary and invested in the
Portfolios, less any money taken out and transfers from the Portfolios
after such anniversary and any related contingent deferred sales charges
and transfer fees.
The above death benefit is the enhanced death benefit. It may not be
available in your state. If it is not, the death benefit (standard death
benefit) will be the greater of:
(a) the Purchase Payments you have made, less any money you have taken
out and related contingent deferred sales charges; or
19
<PAGE> 23
(b) the value of your Contract on the date we receive both proof of
death and an election for the payment method.
Approximately 1.25% of the mortality and expense risk charge is for the
standard death benefit and approximately .27% is for the enhanced death benefit
(see the "Expenses" section of this prospectus). The portion of the charge which
is to pay for the enhanced death benefit will be charged to all Contracts
issued, whether or not your state permits us to offer the enhanced death benefit
(which means that you may pay for a benefit you do not receive).
A Beneficiary may request that the death benefit be paid in one of the
following ways: (1) lump sum payment of the death benefit; (2) payment of the
entire death benefit within 5 years of the date of death; or (3) payment of the
death benefit under an Annuity Option. The death benefit payable under an
Annuity Option must be paid over the Beneficiary's lifetime or for a period not
extending beyond the Beneficiary's life expectancy. Payment must begin within
one year of the date of death. Any portion of the death benefit not applied
under (3) above within one year of the date of the Owner's death must be
distributed within five years of the date of death.
If the Beneficiary is the spouse of the Owner, he/she can choose to
continue the Contract in his/her own name at the then current value, elect a
lump sum payment of the death benefit or apply the death benefit to an Annuity
Option. Payment to the Beneficiary, other than in a lump sum, may only be
elected during the sixty-day period beginning with the date we receive proof of
death. If a lump sum payment is elected and all the necessary requirements are
met, the payment will be made within seven days.
If you (or any Joint Owner) die during the Income Phase and you are not the
Annuitant, any payments which are remaining under the Annuity Option selected
will continue at least as rapidly as they were being paid at your death. If you
die during the Income Phase, the Beneficiary becomes the Owner.
Death of Annuitant
If the Annuitant, who is not an Owner or Joint Owner, dies during the
Accumulation Phase, you can name a new Annuitant. If a new Annuitant is not
named within 30 days of the death of the Annuitant, you will become the
Annuitant. However, if the Owner is a non-natural person (e.g., a corporation),
then the death of the Annuitant will be treated as the death of the Owner, and a
new Annuitant may not be named.
If the Annuitant dies after Annuity Payments have begun, the remaining
amounts payable, if any, will be as provided for in the Annuity Option selected.
The remaining amounts payable will be paid to the Owner at least as rapidly as
they were being paid at the Annuitant's death.
OTHER INFORMATION
ULA
United Life & Annuity Insurance Company (ULA), 8545 United Plaza Boulevard,
Baton Rouge, Louisiana 70809-2264, is a stock life insurance company domiciled
in Louisiana and organized in 1955. ULA is authorized to conduct business in 47
states, the District of Columbia and Puerto Rico. On July 24, 1996, Pacific Life
and Accident Insurance Company (PLAIC) acquired one hundred percent ownership of
ULA. PLAIC is a wholly-owned subsidiary of PennCorp Financial Group, Inc.
(PennCorp). PennCorp is a publicly-traded insurance holding company, the
principal subsidiaries of which are insurance companies.
Until recently, United Life & Annuity Insurance Company (ULA) was known as
United Companies Life Insurance Company. ULA is in the process of formalizing
the name change to United Life & Annuity Insurance Company in the states and
jurisdictions in which it is licensed to do business. In each state in which the
name change is not yet effective, we may continue to do business as United
Companies Life Insurance Company until the name change is formally approved.
20
<PAGE> 24
THE SEPARATE ACCOUNT
ULA established a separate account, United Life & Annuity Separate Account
One (Separate Account), to hold the assets that underlie the Contracts. Prior to
May 1, 1997, the Separate Account was known as United Companies Separate Account
One. Our Board of Directors adopted a resolution to establish the Separate
Account under Louisiana insurance law on November 2, 1994. ULA has registered
the Separate Account with the Securities and Exchange Commission as a unit
investment trust under the Investment Company Act of 1940. The Separate Account
is divided into sub-accounts. Each sub-account invests in a portfolio.
The assets of the Separate Account are held in ULA's name on behalf of the
Separate Account and legally belong to ULA. However, those assets that underlie
the Contracts, are not chargeable with liabilities arising out of any other
business we may conduct. All the income, gains and losses (realized or
unrealized) resulting from these assets are credited to or charged against the
Contracts and not against any other Contracts we may issue.
DISTRIBUTION
United Variable Services, Inc. (UVS), 8545 United Plaza Boulevard, Baton
Rouge, Louisiana 70809-2264, acts as the distributor of the Contracts. UVS is a
wholly-owned subsidiary of ULA. Commissions will be paid to broker-dealers who
sell the Contracts.
FINANCIAL STATEMENTS
The financial statements of ULA and the Separate Account have been included
in the Statement of Additional Information.
21
<PAGE> 25
APPENDIX A
CONDENSED FINANCIAL INFORMATION
ACCUMULATION UNIT VALUES
The following schedule includes Accumulation Unit values for the periods
indicated. This data has been taken from the Separate Account's financial
statements. This information should be read in conjunction with the Separate
Account's financial statements and related notes thereto which appear in the
Statement of Additional Information.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
COMMENCEMENT COMMENCEMENT
DATE OF OF OPERATIONS OR OF OPERATIONS
COMMENCEMENT FOR YEAR ENDED THROUGH
OF OPERATIONS 12-31-96 12-31-95
------------- ---------------- -------------
<S> <C> <C> <C>
ALGER AMERICAN GROWTH SUB-ACCOUNT
Unit value at beginning of period......................... 12/15/95 $ 10.05 $ 10.00
Unit value at end of period............................... $ 11.21 $ 10.05
Number of units outstanding at end of period.............. 223,099 6,521
DREYFUS STOCK INDEX SUB-ACCOUNT
Unit value at beginning of period......................... 12/15/95 $ 10.15 $ 10.00
Unit value at end of period............................... $ 12.24 $ 10.15
Number of units outstanding at end of period.............. 161,011 4,041
DREYFUS GROWTH AND INCOME SUB-ACCOUNT
Unit value at beginning of period......................... 1/2/96 $ 10.48 N/A
Unit value at end of period............................... $ 12.44
Number of units outstanding at end of period.............. 109,336
FEDERATED HIGH INCOME BOND FUND II SUB-ACCOUNT
Unit value at beginning of period......................... 12/15/95 $ 10.16 $ 10.00
Unit value at end of period............................... $ 11.42 $ 10.16
Number of units outstanding at end of period.............. 163,448 456
FEDERATED UTILITY FUND II SUB-ACCOUNT
Unit value at beginning of period......................... 2/21/96 $ 10.30 N/A
Unit value at end of period............................... $ 11.30
Number of units outstanding at end of period.............. 37,035
FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II SUB-ACCOUNT
Unit value at beginning of period......................... 1/2/96 $ 10.14 N/A
Unit value at end of period............................... $ 10.39
Number of units outstanding at end of period.............. 22,384
MFS EMERGING GROWTH SUB-ACCOUNT
Unit value at beginning of period......................... 12/15/95 $ 10.19 $ 10.00
Unit value at end of period............................... $ 11.73 $ 10.19
Number of units outstanding at end of period.............. 199,515 100
MFS TOTAL RETURN SUB-ACCOUNT
Unit value at beginning of period......................... 12/15/95 $ 10.25 $ 10.00
Unit value at end of period............................... $ 11.52 $ 10.25
Number of units outstanding at end of period.............. 121,925 2,346
SCUDDER MONEY MARKET SUB-ACCOUNT
Unit value at beginning of period......................... 11/28/95 $ 10.04 $ 10.00
Unit value at end of period............................... $ 10.37 $ 10.04
Number of units outstanding at end of period.............. 210,903 7,407
SCUDDER INTERNATIONAL SUB-ACCOUNT
Unit value at beginning of period......................... 12/15/95 $ 10.11 $ 10.00
Unit value at end of period............................... $ 11.42 $ 10.11
Number of units outstanding at end of period.............. 101,078 6
VAN ECK WORLDWIDE HARD ASSETS SUB-ACCOUNT
Unit value at beginning of period......................... 1/2/96 $ 10.14 N/A
Unit value at end of period............................... $ 11.77
Number of units outstanding at end of period.............. 7,122
</TABLE>
A-1
<PAGE> 26
APPENDIX B
THE INTEREST ADJUSTMENT ACCOUNT
You may allocate your Purchase Payment to one or more Guarantee Periods of
the Interest Adjustment Account. Currently, we offer three Guarantee Periods in
the Interest Adjustment Account -- 3 years, 5 years and 7 years. During the
Accumulation Phase, you may make transfers from the Portfolios or the Fixed
Account to the Guarantee Periods on the next Contract anniversary. There will be
an initial current interest rate for a Guarantee Period. After the Guarantee
Period ends, the current interest rate for any subsequent Guarantee Period may
be different.
Because of certain exemptive and exclusionary provisions, interests in the
Interest Adjustment Account are not registered under the Securities Act of 1933
and the Interest Adjustment Account is not registered as an investment company
under the Investment Company Act of 1940. Therefore, neither the Interest
Adjustment Account nor any interests in it are subject to the provisions of
these Acts and ULA has been advised that the staff of the Securities and
Exchange Commission has not reviewed the disclosure in this prospectus relating
to the Interest Adjustment Account. Disclosures regarding the Interest
Adjustment Account may, however, be subject to certain generally applicable
provisions of the federal securities laws relating to the accuracy and
completeness of statements made in prospectuses.
During the thirty (30) days prior to the end of a Guarantee Period, you may
elect to renew for the same or any other Guarantee Period or may transfer to the
Fixed Account or the Portfolios.
Except on the latest Annuity Date, if you make a withdrawal, transfer from
or begin receiving Annuity Payments from a Guarantee Period of the Interest
Adjustment Account prior to the end of the Guarantee Period, the amounts
withdrawn, transferred or applied to an Annuity Option may be subject to an
interest adjustment (see below). However, no interest adjustment will be applied
in the following situations: (1) payment of a death benefit; (2) amounts
withdrawn to pay fees and charges; (3) amounts withdrawn as the free withdrawal
amount; and (4) amounts withdrawn or transferred within thirty (30) days prior
to the end of the Guarantee Period.
The interest adjustment will be calculated using the formula which provides
you with the larger value. The formulas are calculated by: (a) multiplying the
amount withdrawn, transferred or annuitized by the formula below or by (b)
accumulating the Purchase Payment withdrawn, transferred or annuitized by 3%
annually. Both (a) and (b) will be adjusted for any applicable contingent
deferred sales charges and any prior deductions for withdrawals and taxes. The
interest adjustment factor is equal to:
((1 + i) / ((1 + j + .004)(n/12)) - 1)
<TABLE>
<S> <C> <C> <C>
where i = Current interest rate credited to the value of your Contract
allocated to a Guarantee Period as of the beginning of the
Guarantee Period.
j = Current interest rate then being offered for new Guarantee
Periods with durations equal to the number of years in the
current Guarantee Period.
n = Number of full months remaining in the Guarantee Period.
</TABLE>
The interest adjustment may be positive or negative. The interest
adjustment will be an addition to or deduction from the remaining amount of the
value of your Contract (except when you make a complete withdrawal).
B-1
<PAGE> 27
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
Company..................................................... 3
Independent Auditors........................................ 3
Legal Opinions.............................................. 4
Distributor................................................. 4
Reduction or Elimination of the Contingent Deferred Sales
Charge.................................................... 4
Yield Calculation For Money Market Portfolio................ 4
Performance Information..................................... 5
Tax Status.................................................. 7
Annuity Provisions.......................................... 14
Financial Statements........................................ 14
</TABLE>
C-1
<PAGE> 28
Please send me, at no charge, the Statement of Additional Information
dated May 1, 1997 for the SpectraDirect Fixed and Variable Annuity
Contract issued by United Life & Annuity Insurance Company.
(Please print or type and fill in all information)
----------------------------------------------------------------------
Name
----------------------------------------------------------------------
Address
----------------------------------------------------------------------
City State Zip Code
ULV-AD-4009SD (5/97)
<PAGE> 29
<TABLE>
<S> <C>
- ------------------------------------ -------------------
- ------------------------------------ Put stamp here
- ------------------------------------ The Post Office will
not deliver mail
without postage.
-------------------
</TABLE>
United Life & Annuity Insurance Company
Attn: Customer Service Dept.
P.O. Box 260100
Baton Rouge, LA 70826-0100
<PAGE> 30
This prospectus does not constitute an offering in any jurisdiction in which
such offering may not lawfully be made. No person is authorized to make any
representations in connection with this offering, other than those contained in
this prospectus.
Issued by:
UNITED LIFE & ANNUITY INSURANCE COMPANY
A Member of the PennCorp Financial Group of Companies
PO Box 260100, Baton Rouge, LA 70826-0100
8545 United Plaza Blvd, Baton Rouge, LA 70809-2264
Distributed by United Variable Services, Inc., Member NASD
<PAGE> 31
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL AND GROUP FIXED AND VARIABLE DEFERRED
ANNUITY CONTRACTS
ISSUED BY
UNITED LIFE & ANNUITY SEPARATE ACCOUNT ONE
(FORMERLY UNITED COMPANIES SEPARATE ACCOUNT ONE)
AND
UNITED LIFE & ANNUITY INSURANCE COMPANY
(FORMERLY UNITED COMPANIES LIFE INSURANCE COMPANY)
THIS IS NOT A PROSPECTUS. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD
BE READ IN CONJUNCTION WITH THE PROSPECTUS DATED MAY 1, 1997, FOR THE INDIVIDUAL
AND GROUP FIXED AND VARIABLE DEFERRED ANNUITY CONTRACTS WHICH ARE REFERRED TO
HEREIN.
THE PROSPECTUS CONCISELY SETS FORTH INFORMATION THAT A PROSPECTIVE INVESTOR
OUGHT TO KNOW BEFORE INVESTING. FOR A COPY OF THE PROSPECTUS CALL OR WRITE THE
COMPANY AT: UNITED LIFE & ANNUITY INSURANCE COMPANY, P.O. BOX 260100, BATON
ROUGE, LOUISIANA 70826-0100, (800) 825-7568.
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED MAY 1, 1997.
<PAGE> 32
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Company..................................................... 1
Independent Auditors........................................ 1
Legal Opinions.............................................. 1
Distributor................................................. 1
Reduction or Elimination of the Contingent Deferred Sales
Charge.................................................... 2
Yield Calculation For Money Market Portfolio................ 2
Performance Information..................................... 2
Tax Status.................................................. 5
Annuity Provisions.......................................... 10
Financial Statements........................................ 10
</TABLE>
i
<PAGE> 33
COMPANY
United Life & Annuity Insurance Company ("ULA" or the "Company") is a stock
life insurance company domiciled in Louisiana and organized in 1955. ULA is
licensed to do business in 47 states, the District of Columbia and Puerto Rico.
Until recently, United Life & Annuity Insurance Company was known as United
Companies Life Insurance Company. ULA is in the process of formalizing the name
change to United Life & Annuity Insurance Company in the states and
jurisdictions in which it is licensed to do business. In each state in which the
name change is not yet effective, the Company may continue to do business as
United Companies Life Insurance Company until the name change is formally
approved.
On July 24, 1996, Pacific Life and Accident Insurance Company ("PLAIC")
acquired one hundred percent ownership of the Company from United Companies
Financial Corporation ("UCFC"), including its wholly-owned subsidiary United
Variable Services, Inc., a registered broker-dealer which acts as the principal
underwriter of the Contracts issued by the Company (the "Acquisition").
Under the terms of the Acquisition, the sales price was comprised of cash,
estimated, as of January 30, 1996, to be $109 million, and real estate and other
assets owned by the Company to be distributed to UCFC prior to the acquisition.
The real estate to be distributed included portions of the United Plaza office
park, including UCFC's home office. In addition, UCFC purchased a convertible
promissory note from an affiliate of the purchaser for $15 million in cash. The
purchaser also agreed that the Company would continue to be an investor in first
lien home equity loans originated by UCFC's lending operations and that the
purchaser would use commercially reasonable efforts to maintain the Company's
home office operations in its present location in Baton Rouge, Louisiana
following the closing for at least two years.
PLAIC is a Texas domestic life insurance company, formed on May 31, 1985.
PLAIC is a wholly-owned life insurance subsidiary of PennCorp Financial Group,
Inc. ("PennCorp") and acts as the holding company for the stock of Pennsylvania
Life Insurance Company and Professional Insurance Corporation.
PennCorp is a publicly-traded insurance holding company the principal
subsidiaries of which are insurance companies with operations throughout the
United States and Canada, the executive offices of which are located in Baton
Rouge, Louisiana, Raleigh, North Carolina, Jacksonville, Florida, Waco, Texas
and Toronto, Canada.
INDEPENDENT AUDITORS
The consolidated financial statements and financial statement schedules of
United Companies Life Insurance Company and subsidiary as of December 31, 1996
and for the periods from July 24, 1996 to December 31, 1996 (Successor period)
and from January 1, 1996 to July 23, 1996 (Predecessor period) and the financial
statements of United Companies Separate Account One as of December 31, 1996 and
for the year then ended have been audited by KPMG Peat Marwick LLP, independent
auditors, as stated in their reports appearing herein.
