-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kr25rExh8f2QGExCQorNcLV0x2mDh6OAlDaHhPmt6uc+WmyZaVbGhF6yKpgsi5n9 GhM6ewMKNxhFwAgwTz9dfg== 0001047469-98-017668.txt : 19980504 0001047469-98-017668.hdr.sgml : 19980504 ACCESSION NUMBER: 0001047469-98-017668 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19980501 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FORTIS BENEFITS INSURANCE CO CENTRAL INDEX KEY: 0000823533 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 810170040 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-43805 FILM NUMBER: 98608110 BUSINESS ADDRESS: STREET 1: 500 BIELENBERG DRIVE CITY: WOODBURY STATE: MN ZIP: 55125 BUSINESS PHONE: 6127385590 MAIL ADDRESS: STREET 1: P O BOX 64284 CITY: ST PAUL STATE: MN ZIP: 55164 FORMER COMPANY: FORMER CONFORMED NAME: WESTERN LIFE INSURANCE CO DATE OF NAME CHANGE: 19920329 S-1/A 1 S-1/A As filed with the Securities and Exchange Commission on May 1, 1998 Registration No. 333-43805 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-1 Amendment No. 2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 FORTIS BENEFITS INSURANCE COMPANY --------------------------------------------------------- (Exact name of registrant as specified in its charter) Minnesota --------------------------------------------- (State or other jurisdiction of incorporation or organization) 63 ---------------------------------- (Primary Standard Industrial Classification Code Number) 81-0170040 ------------------------------ (I.R.S. Employer Identification No.) 500 Bielenberg Drive Woodbury, Minnesota 55125 612-738-5000 -------------------------------------------------- (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Rhonda J. Schwartz, Esquire 500 Bielenberg Drive Woodbury, Minnesota 55125 612-738-5000 ------------------------------------------------ (Name, address including zip code, and telephone number, including area code, of agent for service) Approximate Date of Commencement of Proposed Sale to Public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: /X/ CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------- Title of each Proposed Proposed maximum class of securities Amount to be maximum offering aggregate Amount of to be registered registered price per unit offering price registration fee - --------------------------------------------------------------------------------------------------------- Interests under flexible * * (None registered herewith) premium deferred fixed annuity contracts
- ----------------------- * The maximum aggregate offering price is estimated solely for the purpose of determining the registration fee. The amount being registered and the proposed maximum offering price per unit are not applicable in that these securities are not issued in predetermined amounts or units. FORTIS BENEFITS INSURANCE COMPANY Cross-Reference Sheet Pursuant to Regulation S-K Item 501(b) Form S-1 Item Number Prospectus Caption - -------------------- ------------------ 1. Forepart of the Registration Statement Cover page; Table of Contents; and Outside Front Cover Page of Prospectus Distribution and Servicing 2. Inside Front and Back Cover Pages Other Information; Reports of Prospectus 3. Summary Information, Risk Factors and Summary of Contract Features Ratio of Earnings to Fixed Charges or, as to ratio of earnings to fixed charges, Not Applicable 4. Use of Proceeds The Variable Account; The Portfolios; The Fixed Account 5. Determination of Offering Price Not Applicable 6. Dilution Not Applicable 7. Selling Security Holders None 8. Plan of Distribution Distribution and Servicing 9. Description of Securities to be Cover Page; The Variable Registered Account; The Portfolios; The Fixed Account: Accumulation Period; Charges and Deductions; General Provisions 10. Interests of Named Experts and Counsel Legal Matters 11. Information with Respect to the Registrant Fortis Benefits/Fortis Financial Group Member; Further Information About Fortis Benefits; Financial Statements; Distribution and Servicing 12. Disclosure of Commission Position on Not Applicable Indemnification for Securities Act Liabilities FORTIS EMPOWER VARIABLE ANNUITY Certificates Under Flexible Premium Deferred Combination Variable and Fixed Annuity Contracts PROSPECTUS DATED May 1, 1998 FORTIS-R- FORTIS BENEFITS INSURANCE COMPANY MAILING ADDRESS: STREET ADDRESS: PHONE: 1-800-800-2000 P.O. BOX 64272 500 BIELENBERG DRIVE EXTENSION 3057 ST. PAUL WOODBURY MINNESOTA 55164 MINNESOTA 55125 This Prospectus describes interests under flexible premium deferred combination variable and fixed annuity contracts issued either on a group basis or as individual contracts by Fortis Benefits Insurance Company ("Fortis Benefits"). Participation in a group contract will be accounted for by the issuance of a certificate showing your interest under the group contract. Participation in an individual contract is shown by the issuance of an individual annuity contract. The certificate and the individual contract are hereafter both referred to as the "Certificate". The minimum initial purchase payment under a Certificate is $25,000 and $1,000 for each subsequent purchase payment ($10,000 and $50, respectively, for Certificates pursuant to a qualified contract). A Certificate allows you to accumulate funds on a tax-deferred basis. You may elect a guaranteed interest accumulation option through Fortis Benefits' Fixed Account or a variable return accumulation option through Variable Account D (the "Variable Account") of Fortis Benefits, or a combination of these two options. Under the variable rate accumulation option, you can choose among one or more of the following investment portfolios of Fortis Series Fund, Inc. (the "Portfolios"): Money Market Series S&P 500 Index Series U.S. Government Securities Series Blue Chip Stock Series Diversified Income Series International Stock Series Global Bond Series Mid Cap Stock Series High Yield Series Small Cap Value Series Global Asset Allocation Series Global Growth Series Asset Allocation Series Large Cap Growth Series Value Series Growth Stock Series Growth & Income Series Aggressive Growth Series The accompanying Prospectuses for the Portfolios describe the investment objectives, policies and risks of each of the Portfolios. Under the guaranteed interest accumulation option, you can choose among ten different guarantee periods, each of which has its own interest rate. The Certificate provides several different types of retirement and death benefits, including fixed and variable annuity income options. Within limits, you may make partial surrenders of the Certificate Value or may totally surrender the Certificate for its Certificate Value. You have the right to examine a Certificate for ten days from the time you receive the Certificate and return it for a refund of all purchase payments that have been made, without interest or appreciation or depreciation. However, in certain states where permitted by state law the refund will be in the amount of the then current Certificate Value. This Prospectus gives prospective investors information about the Certificates that they should know before investing. This Prospectus must be accompanied by a current Prospectus for the Portfolios. All of the Prospectuses should be read carefully and kept for future reference. A Statement of Additional Information, dated May 1, 1998, about certain aspects of the Certificates has been filed with the Securities and Exchange Commission and is available without charge, from Fortis Benefits at the address and phone number printed above. The Table of Contents for the Statement of Additional Information appears on page 21 of this Prospectus. THESE POLICIES ARE NOT OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK, CREDIT UNION, BROKER-DEALER OR OTHER FINANCIAL INSTITUTION. THEY ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY; AND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 99185 (Ed. 5/98) TABLE OF CONTENTS
PAGE Special Terms Used in this Prospectus.................................................................... 3 Information Concerning Fees and Charges.................................................................. 4 Summary of Certificate Features.......................................................................... 6 - Fortis Benefits/Fortis Financial Group Member...................................................... 7 The Variable Account..................................................................................... 7 The Portfolios........................................................................................... 7 The Fixed Account........................................................................................ 8 - Guaranteed Interest Rates/Guarantee Periods........................................................ 8 - Market Value Adjustment............................................................................ 8 - Investments by Fortis Benefits..................................................................... 8 Accumulation Period...................................................................................... 9 - Issuance of a Certificate and Purchase Payments.................................................... 9 - Certificate Value.................................................................................. 9 - Allocation of Purchase Payments and Certificate Value.............................................. 10 - Total and Partial Surrenders....................................................................... 10 - Benefit Payable on Death of Participant (or Annuitant)............................................. 11 The Annuity Period....................................................................................... 11 - Annuity Commencement Date.......................................................................... 11 - Commencement of Annuity Payments................................................................... 12 - Relationship Between Subaccount Investment Performance and Amount of Variable Annuity Payments..... 12 - Annuity Forms...................................................................................... 12 - Death of Annuitant or Other Payee.................................................................. 12 Charges and Deductions................................................................................... 13 - Premium Taxes...................................................................................... 13 - Annual Administrative Charge....................................................................... 13 - Charges Against the Variable Account............................................................... 13 - Tax Charge......................................................................................... 13 - Miscellaneous...................................................................................... 13 General Provisions....................................................................................... 13 - The Certificates................................................................................... 13 - Postponement of Payment............................................................................ 13 - Misstatement of Age or Sex and Other Errors........................................................ 13 - Assignment......................................................................................... 14 - Beneficiary........................................................................................ 14 - Reports............................................................................................ 14 Rights Reserved By Fortis Benefits....................................................................... 14 Distribution............................................................................................. 14 Federal Tax Matters...................................................................................... 15 Further Information about Fortis Benefits................................................................ 16 - General............................................................................................ 16 - Selected Financial Data............................................................................ 17 - Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 17 - Directors and Executive Officers................................................................... 19 - Executive Compensation............................................................................. 19 - Ownership of Securities............................................................................ 20 Voting Privileges........................................................................................ 20 Legal Matters............................................................................................ 21 Other Information........................................................................................ 21 Contents of Statement of Additional Information.......................................................... 21 Fortis Benefits Financial Statements..................................................................... F-1 Appendix A--Sample Market Value Adjustment Calculations.................................................. A-1 Appendix B--Sample Death Benefit Calculations............................................................ B-1 Appendix C--Explanation of Expense Calculations.......................................................... C-1
THE CERTIFICATES ARE NOT AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. FORTIS BENEFITS DOES NOT AUTHORIZE ANY INFORMATION OR REPRESENTATION REGARDING THE OFFERING DESCRIBED IN THIS PROSPECTUS WHICH IS NOT INCLUDED IN THIS PROSPECTUS, THE RELATED STATEMENT OF ADDITIONAL INFORMATION, OR ANY SUPPLEMENTS THERETO OR IN ANY SUPPLEMENTAL SALES MATERIAL AUTHORIZED BY FORTIS BENEFITS. SPECIAL TERMS USED IN THIS PROSPECTUS ACCUMULATION The time period under a Certificate between the Certificate Issue Date and the Annuity PERIOD Commencement Date. ACCUMULATION A unit of measure used to calculate the Participants' interest in the Variable Account during UNIT the Accumulation Period. ANNUITANT A person during whose life annuity payments are to be made by Fortis Benefits under the Certificate. The Annuitant is the person named in the application for the Certificate. If such person dies before the Annuity Commencement Date and there is an additional annuitant named in the application, the additional annuitant shall become the Annuitant. If there is no named additional annuitant, or the additional annuitant has predeceased the annuitant who is named in the application, the Participant, if he or she is a natural person, shall become the Annuitant. ANNUITY The date on which the Annuity Period commences. COMMENCEMENT DATE ANNUITY PERIOD The time period following the Accumulation Period, during which annuity payments are made by Fortis Benefits. ANNUITY UNIT A unit of measurement used to calculate variable annuity payments. BENEFICIARY The person entitled to receive benefits under the terms of the Certificate. CASH SURRENDER The amount payable to the Participant on surrender of the Certificate after all applicable VALUE adjustments and deduction of all applicable charges. CERTIFICATE The date on which the Certificate becomes effective as shown on the Certificate Data Page. ISSUE DATE CERTIFICATE The sum of the Fixed Account Value and the Variable Account Value. VALUE FIVE YEAR The fifth anniversary of a Certificate Issue Date, and each subsequent fifth anniversary of ANNIVERSARY that date. FIXED ACCOUNT The name of the alternative under which purchase payments are allocated to Fortis Benefits General Account. FIXED ACCOUNT The amount of your Certificate Value which is in the Fixed Account. VALUE FIXED ANNUITY An annuity option under which Fortis Benefits promises to pay the Annuitant or any other payee OPTION that you designate one or more fixed payments. GENERAL ACCOUNT All assets of Fortis Benefits other than those in the Variable Account, and other than those in any other legally segregated separate account established by Fortis Benefits. GUARANTEED The rate of interest we credit during any Guarantee Period, on an effective annual basis. INTEREST RATE GUARANTEE The period for which a Guaranteed Interest Rate is credited. PERIOD HOME OFFICE Our office at 500 Bielenberg Drive, Woodbury, Minnesota 55125; 1-800-800-2000, extension 3057; Mailing address: P.O. Box 64272, St. Paul, MN 55164. MARKET VALUE Positive or negative adjustment in Fixed Account Value that we make if such value is paid out ADJUSTMENT more than fifteen days before or after the end of a Guarantee Period in which it was being held. NET PURCHASE The gross amount of a purchase payment less any applicable premium taxes or similar PAYMENT governmental assessments. NON-QUALIFIED Certificates that do not qualify for the special federal income tax treatment applicable in CERTIFICATES connection with certain retirement plans. PARTICIPANT The person or company named in the application for a Certificate, who is entitled to exercise all rights and privileges of ownership under the Certificate during the Accumulation Period. PORTFOLIO Each separate investment portfolio available for investment by the Variable Account. QUALIFIED Certificates that are qualified for the special federal income tax treatment applicable in CERTIFICATES connection with certain retirement plans. SUBACCOUNTS The several Subaccounts of the Variable Account, each of which invests its assets in a different Portfolio. VALUATION DATE All business days except, with respect to any Subaccount, days on which the related Portfolio does not value its shares. Generally, the Portfolios value their shares on each day the New York Stock Exchange is open. VALUATION The period that starts at the close of regular trading on the New York Stock Exchange on a PERIOD Valuation Date and ends at the close of regular trading on the exchange on the next succeeding Valuation Date. VARIABLE The segregated asset account referred to as Variable Account D of Fortis Benefits Insurance ACCOUNT Company established to receive and invest purchase payments under Certificates.
3 VARIABLE The amount of your Certificate Value in the Subaccounts of the Variable Account. ACCOUNT VALUE VARIABLE An annuity option under which Fortis Benefits promises to pay the Annuitant or any other payee ANNUITY OPTION chosen by you one or more payments which vary in amount in accordance with the net investment experience of the Subaccounts selected by the Annuitant. WRITTEN REQUEST A written, signed and dated request, in form and substance satisfactory to Fortis Benefits and received at our Home Office.
INFORMATION CONCERNING FEES AND CHARGES PARTICIPANT TRANSACTION CHARGES Front-End Sales Charge Imposed on Purchases....................... 0% Maximum Surrender Charge for Sales Expenses....................... 0% Other Surrender Fees.............................................. 0% Exchange Fee...................................................... 0% ANNUAL CERTIFICATE ADMINISTRATION CHARGE................................ $30(1) VARIABLE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE) Mortality and Expense Risk Charge................................ 1.10% Variable Account Administrative Charge........................... .15% ---- Total Variable Account Annual Expenses......................... 1.25%
--------------------------------- (1) This charge, which is otherwise applied at each Certificate anniversary and total surrender of the Certificate, will not be charged during the Accumulation Period if the Certificate Value as of such anniversary or surrender is $100,000 or more. Currently, Fortis Benefits waives this charge during the Annuity Period. This charge is also subject to any applicable limitations under the law of any state. MARKET VALUE ADJUSTMENT WITH RESPECT TO FIXED ACCOUNT Surrenders and other withdrawals from the Fixed Account more than fifteen days from the end of a Guarantee Period other than the one year Guarantee Period are subject to a Market Value Adjustment. The Market Value Adjustment may increase or reduce the Fixed Account Value. It is computed pursuant to a formula that is described in more detail under "Market Value Adjustment." PORTFOLIO ANNUAL EXPENSES (a)
U.S. Global Money Government Diversified Global High Asset Asset Growth & Market Securities Income Bond Yield Allocation Allocation Value Income Series Series Series Series Series Series Series Series Series ------ ---------- ----------- ------ ------ ---------- ---------- ------ -------- Investment Advisory and Management Fee................ 0.30% 0.47% 0.47% 0.75% 0.50% 0.90% 0.48% 0.70% 0.65% Other Expenses...... 0.08% 0.07% 0.08% 0.35% 0.12% 0.26% 0.05% 0.13% 0.05% Total Series Fund Operating Expenses........... 0.38% 0.54% 0.55% 1.10% 0.62% 1.16% 0.53% 0.83% 0.70%
Investment Advisory and Management Fee................ Other Expenses...... Total Series Fund Operating Expenses........... Blue Large S&P 500 Chip Mid Cap Small Cap Global Cap Growth Aggressive Index Stock International Stock Value Growth Growth Stock Growth Series Series Stock Series Series Series Series Series Series Series ------- ------ ------------- ---------- ---------- ------ ------ ---------- ---------- Investment Advisory and Management Fee................ 0.40% 0.90% 0.85% 0.90% 0.90% 0.70% 0.90% 0.61% 0.69% Other Expenses...... 0.11% 0.12% 0.23% 0.20% 0.20% 0.09% 0.20% 0.05% 0.07% Total Series Fund Operating Expenses........... 0.51% 1.02% 1.08% 1.10% 1.10% 0.79% 1.10% 0.66% 0.76%
--------------------------------- (a) As a percentage of Portfolio average net assets based on 1997 historical data, except that for Small Cap Value Series, Mid Cap Stock Series and Large Cap Growth Series these amounts are based upon estimates for their current fiscal year. 4 EXAMPLES* If you COMMENCE AN ANNUITY payment option, or whether you do or do NOT surrender your Certificate, you would pay the following cumulative expenses on a $1,000 investment, assuming a 5% annual return on assets:
IF ALL AMOUNTS ARE INVESTED IN ONE PORTFOLIO: 1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------- ----------- ----------- ----------- Money Market Series.............................................. 17 52 90 195 U.S. Government Securities Series................................ 18 57 98 212 Diversified Income Series........................................ 18 57 98 212 Global Bond Series............................................... 24 74 126 270 High Yield Series................................................ 19 59 102 221 Global Asset Allocation Series................................... 25 76 129 276 Asset Allocation Series.......................................... 18 57 97 211 Value Series..................................................... 21 66 113 243 Growth & Income Series........................................... 20 62 106 229 S&P 500 Index Series............................................. 18 56 96 209 Blue Chip Stock Series........................................... 23 71 122 262 International Stock Series....................................... 24 73 125 268 Mid Cap Stock Series............................................. 24 74 126 270 Small Cap Value Series........................................... 24 74 126 270 Global Growth Series............................................. 21 65 111 239 Large Cap Growth Series.......................................... 24 74 126 270 Growth Stock Series.............................................. 20 61 104 225 Aggressive Growth Series......................................... 21 64 109 236
-------------------------- * For purposes of these examples, the effect of the annual Certificate administration charge has been computed based on the average total Contract Value during the year ended December 31, 1997 for similar contracts and the total actual amount of annual contract administration charges collected during the year. For the purpose of these examples, Portfolio annual expenses are assumed to continue at the rates set forth in the table above. Also, the examples do not include the effect of any Market Value Adjustment. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. -------------------------- The foregoing tables and examples are included to assist you in understanding the transaction and operating expenses imposed directly or indirectly under the Certificates and the Portfolios. Amounts for state premium taxes or similar assessments will also be deducted, where applicable. See Appendix C for an explanation of the calculation of the amounts set forth above. 5 SUMMARY OF CERTIFICATE FEATURES The following summary should be read in conjunction with the detailed information in this Prospectus. Variations from the information appearing in this Prospectus due to requirements particular to your state are described in supplements which are attached to this Prospectus, or in endorsements to the Certificate as appropriate. The Certificates are designed to provide individuals with retirement benefits through the accumulation of Net Purchase Payments on a fixed or variable basis, and by the application of such accumulations to provide fixed or variable annuity payments. "We," "our," and "us" mean Fortis Benefits Insurance Company. "You" and "your" mean a reader of this Prospectus who is contemplating making purchase payments or taking any other action in connection with a Certificate. PURCHASE PAYMENTS The initial purchase payment under a Certificate must be at least $25,000 ($10,000 for a Certificate pursuant to a qualified contract). Additional purchase payments under a Certificate must be at least $1,000 ($50 for a Certificate pursuant to a qualified contract). See "Issuance of a Certificate and Purchase Payments." On the Certificate Issue Date, the initial purchase payment is allocated, as specified by the Participant in the Certificate application, among one or more of the Subaccounts of the Variable Account, or to one or more of the Guarantee Periods in the Fixed Account, or to a combination thereof. Subsequent purchase payments are allocated in the same way, or pursuant to different allocation percentages that the Participant may subsequently request In Writing. VARIABLE ACCOUNT INVESTMENT OPTIONS Each of the Subaccounts of the Variable Account invests in shares of a corresponding Portfolio. Certificate Value in each of the Subaccounts of the Variable Account will vary to reflect the investment experience of each of the corresponding Portfolios, as well as deductions for certain charges. Each Portfolio has a separate and distinct investment objective and is managed by Fortis Advisers, Inc. or a subadviser of Fortis Advisers, Inc. A full description of the Portfolios and their investment objectives, policies, risks and expenses can be found in the current Prospectus for the Portfolios, which accompanies this Prospectus, and the Portfolios Statement of Additional Information which is available upon request. FIXED ACCOUNT INVESTMENT OPTIONS Any amount allocated by the Participant to the Fixed Account earns a Guaranteed Interest Rate. The level of the Guaranteed Interest Rate depends on the length of the Guarantee Period selected by the Participant. We currently make available ten different Guarantee Periods ranging from one to ten years. If amounts are transferred, surrendered or otherwise paid out more than fifteen days before or after the end of any Guarantee Period other than the 1 year Guarantee Period, a Market Value Adjustment will be applied to increase or decrease the amount of Fixed Account Value that is paid out. Accordingly, the Market Value Adjustment can result in gains or losses to you. THE FIXED ACCOUNT INVESTMENT OPTION IS NOT AVAILABLE FOR CERTIFICATES ISSUED IN THE STATES OF PENNSYLVANIA AND NEVADA. For a more complete discussion of the Fixed Account investment options and the Market Value Adjustment, see "The Fixed Account." TRANSFERS During the Accumulation Period, you can transfer all or part of your Certificate Value from one Subaccount to another or into the Fixed Account and, subject to any Market Value Adjustment, from one Guarantee Period to another or into a Subaccount. There is currently no charge for these transfers. We reserve the right to restrict the frequency of or otherwise condition, terminate, or impose charges upon, transfers from a Subaccount during the Accumulation Period. During the Annuity Period the person receiving annuity payments may make up to four transfers (but not from a Fixed Annuity Option) during each year of the Annuity Period. For a description of certain limitations on transfer rights, see "Allocations of Purchase Payments and Certificate Value--Transfers." TOTAL OR PARTIAL SURRENDERS Subject to certain conditions, all or part of the Certificate Value may be surrendered by the Participant before the earlier of (1) if the Participant is a non-natural person, the Annuitant's death, or (2) the Annuity Commencement Date. Amounts surrendered from the Fixed Account may be subject to a Market Value Adjustment. See "Total and Partial Surrenders," and "Market Value Adjustment." Particular attention should be paid to the tax implications of any surrender, including possible penalties for premature distributions. See "Federal Tax Matters." ANNUITY PAYMENTS The Contract provides several types of annuity benefits to Participants or other persons they properly designate to receive such payments, including Fixed and Variable Annuity Options. The Participant has considerable flexibility in choosing the Annuity Commencement Date. However, the tax implications of an Annuity Commencement Date must be carefully considered, including the possibility of penalties for commencing benefits either too soon or too late. See "Annuity Commencement Date," "Annuity Forms" and "Federal Tax Matters" in this Prospectus and "Taxation Under Certain Retirement Plans" in the Statement of Additional Information. DEATH BENEFIT In the event of the death of the Participant, or the Annuitant if the participant is a non-natural person, prior to the Annuity Commencement Date, a death benefit is payable to the Beneficiary. See "Benefit Payable on Death of Participant (or Annuitant)." RIGHT TO EXAMINE THE CONTRACT The Participant can cancel a Certificate by delivering or mailing it, together with a Written Request, to Fortis Benefits' Home Office or to the sales representative through whom it was purchased, before the close of business on the tenth day after receipt of the Certificate. If these items are sent by mail, properly addressed and postage prepaid, they will be deemed to be received by Fortis Benefits on the date postmarked. Fortis Benefits will refund to you all purchase payments that have been made, without interest or appreciation or depreciation. However, in certain states where permitted by state law the refund will be in the amount of the then current Certificate Value. LIMITATIONS IMPOSED BY RETIREMENT PLANS AND EMPLOYERS Certain rights you would otherwise have under a Certificate may be limited by the terms of any applicable employee benefit plan. These limitations may restrict such things as total and partial surrenders, the amount or timing of purchase payments that may be made, when annuity payments must start and the type of annuity options that may be selected. Accordingly, you should familiarize yourself with these and all other aspects of any retirement plan in connection with which a Certificate is issued. The record owner of the group variable annuity contract pursuant to which Certificates will be issued will be a bank trustee whose sole function is to hold record ownership of the contract or an employer (or the employer's designee) in connection with an employee benefit plan. In the latter cases, certain rights that a Participant otherwise would have under a Certificate may be reserved instead by the employer. 6 TAX IMPLICATIONS The tax implications for Participants or any other persons who may receive payments under a Certificate, and those of any related employee benefit plan can be quite important. A brief discussion of some of these is set out under "Federal Tax Matters" in this Prospectus and "Taxation Under Certain Retirement Plans" in the Statement of Additional Information, but such discussion is not comprehensive. Therefore, you should consider these matters carefully and consult a qualified tax adviser before making purchase payments or taking any other action in connection with a Certificate or any related employee benefit plan. Failure to do so could result in serious adverse tax consequences which might otherwise have been avoided. QUESTIONS AND OTHER COMMUNICATIONS Any question about procedures of the Certificate should be directed to your sales representative, or Fortis Benefits' Home Office: P.O. Box 64272, St. Paul, Minnesota, 55164: 1-800-800-2000, extension 3057. Purchase payments and Written Requests should be mailed or delivered to the same Home Office address. All communications should include the Certificate number, the Participant's name and, if different, the Annuitant's name. The number for telephone transfers is 1-800-800-2000 (extension 3057). Any purchase payment or other communication, except a 10-day cancellation notice, is deemed received at Fortis Benefit's Home Office on the actual date of receipt there in proper form unless received (1) after the close of regular trading on The New York Stock Exchange, or (2) on a date that is not a Valuation Date. In either of these two cases, the date of receipt will be deemed to be the next Valuation Date. FINANCIAL AND PERFORMANCE INFORMATION This prospectus contains no Accumulation Unit Information for the applicable Subaccounts of the Variable Account because no Certificates have been sold and therefore no Accumulation Units have been issued. Financial statements for the Subaccounts are not included because those Subaccounts have not yet commenced operations, have no assets or liabilities, and have received no income nor incurred any expenses as of the date of this Prospectus. Audited financial statements of Fortis Benefits are included in the Statement of Additional Information. Advertising and other sales materials may include yield and total return figures for the Subaccounts of the Variable Account. These figures are based on historical results and are not intended to indicate future performance. "Yield" is the income generated by an investment in the Subaccount over a period of time specified in the advertisement. This rate of return is assumed to be earned over a full year and is shown as a percentage of the investment. "Total return" is the total change in value of an investment in the Subaccount over a period of time specified in the advertisement. The rate of return shown would produce that change in value over the specified period, if compounded annually. Yield and total return figures do not reflect premium tax charges. This makes the performance shown more favorable. Financial information concerning Fortis Benefits is included in this Prospectus under "Additional Information About Fortis Benefits" and "Fortis Benefits Financial Statements." FORTIS BENEFITS/FORTIS FINANCIAL GROUP MEMBER Fortis Benefits Insurance Company, the issuer of the Certificates, was founded in 1910. At the end of 1997, Fortis Benefits had approximately $94 billion of total life insurance in force. Fortis Benefits is a Minnesota corporation and is qualified to sell life insurance and annuity contracts in the District of Columbia and in all states except New York. Fortis Benefits is an indirectly wholly-owned subsidiary of Fortis, Inc., which is itself indirectly owned 50% by Fortis AMEV and 50% by Fortis AG. Fortis, Inc. manages the United States operations for these two companies. Fortis Benefits is a member of the Fortis Financial Group, a joint effort by Fortis Benefits, Fortis Advisers, Inc., Fortis Investors, Inc., and Fortis Insurance Company, offering financial products through the management, marketing and servicing of mutual funds, annuities and life insurance. Fortis AMEV is a diversified financial services company headquartered in Utrecht, The Netherlands, where its insurance operations began in 1847. Fortis AG is a diversified financial services company headquartered in Brussels, Belgium, where its insurance operations began in 1824. Fortis AMEV and Fortis AG have merged their operating companies under the trade name of Fortis. The Fortis group of companies is active in insurance, banking and financial services, and real estate development in The Netherlands, Belgium, the United States, Western Europe, and the Pacific Rim. The Fortis group of companies had approximately $167 billion in assets as of year-end 1997. All of the guarantees and commitments under the Certificates are general obligations of Fortis Benefits, regardless of whether the Certificate Value has been allocated to the Separate Account or to the Fixed Account. None of Fortis Benefits' affiliated companies has any legal obligation to back Fortis Benefits' obligations under the Certificates. THE VARIABLE ACCOUNT The Variable Account, which is a segregated investment account of Fortis Benefits, was established as Variable Account D by Fortis Benefits pursuant to the insurance laws of Minnesota as of October 14, 1987. Although the Variable Account is an integral part of Fortis Benefits, the Variable Account is registered with the Securities and Exchange Commission as a unit investment trust under the Investment Company Act of 1940. Assets in the Variable Account representing reserves and liabilities under Certificates and other variable annuity contracts issued by Fortis Benefits will not be chargeable with liabilities arising out of any other business of Fortis Benefits. There are Subaccounts in the Variable Account. The assets in each Subaccount are invested exclusively in one of the Portfolios listed on the first page of the prospectus. Income and both realized and unrealized gains or losses from the assets of each Subaccount of the Variable Account are credited to or charged against that Subaccount without regard to income, gains or losses from any other Subaccount of the Variable Account or arising out of any other business we may conduct. New Subaccounts may be added as new Portfolios are added and made available. Correspondingly, if any Portfolios are eliminated, Subaccounts may be eliminated from the Variable Account. THE PORTFOLIOS Certificate holders may choose from among a number of different Portfolios, each of which is a mutual fund available for purchase only as a funding vehicle for benefits under variable life insurance and variable annuities issued by Fortis Benefits and other life insurance companies. Each Portfolio corresponds to one of the Subaccounts of the Variable Account. The assets of each Portfolio are separate from the others and each Portfolio operates as a separate investment portfolio whose performance has no effect on the investment performance of any other Portfolio. More detailed information for each Portfolio offered, such as its investment policies and restrictions, charges, risks attendant to investing in it, and other aspects of its operations, may be found in the current prospectus for each Portfolio. Such a prospectus for the Portfolios being considered