The financial statements of United Companies Life Insurance Company and
subsidiary as of December 31, 1995 and for each of the two years in the period
ended December 31, 1995 included in this Statement of Additional Information
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein.
LEGAL OPINIONS
Legal matters in connection with the Contracts described herein are being
passed upon by the law firm of Blazzard, Grodd & Hasenauer, P.C., Westport,
Connecticut.
DISTRIBUTOR
United Variable Services, Inc., a wholly-owned subsidiary of the Company,
acts as the distributor. The offering is on a continuous basis.
1
<PAGE> 34
REDUCTION OR ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE
The amount of the Contingent Deferred Sales Charge on the Contracts may be
reduced or eliminated when sales of the Contracts are made to individuals or to
a group of individuals in a manner that results in savings of sales expenses.
The entitlement to a reduction of the Contingent Deferred Sales Charge will be
determined by the Company after examination of the following factors: 1) the
size of the group; 2) the total amount of purchase payments expected to be
received from the group; 3) the nature of the group for which the Contracts are
purchased, and the persistency expected in that group; 4) the purpose for which
the Contracts are purchased and whether that purpose makes it likely that
expenses will be reduced; and 5) any other circumstances which the Company
believes to be relevant to determining whether reduced sales or administrative
expenses may be expected. None of the reductions in charges for sales is
contractually guaranteed.
The Contingent Deferred Sales Charge will be eliminated when the Contracts
are issued to an officer, director or employee of the Company or any of its
affiliates. In no event will any reduction or elimination of the Contingent
Deferred Sales Charge be permitted where the reduction or elimination will be
unfairly discriminatory to any person.
YIELD CALCULATION FOR MONEY MARKET PORTFOLIO
The Money Market Portfolio will calculate its current yield based upon the
seven days ended on the date of calculation. For the seven calendar days ended
December 31, 1996, the annualized yield of the Money Market Portfolio was 3.21%.
The current yield of the Money Market Portfolio is computed by determining
the net change (exclusive of capital changes) in the value of a hypothetical
pre-existing Owner account having a balance of one Accumulation Unit of the
Portfolio at the beginning of the period, subtracting the Mortality and Expense
Risk Charge, the Administrative Charge and the Contract Maintenance Charge,
dividing the difference by the value of the account at the beginning of the same
period to obtain the base period return and multiplying the result by (365/7).
The Money Market Portfolio computes its effective compound yield according
to the method prescribed by the Securities and Exchange Commission. The
effective yield reflects the reinvestment of net income earned daily on Money
Market Portfolio assets. For the seven calendar days ended December 31, 1996,
the effective yield of the Money Market Portfolio was 3.26%.
Net investment income for yield quotation purposes will not include either
realized capital gains and losses or unrealized appreciation and depreciation,
whether reinvested or not.
The yields quoted should not be considered a representation of the yield of
the Money Market Portfolio in the future since the yield is not fixed. Actual
yields will depend not only on the type, quality and maturities of the
investments held by the Money Market Portfolio and changes in the interest rates
on such investments, but also on changes in the Money Market Portfolio's
expenses during the period.
Yield information may be useful in reviewing the performance of the Money
Market Portfolio and for providing a basis for comparison with other investment
alternatives. However, the Money Market Portfolio's yield fluctuates, unlike
bank deposits or other investments which typically pay a fixed yield for a
stated period of time.
PERFORMANCE INFORMATION
From time to time, the Company may advertise performance data as described
in the Prospectus. Any such advertisement will include total return figures for
the time periods indicated in the advertisement. Such total return figures will
reflect the deduction of a 1.52% Mortality and Expense Risk Charge, a .15%
Administrative Charge, the expenses for the underlying Portfolio being
advertised and any applicable Contract Maintenance Charge. Any such
advertisement will also include average annual total return for the time periods
indicated in the advertisement and will reflect the deduction of the Mortality
and Expense Risk
2
<PAGE> 35
Charge, the Administrative Charge, the Contract Maintenance Charge, the
Contingent Deferred Sales Charge and the expenses for the underlying Portfolio
being advertised.
The hypothetical value of a Contract purchased for the time periods
described in the advertisement will be determined by using the actual
Accumulation Unit values for an initial $1,000 purchase payment, and deducting
any applicable contract maintenance charge to arrive at the ending hypothetical
value. The average annual total return is then determined by computing the fixed
interest rate that a $1,000 purchase payment would have to earn annually,
compounded annually, to grow to the hypothetical value at the end of the time
periods described. The formula used in these calculations is:
P (1 + T)(n) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the time periods used
(or fractional portion thereof) of a hypothetical $1,000
payment made at the beginning of the time periods used.
In addition to total return data, the Company may include yield information
in its advertisements. For each Portfolio (other than the Money Market
Portfolio) for which the Company will advertise yield, it will show a yield
quotation based on a 30 day (or one month) period ended on the date of the most
recent balance sheet of the Separate Account included in the registration
statement, computed by dividing the net investment income per Accumulation Unit
earned during the period by the maximum offering price per Unit on the last day
of the period, according to the following formula:
Yield = 2 [(a - b + 1)(6) -1]
-------
cd
Where: a = Net investment income earned during the period by the
Portfolio attributable to shares owned by the Sub-Account.
b = Expenses accrued for the period (net of reimbursements).
c = The average daily number of Accumulation Units outstanding
during the period.
d = The maximum offering price per Accumulation Unit on the last
day of the period.
The Company may also advertise performance data which will be computed on a
different basis.
HYPOTHETICAL PERFORMANCE INFORMATION
The Sub-Accounts of the Separate Account are relatively new and therefore
have little or no meaningful investment performance history. However, the
corresponding Portfolios have been in existence for some time and consequently
have investment performance history. In order to demonstrate how the actual
investment experience of the Portfolios affects Accumulation Unit values, the
following hypothetical performance information was developed. The information is
based upon the historical experience of the Portfolios and is for the periods
shown.
Actual performance will vary and the hypothetical results shown are not
necessarily representative of future results. Performance for periods ending
after those shown may vary substantially from the examples shown below. Chart 1
shows the performance of the Accumulation Units calculated for a specified
period of time assuming an initial Purchase Payment of $1,000 allocated to each
Portfolio and a deduction of all charges and deductions (see "Expenses" in the
Prospectus for more information). Chart 2 is identical to Chart 1 except that it
does not reflect the deduction of the Contingent Deferred Sales Charge. The
hypothetical performance figures in both charts also reflect the actual fees and
expenses paid by the Portfolio. The percentage increases are determined by
subtracting the initial Purchase Payment from the ending value and dividing the
remainder by the beginning value.
3
<PAGE> 36
For the Periods Ended 12/31/96:
CHART 1
<TABLE>
<CAPTION>
PORTFOLIO
SINCE INCEPTION
1 YEAR 3 YEARS 5 YEARS INCEPTION DATE
------ ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Alger American Growth..................... 2.76% 7.34% 10.70% 14.36% 1/9/89
Dreyfus Growth and Income................. 10.06% -- -- 21.81% 5/2/94
Dreyfus Stock Index....................... 11.09% 6.63% 3.85% 4.92% 9/29/89
Federated High Income Bond II............. 4.14% -- -- .02% 3/1/94
Federated Fund for U.S. Government
Securities II........................... -5.56% -- -- -1.67% 3/28/94
Federated Utility II...................... .64% -- -- 3.24% 2/10/94
MFS Emerging Growth....................... 6.59% -- -- 15.94% 7/24/95
MFS Total Return.......................... 3.87% -- -- 14.98% 1/3/95
Scudder International..................... 3.76% 3.49% 6.88% 6.66% 5/1/87
Van Eck Worldwide Hard Assets............. 5.42% 2.81% 11.13% 5.19% 9/1/89
</TABLE>
CHART 2
<TABLE>
<CAPTION>
PORTFOLIO
SINCE INCEPTION
1 YEAR 3 YEARS 5 YEARS INCEPTION DATE
------ ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Alger American Growth...................... 10.76% 9.33% 11.48% 14.55% 1/9/89
Dreyfus Growth and Income.................. 18.06% -- -- 23.81% 5/2/94
Dreyfus Stock Index........................ 19.09% 8.64% 4.87% 5.32% 9/29/89
Federated High Income Bond II.............. 12.14% -- -- 2.60% 3/1/94
Federated Fund for U.S. Government
Securities II............................ 2.44% -- -- 1.06% 3/28/94
Federated Utility II....................... 8.64% -- -- 5.63% 2/10/94
MFS Emerging Growth........................ 14.59% -- -- 21.10% 7/24/95
MFS Total Return........................... 11.87% -- -- 18.43% 1/3/95
Scudder International...................... 11.76% 5.62% 7.78% 6.78% 5/1/87
Van Eck Worldwide Hard Assets.............. 13.42% 4.98% 11.90% 5.58% 9/1/89
</TABLE>
The Company will also provide standardized total return performance figures
of the Sub-Accounts for the appropriate time periods, where available.
Average Annual Total Return for Periods Ending 12/31/96:
<TABLE>
<CAPTION>
SEPARATE
ACCOUNT
SINCE INCEPTION
1 YEAR 5 YEARS INCEPTION DATE
------ ------- --------- ---------
<S> <C> <C> <C> <C>
Alger American Growth....................... 2.76% N/A 7.61% 12/15/95
Dreyfus Stock Index......................... 11.09% N/A 11.36% 12/15/95
Federated High Income Bond Fund II.......... 4.14% N/A 4.65% 12/15/95
MFS Emerging Growth......................... 6.59% N/A 9.20% 12/15/95
MFS Total Return............................ 3.87% N/A 4.94% 12/15/95
Scudder International....................... 3.76% N/A 5.80% 12/15/95
</TABLE>
You should note that the investment results of each Portfolio will
fluctuate over time, and any presentation of the Portfolio's total return or
yield for any period should not be considered as a representation of what an
investment may earn or what your total return or yield may be in any future
period.
4
<PAGE> 37
TAX STATUS
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON THE COMPANY'S UNDERSTANDING
OF CURRENT FEDERAL INCOME TAX LAW APPLICABLE TO ANNUITIES IN GENERAL. THE
COMPANY CANNOT PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE
MADE. PURCHASERS ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE
POSSIBILITY OF SUCH CHANGES. THE COMPANY DOES NOT GUARANTEE THE TAX STATUS OF
THE CONTRACTS. PURCHASERS BEAR THE COMPLETE RISK THAT THE CONTRACTS MAY NOT BE
TREATED AS "ANNUITY CONTRACTS" UNDER FEDERAL INCOME TAX LAWS. IT SHOULD BE
FURTHER UNDERSTOOD THAT THE FOLLOWING DISCUSSION IS NOT EXHAUSTIVE AND THAT
SPECIAL RULES NOT DESCRIBED HEREIN MAY BE APPLICABLE IN CERTAIN SITUATIONS.
MOREOVER, NO ATTEMPT HAS BEEN MADE TO CONSIDER ANY APPLICABLE STATE OR OTHER TAX
LAWS.
GENERAL
Section 72 of the Code governs taxation of annuities in general. An Owner
is not taxed on increases in the value of a Contract until distribution occurs,
either in the form of a lump sum payment or as annuity payments under the
Annuity Option elected. For a lump sum payment received as a total surrender
(total redemption) or death benefit, the recipient is taxed on the portion of
the payment that exceeds the cost basis of the Contract. For Non-Qualified
Contracts, this cost basis is generally the purchase payments, while for
Qualified Contracts there may be no cost basis. The taxable portion of the lump
sum payment is taxed at ordinary income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion
amount is includible in taxable income. The exclusion amount for payments based
on a fixed annuity option is determined by multiplying the payment by the ratio
that the cost basis of the Contract (adjusted for any period certain or refund
feature) bears to the expected return under the Contract. Payments received
after the investment in the Contract has been recovered (i.e. when the total of
the excludible amounts equals the investment in the Contract) are fully taxable.
The taxable portion is taxed at ordinary income rates. For certain types of
Qualified Plans there may be no cost basis in the Contract within the meaning of
Section 72 of the Code. Owners, Annuitants and Beneficiaries under the Contracts
should seek competent financial advice about the tax consequences of any
distributions.
The Company is taxed as a life insurance company under the Code. For
federal income tax purposes, the Separate Account is not a separate entity from
the Company, and its operations form a part of the Company.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not adequately
diversified in accordance with regulations prescribed by the United States
Treasury Department ("Treasury Department"). Disqualification of the Contract as
an annuity contract would result in imposition of federal income tax to the
Contract Owner with respect to earnings allocable to the Contract prior to the
receipt of payments under the Contract. The Code contains a safe harbor
provision which provides that annuity contracts such as the Contracts meet the
diversification requirements if, as of the end of each quarter, the underlying
assets meet the diversification standards for a regulated investment company and
no more than fifty-five percent (55%) of the total assets consist of cash, cash
items, U.S. government securities and securities of other regulated investment
companies.
On March 2, 1989, the Treasury Department issued regulations (Treas. Reg.
1.817-5) which established diversification requirements for the investment
portfolios underlying variable contracts such as the Contracts. The regulations
amplify the diversification requirements for variable contracts set forth in the
Code and provide an alternative to the safe harbor provision described above.
Under the regulations, an investment portfolio will be deemed adequately
diversified if: (1) no more than 55% of the value of the total assets of the
portfolio is represented by any one investment; (2) no more than 70% of the
value of the total assets of the portfolio is represented by any two
investments; (3) no more than 80% of the value of the total assets of the
5
<PAGE> 38
portfolio is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments.
The Code provides that for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
by Section 817(h) of the Code have been met, "each United States government
agency or instrumentality shall be treated as a separate issuer."
The Company intends that all Portfolios underlying the Contracts will be
managed by the investment advisers for the Portfolios in such a manner as to
comply with these diversification requirements.
The Treasury Department has indicated that the diversification Regulations
do not provide guidance regarding the circumstances in which Owner control of
the investments of the Separate Account will cause the Owner to be treated as
the owner of the assets of the Separate Account, thereby resulting in the loss
of favorable tax treatment for the Contract. At this time it cannot be
determined whether additional guidance will be provided and what standards may
be contained in such guidance.
The amount of Owner control which may be exercised under the Contract is
different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the policy
owner was not the owner of the assets of the separate account. It is unknown
whether these differences, such as the Owner's ability to transfer among
investment choices or the number and type of investment choices available, would
cause the Owner to be considered as the owner of the assets of the Separate
Account resulting in the imposition of federal income tax to the Owner with
respect to earnings allocable to the Contract prior to receipt of payments under
the Contract.
In the event any forthcoming guidance or ruling is considered to set forth
a new position, such guidance or ruling will generally be applied only
prospectively. However, if such ruling or guidance was not considered to set
forth a new position, it may be applied retroactively resulting in the Owner
being retroactively determined to be the owner of the assets of the Separate
Account.
Due to the uncertainty in this area, the Company reserves the right to
modify the Contract in an attempt to maintain favorable tax treatment.
MULTIPLE CONTRACTS
The Code provides that multiple non-qualified annuity contracts which are
issued within a calendar year period to the same contract owner by one company
or its affiliates are treated as one annuity contract for purposes of
determining the tax consequences of any distribution. Such treatment may result
in adverse tax consequences, including more rapid taxation of the distributed
amounts from such combination of contracts. Owners should consult a tax adviser
prior to purchasing more than one non-qualified annuity contract in any calendar
year period.
CONTRACTS OWNED BY OTHER THAN NATURAL PERSONS
Under Section 72(u) of the Code, the investment earnings on purchase
payments for the Contracts will be taxed currently to the Owner if the Owner is
a non-natural person, e.g., a corporation or certain other entities. Such
Contracts generally will not be treated as annuities for federal income tax
purposes. However, this treatment is not applied to Contracts held by a trust or
other entity as an agent for a natural person nor to Contracts held by qualified
plans. Purchasers should consult their own tax counsel or other tax adviser
before purchasing a Contract to be owned by a non-natural person.
TAX TREATMENT OF ASSIGNMENTS
An assignment or pledge of a Contract may be a taxable event. Owners should
therefore consult competent tax advisers should they wish to assign or pledge
their Contracts.
6
<PAGE> 39
INCOME TAX WITHHOLDING
All distributions or the portion thereof which is includible in the gross
income of the Owner are subject to federal income tax withholding. Generally,
amounts are withheld from periodic payments at the same rate as wages and at the
rate of 10% from non-periodic payments. However, the Owner, in most cases, may
elect not to have taxes withheld or to have withholding done at a different
rate.
Effective January 1, 1993, certain distributions from retirement plans
qualified under Section 401 or Section 403(b) of the Code, which are not
directly rolled over to another eligible retirement plan or individual
retirement account or individual retirement annuity, are subject to a mandatory
20% withholding for federal income tax. The 20% withholding requirement
generally does not apply to: (a) a series of substantially equal payments made
at least annually for the life or life expectancy of the participant or joint
and last survivor expectancy of the participant and a designated beneficiary, or
for a specified period of 10 years or more; (b) distributions which are required
minimum distributions; or (c) the portion of the distributions not includible in
gross income (i.e. returns of after-tax contributions). Participants should
consult their own tax counsel or other tax adviser regarding withholding
requirements.
TAX TREATMENT OF WITHDRAWALS -- NON-QUALIFIED CONTRACTS
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the contract value exceeds the aggregate purchase
payments made, any amount withdrawn will be treated as coming first from the
earnings and then, only after the income portion is exhausted, as coming from
the principal. Withdrawn earnings are includible in gross income. It further
provides that a ten percent (10%) penalty will apply to the income portion of
any distribution. However, the penalty is not imposed on amounts received: (a)
after the taxpayer reaches age 59 1/2; (b) after the death of the Owner; (c) if
the taxpayer is totally disabled (for this purpose disability is as defined in
Section 72(m)(7) of the Code); (d) in a series of substantially equal periodic
payments made not less frequently than annually for the life (or life
expectancy) of the taxpayer or for the joint lives (or joint life expectancies)
of the taxpayer and his Beneficiary; (e) under an immediate annuity; or (f)
which are allocable to purchase payments made prior to August 14, 1982.
The above information does not apply to Qualified Contracts. However,
separate tax withdrawal penalties and restrictions may apply to such Qualified
Contracts. (See "Tax Treatment of Withdrawals -- Qualified Contracts.")
QUALIFIED PLANS
The Contracts offered by the Prospectus are designed to be suitable for use
under various types of Qualified Plans. Because of the minimum purchase payment
requirements, these Contracts may not be appropriate for some periodic payment
retirement plans. Taxation of participants in each Qualified Plan varies with
the type of plan and terms and conditions of each specific plan. Owners,
Annuitants and Beneficiaries are cautioned that benefits under a Qualified Plan
may be subject to the terms and conditions of the plan regardless of the terms
and conditions of the Contracts issued pursuant to the plan. Some retirement
plans are subject to distribution and other requirements that are not
incorporated into the Company's administrative procedures. Owners, participants
and Beneficiaries are responsible for determining that contributions,
distributions and other transactions with respect to the Contracts comply with
applicable law. Following are general descriptions of the types of Qualified
Plans with which the Contracts may be used. Such descriptions are not exhaustive
and are for general informational purposes only. The tax rules regarding
Qualified Plans are very complex and will have differing applications, depending
on individual facts and circumstances. Each purchaser should obtain competent
tax advice prior to purchasing a Contract issued under a Qualified Plan.
On July 6, 1983, the Supreme Court decided in Arizona Governing Committee
v. Norris that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women. The Contracts sold by the Company in connection with
Qualified Plans will utilize annuity tables which do not differentiate on the
basis of sex. Such annuity tables will also be available for use in connection
with certain non-qualified deferred compensation plans.
7
<PAGE> 40
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available and described in
this Statement of Additional Information. Generally, Contracts issued pursuant
to Qualified Plans are not transferable except upon surrender or annuitization.
Various penalty and excise taxes may apply to contributions or distributions
made in violation of applicable limitations. Furthermore, certain withdrawal
penalties and restrictions may apply to surrenders from Qualified Contracts.
(See "Tax Treatment of Withdrawals -- Qualified Contracts.")
a. H.R. 10 Plans
Section 401 of the Code permits self-employed individuals to establish
Qualified Plans for themselves and their employees, commonly referred to as
"H.R. 10" or "Keogh" plans. Contributions made to the Plan for the benefit of
the employees will not be included in the gross income of the employees until
distributed from the Plan. The tax consequences to participants may vary,
depending upon the particular Plan design. However, the Code places limitations
and restrictions on all Plans, including on such items as: amounts of allowable
contributions; form, manner and timing of distributions; transferability of
benefits; vesting and nonforfeitability of interests; nondiscrimination in
eligibility and participation; and the tax treatment of distributions,
withdrawals and surrenders. (See "Tax Treatment of Withdrawals -- Qualified
Contracts.") Purchasers of Contracts for use with an H.R. 10 Plan should obtain
competent tax advice as to the tax treatment and suitability of such an
investment.
b. Tax-Sheltered Annuities
Section 403(b) of the Code permits the purchase of "tax-sheltered
annuities" by public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. These qualifying
employers may make contributions to the Contracts for the benefit of their
employees. Such contributions are not includible in the gross income of the
employee until the employee receives distributions from the Contract. The amount
of contributions to the tax-sheltered annuity is limited to certain maximums
imposed by the Code. Furthermore, the Code sets forth additional restrictions
governing such items as transferability, distributions, nondiscrimination and
withdrawals. (See "Tax Treatment of Withdrawals -- Qualified Contracts" and
"Tax-Sheltered Annuities -- Withdrawal Limitations.") Employee loans are not
allowed under these Contracts. Any employee should obtain competent tax advice
as to the tax treatment and suitability of such an investment.
c. Individual Retirement Annuities
Section 408(b) of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity"
("IRA"). Under applicable limitations, certain amounts may be contributed to an
IRA which may be deductible from the individual's gross income. These IRAs are
subject to limitations on eligibility, contributions, transferability and
distributions. (See "Tax Treatment of Withdrawals -- Qualified Contracts.")
Under certain conditions, distributions from other IRAs and other Qualified
Plans may be rolled over or transferred on a tax-deferred basis into an IRA.
Sales of Contracts for use with IRAs are subject to special requirements imposed
by the Code, including the requirement that certain informational disclosure be
given to persons desiring to establish an IRA. Purchasers of Contracts to be
qualified as Individual Retirement Annuities should obtain competent tax advice
as to the tax treatment and suitability of such an investment.
d. Corporate Pension and Profit-Sharing Plans
Sections 401(a) and 401(k) of the Code permit corporate employers to
establish various types of retirement plans for employees. These retirement
plans may permit the purchase of the Contracts to provide benefits under the
Plan. Contributions to the Plan for the benefit of employees will not be
includible in the gross income of the employee until distributed from the Plan.
The tax consequences to participants may vary, depending upon the particular
Plan design. However, the Code places limitations and restrictions on all Plans,
including on such items as: amount of allowable contributions; form, manner and
timing of distributions; transferability of benefits; vesting and
nonforfeitability of interests; nondiscrimination in eligibility and
8
<PAGE> 41
participation; and the tax treatment of distributions, withdrawals and
surrenders. Participant loans are not allowed under the Contracts purchased in
connection with these Plans. (See "Tax Treatment of Withdrawals -- Qualified
Contracts.") Purchasers of Contracts for use with Corporate Pension or
Profit-Sharing Plans should obtain competent tax advice as to the tax treatment
and suitability of such an investment.
TAX TREATMENT OF WITHDRAWALS -- QUALIFIED CONTRACTS
In the case of a withdrawal under a Qualified Contract, a ratable portion
of the amount received is taxable, generally based on the ratio of the
individual's cost basis to the individual's total accrued benefit under the
retirement plan. Special tax rules may be available for certain distributions
from a Qualified Contract. Section 72(t) of the Code imposes a 10% penalty tax
on the taxable portion of any distribution from qualified retirement plans,
including Contracts issued and qualified under Code Sections 401 (H.R. 10 and
Corporate Pension and Profit-Sharing Plans), 403(b) (Tax-Sheltered Annuities)
and 408(b) (Individual Retirement Annuities). To the extent amounts are not
includible in gross income because they have been properly rolled over to an IRA
or to another eligible Qualified Plan, no tax penalty will be imposed. The tax
penalty will not apply to the following distributions: (a) if distribution is
made on or after the date on which the Owner or Annuitant (as applicable)
reaches age 59 1/2; (b) distributions following the death or disability of the
Owner or Annuitant (as applicable) (for this purpose disability is as defined in
Section 72(m)(7) of the Code); (c) after separation from service, distributions
that are part of substantially equal periodic payments made not less frequently
than annually for the life (or life expectancy) of the Owner or Annuitant (as
applicable) or the joint lives (or joint life expectancies) of such Owner or
Annuitant (as applicable) and his designated beneficiary; (d) distributions to
an Owner or Annuitant (as applicable) who has separated from service after he
has attained age 55; (e) distributions made to the Owner or Annuitant (as
applicable) to the extent such distributions do not exceed the amount allowable
as a deduction under Code Section 213 to the Owner or Annuitant (as applicable)
for amounts paid during the taxable year for medical care; (f) distributions
made to an alternate payee pursuant to a qualified domestic relations order; and
(g) distributions from an Individual Retirement Annuity for the purchase of
medical insurance (as described in Section 213(d)(1)(D) of the Code) for the
Owner or Annuitant (as applicable) and his or her spouse and dependents if the
Owner or Annuitant (as applicable) has received unemployment compensation for at
least 12 weeks. This exception will no longer apply after the Owner or Annuitant
(as applicable) has been re-employed for at least 60 days. The exceptions stated
in items (d) and (f) above do not apply in the case of an Individual Retirement
Annuity. The exception stated in item (c) applies to an Individual Retirement
Annuity without the requirement that there be a separation from service.
Generally, distributions from a Qualified Plan must commence no later than
April 1 of the calendar year following the later of: (a) the year in which the
employee attains age 70 1/2, or (b) the calendar year in which the employee
retires. The date set forth in (b) does not apply to an Individual Retirement
Annuity. Required distributions must be over a period not exceeding the life
expectancy of the individual or the joint lives or life expectancies of the
individual and his or her designated beneficiary. If the required minimum
distributions are not made, a 50% penalty tax is imposed as to the amount not
distributed.
TAX-SHELTERED ANNUITIES -- WITHDRAWAL LIMITATIONS
The Code limits the withdrawal of amounts attributable to contributions
made pursuant to a salary reduction agreement (as defined in Section 403(b)(11)
of the Code) to circumstances only when the Owner: (1) attains age 59 1/2; (2)
separates from service; (3) dies; (4) becomes disabled (within the meaning of
Section 72(m)(7) of the Code); or (5) in the case of hardship. However,
withdrawals for hardship are restricted to the portion of the Owner's Contract
value which represents contributions by the Owner and does not include any
investment results. The limitations on withdrawals became effective on January
1, 1989 and apply only to salary reduction contributions made after December 31,
1988, and to income attributable to such contributions and to income
attributable to amounts held as of December 31, 1988. The limitations on
withdrawals do not affect rollovers and transfers between certain Qualified
Plans. Owners should consult their own tax counsel or other tax adviser
regarding any distributions.
9
<PAGE> 42
SECTION 457 -- DEFERRED COMPENSATION PLANS
Under Section 457 of the Code, governmental and certain other tax-exempt
employers may establish deferred compensation plans for the benefit of their
employees which may invest in annuity contracts. The Code, as in the case of
qualified plans, establishes limitations and restrictions on eligibility,
contributions and distributions. Under these Plans, contributions made for the
benefit of the employees will not be includible in the employees' gross income
until distributed from the Plan. Under a Section 457 Plan, the plan assets
remain solely the property of the employer, subject only to the claims of the
employer's general creditors, until such time as made available to the
participant or beneficiary. However, for Plans established after August 20,
1996, it is required that plan assets must be held in trust for the benefit of
plan participants and are not subject to the claims of the general creditors of
the employer. Furthermore, this requirement must be met for all Plans no later
than January 1, 1999. IN CERTAIN STATES, THE CONTRACTS MAY NOT BE AVAILABLE FOR
USE IN CONNECTION WITH SECTION 457 PLANS.
ANNUITY PROVISIONS
Currently, the Company makes available payment plans on a fixed basis only.
(See the Prospectus for a description of the Annuity Options.)
FINANCIAL STATEMENTS
The financial statements of the Company included herein should be
considered only as bearing upon the ability of the Company to meet its
obligations under the Contracts.
10
<PAGE> 43
UNITED COMPANIES
SEPARATE ACCOUNT ONE
Financial Statements
as of December 31, 1996 and 1995
Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
The Board of Directors of United
Companies Life Insurance Company and
Contractowners of United Companies Separate Account One:
We have audited the accompanying statement of assets and liabilities of the
sub-accounts of United Companies Separate Account One as of December 31, 1996
and the related statements of operations and changes in net assets for the
year then ended. These financial statements are the responsibility of the
Separate Account's management. Our responsibility is to express an opinion of
these financial statements based on our audit. The accompanying statement of
changes in net assets for the period from November 28, 1995 (the date
operations commenced) to December 31, 1995 were audited by other auditors
whose report thereon dated February 16, 1996, expressed an unqualified opinion
on that statement.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets and liabilities of the sub-accounts of
United Companies Separate Account One as of December 31, 1996, the results of
their operations and the changes in their net assets for the year then ended
in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
February 21, 1997
<PAGE>
<TABLE>
<CAPTION>
UNITED COMPANIES SEPARATE ACCOUNT ONE
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
Alger Dreyfus Federated
------------ -------------------------- ------------
Growth and High Income
Growth Stock Index Income Bond
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets
- ----------------------------------------------------------------
Investments in mutual funds at market value:
The Alger American Fund (Alger):
Alger American Growth Portfolio - 86,587.513 shares
(cost $2,856,054) $ 2,972,550
The Dreyfus Variable Investment Fund (Dreyfus):
Stock Index Portfolio - 109,803.764 shares
(cost $2,088,961) $ 2,226,820
Growth and Income Fund - 76,747.137 shares
(cost $1,605,670) $ 1,500,407
Federated Investors (Federated):
High Income Bond Fund II - 216,272.157 shares
(cost $2,158,617) $ 2,214,627
Fund for U.S. Government Securities II - 26,588.729 shares
(cost $266,834)
Utility Fund II - 43,452.761 shares (cost $480,466)
Total assets $ 2,972,550 $ 2,226,820 $ 1,500,407 $ 2,214,627
============ ============ ============ ============
Liabilities - - - -
------------ ------------ ------------ ------------
Net Assets $ 2,972,550 $ 2,226,820 $ 1,500,407 $ 2,214,627
============ ============ ============ ============
Units Outstanding 265,241.783 181,968.922 120,597.703 193,943.083
============ ============ ============ ============
Average Unit Value $ 11.21 $ 12.24 $ 12.44 $ 11.42
============ ============ ============ ============
SpectraDirect Unit Value $ 11.21 $ 12.24 $ 12.44 $ 11.42
============ ============ ============ ============
SpectraSelect Unit Value $ 11.21 $ 12.25 $ 12.45 $ 11.43
============ ============ ============ ============
Federated
------------------------
U.S. Govt
Bond Utility
----------- -----------
<S> <C> <C>
Assets
- ----------------------------------------------------------------
Investments in mutual funds at market value:
The Alger American Fund (Alger):
Alger American Growth Portfolio - 86,587.513 shares
(cost $2,856,054)
The Dreyfus Variable Investment Fund (Dreyfus):
Stock Index Portfolio - 109,803.764 shares
(cost $2,088,961)
Growth and Income Fund - 76,747.137 shares
(cost $1,605,670)
Federated Investors (Federated):
High Income Bond Fund II - 216,272.157 shares
(cost $2,158,617)
Fund for U.S. Government Securities II - 26,588.729 shares
(cost $266,834) $ 268,280
Utility Fund II - 43,452.761 shares (cost $480,466) $ 513,177
-----------
Total assets $ 268,280 $ 513,177
=========== ===========
Liabilities - -
----------- -----------
Net Assets $ 268,280 $ 513,177
=========== ===========
Units Outstanding 25,831.491 45,402.768
=========== ===========
Average Unit Value $ 10.39 $ 11.30
=========== ===========
SpectraDirect Unit Value $ 10.39 $ 11.30
=========== ===========
SpectraSelect Unit Value $ 10.39 $ 11.31
=========== ===========
<FN>
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
UNITED COMPANIES SEPARATE ACCOUNT ONE
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
(CONTINED)
MFS Scudder
-------------------------- --------------------------
Emerging Total Money Intl.
Growth Return Market Equity
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets
- -------------------------------------------------------------------
Investments in mutual funds at market value:
MFS Variable Insurance Trust (MFS):
Emerging Growth Series - 215,208.693 shares
(cost $2,846,684) $ 2,849,363
Total Return Series - 123,118.47 shares
(cost $1,625,183) $ 1,687,954
Scudder Variable Life Investment Fund (Scudder):
Money Market Portfolio - 2,369,549 shares (cost $2,369,549) $ 2,369,549
International Portfolio - 103,083.833 shares (cost $1,303,034) $ 1,365,861
Van Eck Worldwide Insurance Trust (Van Eck):
Van Eck Gold/Natural Resources Fund - 5,014.665 shares
(cost $80,637)
Total assets $ 2,849,363 $ 1,687,954 $ 2,369,549 $ 1,365,861
============ ============ ============ ============
Liabilities - - - -
------------ ------------ ------------ ------------
Net Assets $ 2,849,363 $ 1,687,954 $ 2,369,549 $ 1,365,861
============ ============ ============ ============
Units Outstanding 242,852.379 146,453.119 228,486.401 119,630.504
============ ============ ============ ============
Average Unit Value $ 11.73 $ 11.53 $ 10.37 $ 11.42
============ ============ ============ ============
SpectraDirect Unit Value $ 11.73 $ 11.52 $ 10.37 $ 11.42
============ ============ ============ ============
SpectraSelect Unit Value $ 11.74 $ 11.53 $ 10.38 $ 11.42
============ ============ ============ ============
Van Eck Total
----------
All
Gold Funds
---------- -----------
<S> <C> <C>
Assets
- -------------------------------------------------------------------
Investments in mutual funds at market value:
MFS Variable Insurance Trust (MFS):
Emerging Growth Series - 215,208.693 shares
(cost $2,846,684)
Total Return Series - 123,118.47 shares
(cost $1,625,183)
Scudder Variable Life Investment Fund (Scudder):
Money Market Portfolio - 2,369,549 shares (cost $2,369,549)
International Portfolio - 103,083.833 shares (cost $1,303,034)
Van Eck Worldwide Insurance Trust (Van Eck):
Van Eck Gold/Natural Resources Fund - 5,014.665 shares
(cost $80,637) $ 83,845
----------
Total assets $ 83,845 $18,052,433
========== ===========
Liabilities - -
---------- -----------
Net Assets $ 83,845 $18,052,433
========== ===========
Units Outstanding 7,121.781
==========
Average Unit Value $ 11.77
==========
SpectraDirect Unit Value $ 11.77
==========
SpectraSelect Unit Value $ 11.78
==========
<FN>
See accompanying notes to financial statements.