must accompany this Prospectus and should be read in conjunction with it. A copy of each prospectus may be obtained without charge from Fortis Benefits by calling 1-800-800-2000, ext. 3057, or writing P.O. Box 64272, St. Paul, Minnesota 55164. Fortis Benefits purchases and redeems Portfolios' shares for the Variable Account at their net asset value without the imposition of any sales or redemption charges. Any dividend or capital gain distributions attributable to Certificates are automatically reinvested in shares of 7 the Portfolio from which they are received at the Portfolio's net asset value on the date paid. Such dividends and distributions will have the effect of reducing the new asset value of each share of the corresponding Portfolio and increasing, by an equivalent value, the number of shares outstanding of the Portfolio. However, the value of your interest in the corresponding Subaccount will not change as a result of any such dividends and distributions. As indicated, Portfolios may also be available to registered separate accounts offering variable annuity and variable life products of other participating insurance companies, as well as to the Variable Account and other separate accounts of Fortis Benefits. Although Fortis Benefits does not anticipate any disadvantages to this, there is a possibility that a material conflict may arise between the interest of the Variable Account and one or more of the other separate accounts participating in the Portfolios. A conflict may occur due to a change in law affecting the operations of variable life and variable annuity separate accounts, differences in the voting instructions of the Participants and those of other companies, or some other reason. In the event of conflict, Fortis Benefits will take any steps necessary to protect the Participants and variable annuity payees. THE FIXED ACCOUNT GUARANTEED INTEREST RATES/GUARANTEE PERIODS Any amount allocated by the Participant to the Fixed Account earns a Guaranteed Interest Rate commencing with the date of such allocation. This Guaranteed Interest Rate continues for a number of years (not to exceed ten) selected by the Participant. At the end of this Guarantee Period, the Participant's Certificate Value in that Guarantee Period, including interest accrued thereon, will be allocated to a new Guarantee Period of the same length unless Fortis Benefits has received a Written Request from the Participant to allocate this amount to a different Guarantee Period or periods or to one or more of the Subaccounts. We must receive this Written Request at least three business days prior to the end of the Guarantee Period. The first day of the new Guarantee Period (or other reallocation) will be the day after the end of the prior Guarantee Period. We will notify the Participant at least 45 days and not more than 75 days prior to the end of any Guarantee Period. We currently make available ten different Guarantee Periods ranging from one to ten years. Each Guarantee Period has its own Guaranteed Interest Rate, which may differ from those for other Guarantee Periods. From time to time we will, at our discretion, change the Guaranteed Interest Rate for future Guarantee Periods of various lengths. These changes will not affect the Guaranteed Interest Rates being paid on Guarantee Periods that have already commenced. Each allocation or transfer of an amount to a Guarantee Period commences the running of a new Guarantee Period with respect to that amount, which will earn a Guaranteed Interest Rate that will continue unchanged until the end of that period. The Guaranteed Interest Rate will never be less than an effective annual rate of 3%. Fortis Benefits declares the Guaranteed Interest Rates from time to time as market conditions dictate. Fortis Benefits advises a Participant of the Guaranteed Interest Rate for a chosen Guarantee Period at the time a purchase payment is received, a transfer is effectuated or a Guarantee Period is renewed. Fortis Benefits has no specific formula for establishing the Guaranteed Interest Rates for the Guarantee Periods. The rate may be influenced by, but not necessarily correspond to, interest rates generally available on the types of investments acquired with amounts allocated to the Guarantee Period. See "Investments by Fortis Benefits." Fortis Benefits in determining Guaranteed Interest Rates, may also consider, among other factors, the duration of a Guarantee Period, regulatory and tax requirements, sales and administrative expenses borne by Fortis Benefits, risks assumed by Fortis Benefits, Fortis Benefits' profitability objectives, and general economic trends. FORTIS BENEFITS' MANAGEMENT MAKES THE FINAL DETERMINATION OF THE GUARANTEED INTEREST RATES TO BE DECLARED. FORTIS BENEFITS CANNOT PREDICT OR ASSURE THE LEVEL OF ANY FUTURE GUARANTEED INTEREST RATES IN EXCESS OF AN EFFECTIVE ANNUAL RATE OF 3%. THE FIXED ACCOUNT INVESTMENT OPTION IS NOT AVAILABLE FOR CERTIFICATES ISSUED IN THE STATES OF PENNSYLVANIA AND NEVADA. Information concerning the Guaranteed Interest Rates applicable to the various Guarantee Periods at any time may be obtained from our Home Office or from your sales representative. MARKET VALUE ADJUSTMENT Except as described below, if any Fixed Account Value is surrendered, transferred or otherwise paid out before the end of the Guarantee Period in which it is being held, a Market Value Adjustment will be applied. This generally includes amounts applied to an annuity option and amounts paid as a single sum in lieu of an annuity. However, NO Market Value Adjustment will be applied to amounts that are paid out during the period beginning fifteen days before and ending fifteen days after the end of a Guarantee Period in which it was being held. Additionally, no Market Value Adjustment will be applied to amounts that are withdrawn from a Guarantee Period and paid out to the Participant, or transferred to the Variable Account, on an automatic periodic basis under a formal Fortis Benefits program for the withdrawal or transfer of the earnings of the Fixed Account. (There may be conditions and limitations imposed by Fortis Benefits associated with such a program. See your Fortis Benefits representative for the availability of any such program, and the conditions and limitations of such a program, in your state.) Also, no Market Value Adjustment will be applied to amounts that are paid out as a death benefit pursuant to the Certificate or to amounts withdrawn or transferred from the one-year Guarantee Period. The Market Value Adjustment may increase or decrease the amount of Fixed Account Value being withdrawn or transferred. The comparison of two Guaranteed Interest Rates determines whether the Market Value Adjustment produces an increase or a decrease. The first rate to compare is the Guaranteed Interest Rate for the amount being transferred or withdrawn. The second rate is the Guaranteed Interest Rate then being offered for new Guarantee Periods of the same duration as that remaining in the Guarantee Period from which the funds are being withdrawn or transferred. If the first rate exceeds the second by more than 1/2%, the Market Value Adjustment produces an increase. If the first rate does not exceed the second by at least 1/2%, the Market Value Adjustment produces a decrease. Sample calculations are shown in Appendix A. The Market Value Adjustment will be determined by multiplying the amount being withdrawn or transferred from the Guarantee Period (before deduction of any applicable surrender charge) by the following factor: 1 + I n / 12 ---------- - 1 ( 1 + J + .005 )
where, - I is the Guaranteed Interest Rate being credited to the amount being withdrawn from the existing Guarantee Period, - J is the Guaranteed Interest Rate then being offered for new Guarantee Periods with durations equal to the number of years remaining in the existing Guarantee Period (rounded up to the next higher number of years), and - N is the number of months remaining in the existing Guarantee Period (rounded up to the next higher number of months). INVESTMENTS BY FORTIS BENEFITS Our obligations with respect to the Fixed Account are legal obligations of Fortis Benefits and are supported by our General Account assets, 8 which also support obligations incurred by us under other insurance and annuity contracts. Investments purchased with amounts allocated to the Fixed Account are the property of Fortis Benefits and Participants have no legal rights in such investments. Subject to applicable law, we have sole discretion over the investment of assets in our General Account and in the Fixed Account, and neither of such accounts is subject to registration under the Investment Company Act of 1940. Amounts in the Fortis Benefits' General Account and the Fixed Account will be invested in compliance with applicable state insurance laws and regulations concerning the nature and quality of investments for the General Account. Within specified limits and subject to certain standards and limitations, these laws generally permit investment in federal, state and municipal obligations, preferred and common stocks, corporate bonds, real estate mortgages, real estate and certain other investments. See Fortis Benefits' Financial Statements" for information on Fortis Benefits' investments. Investment management for amounts in the General Account and in the Fixed Account is provided to Fortis Benefits by Fortis Advisers, Inc. Fortis Benefits intends to consider the return available on the instruments in which it intends to invest amounts allocated to the Fixed Account when it establishes Guaranteed Interest Rates. Such return is only one of many factors considered in establishing the Guaranteed Interest Rates. See "Guaranteed Interest Rates/Guarantee Periods." Fortis Benefits expects that amounts allocated to the Fixed Account generally will be invested in debt instruments that approximately match Fortis Benefits' liabilities with regard to the Guarantee Periods. Fortis Benefits expects that these will include primarily the following types of debt instruments: (1) securities issued by the United States Government or its agencies or instrumentalities, which securities may or may not be guaranteed by the United States Government; (2) debt securities which have an investment grade, at the time of purchase, within the four highest grades assigned by Moody's Investors Services, Inc. ("Moody's") (Aaa, Aa, A or Baa), Standard & Poor's Corporation ("Standard & Poor's") (AAA, AA, A or BBB), or any other nationally recognized rating service; (3) other debt instruments including, but not limited to, issues of or guaranteed by banks or bank holding companies and corporations, which obligations although not rated by Moody's or Standard & Poor's, are deemed by Fortis Benefits to have an investment quality comparable to securities which may be purchased as stated above; and (4) other evidences of indebtedness secured by mortgages or deeds of trust representing liens upon real estate. Notwithstanding the foregoing, Fortis Benefits is not obligated to invest amounts allocated to the Fixed Account according to any particular strategy, except as may be required by applicable state insurance laws and regulations. See "Regulation and Reserves." ACCUMULATION PERIOD ISSUANCE OF A CERTIFICATE AND PURCHASE PAYMENTS Fortis Benefits reserves the right to reject any application for a Certificate or any purchase payment for any reason. If the issuing instructions can be accepted in the form received, the initial purchase payment will be credited within two Valuation Dates after the later of receipt of the issuing instructions or receipt of the initial purchase payment at Fortis Benefits' Home Office. If the initial purchase payment cannot be credited within five Valuation Dates after receipt because the issuing instructions are incomplete, the initial purchase payment will be returned unless the applicant consents to our retaining the initial purchase payment and crediting it as of the end of the Valuation Period in which the necessary requirements are fulfilled. The initial purchase payment must be at least $25,000 ($10,000 for a Certificate issued pursuant to a qualified plan). The date that the initial purchase payment is applied to the purchase of the Certificate is also the Certificate Issue Date. The Certificate Issue Date is the date used to determine Certificate years, regardless of when the Certificate is delivered. The crediting of investment experience in the Variable Account, or a fixed rate of return in the Fixed Account, begins as of the Certificate Issue Date. The Participant may make additional purchase payments at any time after the Certificate Issue Date and prior to the Annuity Commencement Date, as long as the Annuitant is living. Purchase payments (together with any required information identifying the proper Certificates and account to be credited with purchase payments) must be transmitted to our Home Office. Additional purchase payments are credited to the Certificate and added to the Certificate Value as of the end of the Valuation Period in which they are received in good order. Each additional purchase payment under a Certificate must be at least $1,000 ($50 for a Certificate issued pursuant to a qualified plan). The total of all purchase payments for all Fortis Benefits annuities having the same owner or participant, or annuitant, may not exceed $1 million (not more than $500,000 allocated to the Fixed Account) without Fortis Benefits' prior approval, and we reserve the right to modify this limitation at any time. Purchase payments in excess of the initial minimum may be made by monthly draft against the bank account of any Participant who has completed and returned to us a special "Thrift-O-Matic" authorization form that may be obtained from your sales representative or from our Home Office. Arrangements can also be made for purchase payments by wire transfer, payroll deduction, military allotment, direct deposit and billing. Purchase payments by check should be made payable to Fortis Benefits Insurance Company. If the Certificate Value is less than $1,000, we may cancel the Certificate on any Valuation Date. We will notify the Participant at least 90 days in advance of our intention to cancel the Certificate. Such cancellation would be considered a full surrender of the Certificate. CERTIFICATE VALUE Certificate Value is the total of any Variable Account Value in all the Subaccounts of the Variable Account pursuant to the Certificate, plus any Fixed Account Value in all the Guarantee Periods. There is no guaranteed minimum Variable Account Value. To the extent Certificate Value is allocated to the Variable Account, you bear the entire investment risk. DETERMINATION OF VARIABLE ACCOUNT VALUE. A Certificate's Variable Account Value is based on Accumulation Unit values, which are determined on each Valuation Date. The value of an Accumulation Unit for a Subaccount on any Valuation Date is equal to the previous value of that Subaccount's Accumulation Unit multiplied by that Subaccount's net investment factor (discussed directly below) for the Valuation Period ending on that Valuation Date. At the end of any Valuation Period, a Certificate's Variable Account Value in a Subaccount is equal to the number of Accumulation Units in the Subaccount times the value of one Accumulation Unit for that Subaccount. The number of Accumulation Units in each Subaccount is equal to: - Accumulation Units purchased at the time that any Net Purchase Payments or transferred amounts are allocated to the Subaccount; less - Accumulation Units redeemed to pay for the portion of any transfers from or partial surrenders allocated to the Subaccount; less - Accumulation Units redeemed to pay charges under the Contract. NET INVESTMENT FACTOR. If a Subaccount's net investment factor is greater than one, the Subaccount's Accumulation Unit value has increased. If the net investment factor is less than one, the Subaccount's Accumulation Unit value has decreased. The net investment factor for a Subaccount is determined by dividing (1) the net asset 9 value per share of the Portfolio shares held by the Subaccount, determined at the end of the current Valuation Period, plus the per share amount of any dividend or capital gains distribution made with respect to the Portfolio shares held by the Subaccount during the current Valuation Period, minus a per share charge for the increase, plus a per share credit for the decrease, in any income taxes assessed which we determine to have resulted from the investment operation of the subaccount or any other taxes which are attributable to this Certificate, by (2) the net asset value per share of the Portfolio shares held in the Subaccount as determined at the end of the previous Valuation Period, and subtracting from that result a factor representing the mortality risk, expense risk and administrative expense charge. DETERMINATION OF FIXED ACCOUNT VALUE. A Certificate's Fixed Account Value is guaranteed by Fortis Benefits. Therefore, Fortis Benefits bears the investment risk with respect to amounts allocated to the Fixed Account, except to the extent that (a) Fortis Benefits may vary the Guaranteed Interest Rate for future Guarantee Periods (subject to the 3% effective annual minimum) and (b) the Market Value Adjustment imposes investment risks on the Participant. The Certificate's Fixed Account Value on any Valuation Date is the sum of its Fixed Account Values in each Guarantee Period on that date. The Fixed Account Value in a Guarantee Period is equal to the following amounts, in each case increased by accrued interest at the applicable Guaranteed Interest Rate: - The amount of Net Purchase Payments or transferred amounts allocated to the Guarantee Period; less - The amount of any transfers or surrenders out of the Guarantee Period. ALLOCATION OF PURCHASE PAYMENTS AND CERTIFICATE VALUE ALLOCATION OF PURCHASE PAYMENTS. In the application for a Certificate, the Participant can allocate Net Purchase Payments, or portions thereof, to the available Subaccounts of the Variable Account or to the Guarantee Periods in the Fixed Account, or a combination thereof. Percentages must be in whole numbers and the total allocation must equal 100%. The percentage allocations for future Net Purchase Payments may be changed, without charge, at any time by sending a Written Request to Fortis Benefits' Home Office. Changes in the allocation of future Net Purchase Payments will be effective on the date we receive the Participant's Written Request. TRANSFERS. Transfers of Certificate Value from one available Subaccount to another or into the Fixed Account, or from one Guarantee Period to another or to the Subaccount, can be made by the Participant in Written Request to Fortis Benefits' Home Office, or by telephone transfer as described below. There is currently no charge for any transfer, although transfers from a Guarantee Period other than the one year Guarantee Period that are (1) more than 15 days before or after the expiration thereof, or (2) are not a part of a formal Fortis Benefits program for the transfer of earnings of the Fixed Account are subject to a Market Value Adjustment. See "Market Value Adjustment." The minimum transfer from a Subaccount or Guarantee Period is the lesser of $1,000 or all of the Certificate Value in the Subaccount or Guarantee Period. Irrespective of the above we may permit a continuing request for transfers of lesser specified amounts automatically on a periodic basis. However, we reserve the right to restrict the frequency of or otherwise condition, terminate or impose charges (not to exceed $25 per transfer) upon transfers. We will count all transfers between and among the Subaccounts of the Variable Account and the Fixed Account as one transfer, if all the transfer requests are made at the same time as part of one request. We will execute the transfers and determine all values in connection with transfers as of the end of the Valuation Period in which we receive the transfer request. The amount of any positive or negative Market Value Adjustment, respectively, will be added to or deducted from the transferred amount. If you complete and return the telephone transfer section of the application, transfers may be made pursuant to telephone instructions. We will honor telephone transfer instructions from any person who provides the correct identifying information. Fortis Benefits will not be responsible for, and you will bear the risk of loss from, oral instructions, including fraudulent instructions, which are reasonably believed to be genuine. We will