</TABLE>
<TABLE>
<CAPTION>
UNITED COMPANIES SEPARATE ACCOUNT ONE
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
Alger Dreyfus Federated
--------- --------------------------- -------------------------------------
Growth and High Income U.S. Govt
Growth Stock Index Income Bond Bond Utility
--------- ------------- ------------ ------------ ----------- ----------
Year Year (Jan 2* Year (Jan 2* (Jan 19*
Ended Ended thru Ended thru thru
Dec 31 Dec 31 Dec 31) Dec 31 Dec 31) Dec 31)
--------- ------------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Income:
Dividends $ 619 $ 36,046 $ 156,611 $ 81,762 $ 6,038 $ 8,798
Expenses:
Mortality and expense risks charges
and administrative fees 21,665 16,250 10,812 15,237 1,670 3,319
--------- ------------- ------------ ------------ ----------- ----------
NET INVESTMENT INCOME (LOSS) (21,046) 19,796 145,799 66,525 4,368 5,479
--------- ------------- ------------ ------------ ----------- ----------
REALIZED GAIN (LOSS) ON
INVESTMENTS:
Proceeds from sales 386,735 500,219 293,879 769,625 106,145 93,843
Cost of securities 386,785 482,433 270,913 756,771 106,440 93,230
--------- ------------- ------------ ------------ ----------- ----------
Net Gain (Loss) (50) 17,786 22,966 12,854 (295) 613
Capital Gain Distributions Received 26,178 19,578 - - - 37
--------- ------------- ------------ ------------ ----------- ----------
NET REALIZED GAIN (LOSS) 26,128 37,364 22,966 12,854 (295) 650
--------- ------------- ------------ ------------ ----------- ----------
UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Beginning period 467 (361) - 3 - -
End of period 116,495 137,860 (105,264) 56,010 1,446 32,711
--------- ------------- ------------ ------------ ----------- ----------
NET UNREALIZED GAIN (LOSS) 116,028 138,221 (105,264) 56,007 1,446 32,711
--------- ------------- ------------ ------------ ----------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $121,110 $ 195,381 $ 63,501 $ 135,386 $ 5,519 $ 38,840
========= ============= ============ ============ =========== ==========
MFS Scudder Van Eck
--------------------- ---------------------- ---------
Emerging Total Money Intl.
Growth Return Market Equity Gold
---------- --------- ----------- --------- ---------
Year Year Year Year (Jan 2* Total
Ended Ended Ended Ended thru All
Dec 31 Dec 31 Dec 31 Dec 31 Dec 31) Funds
---------- --------- ----------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Income:
Dividends $ 21,420 $ 31,557 $ 100,036 $ 1,058 $ 16 $ 443,961
Expenses:
Mortality and expense risks charges
and administrative fees 18,788 12,978 33,553 7,205 386 141,863
---------- --------- ----------- --------- --------- ------------
NET INVESTMENT INCOME (LOSS) 2,632 18,579 66,483 (6,147) (370) 302,098
---------- --------- ----------- --------- --------- ------------
REALIZED GAIN (LOSS) ON
INVESTMENTS:
Proceeds from sales 261,740 414,056 12,580,876 213,823 38,605 15,659,546
Cost of securities 238,436 394,420 12,580,876 207,005 38,405 15,555,714
---------- --------- ----------- --------- --------- ------------
Net Gain (Loss) 23,304 19,636 - 6,818 200 103,832
Capital Gain Distributions Received 2,457 5,158 - - - 53,408
---------- --------- ----------- --------- --------- ------------
NET REALIZED GAIN (LOSS) 25,761 24,794 - 6,818 200 157,240
---------- --------- ----------- --------- --------- ------------
UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Beginning period (8) (713) - - - (612)
End of period 2,679 62,772 - 62,827 3,208 370,744
---------- --------- ----------- --------- --------- ------------
NET UNREALIZED GAIN (LOSS) 2,687 63,485 - 62,827 3,208 371,356
---------- --------- ----------- --------- --------- ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 31,080 $106,858 $ 66,483 $ 63,498 $ 3,038 $ 830,694
========== ========= =========== ========= ========= ============
<FN>
See accompanying notes to financial statements.
* Date operations commenced.
</TABLE>
<TABLE>
<CAPTION>
UNITED COMPANIES SEPARATE ACCOUNT ONE
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM NOVEMBER 28, 1995 TO DECEMBER 31, 1995
Alger Dreyfus Federated
----------------------- ------------------------------------------- -----------
Growth and High Income
Growth Stock Index Income Bond
----------------------- ----------------------- ------------------ -----------
Year (Dec 15* Year (Dec 15* (Jan 2* Year
Ended thru Ended thru thru Ended
Dec 31 Dec 31) Dec 31 Dec 31) Dec 31) Dec 31
1996 1995 1996 1995 1996 1995 1996
----------- ---------- ----------- ---------- ----------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
Operations
Net investment income (loss) $ (21,046) $ (8) $ 19,796 $ 464 $ 145,799 $ - $ 66,525
Net realized gain (loss) 26,128 - 37,364 - 22,966 - 12,854
Net unrealized gain (loss) on
investments 116,028 467 138,221 (361) (105,264) - 56,007
----------- ---------- ----------- ---------- ----------- ----- -----------
Net increase in net assets resulting
from operations 121,110 459 195,381 103 63,501 - 135,386
----------- ---------- ----------- ---------- ----------- ----- -----------
CONTRACT TRANSACTIONS:
Transfer of annuity fund deposits 319,655 65,096 211,527 40,935 194,843 - 167,478
Net transfers between sub-accounts 2,554,609 - 1,832,191 - 1,347,401 - 1,987,073
Death benefits (8,772) - - - (9,276) - (24,893)
Surrenders (79,607) - (53,317) - (96,062) - (55,048)
----------- ---------- ----------- ---------- ----------- ----- -----------
Net increase in net assets resulting
from contract transactions 2,785,885 65,096 1,990,401 40,935 1,436,906 - 2,074,610
----------- ---------- ----------- ---------- ----------- ----- -----------
TOTAL INCREASE IN NET ASSETS 2,906,995 65,555 2,185,782 41,038 1,500,407 - 2,209,996
NET ASSETS:
Beginning period 65,555 - 41,038 - - - 4,631
----------- ---------- ----------- ---------- ----------- ----- -----------
End of period $2,972,550 $ 65,555 $2,226,820 $ 41,038 $1,500,407 $ - $2,214,627
=========== ========== =========== ========== =========== ===== ===========
Federated
-----------------------------------------------
High Income U.S. Govt
Bond Bond Utility
---------- ---------------- -----------------
(Dec 15* (Jan 2* (Jan 19*
thru thru thru
Dec 31) Dec 31) Dec 31)
1995 1996 1995 1996 1995
---------- --------- ----- ---------- -----
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
Operations
Net investment income (loss) $ - $ 4,368 $ - $ 5,479 $ -
Net realized gain (loss) - (295) - 650 -
Net unrealized gain (loss) on
investments 3 1,446 - 32,711 -
---------- --------- ----- ---------- -----
Net increase in net assets resulting
from operations 3 5,519 - 38,840 -
---------- --------- ----- ---------- -----
CONTRACT TRANSACTIONS:
Transfer of annuity fund deposits 4,628 47,816 - 91,429 -
Net transfers between sub-accounts - 234,280 - 398,265 -
Death benefits - - - (8,112) -
Surrenders - (19,335) - (7,245) -
---------- --------- ----- ---------- -----
Net increase in net assets resulting
from contract transactions 4,628 262,761 - 474,337 -
---------- --------- ----- ---------- -----
TOTAL INCREASE IN NET ASSETS 4,631 268,280 - 513,177 -
NET ASSETS:
Beginning period - - - - -
---------- --------- ----- ---------- -----
End of period $ 4,631 $268,280 $ - $ 513,177 $ -
========== ========= ===== ========== =====
<FN>
See accompanying notes to financial statements.
* Date operations commenced.
</TABLE>
<TABLE>
<CAPTION>
UNITED COMPANIES SEPARATE ACCOUNT ONE
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM NOVEMBER 28, 1995 TO DECEMBER 31, 1995
(CONTINUED)
MFS Scudder
------------------------------------------- -----------------------------------
International
Emerging Growth Total Return Money Market Equity
-------------------- --------------------- ---------------------- -----------
Year (Dec 15* Year (Dec 15* Year (Nov 28* Year
Ended thru Ended thru Ended thru Ended
Dec 31 Dec 31) Dec 31 Dec 31) Dec 31 Dec 31) Dec 31
1996 1995 1996 1995 1996 1995 1996
----------- ------- ----------- -------- ------------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
Operations
Net investment income (loss) $ 2,632 $ 29 $ 18,579 $ 906 $ 66,483 $ 332 $ (6,147)
Net realized gain (loss) 25,761 - 24,794 - - - 6,818
Net unrealized gain (loss) on
investments 2,687 (8) 63,485 (713) - - 62,827
----------- ------- ----------- -------- ------------- ------- -----------
Net increase in net assets resulting
from operations 31,080 21 106,858 193 66,483 332 63,498
----------- ------- ----------- -------- ------------- ------- -----------
CONTRACT TRANSACTIONS:
Transfer of annuity fund deposits 272,751 1,000 138,317 23,848 17,365,947 74,000 156,616
Net transfers between sub-accounts 2,608,016 - 1,484,454 - (15,021,067) - 1,172,920
Death benefits (9,390) - - - (15,651) - (8,422)
Surrenders (54,115) - (65,716) - (100,495) - (18,814)
----------- ------- ----------- -------- ------------- ------- -----------
Net increase in net assets resulting
from contract transactions 2,817,262 1,000 1,557,055 23,848 2,228,734 74,000 1,302,300
----------- ------- ----------- -------- ------------- ------- -----------
TOTAL INCREASE IN NET ASSETS 2,848,342 1,021 1,663,913 24,041 2,295,217 74,332 1,365,798
NET ASSETS:
Beginning period 1,021 - 24,041 - 74,332 - 63
----------- ------- ----------- -------- ------------- ------- -----------
End of period $2,849,363 $1,021 $1,687,954 $24,041 $ 2,369,549 $74,332 $1,365,861
=========== ======= =========== ======== ============= ======= ===========
Scudder Van Eck Total
----- --------------- -----------------------
International All
Equity Gold Funds
----- --------------- -----------------------
(Dec 15* (Jan 2*
thru thru Year Ended
Dec 31) Dec 31) December 31,
1995 1996 1995 1996 1995
----- -------- ----- ------------ ---------
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS:
Operations
Net investment income (loss) $ - $ (370) $ - $ 302,098 $ 1,723
Net realized gain (loss) - 200 - 157,240 -
Net unrealized gain (loss) on
investments - 3,208 - 371,356 (612)
----- -------- ----- ------------ ---------
Net increase in net assets resulting
from operations - 3,038 - 830,694 1,111
----- -------- ----- ------------ ---------
CONTRACT TRANSACTIONS:
Transfer of annuity fund deposits 63 22,158 - 18,988,537 209,570
Net transfers between sub-accounts - 59,084 - (1,342,774) -
Death benefits - - (84,516) -
Surrenders - (435) - (550,189) -
----- -------- ----- ------------ ---------
Net increase in net assets resulting
from contract transactions 63 80,807 - 17,011,058 209,570
----- -------- ----- ------------ ---------
TOTAL INCREASE IN NET ASSETS 63 83,845 - 17,841,752 210,681
NET ASSETS:
Beginning period - - - 210,681 -
----- -------- ----- ------------ ---------
End of period $ 63 $83,845 $ - $18,052,433 $210,681
===== ======== ===== ============ =========
<FN>
See accompanying notes to financial statements.
* Date operations commenced.
</TABLE>
UNITED COMPANIES SEPARATE ACCOUNT ONE
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS. United Companies Separate Account One (the
"Separate Account") is a separate investment account of United Companies Life
Insurance Company ("UC Life"). The Separate account is registered with the
Securities and Exchange Commission under the Investment Company Act of 1940 as
a unit investment trust. The Separate Account commenced operations on
November 28, 1995. UC Life administers its SpectraSelect and SpectraDirect
products through the Separate Account. SpectraSelect is a seven-year product;
whereas, SpectraDirect is a ten-year product. UC Life is a stock life
insurance company domiciled in Louisiana and organized in 1955. UC Life is
currently authorized to conduct business in 47 states, the District of
Columbia and Puerto Rico. UC Life is a wholly-owned subsidiary of Pacific
Life and Accident Insurance Company, a wholly-owned subsidiary of PennCorp
Financial Group, Inc., an insurance holding company.
As of December 31, 1996, the Separate Account consisted of eleven
sub-accounts. Each of the eleven sub-accounts invests only in a single
corresponding portfolio of either The Alger American Fund (Fred Alger
Management, Advisor), the Dreyfus Variable Investment Fund and the Dreyfus
Stock Index Fund (The Dreyfus Corporation, Advisor), Federated Insurance
Series (Federated Advisors, Advisor), MFS Variable Insurance Trust (MFS,
Advisor), Scudder Variable Life Investment Fund (Scudder, Stevens & Clark,
Inc., Advisor) or the Van Eck Worldwide Insurance Trust (Van Eck Associates
Corporation, Advisor). Each sub-account pays the respective advisor a fee for
services.
2. INVESTMENTS. Investments of the Separate Account are valued daily at
market value using net asset values provided by the respective sub-account
advisors. Transactions are accounted for on the trade date and dividend
income is recognized on the ex-dividend date. Realized gains and losses are
determined on a first-in first-out basis. Generally, investment income and
realized capital gains are reinvested.
3. CONTRACT CHARGES. A mortality and expense risk charge is deducted from
the Separate Account, on a daily basis equal, on an annual basis, to 1.52% for
SpectraDirect and to 1.45% for SpectraSelect, of the average daily net asset
value of each sub-account of the Separate Account. This charge compensates UC
Life for assuming the mortality and expense risks under the contracts and
certificates. In addition, an administrative charge is deducted from the
Separate Account for both SpectraDirect and SpectraSelect contracts which is
equal, on an annual basis, to .15% of the average daily net asset value of
each sub-account of the Separate Account. This charge compensates UC Life for
costs associated with the administration of the contracts, certificates and
the Separate Account. Under certain circumstances, a transfer fee may be
assessed when an owner or certificate holder transfers contract values or
certificate holder's account values between sub-accounts or to or from UC
Life's fixed accounts. A contingent deferred sales charge is assessed against
full or partial surrenders in accordance with contract terms. There is no
contingent deferred sales charge if all premiums were received at least ten
years for SpectraDirect and seven years for SpectraSelect prior to the date of
the full or partial surrenders. An annual contract or certificate maintenance
fee of $30 is charged on SpectraDirect contracts based upon a minimum contract
value. Some states and other jurisdictions assess premium taxes at the time
purchase payments are made; others assess premium taxes at the time annuity
payments begin. Premium taxes are deducted when they are due.
4. INCOME TAXES. The operations of the Separate Account are included in
the federal income tax return of UC Life, which is taxed as a Life Insurance
Company under the provisions of the Internal Revenue Code. UC Life does not
expect to incur any federal income tax liability on earnings, or realized
capital gains attributable to the Separate Account, therefore, no charges for
federal income taxes are currently deducted from the Separate Account. If UC
Life incurs income taxes attributable to the Separate Account, or determines
that such taxes will be incurred, it may make a charge for such taxes against
the Separate Account.
<TABLE>
<CAPTION>
UNITED COMPANIES SEPARATE ACCOUNT ONE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CHANGES IN THE UNITS OUTSTANDING.
Alger Dreyfus Federated
------------------- ----------------------------------- -----------------------------
U.S. Government
Growth Stock Index Growth and Income High Income Bond Bond
------------------- ------------------- -------------- ------------------- --------
(Dec 15* (Dec 15* (Jan 2* (Dec 26* (Jan 2*
thru thru thru thru thru
Dec 31) Dec 31) Dec 31) Dec 31) Dec 31)
1996 1995 1996 1995 1996 1995 1996 1995 1996
-------- --------- -------- --------- -------- ---- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Units outstanding beginning of the period 6,521 - 4,041 - - - 456 - -
Units purchased 29,243 - 18,333 - 15,903 - 15,536 - 4,670
Units transferred between sub-accounts 237,682 6,521 164,152 4,041 113,297 - 185,228 456 23,085
Units surrendered (8,204) - (4,557) - (8,602) - (7,277) - (1,924)
-------- --------- -------- --------- -------- ---- -------- --------- --------
Units outstanding end of the period 265,242 6,521 181,969 4,041 120,598 - 193,943 456 25,831
======== ========= ======== ========= ======== ==== ======== ========= ========
Federated
---------------------
U.S. Government
Bond Utility
---- ---------------
(Jan 19*
thru
Dec 31)
1995 1996 1995
---- --------- ----
<S> <C> <C> <C>
Units outstanding beginning of the period - - -
Units purchased - 8,713 -
Units transferred between sub-accounts - 38,142 -
Units surrendered - (1,452) -
---- --------- ----
Units outstanding end of the period - 45,403 -
==== ========= ====
<FN>
* Date operations commenced.