employ reasonable procedures to confirm that telephone instructions are genuine, but if such procedures are not deemed reasonable, we may be liable for any losses due to unauthorized or fraudulent instructions. Our procedures are to verify address and social security number, tape record the telephone call, and provide written confirmation of the transaction. We may modify or terminate our telephone transfer procedures at any time. The number for telephone transfers is 1-800-800-2638. Certain restrictions on very substantial investments in any one Subaccount are set forth under "Limitations on Allocations" in the Statement of Additional Information. TOTAL AND PARTIAL SURRENDERS TOTAL SURRENDERS. The Participant may surrender all of the Cash Surrender Value at any time during the life of the Annuitant and prior to the Annuity Commencement Date by a Written Request sent to Fortis Benefits' Home Office. We reserve the right to require that the Certificate be returned to us prior to making payment, although this will not affect our determination of the amount of the Cash Surrender Value. Cash Surrender Value is the Certificate Value at the end of the Valuation Period during which the Written Request for the total surrender is received by Fortis Benefits at its Home Office after any Market Value Adjustment. See "Surrender Charge" and "Market Value Adjustment." The written consent of all collateral assignees and irrevocable beneficiaries must be obtained prior to any total surrender. Surrenders from the Variable Account will generally be paid within seven days of the date of receipt by Fortis Benefits' Home Office of the Written Request. Postponement of payments may occur, however, in certain circumstances. See "Postponement of Payment." The amount paid upon total surrender of the Cash Surrender Value (taking into account any prior partial surrenders) may be more or less than the total Net Purchase Payments made. After a surrender of the Cash Surrender Value or at any time the Certificate Value is zero, all rights of the Participant, Annuitant, or any other person will terminate. PARTIAL SURRENDERS. At any time prior to the Annuity Commencement Date and during the lifetime of the Annuitant, the Participant may surrender a portion of the Fixed Account Value and/or the Variable Account Value by sending to Fortis Benefits' Home Office a Written Request. We will not accept a partial surrender request unless the net proceeds payable to you as a result of the request are at least $1,000. If the total Certificate Value in both the Variable Account and Fixed Account would be less than $1,000 after the partial surrender, Fortis Benefits will surrender the entire Cash Surrender Value under the Certificate. In order for a request to be processed, the Participant must specify from which Subaccounts of the Variable Account or Guarantee Periods of the Fixed Account a partial surrender should be made. We will surrender Accumulation Units from the Variable Account and/ or dollar amounts from the Fixed Account so that the total amount of the partial surrender equals the dollar amount of the partial surrender request. If the surrender is from a Guarantee Period other than the one year Guarantee Period, the amount payable to the Contract Participant will be reduced by any negative Market Value Adjustment, or increased 10 by any positive Market Value Adjustment unless the surrender is (1) within 15 days before or after the expiration of a Guarantee Period, or (2) is a part of a formal Fortis Benefits program for the withdrawal of earnings from the Fixed Account. The partial surrender will be effective at the end of the Valuation Period in which Fortis Benefits receives the Written Request for partial surrender at its Home Office. Payments will generally be made within seven days of the effective date of such request, although certain delays are permitted. See "Postponement of Payment." The Internal Revenue Code provides that a penalty tax will be imposed on certain premature surrenders. For a discussion of this and other tax implications of total and partial surrenders, including withholding requirements, see "Federal Tax Matters." Also, under tax deferred annuity Certificates pursuant to Section 403(b) of the Internal Revenue Code, no distributions of voluntary salary reduction amounts will be permitted prior to one of the following events: attainment of age 59 1/2 by the employee or the employee's separation from service, death, disability or hardship. (Hardship distributions will be limited to the lesser of the amount of the hardship or the amount of salary reduction contributions, exclusive of earnings thereon.) BENEFIT PAYABLE ON DEATH OF PARTICIPANT (OR ANNUITANT) If the Participant dies prior to the Annuity Commencement Date, a death benefit will be paid to the Beneficiary. If the Participant is a non-natural person, then a death benefit will be paid upon the death of the Annuitant prior to the Annuity Commencement Date. In such case, if more than one Annuitant has been named, the death benefit payable upon the death of an Annuitant will only be paid upon the death of the last survivor of the persons so named. The death benefit will be equal to the greater of (1) or (2) as follows: (1) The Certificate Value as of the date used for valuing the death benefit. (2) The sum of all Net Purchase Payments made less pro rata adjustments for each partial withdrawal. The pro rata adjustment for a given partial withdrawal is equal to: (a) the withdrawn amount, divided by (b) the Certificate Value immediately before the amount was withdrawn, the result multiplied by (c) the aggregate amount of all prior Net Purchase Payments less pro rata adjustments for all prior withdrawals. (3) The highest anniversary value of each of the Certificate's Five Year Anniversaries prior to the earlier of: (1) the decedent's death, or (2) the Participant's attainment of age 75. An anniversary value is equal to: (a) the Certificate value on the anniversary, plus, (b) any Net Purchase Payment made since the anniversary, reduced by (c) pro rata adjustments for any withdrawals, as described below, made since the anniversary. The pro rata adjustment for a given withdrawal is equal to: (a) the withdrawn amount, divided by (b) the Certificate Value immediately before the amount was withdrawn, the result multiplied by (c) the quantity equal to: (i) the Certificate Value on the anniversary, plus (ii) Net Purchase Payments made since the anniversary and before the withdrawal, minus (iii) pro rata adjustments for withdrawals made since the anniversary and before the given withdrawal. The death benefits described in (2) and (3) above refer to pro rata adjustments. A pro rata adjustment is calculated separately for each withdrawal, creating a decrease in the death benefit proportional to the decrease the withdrawal makes in the Certificate Value. Pro rata adjustments are made for amounts withdrawn for partial surrenders and any associated negative Market Value Adjustments (which shall be deemed to be an amount withdrawn), but not for any Certificate fee-related surrenders. The value of the death benefit is determined as of the end of the Valuation Period in which we receive, at our Home Office, proof of death and the written request as to the manner of payment. Upon receipt of these items, the death benefit generally will be paid within seven days. Under certain circumstances, payment of the death benefit may be postponed. See "Postponement of Payment." If we do not receive a Written Request for a settlement method, we will pay the death benefit in a single sum, based on values determined at that time. The Beneficiary may (a) receive a single sum payment, which terminates the Certificate, or (b) select an annuity option. If the Beneficiary selects an annuity option, he or she will have all the rights and privileges of a payee under the Certificate. If the Beneficiary desires an Annuity option, the election should be made within 60 days of the date the death benefit becomes payable. Failure to make a timely election can result in unfavorable tax consequences. For further information, see "Federal Tax Matters." We accept any of the following as proof of death: a copy of a certified death certificate; a copy of a certified decree of a court of competent jurisdiction as to the finding of death; or a written statement by a medical doctor who attended the deceased at the time of death. If the Participant dies before the Annuity Commencement Date with respect to a Non-Qualified Certificate certain additional requirements are mandated by the Internal Revenue Code, which are discussed below under "Federal Tax Matters--Required Distributions for Non-Qualified Certificates." It is imperative that Written Notice of the death of the Participant be promptly transmitted to Fortis Benefits at its Home Office, so that arrangements can be made for distribution of the entire interest in the Certificate to the Beneficiary in a manner that satisfies the Internal Revenue Code requirements. Failure to satisfy these requirements may result in the Certificate not being treated as an annuity contract for federal income tax purposes, which could have adverse tax consequences. THE ANNUITY PERIOD ANNUITY COMMENCEMENT DATE The Participant may specify an Annuity Commencement Date in the application. The Annuity Commencement Date marks the beginning of the period during which an Annuitant or other payee designated by the Participant receives annuity payments under the Certificate. The Annuity Commencement Date must be at least two years after the Certificate Issue Date. Depending on the type of retirement arrangement involved, amounts that are distributed either too soon or too late may be subject to penalty taxes under the Internal Revenue Code. See "Federal Tax Matters." You should consider this carefully in selecting or changing an Annuity Commencement Date. In order to advance or defer the Annuity Commencement Date, the Participant must submit a Written Request. The request must be received at our Home Office at least 30 days before the then-scheduled Annuity Commencement Date. The new Annuity Commencement Date must also be at least 30 days after the Written Request is received. There is no right to make any total or partial surrender during the Annuity Period. 11 COMMENCEMENT OF ANNUITY PAYMENTS If the Certificate Value at the end of the Valuation Period which contains the Annuity Commencement Date is less than $1,000, we may pay the entire Certificate Value, without the imposition of any charges other than the premium tax charge, if applicable, in a single sum payment to the Annuitant or other payee chosen by the Participant and cancel the Certificate. Otherwise, Fortis Benefits will apply (1) the Fixed Account Value to provide a Fixed Annuity Option and (2) the Variable Account Value in any Subaccount to provide a Variable Annuity Option using the same Subaccount, unless the Participant has notified us by Written Request to apply the Fixed Account Value and Variable Account Value in different proportions. Any such Written Request must be received by us at our Home Office at least 30 days before the Annuity Commencement Date. Annuity payments under a Fixed or Variable Annuity Option will be made on a monthly basis to the Annuitant or other properly-designated payee, unless we agree to a different payment schedule. If more than one person is named as an Annuitant, the Contract Owner may elect to name one of such persons to be the sole Annuitant as of the Annuity Commencement Date. We reserve the right to change the frequency of any annuity payment so that each payment will be at least $50 ($20 in Texas). There is no right to make any total or partial surrender during the Annuity Period. The amount of each annuity payment will depend on the amount of Certificate Value applied to an annuity option, the form of annuity selected and the age of the Annuitant. Information concerning the relationship between the Annuitant's sex and the amount of annuity payments, including special requirements in connection with employee benefits plans, is set forth under "Calculations of Annuity Payments" in the Statement of Additional Information. The Statement of Additional Information also contains detailed information about how the amount of each annuity payment is computed. The dollar amount of any fixed annuity payments is specified during the entire period of annuity payments according to the provisions of the annuity form selected. The dollar amount of variable annuity payments varies during the annuity period based on changes in Annuity Unit Values for the Subaccounts that you choose to use in connection with your payments. RELATIONSHIP BETWEEN SUBACCOUNT INVESTMENT PERFORMANCE AND AMOUNT OF VARIABLE ANNUITY PAYMENTS If a Subaccount on which a variable annuity payment is based has an average effective net investment return higher than 3% per annum during the period between two such annuity payments, the Annuity Unit Value will increase, and the second payment will be higher than the first. Conversely, if the Subaccount's average effective net investment return over the period between the annuity payments is less than 3% per annum, the Annuity Unit Value will decrease, and the second payment will be lower than the first. "Net investment return," for this purpose, refers to the Subaccount's overall investment performance, net of the mortality and expense risk and administrative expense charges, which are assessed at a nominal aggregate annual rate of 1.35%. We guarantee that the amount of each variable annuity payment after the first payment will not be affected by variations in our mortality experience or our expenses. TRANSFERS. During the Annuity Period, the person receiving annuity payments may make up to four transfers a year among Subaccounts. The current procedures for and conditions on these transfers are the same as described above under "Allocation of Purchase Payments and Certificate Value--Transfers." Transfers from a Fixed Annuity Option are not permitted during the Annuity Period. ANNUITY FORMS The Participant may select an annuity form or change a previous selection by Written Request, which must be received by us at least 30 days before the Annuity Commencement Date. One annuity form may be selected, although as discussed above, payments under that form may be received on a combination fixed and variable basis. If no annuity form selection is in effect on the Annuity Commencement Date, in most cases we automatically apply Option B (described below), with payments guaranteed for 10 years. If the Certificate is issued under certain retirement plans, however, federal pension law may require that any default payments be made pursuant to plan provisions and/or federal law. Tax laws and regulations may impose further restrictions to assure that the primary purpose of the plan is distribution of the accumulated funds to the employee. The following options are available for fixed annuity payments and for variable annuity payments. OPTION A, LIFE ANNUITY. Payments are made as of the first Valuation Date of each monthly period during the Annuitant's life, starting with the Annuity Commencement Date. No payments will be made after the Annuitant dies. It is possible for the payee to receive only one payment under this option, if the Annuitant dies before the second payment is due. OPTION B, LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10 YEARS TO 20 YEARS. Payments are made as of the first Valuation Date of each monthly period starting on the Annuity Commencement Date. Payments will continue as long as the Annuitant lives. If the Annuitant dies before all of the guaranteed payments have been made, we will continue installments of the guaranteed payments to the Beneficiary. OPTION C, JOINT AND FULL SURVIVOR ANNUITY. Payments are made as of the first Valuation Date of each monthly period starting with the Annuity Commencement Date. Payments will continue as long as either the Annuitant or the joint Annuitant is alive. Payments will stop when both the Annuitant and the joint Annuitant have died. It is possible for the payee or payees under this option to receive only one payment, if both Annuitants die before the second payment is due. OPTION D, JOINT AND ONE-HALF CONTINGENT SURVIVOR ANNUITY. Payments are made as of the first Valuation Date of each monthly period starting with the Annuity Commencement Date. Payments will continue as long as either the Annuitant or the joint Annuitant is alive. If the Annuitant dies first, payments will continue to the joint Annuitant at one-half the original amount. If the joint Annuitant dies first, payments will continue to the Annuitant at the original full amount. Payments will stop when both the Annuitant and the joint Annuitant have died. It is possible for the payee or payees under this option to receive only one payment if both Annuitants die before the second payment is due. We also have other annuity forms available and information about them can be obtained from your sales representative or by calling or writing to our Home Office. DEATH OF ANNUITANT OR OTHER PAYEE Under most annuity forms offered by Fortis Benefits, the amounts, if any, payable on the death of the Annuitant during the Annuity Period are the continuation of annuity payments for any remaining guarantee period or for the life of any joint Annuitant. In all such cases, the person entitled to receive payments also receives any rights and privileges under the annuity form in effect. Additional rules applicable to such distributions under Non-Qualified Certificates are described under "Federal Tax Matters--Required Distributions for Non-Qualified Certificates." Though the rules there described do not apply to Certificates issued in connection with qualified plans, similar rules apply to the plans themselves. 