</TABLE>
<TABLE>
<CAPTION>
UNITED COMPANIES SEPARATE ACCOUNT ONE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. CHANGES IN THE UNITS OUTSTANDING. (CONTINUED)
MFS Scudder
---------------------------------------- -------------------------------
International
Emerging Growth Total Return Money Market Equity
------------------- ------------------- --------------------- --------
(Dec 15* (Dec 15* (Nov 28*
thru thru thru
Dec 31) Dec 31) Dec 31)
1996 1995 1996 1995 1996 1995 1996
-------- --------- -------- --------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Units outstanding beginning of the period 100 - 2,346 - 7,407 - 6
Units purchased 23,409 - 12,487 - 1,703,017 20,925 14,346
Units transferred between sub-accounts 224,700 100 137,503 2,346 (1,471,540) (13,518) 107,758
Units surrendered (5,357) - (5,883) - (10,398) - (2,479)
-------- --------- -------- --------- --------------------- --------
Units outstanding end of the period 242,852 100 146,453 2,346 228,486 7,407 119,631
======== ========= ======== ========= =========== ======== ========
Scudder Van Eck
-------- --------------
International
Equity Gold
-------- --------------
(Dec 15* (Jan 2*
thru thru
Dec 31) (Dec 31)
1995 1996 1995
-------- -------- ----
<S> <C> <C> <C>
Units outstanding beginning of the period - - -
Units purchased - 1,937 -
Units transferred between sub-accounts 6 5,223 -
Units surrendered - (38) -
-------- -------- ----
Units outstanding end of the period 6 7,122 -
======== ======== ====
<FN>
* Date operations commenced.
</TABLE>
<TABLE>
<CAPTION>
UNITED COMPANIES SEPARATE ACCOUNT ONE
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. UNIT VALUES:
A summary of unit values and units outstanding for variable annuity contracts and the expense
ratios, including expenses of the underlying funds for each of the two years in the period
ended December 31, 1996 follows.
Annualized
of Ratio of
to Expenses
Average Net Assets to Average
Units Unit Value (000's) Assets Net Assets
------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Alger American Growth Portfolio
- ------------------------------------------------
December 31
1996 265,242 $ 11.21 $ 2,972,550 1.43%
1995 6,521 10.05 65,555 .56%
Dreyfus Stock Index Portfolio
- ------------------------------------------------
December 31
1996 181,969 12.24 2,226,820 1.43%
1995 4,041 10.15 41,038 .44%
Dreyfus Growth and Income Fund
- ------------------------------------------------
December 31
1996 120,598 12.44 1,500,407 1.44%
1995 - - - -
Federated High Income Bond Fund II
- ------------------------------------------------
December 31
1996 193,943 11.42 2,214,627 1.37%
1995 456 10.16 4,631 -
Federated Fund for U.S. Government Securities II
- ------------------------------------------------
December 31
1996 25,831 10.39 268,280 1.24%
1995 - - - -
Federated Utility Fund II
- ------------------------------------------------
December 31
1996 45,403 11.30 513,177 1.29%
1995 - - - -
MFS Emerging Growth Series
- ------------------------------------------------
December 31
1996 242,852 11.73 2,849,363 1.32%
1995 100 10.19 1,021 -
MFS Total Return Series
- ------------------------------------------------
December 31
1996 146,453 11.53 1,687,954 1.52%
1995 2,346 10.25 24,041 .57%
Scudder Money Market Portfolio
- ------------------------------------------------
December 31
1996 228,486 10.37 2,369,549 2.75%
1995 7,407 10.04 74,332 4.29%
Scudder International Portfolio
- ------------------------------------------------
December 31
1996 119,631 11.42 1,365,861 1.05%
1995 6 10.11 63 -
Van Eck Gold/Natural Resources Fund
- ------------------------------------------------
December 31
1996 7,122 11.77 83,845 .92%
1995 - - - -
</TABLE>
<PAGE> 1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
United Companies Life Insurance Company:
We have audited the accompanying consolidated balance sheet of United Companies
Life Insurance Company and subsidiary as of December 31, 1996, and the related
consolidated statements of operations, cash flows, and stockholder's equity for
the periods from July 24, 1996 to December 31, 1996 (Successor period), and
from January 1, 1996 to July 23, 1996 (Predecessor period). Our audit also
included the financial statement schedules listed in the Index at Item 14.
These consolidated financial statements and financial statement schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the aforementioned consolidated financial statements present
fairly, in all material respects, the financial position of United Companies
Life Insurance Company and subsidiary as of December 31, 1996, and the results
of their operations and their cash flows for the periods from July 24, 1996 to
December 31, 1996 (Successor period), and from January 1, 1996 to July 23, 1996
(Predecessor period), in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statements schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein.
As discussed in Note 2 to the consolidated financial statements, effective July
24, 1996, PennCorp Financial Group, Inc. acquired all of the outstanding stock
of United Companies Life Insurance Company in a business combination accounted
for as a purchase. As a result of the acquisition, the consolidated financial
information for the period after the acquisition is presented on a different
cost basis than that for the periods before the acquisition and, therefore, is
not comparable.
/s/ KPMG PEAT MARWICK LLP
Baton Rouge, Louisiana
February 28, 1997
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
United Companies Life Insurance Company
We have audited the accompanying consolidated balance sheet of United Companies
Life Insurance Company and its subsidiary as of December 31, 1995, and the
related consolidated statements of income, stockholder's equity, and cash flows
for each of the two years in the period ended December 31, 1995. Our audits
also included the financial statement schedules listed in the Index at Item 14.
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedules 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, such consolidated financial statements present fairly, in all
material respects, the financial position of United Companies Life Insurance
Company and its subsidiary at December 31, 1995, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Baton Rouge, Louisiana
February 29, 1996
<PAGE> 3
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Purchase Historical
basis of basis of
accounting accounting
---------- ----------
December 31, December 31,
1996 1995
---------- ----------
(dollars in thousands)
<S> <C> <C>
Assets
Investments:
Fixed maturity securities:
Held for investment at amortized cost (fair value $50,902 in
1996 and $59,330 in 1995)...................................... $ 48,473 $ 60,919
Available for sale at fair value (amortized cost $1,127,850
in 1996 and $1,094,385 in 1995)................................ 1,144,165 1,140,160
Mortgage loans on real estate, less allowances for doubtful
loans of $11,945 in 1996 and $2,117 in 1995........................ 235,981 336,269
Investment real estate ............................................. -- 32,423
Policy loans ....................................................... 21,536 20,291
Investments in limited partnerships ................................ 5,704 25,594
Short-term investments ............................................. 467 22,804
Other invested assets .............................................. 1,491 3,263
---------- ----------
Total investments .......................................... 1,457,817 1,641,723
Cash ................................................................. 14,487 3,028
Accrued investment income ............................................ 17,251 16,529
Due from reinsurers .................................................. 34,923 33,583
Present value of insurance in force .................................. 54,931 --
Deferred policy acquisition costs .................................... 4,187 90,703
Costs in excess of net assets acquired ............................... 33,373 --
Deferred income tax benefit .......................................... 11,589 --
Other assets ......................................................... 7,186 3,831
Assets held in separate accounts ..................................... 18,052 211
---------- ----------
Total assets ............................................... $1,653,796 $1,789,608
========== ==========
Liabilities and stockholder's equity
Liabilities:
Policy reserves .................................................... $1,441,582 $1,530,805
Repurchase agreements .............................................. -- 40,857
Deferred income tax payable ........................................ -- 22,770
Other liabilities .................................................. 16,755 8,440
Liabilities related to separate accounts ........................... 18,052 211
---------- ----------
Total liabilities .......................................... 1,476,389 1,603,083
---------- ----------
Stockholder's equity:
Common stock, $2 par value;
Authorized - 4,200,528 shares;
Issued - 4,200,528 shares ....................................... 8,401 8,401
Additional paid-in capital ......................................... 158,913 28,980
Retained earnings .................................................. 6,076 119,667
Net unrealized gains on securities ................................. 4,017 29,477
---------- ----------
Total stockholder's equity ................................. 177,407 186,525
---------- ----------
Total liabilities and stockholder's equity ................. $1,653,796 $1,789,608
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 4
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Purchase
basis of
accounting Historical basis of accounting
---------- --------------------------------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23, Years ended December 31,
---------- ---------- ------------------------
1996 1996 1995 1994
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
REVENUES:
Premiums ................................................... $ 3,483 $ 3,732 $ 8,508 $ 11,373
Interest sensitive policy product charges .................. 1,048 1,421 1,949 1,432
Net investment income ...................................... 50,041 66,421 125,591 117,105
Realized investment gains (losses) ......................... 559 (1,592) (3,670) (4,803)
Other income ............................................... 907 52 172 (8)
---------- ---------- ---------- ----------
Total revenues ..................................... 56,038 70,034 132,550 125,099
---------- ---------- ---------- ----------
EXPENSES:
Interest on annuity policies ............................... 32,022 42,434 81,035 74,497
Insurance benefits ......................................... 3,836 5,967 9,930 12,654
Amortization of present value of insurance in force
and deferred policy acquisition costs ................. 5,068 9,699 13,159 13,528
Amortization of costs in excess of net assets acquired ..... 675 -- -- --
Underwriting and other administrative expenses ............. 4,733 9,753 16,326 15,340
---------- ---------- ---------- ----------
Total benefits and expenses ........................ 46,334 67,853 120,450 116,019
---------- ---------- ---------- ----------
Income before income taxes ................................... 9,704 2,181 12,100 9,080
---------- ---------- ---------- ----------
PROVISION (BENEFIT) FOR INCOME TAXES:
Current .................................................... 2,427 1,139 5,259 5,915
Deferred ................................................... 1,201 (370) (1,194) (2,721)
---------- ---------- ---------- ----------
Total .............................................. 3,628 769 4,065 3,194
---------- ---------- ---------- ----------
Net income ................................................. $ 6,076 $ 1,412 $ 8,035 $ 5,886
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Purchase
basis of Historical basis
accounting of accounting
---------- -------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23,
--------- ---------
1996 1996
--------- ---------
(dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income .............................................................................. $ 6,076 $ 1,412
Adjustments to reconcile net income to net cash provided by operating activities:
Capitalization of deferred policy acquisition costs ................................... (5,172) (4,797)
Amortization of intangibles, depreciation and accretion, net .......................... 5,743 9,699
Decrease in policy liabilities and accruals and other policyholder funds .............. 28,282 37,485
Purchases of trading securities ....................................................... (99) (593)
Sales of trading securities ........................................................... 228 441
Other, net ............................................................................ 2,000 3,032
--------- ---------
Net cash provided by operating activities ........................................ 37,058 46,679
--------- ---------
Cash flows from investing activities:
Purchases of securities available for sale ............................................ (94,025) (158)
Maturities of securities held for investment .......................................... 7,796 2,790
Maturities of securities available for sale ........................................... 18,781 35,692
Acquisitions and originations of mortgage loans ....................................... (112,473) (749,952)
Sales of securities available for sale ................................................ 3 --
Sales of mortgage loans ............................................................... 151,972 732,484
Principal payments on mortgage loans .................................................. 21,657 44,264
Decrease (increase) in short-term investments, net (including changes in amounts
due to broker) ................................................................... 50,063 (27,726)
Other, net ............................................................................ 153 235
--------- ---------
Net cash provided by investing activities ........................................ 43,927 37,629
--------- ---------
Cash flows from financing activities:
Receipts from interest sensitive products credited to policyholders' account balances.. 52,675 56,403
Return of policyholders' account balances on interest sensitive products .............. (109,233) (160,622)
Other, net ............................................................................ 4,961 1,982
--------- ---------
Net cash used by financing activities ............................................ (51,597) (102,237)
--------- ---------
Increase (decrease) in cash ...................................................... 29,388 (17,929)
Cash (overdraft) at beginning of year or acquisition date................................... (14,901) 3,028
--------- ---------
Cash (overdraft) at end of year or acquisition date......................................... $ 14,487 $ (14,901)
========= =========
Supplemental disclosures:
Income taxes paid ..................................................................... $ -- $ 2,797
Interest paid ......................................................................... 439 2,392
<CAPTION>
Historical basis of accounting
------------------------------
Year Ended December 31,
----------------------
1995 1994
--------- ---------
(dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income .............................................................................. $ 8,035 $ 5,886
Adjustments to reconcile net income to net cash provided by operating activities:
Capitalization of deferred policy acquisition costs ................................... (11,947) (21,947)
Amortization of intangibles, depreciation and accretion, net .......................... 13,159 13,528
Decrease in policy liabilities and accruals and other policyholder funds .............. 71,048 59,860
Purchases of trading securities ....................................................... (442) (919)
Sales of trading securities ........................................................... 541 232
Other, net ............................................................................ 8,017 5,974
--------- ---------
Net cash provided by operating activities ........................................ 88,411 62,614
--------- ---------
Cash flows from investing activities:
Purchases of securities available for sale ............................................ (136,503) (300,384)
Maturities of securities held for investment .......................................... 1,940 2,270
Maturities of securities available for sale ........................................... 51,000 76,778
Acquisitions and originations of mortgage loans ....................................... (1,208,195) (901,898)
Sales of securities available for sale ................................................ 25,185 7,363
Sales of mortgage loans ............................................................... 1,111,636 940,099
Principal payments on mortgage loans .................................................. 71,294 94,084
Decrease (increase) in short-term investments, net (including changes in amounts
due to broker) ................................................................... 31,860 (17,813)
Other, net ............................................................................ (180) (630)
--------- ---------
Net cash used by investing activities ............................................ (51,963) (100,131)
--------- ---------
Cash flows from financing activities:
Receipts from interest sensitive products credited to policyholders' account balances.. 135,325 249,738
Return of policyholders' account balances on interest sensitive products .............. (222,791) (191,812)
Other, net ............................................................................ 40,877 (29,956)
--------- ---------
Net cash used by financing activities.... ........................................ (46,589) 27,970
--------- ---------
Increase (decrease) in cash ...................................................... (10,141) (9,547)
Cash at beginning of year .................................................................. 13,169 22,716
--------- ---------
Cash at end of year ........................................................................ $ 3,028 $ 13,169
========= =========
Supplemental disclosures:
Income taxes paid ..................................................................... $ 4,655 $ 1,399
Interest paid ......................................................................... 3,362 1,987
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Additional Gains Total
Common Paid-in Retained (Losses) Stockholder's
Stock Capital Earnings on Securities Equity
-------------- -------------- --------------- --------------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
HISTORICAL BASIS OF ACCOUNTING:
Balance, December 31, 1993................... $ 8,401 $28,980 $105,746 $ -- $143,127
Net income................................... -- -- 5,886 -- 5,886
Cumulative effect of accounting change, net.. -- -- -- (46.834) (46,834)
------ -------- -------- -------- --------
Balance, December 31, 1994................... 8,401 28,980 111,632 (46,834) 102,179
Net income................................... -- -- 8,035 -- 8,035
Change in net unrealized gains (losses)
on securities, net......................... -- -- -- 76,311 76,311
------ -------- -------- -------- --------
Balance, December 31, 1995................... 8,401 28,980 119,667 29,477 186,525
Net income................................... -- -- 1,412 -- 1,412
Change in net unrealized gains (losses)
on securities, net......................... -- -- -- (31,665) (31,665)
Distribution to stockholder.................. -- -- (58,334) -- (58,334)
------ -------- -------- -------- --------
Balance, July 23, 1996.................. $8,401 $ 28,980 $ 62,745 $(2,188) $ 97,938
====== ======== ======== ======== ========
PURCHASE BASIS OF ACCOUNTING:
Balance, July 24, 1996....................... $8,401 $101,655 $ -- $ -- $110,056
Net income................................... -- -- 6,076 -- 6,076
Capital contribution......................... -- 57,258 -- -- 57,258
Change in net unrealized gains (losses)
on securities, net......................... -- -- -- 4,017 4,017
------ -------- -------- -------- --------
Balance, December 31, 1996.............. $8,401 $158,913 $ 6,076 $ 4,017 $177,407
====== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 7
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1.1 Principles of Consolidation. The consolidated financial statements
include United Companies Life Insurance Company (the "Company") and its
wholly-owned subsidiary, United Variable Services, Inc. All significant
intercompany balances and transactions have been eliminated in the consolidated
financial statements.
1.2 Organization. United Companies Life Insurance Company (the
"Company" or "UC Life") is a wholly-owned subsidiary of Pacific Life and
Accident Insurance Company ("PLAIC"), a wholly-owned subsidiary of PennCorp
Financial Group, Inc. ("PennCorp"). (See note 2 to Notes to Consolidated
Financial Statements.) PennCorp is an insurance holding company which offers,
through its wholly-owned subsidiaries, a broad range of life insurance, annuity
and accident and sickness products.
The Company, a life insurance company domiciled in Louisiana and
organized in 1955, is currently authorized to conduct business in 47 states,
the District of Columbia and Puerto Rico. The primary products of the Company
are tax deferred annuity contracts marketed to individuals principally through
financial institutions and independent agents.
1.3 Basis of Presentation. The accompanying financial statements have
been prepared in accordance with generally accepted accounting principals
("GAAP") on a historical cost basis of accounting through the date of
acquisition and on a purchase GAAP push-down basis of accounting ("purchase
GAAP") from the date of acquisition to the end of the period. The comparability
of the financial condition and the operating results for the post-acquisition
period and the pre-acquisition periods are affected by the mark to market
valuation of assets and liabilities under purchase accounting which became the
new cost basis.