12 CHARGES AND DEDUCTIONS PREMIUM TAXES The states of South Dakota and Wyoming impose a premium tax upon the receipt of a purchase payment. In these states, and in any other state or jurisdiction where premium taxes or similar assessments are imposed upon the receipt of purchase payments, Fortis Benefits will pay such taxes on behalf of the Participant and then deduct a charge for these amounts from the Certificate Value upon the surrender, death of annuitant or Participant, or annuitization of the Certificate. In jurisdictions where premium taxes or similar assessments are imposed at the time annuity payments begin, Fortis Benefits will deduct a charge for such amounts from the Certificate Value at that time. In such jurisdictions, the charge will be deducted on a pro-rata basis from the then-current Fixed Account Value and, by redemption of Accumulation Units, the then-current Variable Account Value in each Subaccount. Similarly, Fortis Benefits may deduct premium taxes from Certificate Value when no deduction was made from purchase payments, but is subsequently determined to be due. Conversely, Fortis Benefits will credit to the Certificate Value the amount of any deductions for premium taxes or similar assessments that are subsequently determined not to be owed. Applicable premium tax rates depend upon the Participant's then-current place of residence. Applicable rates are subject to change by legislation, administrative interpretations or judicial acts. ANNUAL ADMINISTRATIVE CHARGE A $30 annual administrative charge is deducted each Certificate year from the Certificate Value on each anniversary of the Certificate Issue Date. (This charge will be lower to the extent legally required in some states.) This charge is to help cover administrative costs such as those incurred in issuing Certificates, establishing and maintaining the records relating to Certificates, making regulatory filings and furnishing confirmation notices, voting materials and other communications, providing computer, actuarial and accounting services, and processing Certificate transactions. This charge will initially be waived during the Annuity period although Fortis Benefits reserves the right to reinstate it at any time. This charge will be waived during the Accumulation Period if the Certificate Value at the end of the Certificate Year (or upon total surrender) is $100,000 or more. The annual administrative charge will be deducted by redemption of Accumulation Units from each Subaccount of the Variable Account and from the Fixed Account in the same proportion as the then-current Certificate Value is then allocated among those alternatives pursuant to the Certificate. If the Certificate is totally surrendered, the full annual administrative charge will be deducted at the time of surrender if the Certificate Value is less than $100,000 at such time. CHARGES AGAINST THE VARIABLE ACCOUNT MORTALITY AND EXPENSE RISK CHARGE. We will assess each Subaccount of the Variable Account with a daily charge for mortality and expense risk at a nominal annual rate of 1.10% of the average daily net assets of the Variable Account (consisting of approximately .80% for mortality risk and approximately .30% for expense risk). This charge is assessed during both the Accumulation Period and the Annuity Period. We guarantee not to increase this charge for the duration of the Certificate. The mortality risk borne by Fortis Benefits arises from its obligation to make annuity payments (determined in accordance with the annuity tables and other provisions contained in the Certificate) for the full life of all Annuitants regardless of how long all Annuitants or any individual Annuitant might live. In addition, Fortis Benefits bears a mortality risk in that it guarantees to pay a death benefit upon the death of an Annuitant or Participant prior to the Annuity Commencement Date. No surrender charge is imposed upon the payment of a death benefit which places a further mortality risk on the Company. The expense risk assumed is that actual expenses incurred in connection with issuing and administering the Certificate will exceed the limits on administrative charges set in the Certificate. If the administrative charges and the mortality and expense risk charge are insufficient to cover the expenses and costs assumed, the loss will be borne by the Company. Conversely, if the amount deducted proves more than sufficient, the excess will be profit to the Company. ADMINISTRATIVE EXPENSE CHARGE. We will assess each Subaccount of the Variable Account with a daily charge at an annual rate of .15% of the average daily net assets of the Subaccount. This charge is imposed during both the Accumulation Period and the Annuity Period. This charge is to help cover administrative costs such as those incurred in issuing Certificates, establishing and maintaining the records relating to Certificates, making regulatory filings and furnishing confirmation notices, voting materials and other communications, providing computer, actuarial and accounting services, and processing Certificate transactions. There is no necessary relationship between the amount of administrative charges imposed on a given Certificate and the amount of expenses actually attributable to that Certificate. TAX CHARGE We currently impose no charge for taxes payable by us in connection with the Certificate, other than for premium taxes and similar assessments when applicable. We reserve the right to impose a charge for any other taxes that may become payable by us in the future in connection with the Certificates or the Separate Account. The annual administrative charge and charges against the Variable Account described above are for the purposes described and Fortis Benefits may receive a profit as a result of these charges. MISCELLANEOUS Because the Variable Account invests in shares of the Portfolios, the net assets of the Variable Account will reflect the investment advisory fees and certain other expenses incurred by the Portfolios that are described in the prospectus for the Portfolios. GENERAL PROVISIONS THE CERTIFICATES The Certificate, copies of any applications, amendments, riders, or endorsements attached to the Certificate and copies of any supplemental applications, amendments, endorsements, or revised Certificate pages which are mailed to you are the entire Certificate. Only an officer of Fortis Benefits can agree to change or waive any provisions of a Certificate. Any change or waiver must be in writing and signed by an officer of Fortis Benefits. The Certificates are non-participating and do not share in dividends or earnings of Fortis Benefits. POSTPONEMENT OF PAYMENT Fortis Benefits may defer for up to 15 days the payment of any amount attributable to a purchase payment made by check to allow the check reasonable time to clear. For a description of other circumstances in which amounts payable out of Variable Account assets could be deferred, see "Postponement of Payments" in the Statement of Additional Information. Fortis Benefits may also defer payment of surrender proceeds payable out of the Fixed Account for a period of up to 6 months. MISSTATEMENT OF AGE OR SEX AND OTHER ERRORS If the age or sex of the Annuitant has been misstated, any amount payable will be that which the purchase payments paid would have purchased at the correct age and sex. If we have made any overpayments because of incorrect information about age or sex, or any other 13 miscalculation, Fortis Benefits will deduct the overpayment from the next payment or payments due. We add underpayments to the next payment. The amount of any adjustment will be credited or charged with interest at the effective annual rate of 3% per year. ASSIGNMENT Rights and interests under a Qualified Certificate may be assigned only in certain narrow circumstances referred to in the Certificate. Participants and other payees may assign their rights and interests under Non-Qualified Certificates, including their ownership rights. We take no responsibility for the validity of any assignment. A change in ownership rights must be made in writing and a copy must be sent to Fortis Benefits' Home Office. The change will be effective on the date it was made, although we are not bound by a change until the date we record it. The rights under a Certificate are subject to any assignment of record at the Home Office of Fortis Benefits. An assignment or pledge of a Certificate may have adverse tax consequences. See below under "Federal Tax Matters." BENEFICIARY Before the Annuity Commencement Date, the Participant may name or change a beneficiary or a contingent beneficiary by sending a Written Request of the change to Fortis Benefits. Under certain retirement programs, however, spousal consent may be required to name or change a beneficiary, and the right to name a beneficiary other than the spouse may be subject to applicable tax laws and regulations. We are not responsible for the validity of any change. A change will take effect as of the date it is signed but will not affect any payments we make or action we take before receiving the Written Request. We also need the consent of any irrevocably named person before making a requested change. In the event of the death of a Participant, or the Annuitant, if the Participant is a non-natural person, prior to the Annuity Commencement date the Beneficiary will be determined as follows: - If there is any surviving Participant, the surviving Participant will be the Beneficiary (this overrides any other beneficiary designation). - If there is no surviving Participant, the Beneficiary will be the beneficiary designated by the Participant. - If there is no surviving Participant and no surviving beneficiary who has been designated by the Participant, then the estate of the last surviving Participant will be the Beneficiary. REPORTS We will mail to the Participant (or to the person receiving payments during the annuity period), at the last known address of record, any reports and communications required by any applicable law or regulation. You should therefore give us prompt written notice of any address change. This will include annual audited financial statements of the Portfolios, but not necessarily of the Variable Account or Fortis Benefits. RIGHTS RESERVED BY FORTIS BENEFITS Fortis Benefits reserves the right to make certain changes if, in its judgment, they would best serve the interests of Participants and Annuitants or would be appropriate in carrying out the purposes of the Certificates. Any changes will be made only to the extent and in the manner permitted by applicable laws. Also, when required by law, Fortis Benefits will obtain your approval of the changes and approval from any appropriate regulatory authority. Such approval may not be required in all cases, however. Examples of the changes Fortis Benefits may make include: - To operate the Variable Account in any form permitted under the Investment Company Act of 1940 or in any other form permitted by law. - To transfer any assets in any Subaccount to another Subaccount, or to one or more separate accounts, or to the Fixed Account; or to add, combine or remove Subaccounts in the Variable Account. - To substitute, for the Portfolio shares held in any Subaccount, the shares of another Portfolio or the shares of another investment company or any other investment permitted by law. - To make any changes required by the Internal Revenue Code or by any other applicable law in order to continue treatment of the Certificate as an annuity. - To change the time or time of day at which a Valuation Date is deemed to have ended. - To make any other necessary technical changes in the Certificate in order to conform with any action the above provisions permit Fortis Benefits to take, including to change the way Fortis Benefits assesses charges, but without increasing as to any then outstanding Certificate the aggregate amount of the types of charges which Fortis Benefits has guaranteed. DISTRIBUTION The Certificates will be sold by individuals who, in addition to being licensed by state insurance authorities to sell the Certificates of Fortis Benefits, are also registered representatives of Fortis Investors, Inc. ("Fortis Investors"), the principal underwriter of the Certificates or registered representatives of other broker-dealer firms or representatives of other firms that are exempt from broker dealer regulation. Fortis Investors and any such other broker-dealer firms are registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 as broker-dealers and are members of the National Association of Securities Dealers, Inc. Fortis Investors will pay a selling allowance to its registered representatives and selling brokers in varying amounts which under normal circumstances is not expected to exceed 2.15% of purchase payments plus a servicing fee of 1% of contract value per year, starting in the second contract year. Fortis Investors may, under certain flexible compensation arrangements, pay lesser or greater selling allowances and larger or smaller service fees to its registered representatives and other broker dealer firms than as set forth above. However, in such case, such flexible compensation arrangements will have actuarial present values which are approximately equivalent to the amounts of the selling allowances and service fees set forth above. Additionally, registered representatives, broker-dealer firms, and exempt firms may be eligible for additional compensation based upon meeting certain production standards. Fortis Investors may charge back commissions paid to others if the Certificate upon which the commission was paid is surrendered or cancelled within certain specified time periods. Fortis Benefits paid a total of $29,918,620, $30,567,607 and $37,024,997 to Fortis Investors for annuity contract distribution services during 1995, 1996 and 1997, respectively, $3,925,959 of which in 1995, $7,531,629 in 1996 and $5,091,431 in 1997 was not reallowed to other broker-dealers or exempt firms. In the distribution agreement, Fortis Benefits has agreed to indemnify Fortis Investors (and its agents, employees, and controlling persons) for certain damages and expenses, including those arising under federal securities laws. 14 Fortis or Fortis Investors may also provide additional compenstion to broker-dealers in connection with sales of Certificates. Compensation may include financial assistance to broker-dealers in connection with conferences, sales or training programs for their employees, seminars for the public, advertising, sales campaigns regarding Certificates, and other broker-dealer sponsored programs or events. Compensation may include payment for travel expenses incurred in connection with trips taken by invited sales representatives and members of their families to locations within or outside of the United States for meetings or seminars of a business nature. See Note 12 to the Notes to Fortis Benefits' Financial Statements as to amounts it has paid to Fortis, Inc. for various services. Fortis Investors is an indirect subsidiary of Fortis AMEV and Fortis AG and is therefore under common control with Fortis Benefits. Fortis Investors' principal business address is the same as that of our Home Office. Fortis Investors is not obligated to sell any specific amount of interests under the Certificates. $45,000,000 of interests in the Fixed Account and an indefinite amount of interests in the Variable Account have been registered with the Securities and Exchange Commission. FEDERAL TAX MATTERS The following description is a general summary of the tax rules, primarily related to federal income taxes, which in the opinion of Fortis Benefits are currently in effect. These rules are based on laws, regulations and interpretations which are subject to change at any time. This summary is not comprehensive and is not intended as tax advice. Federal estate and gift tax considerations, as well as state and local taxes, may also be material. You should consult a qualified tax adviser as to the tax implications of taking any action under a Certificate or related retirement plan. NON-QUALIFIED CERTIFICATES Section 72 of the Internal Revenue Code ("Code") governs the taxation of annuities in general. Purchase payments made under Non-Qualified Certificates are not excludible or deductible from the gross income of the Participant or any other person. However, any increase in the accumulated value of a Non-Qualified Certificate resulting from the investment performance of the Variable Account or interest credited to the Fixed Account is generally not taxable to the Participant or other payee until received by him or her, as surrender proceeds, death benefit proceeds, or otherwise. The exception to this rule is that, generally, Participants who are not natural persons ARE taxed annually on any increase in the Certificate Value. However, this exception does not apply in all cases, and you may wish to discuss this with your tax adviser. The following discussion applies generally to Certificates owned by natural persons. In general, surrenders or partial withdrawals under Certificates are taxed as ordinary income to the extent of the accumulated income or gain under the Certificate. If a Participant assigns or pledges any part of the value of a Certificate, the value so pledged or assigned is taxed to the Participant as ordinary income to the same extent as a partial withdrawal. With respect to annuity payment options, although the tax consequences may vary depending on the option elected under the Certificate, until the investment in the Certificate is recovered, generally only the portion of the annuity payment that represents the amount by which the Certificate Value exceeds the "investment in the Certificate" will be taxed. In general, a person's "investment in the Certificate" is the aggregate amount of purchase payments made by him or her. After an Annuitant's or other payee's "investment in the Certificate" is recovered, the full amount of any additional annuity payments is taxable. For variable annuity payments, in general, the taxable portion of each annuity payment (prior to recovery of the "investment in the Certificate") is determined by a formula which establishes the specific dollar amount of each annuity payment that is not taxed. This dollar amount is determined by dividing the "investment in the Certificate" by the total number of expected annuity payments. For fixed annuity payments, in general, prior to recovery of the "investment in the Certificate," there is no tax on the amount of each payment which bears the same ratio to that payment as the "investment in the Certificate" bears to the total expected value of the annuity payments for the term of the payments. However, the remainder of each annuity payment is taxable. The taxable portion of a distribution (in the form of an annuity or a single sum payment) is taxed as ordinary income. For purposes of determining the amount of taxable income resulting from distributions, all Certificates and other annuity contracts issued by us or our affiliates to the Participant within the same calendar year will be treated as if they were a single Certificate. There is a 10% penalty under the Code on the taxable portion of a "premature distribution." Generally, an amount is a "premature distribution" unless the distribution is (1) made on or after the Participant or other payee reaches age 59 1/2, (2) made to a Beneficiary on or after death of the Participant, (3) made upon the disability of the Participant or other payee, or (4) part of a series of substantially equal annuity payments for the life or life expectancy of the Participant or the Participant and Beneficiary. Premature distributions may result, for example, from an early Annuity Commencement Date, an early surrender, partial surrender or assignment of a Certificate or the early death of an Annuitant who is not also the Participant or other person receiving annuity payments under the Certificate. A transfer of ownership of a Certificate, or designation of an Annuitant or other payee who is not also the Participant, may result in certain income or gift tax consequences to the Participant that are beyond the scope of this discussion. A Participant contemplating any transfer or assignment of a Certificate should contact a competent tax adviser with respect to the potential tax effects of such transaction. REQUIRED DISTRIBUTIONS FOR NON-QUALIFIED CERTIFICATES In order that a Non-Qualified Certificate be treated as an annuity contract for federal income tax purposes, Section 72(s) of the Code requires (a) if any person receiving annuity payments dies on or after the Annuity Commencement Date but prior to the time the entire interest in the Certificate has been distributed, the remaining portion of such interest will be distributed at least as rapidly as under the method of distribution being used as of the date of the person's death; and (b) if any Participant dies prior to the Annuity Commencement Date, the entire interest in the Certificate will be distributed (1) within five years after the date of that person's death or (2) as annuity payments which will begin within one year of that Participant's death and which will be made over the life of the Participant's designated Beneficiary or over a period not extending beyond the life expectancy of that Beneficiary. However, if the Participant's designated Beneficiary is the surviving spouse of the Participant, the Certificate may be continued with the surviving spouse deemed to be the new Participant. Where the Participant or other person receiving payments is not a natural person, the required distributions provided by Section 72(A) apply upon the death of the primary Annuitant. No regulations interpreting the requirements of Section 72(s) have yet been issued (although proposed regulations have been issued interpreting similar requirements for qualified plans). Fortis Benefits intends to review and modify the Certificate if necessary to ensure that it complies with the requirements of Section 72(s) when clarified by regulation or otherwise. Generally, unless the Beneficiary elects otherwise, the above requirements will be satisfied where the death occurs prior to the Annuity 15 Commencement Date by paying the death benefit in a single sum, subject to proof of the Participant's death. The Beneficiary, however, may elect by Written Request to receive an annuity option instead of a lump sum payment. However, if the election is not made within 60 days of the date the single sum death benefit otherwise becomes payable, particularly where the annuitant dies and the annuitant is not the Participant, the IRS may disregard the election for tax purposes and tax the Beneficiary as if a single sum payment had been made. QUALIFIED CERTIFICATES The Certificates may be used with several types of tax-qualified plans. The tax rules applicable to Participants, Annuitants and other payees vary according to the type of plan and the terms and conditions of the plan itself. In general, purchase payments made under a retirement program recognized under the Code on behalf of an individual are excludable from the individual's gross income for tax purposes during the Accumulation Period. The portion, if any, of any purchase payment made by or on behalf of an individual under a Certificate that is not excluded from the individual's gross income for tax purposes during the Accumulation Period constitutes the individual's "investment in the Certificate." Aggregate deferrals under all plans at the employee's option may be subject to limitations. When annuity payments begin, the individual will receive back his or her "investment in the Certificate" if any, as a tax-free return of capital. The dollar amount of annuity payments received in any year in excess of such return is taxable as ordinary income. When payments are received as an annuity, the tax-free return of capital is treated as if received ratably over the entire period of the annuity until fully recovered (as described above with respect to Non-Qualified Certificates). The Certificates are available in connection with the following types of retirement plans: Section 403(b) annuity plans for employees of certain tax-exempt organizations and public educational institutions; Section 401 or 403(a) qualified pension, profit-sharing or annuity plans; individual retirement annuities ("IRAs") under Section 408(b); simplified employee pension plans ("SEPs") under Section 408(k); SIMPLE IRA Plans under Section 408(p); Section 457 unfunded deferred compensation plans of public employers and tax-exempt organizations' and private employer unfunded deferred compensation plans. The tax implications of these plans are further discussed in the Statement of Additional Information under the heading "Taxation Under Certain Retirement Plans." WITHHOLDING Annuity payments and other amounts received under Certificates are subject to income tax withholding unless the recipient elects not to have taxes withheld. The amounts withheld will vary among recipients depending on the tax status of the individual and the type of payments from which taxes are withheld. Notwithstanding the recipient's election, withholding may be required with respect to certain payments to be delivered outside the United States and with respect to certain distributions from certain types of qualified retirement plans, unless the proceeds are transferred directly from the qualified plan to another qualified retirement plan. Moreover, special "backup withholding" rules may require Fortis Benefits to disregard the recipient's election if the recipient fails to supply Fortis Benefits with a "TIN" or taxpayer identification number (social security number for individuals), or if the Internal Revenue Service notifies Fortis Benefits that the TIN provided by the recipient is incorrect. PORTFOLIO DIVERSIFICATION The United States Treasury Department has adopted regulations under Section 817(h) of the Code which set standards of diversification for the investments underlying the Certificates, in order for the Certificates to be treated as annuities. Fortis Benefits believes that these diversification standards will be satisfied. Failure to do so would result in immediate taxation to Participants or persons receiving annuity payments of all returns credited to Certificates, except in the case of certain Qualified Certificates. Also, current regulations do not provide guidance as to any circumstances in which control over allocation of values among different investment alternatives may cause Participants or persons receiving annuity payments to be treated as the owners of Variable Account assets for tax purposes. Fortis Benefits reserves the right to amend the Certificates in any way necessary to avoid any such result. The Treasury Department may establish standards in this regard through regulations or rulings. Such standards may apply only prospectively, although retroactive application is possible if such standards were considered not to embody a new position. CERTAIN EXCHANGES Section 1035 of the Code provides generally that no gain or loss will be recognized under the exchange of a life insurance or annuity contract for an annuity contract. Thus, a properly completed exchange from one of these types of products into a Certificate pursuant to the special annuity contract exchange form we provide for this purpose is not generally a taxable event under the Code, and your investment in the Certificate will be the same as your investment in the product you exchanged out of. Because of the complexity of these and other tax aspects in connection with an exchange, you should consult a tax adviser before making any exchange. TAX LAW RESTRICTIONS AFFECTING SECTION 403(B) PLANS Section 403(b)(12) of the Internal Revenue Code restricts the distribution under Section 403(b) annuity contracts of: (1) elective contributions made for years beginning after December 31, 1988; (2) earnings on those contributions; and (3) earnings on amounts held as of December 31, 1988. Distribution of these amounts may only occur upon death of the employee, attainment of age 59 1/2, separation from service, disability, or financial hardship. In addition, income attributable to elective contributions made after December 31, 1988 may not be distributed in the case of hardship. FURTHER INFORMATION ABOUT FORTIS BENEFITS GENERAL Fortis Benefits is engaged in the offer and sale of insurance products, including fixed and variable life insurance policies, fixed and variable annuity contracts, and group life, accident and health insurance policies. The Company markets its products to small business and individuals through a national network of independent agents, brokers, and financial institutions. 16 SELECTED FINANCIAL DATA The following is a summary of certain financial data of Fortis Benefits. This summary has been derived in part from, and should be read in conjunction with, the financial statements of Fortis Benefits included elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, ---------------------------------------------------------- (IN THOUSANDS) 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- INCOME STATEMENT DATA Premiums and policy charges.............................. $1,238,006 $1,295,878 $1,232,329 $1,022,446 $ 955,053 Net investment income.................................... 228,724 206,023 203,537 162,514 153,657 Net realized gains (losses) on investment................ 41,101 25,731 55,080 (28,815) 73,623 Other income............................................. 36,458 31,725 33,085 35,958 27,100 ---------- ---------- ---------- ---------- ---------- TOTAL REVENUES......................................... $1,544,289 $1,559,357 $1,524,031 $1,192,103 $1,209,433 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total benefits and expenses.............................. $1,442,059 $1,470,066 $1,442,270 $1,157,651 $1,100,199 Federal Income taxes..................................... 35,120 31,099 27,891 11,595 31,090 Income before cumulative effect of accounting changes.... 67,110 58,192 53,870 22,857 78,144 Net income............................................... 67,110 58,192 53,870 22,857 81,707 BALANCE SHEET DATA Total assets............................................. $6,819,484 $5,951,876 $5,143,012 $4,043,914 $3,584,139 Total liabilities........................................ 5,939,378 5,171,203 4,431,914 3,569,717 3,052,231 Total shareholder's equity............................... 880,106 780,673 711,098 474,197 531,908
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1997 COMPARED TO 1996 FINANCIAL POSITION Total invested assets of Fortis Benefits Insurance Company (the "Company") increased to $3.3 billion in 1997 compared to $3.1 billion in 1996. As of December 31, 1997, 96% of the Company's fixed maturity securities consisted of investment grade bonds. Mortgage loans represent 18.1% of total invested assets compared to 18.9% in 1996. The Company believes that adequate reserves have been established for potential delinquencies and foreclosures. The mortgage loan portfolio consists generally of small loans on commercial properties, dispersed throughout the United States. The Company's delinquency and foreclosure rate are well below industry averages. RESULTS OF OPERATIONS REVENUES The Company's major products are group medical, group disability and dental, group life, and annuity and individual life insurance coverages sold through a network of independent agents and brokers. Total group medical, group disability and dental, group life, and annuity and individual life premiums represented 37%, 35%, 21% and 7% respectively of total premium in 1997 and 45%, 30%, 19% and 6% respectively in 1996. The decrease in group medical premium is the result of a decision in 1996 to discontinue new sales of certain medical products. The Company continues to match investment portfolio composition to liquidity needs and capital requirements. Changes in interest rates during 1997, 1996, and 1995 resulted in recognition of realized gains and losses. BENEFITS Policyholder benefit to premium ratio decreased from 84% in 1996 to 82% in 1997, as a result of general improved experience. The primary improvement was in the group life business which experienced these mortality declines consistently throughout 1997. Annuity and individual life also experienced lower mortality experience in 1997 in addition to higher interest crediting on the Company's steadily increasing policy base of interest sensitive and investment products. Group medical, group disability and dental, group life, and annuity and individual life benefit to premium ratio was 77%, 82%, 76% and 124% respectively in 1997 and 78%, 84%, 86%, and 131% respectively in 1996. EXPENSES The Company's general and administrative expense to premium ratio has increased in 1997 to 17.5% from 15.3% in 1996. Enabling the application systems to be Year 2000 compliant and managed dental initiatives are the primary reasons for this increase. Included in the managed dental initiative expense is an $13.5 million write-off of the expenses incurred on behalf of a company that provides the managed care services. Commission rates have increased from the levels in 1996. This is primarily due to changes in the mix of business by product lines as well as the change in first year versus renewal premiums. YEAR 2000 The Year 2000 issue is the result of computer programs having been written using two digits rather than four to define a year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than 2000. This could result in the failure of major systems or miscalculations, which could have a material impact on the operations of the Company and any of its businesses or subsidiaries. All of the Company's major businesses are heavily dependent upon internal computer systems, and many have significant interaction with systems of third parties. A comprehensive review of the Company's computer systems and business processes has been conducted to identify the major systems that could be affected by the Year 2000 issue. Steps are being taken to resolve any potential problems including modification to existing software and the purchase of new software. These measures are scheduled to be completed and tested on a timely basis. The Company's goal is to complete internal remediation and testing of each system by early 1999. Factors that could influence the total costs to be incurred by the Company in connection with the Year 2000 issue include the ability of the Company to successfully identify systems containing two-digit year codes, the nature and amount of programming required to fix the affected programs, the related labor and consulting costs for such remediation, and the ability of third parties that interface with the Company to successfully address their Year 2000 issues. The Company is evaluating the Year 2000 readiness of advisors and other third parties whose system failures could have an impact on the Company's operations. The potential materiality of any such impact is not entirely know at this time. The Company is closely monitoring these entities to avoid any unforeseen circumstances. 1996 COMPARED TO 1995 REVENUES Traditional life insurance premiums of Fortis Benefits (the "Company") are principally composed of group life coverages. Total life 17 premiums increased over 1995 due primarily to group life sales in 1996. Interest sensitive and investment product policy charges, which consist primarily of cost of insurance charges, increased 37% from 1995 to 1996. Continued sales of interest sensitive and investment products has steadily increased the policy base on which these charges are assessed. Total accident and health premiums increased in 1996 compared to 1995 due to an increase in the group disability product sales and strong persistency. Partially offsetting this increase was a 3% decrease in the group medical products driven by a decision to roll the fully insured medical business into a common medical plan and the decision to cease new sales of large group self funded medical plans, effective January 1, 1996. Beginning April 1, 1996 and continuing into 1997, the groups will gradually be rolled to a third party administrator. The Company continues to match investment portfolio composition to liquidity needs and capital requirements. Changes in interest rates during 1996, 1995 and 1994 resulted in recognition of realized gains and losses. BENEFITS The Company's group life benefits which are included in the traditional life benefits were higher in 1996 compared to 1995 as a result of increased mortality. Interest sensitive and investment product benefits for the period ended December 31, 1996 increased 23% from 1995. This increase was the result of higher interest crediting on the Company's steadily increasing policy base in 1996 compared to 1995. The accident and health claims to premium ratio improved from 1995 to 1996 due primarily to the improved claim closure rates in the group disability lines. EXPENSES The commission rates have declined from the levels in 1995. This is primarily due to change in the mix of business by product lines as well as the change in the first year versus renewal premiums. Interest sensitive and investment products commission increased from 1996 compared to 1995; however, the Company deferred $62.4 million of these commissions in 1996, compared to $52.7 million in 1995. The additional commission and deferral is the result of an increase in sales of the company's variable life and variable annuity products. This increase in deferred commissions more than offset the increase in paid commissions and lowered the net commission expense for 1996. In 1996, the Company consolidated the fully insured group medical business administration processing. This has resulted in expense savings as demonstrated by the reduction in the general and administrative expenses. Also contributing to the expense reduction was the decision to discontinue issuing large group self funded medical business. CASH FLOW AND LIQUIDITY The market value of cash, short-term investments and publicly traded bonds and stocks is at least equal to all policyholder reserves and liabilities. The Company's portfolio is readily marketable and convertible to cash to a degree sufficient to provide for short-term needs. The Company expects its operating activities to continue to meet its capital resource needs. The Company consistently monitors its liability durations and invests assets accordingly. The Company has no material commitments or off-balance sheet financing arrangements which would reduce sources of funds in the upcoming year. The National Association of Insurance Commissioners' risk-based capital formula helps to establish guidelines for capital levels. At December 31, 1997, the Company's capital exceeded the minimum recommended risk-based capital level. COMPETITION Fortis Benefits seeks to compete primarily on the basis of customer service, product design, and, in the case of products funded through Series Fund, the investment results achieved by Fortis Advisers, Inc. Many other insurance companies compete with Fortis Benefits in each of its markets, including on the basis of price. Many of these companies, which include some of the largest and best known insurance companies, have considerably greater resources than Fortis Benefits. REGULATION AND RESERVES The Company is subject to regulation and supervision by the insurance departments of the states in which it is licensed to do business. This regulation covers a variety of areas, including benefit reserve requirements, adequacy of insurance company capital and surplus, various operational standards, and accounting and financial reporting procedures. Fortis Benefits' operations and accounts are subject to periodic examination by insurance regulatory authorities. Under insurance guaranty fund laws in most states, insurers doing business therein can be assessed up to prescribed limits for insurance contract losses, if covered, incurred by insolvent companies. The amount of any future assessments of Fortis Benefits under these laws cannot be reasonably estimated. Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer's own financial strength. Although the federal government generally does not directly regulate the business of insurance, federal initiatives often have an impact on the business in a variety of ways. Federal measures that may adversely affect the insurance business include health care reform, employee benefit regulation, controls on medicare costs and medical entitlement programs, tax law changes affecting the taxation of insurance companies or of insurance products, changes in the relative desirability of various personal investment vehicles, and removal of impediments on the entry of banking institutions into the business of insurance. Pursuant to state insurance laws and regulations, Fortis Benefits is obligated to carry on its books, as liabilities, reserves to meet its obligations under outstanding insurance contracts. These reserves are based on assumptions about, among other things, future claims experience and investment returns. Neither the reserve requirements nor the other aspects of state insurance regulation provide absolute protection to holders of insurance contracts, including the Certificates, if Fortis Benefits were to incur claims or expenses at rates significantly higher than expected (due, for example, to acquired immune deficiency syndrome or other infectious diseases or catastrophes) or significant unexpected losses on its investments. EMPLOYEES AND FACILITIES Fortis Benefits has approximately 2,000 employees and considers its employee relations to be excellent; Fortis Benefits owns its Home Office building, consisting of 295,000 square feet in Woodbury, Minnesota. It also has administrative offices in Kansas City, Missouri. Fortis Benefits leases a portion of that building consisting of 297,000 square feet. In addition Fortis Benefits has several regional claims and sales offices throughout the United States. Fortis Benefits occupies approximately 100% of its home office and 70% of its administration building, which it expects will be adequate for its purposes for the foreseeable future. 18 DIRECTORS AND EXECUTIVE OFFICERS Set forth is information concerning the Company's directors and executive officers, to the extent responsible for its variable annuity operations, together with their business experience and principal occupations for the past five years: OFFICER-DIRECTORS Dean C. Kopperud, 45 Senior Vice President--Marketing and Sales; also Director since 1995 officer of affiliated companies. Robert Brian Pollock, 43 President and Chief Executive Officer; before then Director Since 1988 Senior Vice President--Life and Disability. Thomas Michael Keller, 50 Executive Vice President; before then Senior Vice Director since 1990 President of Fortis, Inc. OTHER DIRECTORS Allen Royal Freedman, 58 Chairman and Chief Executive Officer of Fortis, Inc. Chairman of the Board since 1995 J. Kerry Clayton, 52 Executive Vice President of Fortis, Inc. Director Since 1997 Arie Aristide Fakkert, 54 Assistant General Manager of Fortis International Director Since 1987 N.V. EXECUTIVE OFFICERS Rhonda Schwartz, 39 Senior Vice President and General Counsel--Life and Investment Products; before then secretary and General Counsel of Fortis Inc. Michael John Peninger, 43 Senior Vice President and Chief Financial Officer Jon H. Nicholson, 48 Senior Vice President--Custom Solutions Group. Peggy L. Ettestad, 40 Senior Vice President--Life Operations; before that Vice President of General Electric Company. Melinda S. Urion, 44 Senior Vice President--Chief Financial Officer since 1997; before then Senior Vice President-- Finance & CFO of American Express Financial Corporation. Dickson W. Lewis, 49 Senior Vice President--Distribution and Marketing since 1997; before then President of Hedstrom/ Blessing Marketing.