The preparation of financial statements in conformity with GAAP
requires management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and the reported amounts of revenues
and expenses during the reporting period. Accounts that the Company deems to be
acutely sensitive to changes in estimates include deferred policy acquisition
costs, future policy benefits, policy and contract claims and present value of
insurance in force. In addition, the Company must determine requirements for
disclosure of contingent assets and liabilities as of the date of the financial
statements based upon estimates. In all instances, actual results could differ
from these estimates.
1.4 Investments.
1.4(a)Fixed Maturity and Equity Securities. During the first quarter
of 1994, the Company implemented the provisions of Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 115, which revised the method of accounting for certain of the
Company's investments. Prior to adoption of SFAS No. 115, the Company reported
its investments in fixed income investments at amortized cost, adjusted for
declines in value considered to be other than temporary. SFAS No. 115 requires
the classification of securities in one of three categories: "available for
sale," "held to maturity" or "trading." Securities classified as held to
maturity are carried at amortized cost, whereas securities classified as
trading securities or available for sale are recorded at fair value. Effective
with the adoption of SFAS No. 115, the Company determined the appropriate
classification of its investments and, if necessary, adjusted the carrying
value of such securities, accordingly, as if the unrealized gains or losses
had been realized. The adjustment, net of applicable income taxes, for
investments classified as available for sale is recorded in "Net unrealized
gains (losses) on securities" and is included in stockholder's equity on the
balance sheet. The adjustment for investments classified as trading is
recorded in "other income" in the statement of income.
<PAGE> 8
1.4(b) Mortgage Loans on Real Estate. Loans are carried at amortized
cost, net of an allowance for losses. The Company provides for estimated loan
losses on loans owned by the Company by establishing an allowance for loan
losses through a charge to earnings. The Company conducts periodic reviews of
the quality of the loan portfolio and estimates the risk of loss based upon
historical loss experience, prevailing economic conditions, estimated
collateral value and such other factors which, in management's judgment, are
relevant in estimating the adequacy of the Company's allowance for loan losses.
While management uses the best information available in conducting its
evaluation, future adjustments to the allowance may be necessary if there are
significant changes in economic conditions, collateral value or other elements
used in conducting the review.
1.4(c) Investment Real Estate. The Company's investments in real estate
are comprised of properties received in settlement of loans ("foreclosed
properties"). The Company records foreclosed properties at the lower of their
fair value less estimated costs to sell ("fair value") or the outstanding loan
amount plus accrued interest ("cost"). The Company accomplishes this by
providing a specific reserve, on a property by property basis, for the
difference between fair value and cost. Fair value is determined by property
appraisals performed either by its former affiliate, United Companies Lending
Corporation ("UC Lending"), or independent appraisers. The related adjustments
are included in the Company's provision for losses. Depreciation is computed on
the straight-line method over the estimated useful lives of the underlying
property. In conjunction with the sale of the Company (see note 2 to Notes to
Consolidated Financial Statements) all of the Company's investment real estate
was distributed to its former parent.
1.4(d) Policy Loans. Policy loans are reported at unpaid principal
balance.
1.4(e) Investment in Limited Partnerships. The Company's investment in
limited partnerships, whose affairs are not controlled by the Company, is
reflected on the equity method.
1.4(f) Short-term Investments. At December 31, 1996, short-term
investments totaled $467,000 bearing interest rates ranging from 4.9% to 5.3%
per annum.
1.4(g) Realized Investment Gains and Losses. Realized investment gains
and losses and declines in value which are other than temporary, determined on
the basis of specific identification, are included in net income.
1.5 Present Value of Insurance In Force. The present value of
insurance in force represents the anticipated gross profits to be realized from
future revenues on insurance in force at the date the Company was purchased,
discounted to provide an appropriate rate of return and amortized, with
interest, over the years that such profits are anticipated to be received in
proportion to the estimated gross profits.
1.6 Deferred Policy Acquisition Costs. Commissions and other costs
related to the production of new and renewal business have been deferred. The
deferred costs related to traditional life insurance are amortized over the
premium payment period using assumptions consistent with those used in
computing policy benefit reserves. Deferred costs related to annuities and
interest sensitive products are amortized over the estimated life of the policy
in relation to the present value of estimated gross profits on the contract.
The Company periodically reviews the appropriateness of assumptions used in
calculating the estimated gross profits on annuity contracts. Any change
required in these assumptions may result in an adjustment to deferred policy
acquisition costs which would affect income.
1.7 Costs in Excess of Net Assets Acquired. Costs in excess of the
fair value of net assets acquired are amortized on a straight-line basis over
20 years. Accumulated amortization was $675,000 at December 31, 1996.
The Company continuously monitors the value of costs in excess of net
assets acquired based upon estimates of future earnings. Any amounts deemed to
be impaired are charged, in the period in which such impairment was determined,
as an expense against earnings. For the periods presented there was no charge
to earnings for the impairment of costs in excess of net assets acquired.
1.8 Other Assets. Property is stated at cost less accumulated
depreciation and is included in "Other assets." Depreciation is computed on the
straight-line and accelerated methods over the estimated useful lives of the
assets.
1.9 Policy Reserves. Policy benefit reserves for traditional life
insurance policies have been provided on a net level premium method including
assumptions as to investment yield, mortality and withdrawals based on the
Company's experience and industry standards with provisions for possible
adverse deviation. Investment yield assumptions range from 5.5% to 8.5% per
annum. Policy benefit reserves include certain deferred profits on limited
payment policies. These profits are being recognized in income over the policy
term. Subsequent to the purchase, the Company utilizes statutory reserves as a
reasonable approximation of GAAP reserves for all non-interest sensitive
products.
<PAGE> 9
Reserves for annuity policies and interest sensitive life
policies represent the policy account balance, or accumulated fund value,
before applicable surrender charges. Benefit claims incurred in excess of
related policy account balances and interest credited during the period to
policy account balances are charged to expense.
1.10 Repurchase agreements. At December 31, 1995, the Company had a
liability of approximately $40.9 million incurred pursuant to securities sold
under agreements to repurchase ("repurchase agreements"). The securities sold
under these agreements are classified as "Available for sale" investment
securities and are carried at their aggregate market value of $42.2 million at
December 31, 1995. The repurchase agreements bore interest at 5.70% and 5.74%
and matured in January, 1996. There were no repurchase agreements at December
31, 1996.
1.11 Income Taxes. The Company accounts for income taxes under the
provisions of SFAS No. 109, "Accounting for Income Taxes." Under the asset and
liability method of SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to (i) temporary
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, and (ii) operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which the
temporary differences are expected to be recovered or settled. Under SFAS No.
109, the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date. Prior
to the date of the sale, the Company filed a consolidated federal income tax
return with its former parent and other former affiliated companies. The former
parent allocated to the Company its proportionate share of the consolidated tax
liability under a tax allocation agreement whereby each affiliate's federal
income tax provision is computed on a separate return basis. Subsequent to the
purchase, the Company files a consolidated return with PLAIC whereby the
Company's proportionate share of the consolidated tax liability is allocated
based upon separate return calculations.
1.12 Insurance Revenues. Income on short duration single premium
contracts, primarily credit insurance products, is recognized over the contract
period. Premiums on other insurance contracts principally traditional life
insurance and limited payment life insurance policies, are recognized as
revenue when due.
Revenues for interest sensitive annuity contracts represent charges
assessed against the policyholders' account balance, primarily for the
surrenders.
1.13 Reinsurance. The Company generally reinsures with other insurance
companies the portion of any one risk which exceeds $100,000. On certain types
of policies this limit is $25,000. The Company is contingently liable for
insurance ceded to reinsurers. Premiums ceded under reinsurance agreements were
$1.3 million, $1.7 million and $2.1 million in 1996, 1995 and 1994,
respectively. Reserve credit taken under reinsurance agreements totaled $33.9
million, $32.9 million and $34.0 million at December 31, 1996, 1995 and 1994,
respectively.
<PAGE> 10
The Company has a receivable at December 31, 1996 of approximately
$32.7 million from one reinsurer; however, the funds supporting the receivable
are escrowed in a separate trust account for the benefit of the Company by the
reinsurer. The following table reflects the effect of reinsurance agreements on
premiums and the amounts earned for the periods indicated.
<TABLE>
<CAPTION>
Purchase
basis of
accounting Historical basis of accounting
---------- --------------------------------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23, Years ended December 31,
---------- ---------- ------------------------
1996 1996 1995 1994
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Direct premiums ................. $ 2,704 $ 3,148 $ 7,659 $ 10,537
Reinsurance assumed ............. 1,214 1,461 2,589 2,966
Reinsurance ceded ............... (435) (877) (1,740) (2,130)
---------- ---------- ---------- ----------
Net insurance premiums ..... $ 3,483 $ 3,732 $ 8,508 $ 11,373
========== ========== ========== ==========
</TABLE>
1.14 Participating Policies. Direct participating business, primarily
related to the Company's pre-need funeral policies, represented 9%, 8.2% and
7.2% of the life insurance in force as of December 31, 1996, 1995 and 1994,
respectively. The amount of dividends paid on participating policies is based
on published dividend scales and totaled $1.4 million, $1.2 million and $1.0
million for the years ended December 31, 1996, 1995 and 1994, respectively.
1.15 Reclassifications. Certain amounts from prior periods have been
reclassified to conform with the current year presentation. Such
reclassifications had no effect on net income.
2. SALE OF THE COMPANY
On July 24, 1996, PLAIC consummated the acquisition of the Company from
United Companies Financial Corporation ("UC Financial"). Pursuant to an Amended
and Restated Stock Purchase Agreement (the "Agreement") dated as of July 24,
1996, PLAIC acquired 100% of the outstanding capital stock of UC Life (the "UC
Life Common Stock") for $110.1 million in cash including expenses incurred of
$9.7 million as part of the acquisition. Immediately following the acquisition
of UC Life, PLAIC contributed $57.3 million in cash to UC Life, which
represented the market value of certain real estate and other assets distributed
to UC Financial immediately prior to the consummation of the acquisition.
The Company's acquisition has been accounted for using the purchase
method of accounting. The total purchase price of the acquisition was allocated
to the tangible and intangible assets and liabilities acquired based upon their
respective fair values as of the date of acquisition. Based upon such
respective fair values, the value of the net assets acquired was $76.0 million,
resulting in costs in excess of net assets acquired at the date of acquisition
of $34.1 million.
<PAGE> 11
3. INVESTMENTS
3.1 Fixed Maturity Securities. The Company's portfolio of fixed
maturity securities consisted of the following:
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Government ....... $ 9,029 $ 93 $ -- $ 9,122
Municipal ............. 5,434 1 48 5,387
Foreign ............... 10,920 185 -- 11,105
Corporate ............. 414,551 5,944 1,064 419,431
Mortgage-backed ....... 687,916 11,210 6 699,120
---------- ---------- ---------- ----------
Total ............ $1,127,850 $ 17,433 $ 1,118 $1,144,165
========== ========== ========== ==========
Held for Investment:
Corporate ............. $ 13,927 $ 124 $ 2 $ 14,049
Mortgage-backed ....... 34,546 2,307 -- 36,853
---------- ---------- ---------- ----------
Total ............ $ 48,473 $ 2,431 $ 2 $ 50,902
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------------
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Government ....... $ 11,504 $ 409 $ -- $ 11,913
Municipal ............. 425 21 -- 446
Foreign ............... 20,394 1,916 -- 22,310
Corporate ............. 328,546 22,452 679 350,319
Mortgage-backed ....... 733,516 22,258 602 755,172
---------- ---------- ---------- ----------
Total ............ $1,094,385 $ 47,056 $ 1,281 $1,140,160
========== ========== ========== ==========
Held for Investment:
Corporate ............. $ 16,692 $ 550 $ 281 $ 16,961
Mortgage-backed ....... 44,227 1,414 3,272 42,369
---------- ---------- ---------- ----------
Total ............ $ 60,919 $ 1,964 $ 3,553 $ 59,330
========== ========== ========== ==========
</TABLE>
The cost and estimated fair value of fixed maturity securities by
contractual maturity at December 31, 1996 are shown below.
<TABLE>
<CAPTION>
Available for Sale Held for Investment
----------------------- -----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
1 year or less .................... $ 14,605 $ 14,637 $ -- $ --
Over 1 year through 5 years ....... 87,224 87,973 8,507 8,568
Over 5 years through 10 years ..... 319,480 323,733 5,420 5,481
After 10 years .................... 18,625 18,702 -- --
Mortgage-backed securities ........ 687,916 699,120 34,546 36,853
---------- ---------- ---------- ----------
Total ........................ $1,127,850 $1,144,165 $ 48,473 $ 50,902
========== ========== ========== ==========
</TABLE>
<PAGE> 12
Expected maturities may differ from contractual maturities because
certain issuers may have the right to call or prepay obligations with or
without call or prepayment penalties.
In 1990, the Company securitized pools of commercial real estate loans
owned by it in two transactions and in connection therewith sold pass-through
certificates ("Series 90-1" and "Series 90-2") for which an election under the
real estate mortgage investment conduit provisions ("REMIC") of the Internal
Revenue Code of 1986, as amended were made. The Company retained as an
investment subordinated junior certificates in both issues, as well as a senior
certificate interest in Series 90-2.
Included in Held for investment fixed maturity securities are
investments in the two REMIC's of approximately $34 million at December 31,
1996, and $44.2 million at December 31, 1995.
A summary of the Company's investment at December 31, 1996, in the
REMIC's is as follows:
<TABLE>
<CAPTION>
Remaining
Date of Principal Carrying Interest Maturity
Issue Balance Value Rate Date
------------ ------------ ----------- ----- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
United Companies Life REMIC
Series 90-1, Class B-1........... Mar 29, 1990 $ 10,574 $ 7,263 10.05% Sep 25, 2009
Series 90-2, Class A-3........... Dec 18, 1990 14,688 14,965 9.88% May 25, 2000
Series 90-2, Class B-1........... Dec 18, 1990 14,339 11,750 9.88% Jan 25, 2009
------------ -----------
$ 39,601 $ 33,978
============ ===========
</TABLE>
At December 31, 1996, securities with a cost of $9.3 million were on
deposit with insurance regulatory authorities.
<PAGE> 13
3.2 Equity Securities. The net unrealized capital gains and losses on
common stocks included as "Other invested assets" are as follows:
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------------
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Trading .................... $ 765 $ 169 $ 34 $ 900
Available for sale ......... 78 -- 72 6
---------- ---------- ---------- ----------
Total .................. $ 843 $ 169 $ 106 $ 906
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------------
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Trading .................... $ 545 $ 215 $ 8 $ 752
Available for sale ......... 467 -- 425 42
---------- ---------- ---------- ----------
Total ................. $ 1,012 $ 215 $ 433 $ 794
========== ========== ========== ==========
</TABLE>
3.3 Mortgage Loans on Real Estate. The following schedule summarizes
the composition of mortgage loans on real estate:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
---------- ----------
(dollars in thousands)
<S> <C> <C>
Residential ................... $ 61,911 $ 169,175
Allowance for loan losses ..... (7,734) --
Unearned loan charges ......... (266) (301)
---------- ----------
Residential, net .............. 53,911 168,874
---------- ----------
Commercial .................... 186,281 169,512
Allowance for loan losses ..... (4,211) (2,117)
---------- ----------
Commercial, net ............... 182,070 167,395
---------- ----------
Total .................... $ 235,981 $ 336,269
========== ==========
</TABLE>
Included in the loans owned at December 31, 1996 and 1995 were
nonaccrual loans of $1.4 million and $2.4 million, respectively.
The Company provides an estimate for future credit losses in an
allowance for loan losses. A summary analysis of the changes in the Company's
allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Purchase basis
of accounting Historical basis of accounting
--------------------- ------------------------------------------------------------------------
Period from Period from
Jul 24 to Dec 31, Jan 1 to Jul 23, Years ended Dec 31,
1996 1996 1995 1994
--------------------- ---------------------- ---------------------- ----------------------
Commercial Residential Commercial Residential Commercial Residential Commercial Residential
--------- --------- --------- --------- --------- --------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of year . $ 4,211 $ 8,450 $ 2,117 $ -- $ 1,778 $ -- $ 2,639 $ --
Loans charged to allowance ... -- (716) (771) -- (194) -- (1,510) --
Loan loss provision .......... -- -- 478 -- 533 -- 649 --
--------- --------- --------- --------- --------- --------- --------- ---------
Balance at end of year ....... $ 4,211 $ 7,734 $ 1,824 $ -- $ 2,117 $ -- $ 1,778 $ --
========= ========= ========= ========= ========= ========= ========= =========
Specific reserves ............ $ 706 $ 7,734 $ 824 $ -- $ 1,117 $ -- 752 $ --
Unallocated reserves ......... 3,505 -- 1,000 -- 1,000 -- 1,026 --
--------- --------- --------- --------- --------- --------- --------- ---------
Total reserves .......... $ 4,211 $ 7,734 $ 1,824 $ -- $ 2,117 $ -- $ 1,778 $ --
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
<PAGE> 14
To the date of the sale of the Company on July 23, 1996, the Company
assumed no credit risk on the residential loans portfolio whose principal and
interest was guaranteed by UCFC. Therefore, residential loan loss reserves were
established on the portfolio in conjunction with determining the acquisition
value of the residential loans.
3.4 Investment Real Estate. Immediately prior to closing, the
Company distributed all of its real estate to its former parent. (See note 2 to
Notes to Consolidated Financial Statements.)