Fortis Benefits' officers serve at the pleasure of the board of directors, and members of the board serve without compensation (except for expenses of attending board meetings), until their successors are duly elected and qualified. Mr. Freedman is a director of Systems and Computer Technology Corporation and Genesis Health Ventures. Mr. Freedman is also a director of the following registered investment companies: Fortis Equity Portfolios, Inc.; Fortis Growth Fund, Inc.; Fortis Fiduciary Fund, Inc., Fortis Income Portfolios, Inc.; Fortis Securities, Inc.; Fortis Tax-Free Portfolios, Inc.; Fortis Money Portfolios, Inc.; Fortis Advantage Portfolios, Inc.; Fortis World Wide Portfolios, Inc.; Fortis Series Fund, Inc.; Special Portfolios, Inc. EXECUTIVE COMPENSATION Set forth below is certain information concerning the compensation of the executive officers of Fortis Benefits. - -------------------------------------------------------------------------------- SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION --------------------------------------- ---------------------------------- OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION LTIP PAYOUTS COMPENSATION (1) - ------------------------------------------- --------- --------- --------- ----------------- ----------------- --------------- Robert B. Pollock 1997 $ 275,000 $ 56,817 $ 0 $ 0 $ 15,762 President and Chief Executive Officer 1996 215,000 69,660 0 0 15,318 1995 215,000 84,000 0 0 14,851 - ----------------------------------------------------------------------------------------------------------------------------------- Francis J. Guthrie 1997 235,000 140,388 0 0 15,762 Executive Vice President 1996 88,125 0 0 0 12,279 1995 N/A N/A 0 0 0 - ----------------------------------------------------------------------------------------------------------------------------------- Debra Foss 1997 160,000 63,100 0 0 13,386 Sr. Vice President-- 1996 150,000 15,100 0 0 1,500 Human Resources 1995 37,500 5,000 0 0 NOT ELIGIBLE - ----------------------------------------------------------------------------------------------------------------------------------- William D. Greiter 1997 187,000 48,195 0 0 14,112 Senior Vice President-- 1996 178,500 48,195 0 0 12,829 Provider Markets 1995 170,000 38,808 0 0 12,528 - ----------------------------------------------------------------------------------------------------------------------------------- Michael John Peninger 1997 200,000 31,194 0 0 13,872 Senior Vice President and 1996 165,000 51,975 0 0 13,018 Chief Financial Officer 1995 165,000 39,150 0 0 12,249
- ------------------------ (1) This column includes contributions made by Fortis Benefits for the year for the benefit for the named individual to a defined contribution retirement plan. 19 LONG-TERM INCENTIVE PLAN AWARDS TABLE (LONG-TERM INCENTIVE PLAN(1) AWARDS IN LAST FISCAL YEAR)
PERFORMANCE OR OTHER PERIOD ESTIMATED FUTURE PAYOUTS UNDER NUMBER OF UNTIL NON-STOCK PRICE BASED PLANS SHARES, UNITS OR MATURATION OR ---------------------------------- NAME OTHER RIGHTS PAYOUT THRESHOLD TARGET MAXIMUM - --------------------------------------------------- ---------------- --------------- --------- ---------- ----------- Robert B. Pollock.................................. 348 Units 3 years 0 Units 348 Units 1,044 Units Francis J. Guthrie................................. 174 Units 3 years 0 Units 174 Units 522 Units Debra Foss......................................... 0 Units 3 years 0 Units 0 Units 0 Units William D. Greiter................................. 184 Units 3 years 0 Units 184 Units 552 Units Michael John Peninger.............................. 178 Units 3 years 0 Units 178 Units 534 Units
- ------------------------ (1) Units shown in this table represent performance units granted pursuant to an Executive Incentive Compensation Plan in which officers and managers of Fortis Benefits participate. Awards are made pursuant to this plan based on the employee's position with Fortis Benefits and salary level and the extent to which the employee and Fortis Benefits meet certain performance objectives over 1- and 3-year periods. Employees may elect to defer awards payable to them under this plan. As additional compensation to its employees and executive officers, Fortis Benefits has an Employees' Uniform Retirement Plan and an Executive Retirement Plan which generally provide an annual annuity benefit upon retirement at age 65 (or a reduced benefit upon early retirement) equal to: .9% of the employee's Average Annual compensation up to the employee's social security covered compensation, plus 1.3% of compensation above the social security covered compensation, up to $255,300, as adjusted by an index, multiplied by the employee's years of credited services. In addition, Fortis Benefits provides an unfunded Supplemental Executive Retirement Plan for certain executives of Fortis Benefits. Mr. Pollock is the only named executive currently covered by the Plan. Under the Supplemental Executive Retirement Plan, the annual benefit is calculated by subtracting the benefit payable under the Employees' Uniform Retirement Plan and the estimated Social Security benefit from the "Target Benefit." The "Target Benefit" is equal to 50% of Final Average Salary (average salary over the final 36 consecutive months of employment) reduced for less than 20 years of service at retirement. Upon retirement prior to age 65 and after attaining age 55 with 10 years of service, special early retirement rules apply. The salary used to calculate the Final Average Salary consists of regular compensation and the annual target incentive bonus of the participant. The estimated annual benefit of Mr. Pollock, based on current compensation levels, under this plan is $63,740. The following table illustrates the COMBINED estimated life annuity benefit payable from the Employees' Uniform Retirement Plan and Executive Retirement Plan to employees with the specified Final Average Salary and years of service upon retirement. PENSION PLAN TABLE*
YEARS OF SERVICE ---------------------------------------------------------------- FINAL AVERAGE SALARY 10 15 20 25 30 35 - --------------------------- --------- --------- --------- --------- --------- --------- $125,000................... $15,078 $ 22,617 $ 30,156 $ 37,695 $ 45,234 $ 52,772 150,000................... 18,328 27,492 36,656 45,820 54,984 64,147 175,000................... 21,578 32,367 43,156 53,945 64,734 75,522 200,000................... 24,828 37,242 49,656 62,070 74,484 86,897 225,000................... 28,078 42,117 56,156 70,195 84,234 98,272 250,000................... 30,695 46,042 61,389 76,737 92,084 107,432 275,000+.................. 31,163 46,744 62,326 77,907 93,489 109,070
- ------------------------ *The table excludes social security benefits. In general, for the purposes of these plans, compensation includes salary and bonuses. The credited years of service with Fortis Benefits for these individuals named in the Summary Compensation Table above are as follows: 18, 4, 2, 14, and 13, respectively. OWNERSHIP OF SECURITIES All of Fortis Benefits' outstanding shares are owned by Fortis Insurance Company, 515 West Wells, Milwaukee, Wisc. 53201, which is itself wholly owned by Fortis, Inc., One Chase Manhattan Plaza, New York, N.Y. 10005. Fortis, Inc., in turn is wholly owned by Fortis International, Inc., which is wholly owned by AMEV/VSB 1990 N.V., both of which share the same address with N.V. AMEV., Archimedeslaan 10, 3584 BA, Utrecht, The Netherlands. AMEV/VSB 1990 N.V. is 50% owned by Fortis AMEV and 50% owned, through certain subsidiaries, by Fortis AG, Boulevard Emile Jacqmain 53, 1000 Brussels, Belgium. VOTING PRIVILEGES In accordance with its view of current applicable law, Fortis Benefits will vote shares of each of the Portfolios which are attributable to a Certificate at regular and special meetings of the shareholders of Series Fund in proportion to instructions received from the persons having the voting interest in the Certificate as of the record date for the corresponding Portfolio shareholders meeting. Participants have the voting interest during the Accumulation Period, persons receiving annuity payments during the Annuity Period, and Beneficiaries after the death of the Annuitant or Participant. However, if the Investment Company Act of 1940 or any rules thereunder should be amended or if the present interpretation thereof should change, and as a result Fortis Benefits determines that it is permitted to vote shares of the Portfolios in its own right, it may elect to do so. During the Accumulation Period, the number of shares of a Portfolio attributable to a Certificate is determined by dividing the amount of Certificate Value in the corresponding Subaccount pursuant to the Certificate as of the record date for the shareholders meeting by the net asset value of one Portfolio share as of that date. During the Annuity Period, or after the death of the Annuitant or Participant, the number of Portfolio shares deemed attributable to the Certificate will be computed in a comparable manner, based on the liability for future 20 variable annuity payments allocable to that Subaccount under the Certificate as of the record date. Such liability for future payments will be calculated on the basis of the mortality assumptions and the assumed interest rate used in determining the number of Annuity Units credited to the Certificate and the applicable Annuity Unit value on the record date. During the Annuity Period, the number of votes attributable to a Certificate will generally decrease since funds set aside to make the annuity payments will decrease. Fortis Benefits will vote shares for which it has received no timely instructions, and any shares attributable to excess amounts Fortis Benefits has accumulated in the related Subaccount, in proportion to the voting instructions which it receives with respect to all Certificates and other variable annuity contracts participating in a Portfolio. To the extent that Fortis Benefits or any affiliated company holds any shares of a Portfolio, they will be voted in the same proportion as instructions for that Portfolio that are received from persons holding the voting interest with respect to all Fortis Benefits separate accounts participating in that Portfolio. Shares held by separate accounts other than the Variable Account will in general be voted in accordance with instructions of participants in such other separate accounts. This diminishes the relative voting influence of the Certificates. Each person having a voting interest in a Subaccount of the Separate Account will receive proxy material, reports and other materials relating to the appropriate Portfolio. Pursuant to the procedures described above, these persons may give instructions regarding the election of the Board of Directors of a Portfolio, ratification of the selection of its independent auditors, the approval of the investment managers of a Portfolio, changes in fundamental investment policies of a Portfolio and all other matters that are put to a vote of Portfolio shareholders. LEGAL MATTERS The legality of the Certificates described in this Prospectus has been passed upon by Douglas R. Lowe, Esquire, Associate General Counsel with the law department of Fortis Benefits. Messrs. Freedman, Levy, Kroll & Simonds, Washington, D.C., have advised Fortis Benefits on certain federal securities law matters. OTHER INFORMATION Registration Statements have been filed with the Securities and Exchange Commission under the Securities Act of 1933 as amended, with respect to the Certificates discussed in this Prospectus. Not all of the information set forth in the Registration Statement, amendments and exhibits thereto has been included in this Prospectus. Statements contained in this Prospectus concerning the content of the Certificates and other legal instruments are intended to be summaries. For a complete statement of the terms of these documents, reference should be made to the instruments filed with the Securities and Exchange Commission. A Statement of Additional Information is available upon request. Its contents are as follows: CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
PAGE Fortis Benefits and the Variable Account....... 2 Calculation of Annuity Payments................ 2 Postponement of Payments....................... 3 Services....................................... 4 - Safekeeping of Variable Account Assets..... 4 - Experts.................................... 4 - Principal Underwriter...................... 4 Limitations on Allocations..................... 4 Taxation Under Certain Retirement Plans........ 4 Withholding.................................... 9 Variable Account Financial Statements.......... 10 APPENDIX A--Performance Information............ A-1
FORTIS BENEFITS FINANCIAL STATEMENTS The financial statements of Fortis Benefits that are included in this Prospectus should be considered primarily as bearing on the ability of Fortis Benefits to meet its obligations under the Certificates. The Certificates are not entitled to participate in earnings, dividends or surplus of Fortis Benefits. 21 REPORT OF INDEPENDENT AUDITORS Board of Directors Fortis Benefits Insurance Company We have audited the accompanying balance sheets of Fortis Benefits Insurance Company, an indirect, wholly-owned subsidiary of Fortis AMEV and Fortis AG, as of December 31, 1997 and 1996, and the related statements of income, changes in shareholder's equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Fortis Benefits Insurance Company at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young, LLP Minneapolis, Minnesota February 27, 1998 F-1 BALANCE SHEETS FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31 -------------------- 1997 1996 --------- --------- ASSETS Investments: Fixed maturities, at fair value (amortized cost 1997--$2,325,589; 1996--$2,078,438)................................................................... $2,415,915 $2,115,499 Equity securities, at fair value (cost 1997--$88,719; 1996--$84,144)................. 109,832 106,290 Mortgage loans on real estate, less allowance for possible losses (1997--$11,085; 1996--$9,697)....................................................................... 602,064 582,869 Policy loans......................................................................... 68,566 60,722 Short-term investments............................................................... 70,537 182,817 Real estate and other investments.................................................... 55,035 29,628 --------- --------- 3,321,949 3,077,825 Cash and cash equivalents.............................................................. 9,901 20,474 Receivables: Uncollected premiums................................................................. 74,220 71,386 Reinsurance recoverable on unpaid and paid losses.................................... 13,852 12,939 Other................................................................................ 19,762 9,045 --------- --------- 107,834 93,370 Accrued investment income.............................................................. 47,376 39,519 Deferred policy acquisition costs...................................................... 291,742 268,075 Property and equipment at cost, less accumulated depreciation.......................... 42,773 52,882 Deferred federal income taxes.......................................................... 15,037 17,008 Other assets........................................................................... 4,250 8,005 Assets held in separate accounts....................................................... 2,978,622 2,374,718 --------- --------- TOTAL ASSETS........................................................................... $6,819,484 $5,951,876 --------- --------- --------- ---------
See accompanying notes. F-2 BALANCE SHEETS (CONTINUED) FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31 -------------------- 1997 1996 --------- --------- POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY POLICY RESERVES AND LIABILITIES: Future policy benefit reserves: Traditional life insurance......................................................... $ 449,017 $ 434,378 Interest sensitive and investment products......................................... 1,264,227 1,175,480 Accident and health................................................................ 792,249 834,119 --------- --------- 2,505,493 2,443,977 Unearned revenues.................................................................... 10,653 12,622 Other policy claims and benefits payable............................................. 260,596 191,940 Policyholder dividends payable....................................................... 8,197 8,783 --------- --------- 2,784,939 2,657,322 Debt................................................................................. 26,433 -- Accrued expenses..................................................................... 49,909 42,223 Current income taxes payable......................................................... 10,549 17,424 Other liabilities.................................................................... 113,222 104,834 Due to affiliates.................................................................... 6,925 4,926 Liabilities related to separate accounts............................................. 2,947,401 2,344,474 --------- --------- TOTAL POLICY RESERVES AND LIABILITIES.................................................. 5,939,378 5,171,203 SHAREHOLDER'S EQUITY: Common Stock, $5 par value: Authorized, issued and outstanding shares--1,000,000............................... 5,000 5,000 Additional paid-in capital........................................................... 468,000 468,000 Retained earnings.................................................................... 332,723 265,613 Unrealized gains on investments, net................................................. 68,981 36,290 Unrealized gains on assets held in separate accounts, net............................ 5,402 5,770 --------- --------- TOTAL SHAREHOLDER'S EQUITY............................................................. 880,106 780,673 --------- --------- TOTAL POLICY RESERVES, LIABILITIES AND SHAREHOLDER'S EQUITY............................ $6,819,484 $5,951,876 --------- --------- --------- ---------