3.5 Investment In Limited Partnerships. Immediately prior to
closing, the Company distributed a limited partnership investment to its former
parent. (See note 2 to Notes to Consolidated Financial Statements.) Following
is an analysis of the Company's investment in limited partnerships:
<TABLE>
<CAPTION>
Purchase
basis of
accounting Historical basis of accounting
---------- ----------------------------------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23, Year Ended December 31,
---------- ---------- ---------- ----------
1996 1996 1995 1994
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Balance, beginning of period............. $ 6,041 $ 25,594 $ 26,672 $ 26,698
Contributions and capitalized costs ..... 43 620 9,869 5,168
Net partnership income .................. 948 1,061 6,279 1,480
Distributions ........................... (1,328) (3,451) (17,226) (6,674)
Distribution of partnerships ............ -- (17,783) -- --
---------- ---------- ---------- ----------
Balance, end of period.............. $ 5,704 $ 6,041 $ 25,594 $ 26,672
========== ========== ========== ==========
</TABLE>
The limited partnerships were formed for the purpose of participating
in privately placed mezzanine investments. These investments, acquired in
leveraged investment transactions, generally include higher risk subordinated
debt combined with equity securities.
3.6 Investment Income. Investment income by type that exceeds five
percent of total investment income was as follows:
<TABLE>
<CAPTION>
Purchase
basis of
accounting Historical basis of accounting
---------- ------------------------------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23, Years ended December 31,
---------- ---------- -----------------------
1996 1996 1995 1994
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities ......... $ 37,140 $ 47,606 $ 85,852 $ 74,443
Mortgage loans on real estate ..... 11,192 20,331 35,056 42,763
Other investments ................. 3,281 4,067 14,386 8,925
---------- ---------- ---------- ----------
Cross investment income ...... 51,613 72,004 135,294 126,131
Less: Investment expenses ......... 1,572 5,583 9,703 9,026
---------- ---------- ---------- ----------
Net investment income ........ $ 50,041 $ 66,421 $ 125,591 $ 117,105
========== ========== ========== ==========
</TABLE>
<PAGE> 15
3.7 Realized, and Changes in Unrealized, Investment Gains
(Losses). Net realized, and changes in unrealized, investment gains (losses)
were as follows:
<TABLE>
<CAPTION>
Purchase
basis of
accounting Historical basis of accounting
---------- --------------------------------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23, Years ended December 31,
---------- ---------- ---------- ----------
1996 1996 1995 1994
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities:
Gross gains ...................................... $ -- $ 42 $ 524 $ 303
Gross losses ..................................... (157) (1,388) (1,807) (3,373)
Loss provision ................................... -- 477 (350) 1,198
---------- ---------- ---------- ----------
Net losses on fixed maturity securities ..... (157) (869) (1,633) (1,872)
---------- ---------- ---------- ----------
Mortgage loans on real estate:
Losses on sale ................................... -- (771) (194) --
Loss provision ................................... 716 293 (339) 861
---------- ---------- ---------- ----------
Net gains (losses) on mortgage loans on
real estate ............................... 716 (478) (533) 861
---------- ---------- ---------- ----------
Investment real estate:
Losses on sale ................................... -- (1,098) (2,638) (2,840)
Loss provision ................................... -- 853 1,134 (952)
---------- ---------- ---------- ----------
Net losses on investment real estate ........ -- (245) (1,504) (3,792)
---------- ---------- ---------- ----------
Realized investment gains (losses) ..... $ 559 $ (1,592) $ (3,670) $ (4,803)
========== ========== ========== ==========
Changes in unrealized gains (losses):
Securities held for investment................... $ 2,429 $ (2,789) $ 681 $ (1,989)
Securities available for sale.................... 16,243 (48,716) 117,404 (72,054)
---------- ---------- ---------- ----------
Net change in unrealized gains (losses)..... $ 18,672 $ (51,505) $ 118,085 $ (74,043)
========== ========== ========== ==========
Trading portfolio:
Net gains (losses) from sales.................... $ (20) $ 37 $ (12) $ (31)
Net change in unrealized gains (losses).......... 135 (26) 184 23
---------- ---------- ---------- ----------
Total trading gains (losses)........... $ 115 $ 11 $ 172 $ (8)
========== ========== ========== ==========
</TABLE>
3.8 Individually Significant Investments. The following
investments, other than obligations of the U.S. Government or agencies
thereof, individually exceeded 10% of total stockholder's equity:
<TABLE>
<CAPTION>
December 31,1996
-----------------------
Amortized Fair
Cost Value
---------- ----------
(Dollars in thousands)
<S> <C> <C>
United Companies Life REMIC 1990-2 ..... $ 26,715 $ 27,595
FNMA Pool #161648 ...................... 25,568 25,729
---------- ----------
$ 52,283 $ 53,324
========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31,1995
-----------------------
Amortized Fair
Cost Value
---------- ----------
(Dollars in thousands)
<S> <C> <C>
United Companies Life REMIC 1990-2 ..... $ 33,931 $ 35,488
FNMA Pool #161648 ...................... 30,370 31,112
FNMA Pool #124447 ...................... 18,263 18,366
CIGNA Mezzanine Partners III L.P. ...... 17,233 17,233
---------- ----------
$ 99,797 $ 102,199
========== ==========
</TABLE>
<PAGE> 16
4. INCOME TAXES
The provision (benefit) for income taxes attributable to operations is
as follows:
<TABLE>
<CAPTION>
Purchase
basis of
accounting Historical basis of accounting
----------- -----------------------------------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23, Years ended December 31,
----------- ----------- --------------------------
1996 1996 1995 1994
----------- ----------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Current .................... $ 2,427 $ 1,139 $ 5,259 $ 5,915
Deferred ................... 1,201 (370) (1,194) (2,721)
----------- ----------- ----------- -----------
Total ............ $ 3,628 $ 769 $ 4,065 $ 3,194
=========== =========== =========== ===========
</TABLE>
Reported income tax expense attributable to operations differs from
the amount computed by applying the statutory federal income tax rate to income
from operations before income taxes for the following reasons:
<TABLE>
<CAPTION>
Purchase
basis of
accounting Historical basis of accounting
---------- -------------------------------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23, Years ended December 31,
---------- ---------- ------------------------
1996 1996 1995 1994
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Federal income tax (benefit) at statutory rate ..... $ 3,396 $ 763 $ 4,235 $ 3,178
Differences resulting from:
Miscellaneous.................................. 232 6 (170) 16
---------- ---------- ---------- ----------
Reported income tax provision benefit .............. $ 3,628 $ 769 $ 4,065 $ 3,194
========== ========== ========== ==========
</TABLE>
The significant components of the Company's net deferred income tax
benefit and liability are as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------- --------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
------ ----------- -------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans on real estate ....................... $ -- $ -- $ -- $ 2,319
Deferred policy acquisition costs ................... -- 1,477 -- 29,475
Present value of insurance in force ................. -- 5,062 -- --
Unrealized gain on investment securities ............ -- 2,163 -- 12,495
Policy reserves ..................................... 19,319 -- 21,530 --
Other ............................................... 972 -- -- 11
------- ------ ------- -------
$20,291 $8,702 $21,530 $44,300
======= ====== ======= =======
</TABLE>
In assessing the realization of deferred taxes, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent on the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies in making this assessment. Based upon those
considerations, management believes it is more likely than not that the
Company will realize the benefits of these deductible differences as of
December 31, 1996.
Payments made for income taxes, net of refunds received, during the
years ended December 31, 1996, 1995 and 1994 were $2.8 million, $4.6 million
and $1.4 million, respectively.
The Company's approximately $5.2 million of "Policyholders' Surplus"
at December 31, 1995 became taxable income to its former parent in conjunction
with the sale of the Company in 1996 and was therefore, extinguished.
<PAGE> 17
The Company had a current income tax payable, which is included in
"Other liabilities," in the amount of $3 million at December 31, 1996, and $2.3
million at December 31, 1995.
5. TRANSACTIONS WITH AFFILIATES
In conjunction with the sale of the Company, Knightsbridge Management
LLC ("Knightsbridge"), an affiliate, accrued transaction fees of $2.5 million,
which were capitalized as costs in excess of net assets acquired.
The Company received $57.3 million in cash from PLAIC as replacement
for assets distributed to its former parent in conjunction with the sale of the
Company. (See note 2 to Notes to Consolidated Financial Statements.)
Knightsbridge provides management consulting services to the Company
for an annualized fee of $1 million. For the period from July 24, 1996 through
December 31, 1996, the accompanying financial statements include $.4 million
for these fees. The Company was allocated certain costs from UCFC and its
affiliates under a cost sharing agreement totaling $ - million, $2.1 million,
$4.1 million and $3.3 million, for the periods from July 24, 1996 to December
31, 1996 and January 1, 1996 to July 23, 1996 and years ended December 31, 1995
and 1994, respectively.
Knightsbridge also provides investment management consulting services
to the Company for a fee based upon the average dollar amount of the related
investments. For the period from July 24, 1996 to December 31, 1996, the Company
incurred $.6 million in such fees.
UC Mortgage, an affiliate, services commercial loans for the Company
for a fee of three-eights of one percent of the principal balances. For the
period from July 24, 1996 to December 31, 1996, the Company paid UC Mortgage $.4
million for mortgage servicing fees. In addition, the Company provides employees
to UC Mortgage and is reimbursed for salary and salary related expenses for
those employees. The total amount of reimbursed employee expenses for the period
from July 24, 1996 to December 31, 1996 was $.3 million. As of December 31,
1996, 1995 and 1994, UC Lending, a former affiliate, serviced loans owned by
the Company having aggregate unpaid principal balances of approximately $62.6
million, $338.4 million, and $296.9 million, respectively. The Company paid
servicing fees relative to these loans of approximately $ - million, $.5
million, $.9 million, and $1.1 million for the periods from July 24, 1996 to
December 31, 1996 and January 1, 1996 to July 23, 1996 and the years ended
December 31, 1995 and 1994, respectively.
The Company has an agreement with UC Lending to purchase qualifying
residential home equity mortgage loans originated or purchased and underwritten
by UC Lending. (See note 10 to Notes to Consolidated Financial Statements.)
These loans are usually held three to six months until resold to UC Lending for
sale by UC Lending in loan securitizations. Also, under an agreement applicable
to the period from January 1, 1996 to July 23, 1996, and the years ended
December 31, 1995 and 1994, UC Lending was obligated to repurchase these home
equity loans previously sold to the Company at the time of foreclosure. At
December 31, 1996 and 1995, $61 million and $166.5 million, respectively, of
home equity loans originated by UC Lending were owned by the Company. During the
periods from July 24, 1996 to December 31, 1996, January 1, 1996 to July 23,
1996 and the years ended December 31, 1995 and 1994, the Company purchased home
equity loans for approximately $75.2 million, $656 million, $1,169 million and
$893 million, respectively, from UC Lending. Sales of these home equity loans to
UC Lending by the Company were $51.4 million, $679.2 million, $1.112 billion and
$932.7 million for the periods from July 24, 1996 to December 31, 1996 and
January 1, 1996 to July 23, 1996 and the years ended December 31, 1995 and 1994,
respectively. No gain or loss was recorded by the Company in these transactions.
The Company formerly leased home office space to UCFC and other former
affiliates. Rent income attributable to these affiliates was approximately $ -
million and $1 million for the periods from July 24, 1996 to December 31, 1996,
and each of the periods from January 1, 1996 to July 23, 1996 and the years
ended December 31, 1995 and 1994, respectively.
United Companies Realty & Development Co., Inc. ("UCRD"), a former
affiliate, managed the home office buildings leased by the Company to UCFC and
other third party tenants under a real estate management contract for the period
from January 1, 1996 to July 23, 1996, and for the years ended December 31, 1995
and 1994. The Company paid approximately $.2 million, $.4 million and $.3
million to UCRD in management fees for the period January 1, 1996 to July 23,
1996, and the years ended December 31, 1995 and 1994, respectively.
The Company owned at December 31, 1996 and 1995 three subordinated
debentures purchased in May 1993, from UC Lending. Listed below is summarized
information on the subordinated debentures that were issued by UC Lending:
<TABLE>
<CAPTION>
Date of Principal Interest Maturity
Series Issue Balance Rate Date
---------------- ------------ --------- -------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
A-1 May 14, 1993 $ 3,000 6.05% May 20, 1998
B May 14, 1993 3,000 6.64% May 20, 2000
C May 14, 1993 4,000 7.18% May 20, 2003
--------
Total $ 10,000
========
</TABLE>
Interest income received from UC Lending with respect to those
subordinated debentures totaled approximately $.33 million in each of the
periods from July 24 to December 31, 1996, and January 1 to July 23, 1996, and
$.67 million in each of the years ended December 31, 1995 and 1994. All
principal is paid upon maturity.
6. DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF INSURANCE IN
FORCE
Deferred policy acquisition costs represent commissions, premium taxes
and certain other acquisition expenses, including underwriting and issue costs.
Information relating to these costs is as follows:
<TABLE>
<CAPTION>
Purchase
basis of
accounting Historical basis of accounting
---------- --------------------------------------
Period from Period from
Jul 24 to Jan 1 to
Dec 31, Jul 23, Years ended December 31,
---------- ---------- ------------------------
1996 1996 1995 1994
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Unamortized deferred policy
acquisition costs at beginning of period.. $ -- $ 90,703 $ 91,915 $ 83,495
Policy acquisition costs deferred:
Commissions ............................. 4,298 4,531 11,283 20,743
Underwriting and issue costs ............ 874 266 664 1,205
Policy acquisition costs amortized ......... (8) (9,699) (13,159) (13,528)
Unrealized investment gain adjustment ...... (977) -- -- --
---------- ---------- ---------- ----------
Unamortized deferred policy
acquisition costs at end of period .... $ 4,187 $ 85,801 $ 90,703 $ 91,915
========== ========== ========== ==========
</TABLE>
The methods used by the Company to value the fixed benefit, life, and
accumulation products purchased are consistent with the valuation methods used
most commonly to value blocks of insurance business. It is also consistent with
the basic methodology generally used to value insurance assets. The method used
by the Company includes identifying the future cash flows from the acquired
business, the risks inherent in realizing those cash flows, the rate of return
the Company believes it must earn in order to accept the risks inherent in
realizing the cash flows, and determining the value of the insurance asset by
discounting the expected future cash flows by the discount rate the Company
requires.
<PAGE> 18
The discount rate used to determine such values is the rate of return
required in order to invest in the business being acquired. In selecting the
rate of return, the Company considered the magnitude of the risks associated
with actuarial factors described in the following paragraph, cost of capital
available to the Company to fund the acquisition, compatibility with other
Company activities that may favorably affect future profits, and the complexity
of the acquired Company.
Expected future cash flows used in determining such values are based
on actuarial determination of future premium collection, mortality, surrenders,
operating expenses and yields on assets held to back policy liabilities as well
as other factors. Variances from original projections, whether positive or
negative, are included in income as they occur. To the extent that these
variances indicate that future cash flows will differ from those included in
the original scheduled amortization of the value of the insurance in force,
current and future amortization may be adjusted. Recoverability of the value of
insurance in force is evaluated annually and appropriate adjustments are then
determined and reflected in the financial statements for the applicable period.
Information related to the present value of insurance in force is as
follows:
<TABLE>
<CAPTION>
Purchase
basis of
accounting
----------
Period from
Jul 24 to
Dec 31,
----------
1996
----------
(dollars in thousands)
<S> <C>
Balance at the beginning of the period ..... $ --
Addition due to acquisition ................ 69,077
Accretion of interest ...................... 1,633
Amortization ............................... (6,693)
Unrealized investment gain adjustment ...... (9,086)
----------
Balance at end of period ................... $ 54,931
==========
</TABLE>
Expected gross amortization, based upon current assumptions and
accretion of interest at a policy or contract rates ranging from 5.36% to 5.43%
for the next five years of the present value of insurance in force is as
follows:
<TABLE>
<CAPTION>
Beginning Gross Accretion Net
Balance Amortization of Interest Amortization
- -------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
1997 $54,931 $13,287 $3,451 $9,836
1998 45,095 11,386 2,941 8,445
1999 36,650 10,058 2,465 7,593
2000 29,057 8,546 2,044 6,502
2001 22,555 7,082 1,696 5,386
</TABLE>
7. RETIREMENT AND PROFIT SHARING PLANS
Eligible employees may elect to participate in PennCorp's defined
contribution 401(K) retirement plan. Contributions to the Plan are made
pursuant to salary deferral elections by participants in an amount equal to 1%
to 15% of their annual compensation. In addition, the Company makes matching
contributions in an amount equal to 50% of each participant's salary deferral
to a maximum of 3% of annual compensation. The defined contribution plan also
provides for a discretionary employer profit sharing contribution, which is
determined annually by the Board of Directors for the succeeding plan year.
Profit sharing contributions are credited to participant's accounts on the
basis of their respective compensation in accordance with a formula that
provides a higher percentage contribution for compensation in excess of the
federal Social Security wage base. Salary deferral contribution accounts are at
all times fully vested, while matching contribution accounts vest ratably from
one to two years of service, and profit sharing contribution accounts vest
ratably from one to five years of service. All participant accounts are fully
vested at death, disability or attainment of age 65. Payment of vested benefits
under the defined contribution plan may be elected by a participant in a
variety of forms of payment. The Company's funding policy is to contribute
annually an amount that can be deducted for federal income tax
<PAGE> 19
purposes. Expenses related to this plan for the period from July 24, 1996, to
December 31, 1996, was $78,000 compared to costs associated with employee
benefit plans of the Company's former parent of $184,600, $414,000 and $327,500
for the period from January 1, 1996, through July 23, 1996, and the years ended
December 31, 1995 and 1994, respectively.
8. STATUTORY ACCOUNTING
Accounting records of the Company are also maintained in accordance
with practices prescribed or authorized by insurance regulatory authorities.
Prescribed statutory accounting principles include a variety of publications of
the National Association of Insurance Commissioners, as well as state laws,
regulations, and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed. The Company's
capital and surplus pursuant to the statutory accounting basis as of December
31, 1996 and 1995, was $103.1 million and $99.9 million, respectively. On a
statutory accounting basis, net gain from operations for the years ended
December 31, 1996, 1995 and 1994, was $10.1 million, $12.8 million and $9.7
million, respectively. Net income on a statutory accounting basis, which
includes realized capital gains and losses, was $6.8 million, $10 million and
$5.8 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
Under the current statutory requirements in Louisiana, the
Company has the capacity to pay dividends of $9.4 million in 1997.
Extraordinary dividends, with a statutory value of $62.6 million, consisting of
real estate, an investment in a limited partnership and $10 million cash, were
distributed to the Company's former parent immediately prior to the closing of
the sale of the Company. Immediately after the closing, PLAIC contributed $57.3
million cash to the Company as a replacement for the distributed assets. (See
note 2 to Notes to Consolidated Financial Statements.) No dividends were paid
during 1994 or 1995. As part of its July 1996 approval of PLAIC's acquisition
of the Company, the Louisiana Insurance Commissioner approved a dividend plan
for the Company pursuant to which the Company may pay a specified amount of
dividends for each of the five years following the acquisition, beginning in
1997, amounting to the lesser of the pro forma dividend amounts in such plan or
the actual earnings of the Company, and conditioned on the Company's
maintaining a risk-based capital of at least 300 percent of the Authorized
Control Level.
The Company received written approval from the Louisiana Department of
Insurance to invest in first lien residential mortgage loans originated by UCLC
on a short-term basis without recording the assignment of the mortgage loans to
the Company, which differs from prescribed statutory accounting practices.
Statutory accounting practices prescribed by the State of Louisiana require
that investments in mortgage loans be secured by unrestricted first liens on
the underlying property. As of December 31, 1996, statutory surplus was
increased by approximately $6.3 million as a result of this permitted practice.
9. DISCLOSURE ABOUT FINANCIAL INSTRUMENTS
The carrying value and fair value of the Company's financial
assets and liabilities were as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------------- -----------------------
Purchase basis Historical basis
of accounting of accounting
----------------------- -----------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Investments:
Fixed maturity securities:
Available for sale .................. $1,144,165 $1,144,165 $1,140,160 $1,140,160
Held to maturity .................... 48,473 50,902 60,919 59,330
Mortgage loans on real estate ......... 235,981 235,981 336,269 335,157
Investment real estate ................ -- -- 32,423 38,978
Policy loans .......................... 21,536 21,536 20,291 20,291
Investment in limited partnership ..... 5,704 5,704 25,594 25,594
Short-term investments ................ 467 467 22,804 22,804
Other invested assets ................. 1,491 1,491 3,263 3,263
Cash .................................. 14,487 14,487 3,028 3,028
Financial liabilities:
Annuity reserves ...................... 1,330,100 1,271,346 1,417,803 1,350,626
Repurchase agreements ................. -- -- 40,857 40,857
</TABLE>
<PAGE> 20
The above values do not reflect any premium or discount from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Fair value estimates are made at a specific point in time based on
relevant market information, if available. Because no market exists for certain
of the Company's financial instruments, fair value estimates for these assets
and liabilities were based on subjective estimates of market conditions and
perceived risks of the financial instruments. Fair value estimates were also
based on judgments regarding future loss and prepayment experience and were
influenced by the Company's historical information.
The following methods and assumptions were used to estimate the fair
value of the Company's financial instruments.
Fixed Maturity and Equity Securities. The estimated fair value for the
Company's investment portfolio was generally determined from quoted market
prices for publicly traded securities. Certain of the securities owned by the
Company may trade infrequently or not at all; therefore, fair value for these
securities was determined by management by evaluating the relationship between
quoted market values and carrying value and assigning a liquidity factor to
this segment of the investment portfolio.
Mortgage Loans on Real Estate. The fair value of the Company's loan
portfolio was determined by segregating the portfolio by type of loan and
further by its performing and non-performing components. Performing loans were
further segregated based on the due date of their payments, an analysis of
credit risk by category was performed and a matrix of pricing by category was
developed. The fair value of delinquent loans was estimated by the Company's
using estimated recoveries on defaulted loans.
Investment Real Estate. The fair value of the Company's investment
real estate was based upon independent appraisals of the properties.
Policy Loans. Policy loans are generally settled at the loan amount
plus accrued interest; therefore, the carrying value of these assets is a
reasonable estimate of their fair values.
Other Invested Assets. The fair value of the Company's investment in
other invested assets approximates their carrying value.
Short-term Investments. The carrying amount of short-term investments
approximates their fair values because these assets generally mature in 90 days
or less and do not present any significant credit concerns.
Investment in Limited Partnerships. The fair value of the Company's
investment in limited partnerships approximated their carrying value.
Annuity Reserves. The Company's annuity contracts generally do not
have a defined maturity and are considered as deposits under SFAS No. 97. SFAS
No. 107 states that the fair value to be disclosed for deposit liabilities
with no defined maturities is the amount payable on demand at the reporting
date. Accordingly, the Company has estimated the fair value of its annuity
reserves as the cash surrender value of these contracts.
Repurchase Agreements. The repurchase agreements mature in less than
60 days; therefore, the carrying value of the repurchase agreements is
considered to be a reasonable estimate of fair value.
10. COMMITMENTS AND CONTINGENCIES
The Company is obligated under operating leases, including office
space, computer equipment and automobiles. Rent expense was $.6 million, $.7
million, and $.5 million in 1996, 1995 and 1994 respectively.
Minimum annual commitments under noncancellable operating leases are
as follows (in thousands of dollars):
<TABLE>
<S> <C>
1997 $ 553
1998 533
1999 44
-------
Total minimum payments required $ 1,130
=======
</TABLE>
<PAGE> 21
In connection with the sale of the Company, the Company entered into
an agreement with UC Financial which will provide for the Company's purchase of
up to $300 million, at any one time outstanding, of first mortgage residential
loans originated by UC Financial. The agreement provides that UC Financial will
have the right for a limited time to repurchase certain loans which are
eligible for securitization by UC Financial. The agreement also has a sublimit
of $150 million for loans that are not eligible for securitization by UC
Financial.
In conjunction with the sale of the Company, and in accordance with
past practices, historical basis deferred acquisition cost assumptions were
adjusted to reflect actual experience to July 24, 1996, the acquisition date.
This adjustment resulted in a $2.9 million increase in amortization of deferred
acquisition costs associated with certain annuity plans, primarily as a result
of revised surrender estimates. As a result of the purchase price adjustment
provision contained in the Agreement, and the adjustment noted immediately
above, the final aggregate purchase price paid for the Company is yet to be
determined, although UC Life does not expect the final aggregate purchase price
to vary materially from estimates utilized in the preparation of these
financial statements.
The Company is subject to various litigation arising during the
ordinary course of business. While the outcome of such litigation cannot be
predicted with certainty, management does not expect the resolution of these
matters to have a material adverse effect on the financial condition or results
of operations of the Company.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is as follows:
<TABLE>
<CAPTION>
Historical basis Purchase basis
of accounting of accounting
------------------------------------ -----------------------
Three Three Period Period Three
Months Months from from Months
Ended Ended Jul 1 to Jul 24 to Ended
Mar 31 Jun 30 July 23, Sep 30, Dec 31,
---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
1996:
Total revenues .................... $ 32,216 $ 31,239 $ 6,579 $ 23,820 $ 32,218
Income (loss) from operations
before income taxes ............. 2,661 2,516 (2,996) 4,095 5,609
Net income (loss) ................. 1,730 1,622 (1,940) 2,569 3,507
</TABLE>
<TABLE>
<CAPTION>
Historical basis of accounting
-------------------------------------------------
Three Months Ended
-------------------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31
---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
1995:
Total revenues .................................. $ 33,151 $ 35,146 $ 32,874 $ 31,379
Income from operations
before income taxes ............................ 3,170 4,563 2,671 1,696
Net income ...................................... 2,266 2,963 1,732 1,074
</TABLE>
<PAGE> 22
SCHEDULE I
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
SUMMARY OF INVESTMENTS
<TABLE>
<CAPTION>
Amount Shown
Type of Investment Cost Value on Balance Sheet
- ------------------------------------------------------------------ ------------ ------------ -----------------
(dollars in thousands)
<S> <C> <C> <C>
Fixed maturity securities available for sale:
U.S. Government and agencies and authorities ................... $ 644,795 $ 655,077 $ 655,077
Municipal ...................................................... 5,434 5,387 5,387
Foreign ........................................................ 10,920 11,105 11,105
Public utilities ............................................... 12,695 12,852 12,852
All other corporate bonds ...................................... 454,006 459,744 459,744
------------ ------------ ------------
Total fixed maturity securities available for sale ..... 1,127,850 1,144,165 1,144,165
------------ ------------ ------------
Fixed maturity securities held to maturity:
All other corporate bonds ...................................... 48,473 50,902 48,473
------------ ------------ ------------
Total fixed maturity securities ........................ 1,176,323 1,195,067 1,192,638
------------ ------------ ------------
Mortgage loans on real estate .................................... 235,981 XXXXXX 235,981
Policy loans ..................................................... 21,536 XXXXXX 21,536
Investment in limited partnerships ............................... 5,704 XXXXXX 5,704
Short-term investments ........................................... 467 XXXXXX 467
Other long-term investments ...................................... 1,491 XXXXXX 1,491
------------ ------------
Total investments ...................................... $ 1,441,502 $ 1,457,817
============ ============
</TABLE>
<PAGE> 23
SCHEDULE III
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN F COLUMN G COLUMN H COLUMN I & J
- ------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------------
Deferred Policy
Acquisition Cost
Deferred Amortization
Policy Net Benefits, and
Acquisition Future Policy Unearned Premium Investment Claims Other Operating
Costs Benefits(1) Premiums Revenues(3) Income Losses, Etc. Expenses
----------- ----------- ----------- ----------- ----------- ----------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
PURCHASE BASIS OF ACCOUNTING:
Period from July 24 through
December 31, 1996 $ 4,187 $ 1,441,307 $ 275 $ 3,483 $ 50,041 $ 3,836 $ 4,741
HISTORICAL BASIS OF ACCOUNTING:
Period from January 1 through
July 23, 1996 $ 85,801 $ 1,463,230 $ 1,074 $ 3,732 $ 66,421 $ 5,967 $ 19,452
Year ended December 31, 1995 $ 90,703 $ 1,529,012 $ 1,793 $ 8,508 $ 125,591 $ 9,930 $ 29,485
Year ended December 31, 1994 $ 91,915 $ 1,542,474 $ 4,491 $ 11,373 $ 117,105 $ 12,654 $ 28,868
</TABLE>
NOTES:
(1) Column C includes accumulated fund values on annuity and interest
sensitive products.
(2) Column E is omitted as amounts are not material and are included with
Column C.
(3) Column F excludes premiums on annuity and interest sensitive products
which are accounted for as deposits.
<PAGE> 24
SCHEDULE IV
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
REINSURANCE
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ---------------------------------------- ---------- ---------- ---------- ---------- --------------
Percentage
Ceded to Assumed of Amount
Direct Other From Other Net Assumed to
Amount Companies Companies Amount Net Amount
---------- ---------- ---------- ---------- --------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Period from July 24, 1996 to
December 31, 1996
Life insurance in force
at end of period ................. $ 468,284 $ 131,816 $ 891,694 $1,228,162 72.6%
========== ========== ========== ==========
Premiums
Life insurance .................... $ 2,496 $ 481 $ 1,214 $ 3,229 37.6
Accident and health insurance ..... 208 (46) -- 254 --
---------- ---------- ---------- ----------
Total premiums ............... $ 2,704 $ 435 $ 1,214 $ 3,483 34.9
========== ========== ========== ==========
Period from January 1, 1996 to
July 23, 1996
Life insurance in force
at end of period ................. $ 498,662 $ 141,816 $ 992,672 $1,350,148 73.5
========== ========== ========== ==========
Premiums
Life insurance .................... $ 2,719 $ 341 $ 877 $ 3,255 26.9
Accident and health insurance ..... 429 (48) -- 477 --
---------- ---------- ---------- ----------
$ 3,148 $ 293 $ 877 $ 3,732 23.5
========== ========== ========== ==========
Years ended December 31, 1995
Life insurance in force
at end of period .................. $ 554,131 $ 149,080 $ 992,979 $1,398,030 71.0
========== ========== ========== ==========
Premiums
Life insurance .................... $ 6,016 $ 1,625 $ 2,588 $ 6,979 37.1
Accident and health insurance ..... 1,643 115 1 1,529 --
---------- ---------- ---------- ----------
Total premiums ............... $ 7,659 $ 1,740 $ 2,589 $ 8,508 30.4
========== ========== ========== ==========
Years ended December 31, 1994
Life insurance in force
at end of period ................. $ 709,883 $ 177,585 $1,106,148 $1,638,446 67.5
========== ========== ========== ==========
Premiums
Life insurance .................... $ 7,467 $ 1,931 $ 2,959 $ 8,495 34.8
Accident and health insurance ..... 3,070 199 7 2,878 0.2
---------- ---------- ---------- ----------
Total premiums ............... $ 10,537 $ 2,130 $ 2,966 $ 11,373 26.1
========== ========== ========== ==========
</TABLE>
<PAGE> 25
SCHEDULE V
UNITED COMPANIES LIFE INSURANCE COMPANY AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN C COLUMN D
COLUMN A COLUMN B ADDITIONS DEDUCTIONS(2) COLUMN E(3)
- ----------------------------------------- --------- ---------------------- ------------- -----------
Charged
Balance at to Costs Charged Balance at
Beginning and to Other End
of Period Expenses Accounts(1) of Period
--------- --------- ----------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Purchase basis of accounting:
- -----------------------------
Period from July 24, 1996 to
December 31, 1996
Allowance for loan losses ............ $ 12,661 $ -- $ -- $ 716 $ 11,945
Allowance for real estate losses ..... -- -- -- -- --
Allowance for bond losses ............ 189 -- -- -- 189
Unearned loan charges ................ 284 -- -- 18 266
--------- --------- --------- --------- ---------
Total ....................... $ 13,134 $ -- $ -- $ 734 $ 12,400
========= ========= ========= ========= =========
Historical basis of accounting:
- -----------------------------
Period from January 1, 1996 to
July 23, 1996
Allowance for loan losses ............ $ 2,117 $ 478 $ -- $ 771 $ 1,824
Allowance for real estate losses ..... 3,987 (1,098) -- 2,889 --
Allowance for bond losses ............ 666 884 -- 1,361 189
Unearned loan charges ................ 301 -- -- 17 284
--------- --------- --------- --------- ---------
Total ....................... $ 7,071 $ 264 $ -- $ 5,038 $ 2,297
========= ========= ========= ========= =========
Year ended December 31, 1995
Allowance for loan losses ............ $ 1,778 $ 533 $ -- $ 194 $ 2,117
Allowance for real estate losses ..... 5,120 1,505 -- 2,638 3,987
Allowance for bond losses ............ 317 2,013 -- 1,664 666
Unearned loan charges ................ 419 -- -- 118 301
--------- --------- --------- --------- ---------
Total ........................ $ 7,634 $ 4,051 $ -- $ 4,614 $ 7,071
========= ========= ========= ========= =========
December 31, 1994
Allowance for loan losses ............ $ 2,639 $ 649 $ -- $ 1,510 $ 1,778
Allowance for real estate losses ..... 4,473 2,561 -- 1,914 5,120
Allowance for bond losses ............ 1,515 1,849 -- 3,047 317
Unearned loan charges ................ 592 -- -- 173 419
--------- --------- --------- --------- ---------
Total ........................ $ 9,219 $ 5,059 $ -- $ 6,644 $ 7,634
========= ========= ========= ========= =========
</TABLE>
- ---------------------
NOTES:
(1) Represents the approximate amount of unearned loan charges on installment
loans originated during the period.
(2) Represents loans and bonds charged off and loan charges earned during the
period.
(3) All of the above are deducted in the balance sheet from the asset to which
they apply.
<PAGE> 26
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Stockholder
United Companies Life Insurance Company:
We consent to incorporation by reference in the registration statements (Nos.
33-91362 and 33-05778) on Form N-4 of United Companies Life Insurance Company
of our report dated February 28, 1997, relating to the consolidated balance
sheets of United Companies Life Insurance Company and subsidiary as of December
31, 1996, and the related consolidated statements of operations, cash flows,
and stockholder's equity for the periods from July 24, 1996 to December 31,
1996, and from January 1, 1996 to July 23, 1996, and all related schedules,
which report appears in the December 31, 1996 annual report on Form 10-K of
United Companies Life Insurance Company.
KPMG PEAT MARWICK LLP
Baton Rouge, Louisiana
March 28, 1997
<PAGE> 27
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference of our opinion dated February 29,
1996 appearing in this Annual Report on Form 10-K of United Companies Life
Insurance Company in the following: Registration Statement Numbers 33-91362
and 33-05778 on Form N-4, pertaining to United Companies Life Insurance
Company's variable annuity separate account, United Companies Separate Account
One.
/s/ DELOITTE & TOUCHE LLP
Baton Rouge, Louisiana
March 28, 1997