See accompanying notes. F-3 FORTIS BENEFITS INSURANCE COMPANY STATEMENTS OF INCOME (IN THOUSANDS)
YEAR ENDED DECEMBER 31 -------------------------------- 1997 1996 1995 ---------- --------- --------- REVENUES Insurance operations: Traditional life insurance premiums....................................... $ 269,540 $ 258,496 $ 251,353 Interest sensitive and investment product policy charges.................. 77,429 63,336 46,076 Accident and health insurance premiums.................................... 891,037 974,046 934,900 ---------- --------- --------- 1,238,006 1,295,878 1,232,329 Net investment income....................................................... 228,724 206,023 203,537 Net realized gains on investments........................................... 41,101 25,731 55,080 Other income................................................................ 36,458 31,725 33,085 ---------- --------- --------- TOTAL REVENUES............................................................ 1,544,289 1,559,357 1,524,031 BENEFITS AND EXPENSES Benefits to policyholders: Traditional life insurance................................................ 204,497 220,227 202,911 Interest sensitive investment products.................................... 103,077 90,358 73,676 Accident and health claims................................................ 707,113 778,439 769,588 ---------- --------- --------- 1,014,687 1,089,024 1,046,175 Policyholder dividends........................................................ 2,935 4,169 4,305 Amortization of deferred policy acquisition costs............................. 43,931 39,325 41,291 Insurance commissions......................................................... 107,378 94,723 95,559 General and administrative expenses........................................... 273,128 242,825 254,940 ---------- --------- --------- TOTAL BENEFITS AND EXPENSES............................................... 1,442,059 1,470,066 1,442,270 ---------- --------- --------- Income before federal income taxes............................................ 102,230 89,291 81,761 Federal income taxes.......................................................... 35,120 31,099 27,891 ---------- --------- --------- NET INCOME.................................................................... $ 67,110 $ 58,192 $ 53,870 ---------- --------- --------- ---------- --------- ---------
See accompanying notes. F-4 STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS)
UNREALIZED UNREALIZED GAINS GAINS (LOSSES) ON ADDITIONAL (LOSSES) ON ASSETS HELD IN COMMON PAID-IN RETAINED INVESTMENTS, SEPARATE STOCK CAPITAL EARNINGS NET ACCOUNTS, NET TOTAL ----------- ----------- ----------- --------------- --------------- --------- Balance, January 1, 1995................. $ 5,000 $ 358,000 $ 153,551 $ (42,908) $ 554 $ 474,197 Net income............................... -- -- 53,870 -- -- 53,870 Additional paid-in capital............... -- 50,000 -- -- -- 50,000 Change in unrealized gains (losses) on investments, net........................ -- -- -- 131,039 -- 131,039 Change in unrealized gains (losses) on assets held in separate accounts, net... -- -- -- -- 1,992 1,992 ----------- ----------- ----------- ------- ------ --------- Balance, December 31, 1995............... 5,000 408,000 207,421 88,131 2,546 711,098 Net income............................... -- -- 58,192 -- -- 58,192 Additional paid-in capital............... -- 60,000 -- -- -- 60,000 Change in unrealized gains (losses) on investments, net........................ -- -- -- (51,841) -- (51,841) Change in unrealized gains (losses) on assets held in separate accounts, net... -- -- -- -- 3,224 3,224 ----------- ----------- ----------- ------- ------ --------- Balance, December 31, 1996............... 5,000 468,000 265,613 36,290 5,770 780,673 Net income............................... -- -- 67,110 -- -- 67,110 Change in unrealized gains (losses) on investments, net........................ -- -- -- 32,691 -- 32,691 Change in unrealized gains (losses) on assets held in separate account, net.... -- -- -- -- (368) (368) ----------- ----------- ----------- ------- ------ --------- Balance, December 31, 1997............... $ 5,000 $ 468,000 $ 332,723 $ 68,981 $ 5,402 $ 880,106 ----------- ----------- ----------- ------- ------ --------- ----------- ----------- ----------- ------- ------ ---------
See accompanying notes. F-5 STATEMENTS OF CASH FLOWS FORTIS BENEFITS INSURANCE COMPANY (IN THOUSANDS)
YEAR ENDED DECEMBER 31 ------------------------------------- 1997 1996 1995 ------------ ---------- ----------- OPERATING ACTIVITIES Net income............................................................. $ 67,110 $ 58,192 $ 53,870 Adjustments to reconcile net income to net cash provided by operating activities: (Decrease)/increase in future policy benefit reserves for traditional, interest sensitive and accident and health policies.... (2,496) 26,193 80,478 Increase in other policy claims and benefits and policyholder dividends payable................................................... 68,070 18,638 27,676 Provision for deferred federal income taxes.......................... (6,449) (1,094) (13,584) (Decrease)/increase in income taxes payable.......................... (6,875) 12,049 1,023 Amortization of deferred policy acquisition costs.................... 43,931 39,325 41,291 Policy acquisition costs deferred.................................... (69,694) (66,515) (56,391) Provision for mortgage loan losses................................... 1,388 1,344 924 Provision for depreciation........................................... 14,351 17,312 15,654 Write-off of investment.............................................. 3,000 -- -- Amortization of investment (discounts) premiums, net................. (466) 1,821 (239) Change in receivables, accrued investment income, unearned premiums, accrued expenses and other liabilities.............................. (2,720) 38,614 3,427 Net realized gains on investments.................................... (41,101) (25,731) (55,080) Other................................................................ (12,496) (261) (2,431) ------------ ---------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES........................ 55,553 119,887 96,618 INVESTING ACTIVITIES Purchases of fixed maturity investments................................ (3,611,770) (2,778,352) (2,151,133) Sales or maturities of fixed maturity investments...................... 3,378,898 2,652,887 2,000,068 Decrease (increase) in short-term investments.......................... 112,280 (29,318) (35,908) Purchases of other investments......................................... (209,771) (210,182) (240,264) Sales of other investments............................................. 205,084 163,569 112,598 Purchases of property and equipment.................................... (4,242) (10,992) (19,975) Other.................................................................. (617) -- 1,229 ------------ ---------- ----------- NET CASH USED IN INVESTING ACTIVITIES............................ (130,138) (212,388) (333,385) FINANCING ACTIVITIES Activities related to investment products: Considerations received.............................................. 200,760 128,446 187,484 Surrenders and death benefits........................................ (190,361) (125,274) (60,522) Interest credited to policyholders................................... 53,613 49,802 48,918 Additional paid-in capital from shareholder............................ -- 60,000 50,000 ------------ ---------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES........................ 64,012 112,974 225,880 ------------ ---------- ----------- (Decrease) increase in cash and cash equivalents......................... (10,573) 20,473 (10,887) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................... 20,474 1 10,888 ------------ ---------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR......................... $ 9,901 $ 20,474 $ 1 ------------ ---------- ----------- ------------ ---------- -----------
See accompanying notes. F-6 NOTES TO FINANCIAL STATEMENTS FORTIS BENEFITS INSURANCE COMPANY DECEMBER 31, 1997 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Fortis Benefits Insurance Company (the Company) is an indirect, wholly-owned subsidiary of Fortis AMEV and Fortis AG. The Company is incorporated in Minnesota and distributes its products in all states except New York. To date, the majority of the Company's revenues have been derived from group employee benefits products and the remainder from individual life and annuity products. BASIS OF STATEMENT PRESENTATION The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The Company follows generally accepted accounting principles which differ in certain respects from statutory accounting practices prescribed or permitted by regulatory authorities. The more significant of these principles are: REVENUE RECOGNITION AND FUTURE POLICY BENEFIT RESERVES Premiums for traditional life insurance are recognized as revenues when due over the premium-paying period. Reserves for future policy benefits are computed using the net level method and include investment yield, mortality, withdrawal, and other assumptions based on the Company's experience, modified as necessary to reflect anticipated trends and to include provisions for possible unfavorable deviations. Revenues for interest sensitive and investment products consist of charges assessed against policy account balances during the period for the cost of insurance, policy administration, and surrender charges. Future policy benefit reserves are computed under the retrospective deposit method and consist of policy account balances before applicable surrender charges. Policy benefits charged to expense during the period include amounts paid in excess of policy account balances and interest credited to policy account balances. Interest crediting rates for universal life and investment products ranged from 2.5% to 8.75% in 1997 and 1996. Premiums for accident and health insurance products, including medical, long and short-term disability and dental insurance products, are recognized as revenues ratably over the contract period in proportion to the risk insured. Reserves for future disability benefits are based on the 1964 Commissioners Disability Table at 6% interest. Calculated reserves are modified based on the Company's actual experience. CLAIMS AND BENEFITS PAYABLE Other policy claims and benefits payable for reported and incurred but not reported claims and related claims adjustment expenses are determined using case-basis estimates and past experience. The methods of making such estimates and establishing the related liabilities are continually reviewed and updated. Any adjustments resulting therefrom are reflected in income currently. DEFERRED POLICY ACQUISITION COSTS The costs of acquiring new business, which vary with and are directly related to the production of new business, are deferred to the extent recoverable and amortized. For traditional life insurance products, such costs are amortized over the premium paying period. For interest sensitive and investment products, such costs are amortized in relation to expected future gross profits. For accident and health and group life insurance products, these costs represent the present value at the acquisition of these lines in the October 1, 1991 purchase (see Note 2) of future profits which are amortized against the expected premium revenues of the lines acquired. Estimation of future gross profits requires significant management judgment and are reviewed periodically. As excess amounts of deferred costs over future premiums or gross profits are identified, such excess amounts are expensed. INVESTMENTS The Company's investment strategy is developed based on many factors including insurance liability matching, rate of return, maturity, credit risk, tax considerations and regulatory requirements. All fixed maturity investments and all marketable equity securities are classified as available-for-sale and carried at fair value. Changes in fair values of available-for-sale securities, after related deferred income taxes and after adjustment for the changes in pattern of amortization of deferred policy acquisition costs and participating policyholder dividends are reported directly in shareholder's equity as unrealized gains (losses) on investments and, accordingly, have no effect on net income. The unrealized appreciation or depreciation is net of deferred policy acquisition cost amortization and taxes that would have been required as a charge or credit to income had such unrealized amounts been realized. Mortgage loans constitute first liens on commercial real estate and other income producing properties. The insurance statutes in Minnesota generally require that the initial principal loaned not exceed 80% of the appraised value of the property securing the loan. The Company's policy fully complies with this statute. Mortgage loans on real estate are reported at unpaid balance, adjusted for amortization of premium or discount, less allowance for possible losses. The change in the allowance for possible losses is recorded with realized gains and losses on investments. Policy loans are reported at their unpaid balance. Short term investments are at cost which approximates fair value. Realized gains and losses on sales of investments, and declines in value judged to be other-than-temporary, are recognized on the specific identification basis. Investment income is recorded as earned. F-7 NOTES TO FINANCIAL STATEMENTS (CONTINUED) FORTIS BENEFITS INSURANCE COMPANY 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are recorded at cost less accumulated depreciation. The Company provides for depreciation principally on the straight-line method over the estimated useful lives of the related property. INCOME TAXES Income taxes have been provided using the liability method in accordance with Financial Accounting Standards Board ("FASB") Statement 109, ACCOUNTING FOR INCOME TAXES. Deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases and are measured using the enacted tax rates. SEPARATE ACCOUNTS Revenues and expenses related to the separate account assets and liabilities, to the extent of benefits paid, are provided to the separate account policyholders and are excluded from the amounts reported in the accompanying statements of operations. Assets and liabilities associated with the separate accounts relate to deposits and annuity considerations for variable life and annuity products for which the contract holder, rather than the Company, bears the investment risk. Separate account assets are reported at fair value. GUARANTY FUND ASSESSMENTS There are a number of insurance companies that are currently under regulatory supervision. This may result in future assessments by state guaranty fund associations to cover losses to policyholders of insolvent or rehabilitated companies. These assessments can be partially recovered through a reduction in future premium taxes in some states. The Company believes it has adequately provided for the impact of future assessments. STATEMENTS OF CASH FLOWS The Company considers investments with a maturity at the date of their acquisition of three months or less to be cash equivalents. These securities are carried principally at amortized cost which approximates fair value. NEW FINANCIAL ACCOUNTING STANDARDS In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 defines the financial statement presentation for all changes in a company's equity during a period except those resulting from investments by owners and distributions to owners. SFAS No. 130 will be adopted by the Company in the first quarter of 1998. Because the statement is merely a change in presentation, the Company does not expect the adoption of this statement to have a significant impact on the financial statements. RECLASSIFICATIONS Certain amounts in the 1996 and 1995 financial statements have been reclassified to conform to the 1997 presentation. 2. ACQUIRED BUSINESS In 1991, the Company purchased certain assets and assumed certain liabilities from The Mutual Benefit Life Insurance Company in Rehabilitation (MBL). The seller transferred to the Company, the assets and liabilities relating to the group life, accident and health, disability and dental insurance business of MBL. The acquisition was accounted for as a purchase. The original purchase price of the acquisition was $318,000,000. Subsequent additional payments of $20,850,000 were made ending in 1994. These additional payments, as well as $126,515,000 of the original purchase price represent the estimated present value of future profits on the lines of business acquired at the date of acquisition and have been accounted for as deferred policy acquisition costs (see Note 4). F-8 NOTES TO FINANCIAL STATEMENTS (CONTINUED) FORTIS BENEFITS INSURANCE COMPANY 3. INVESTMENTS AVAILABLE-FOR-SALE SECURITIES The following is a summary of the available-for-sale securities (in thousands):
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAIN LOSS FAIR VALUE ---------- -------- -------- ---------- December 31, 1997: Fixed maturities: Governments.................................. $ 228,856 $ 8,698 $ 30 $ 237,524 Public utilities............................. 121,128 4,217 13 125,332 Industrial and miscellaneous................. 1,932,894 77,442 1,625 2,008,711 Other........................................ 42,711 1,637 -- 44,348 ---------- -------- -------- ---------- Total fixed maturities....................... 2,325,589 91,994 1,668 2,415,915 Equity securities............................ 88,719 24,769 3,656 109,832 ---------- -------- -------- ---------- Total...................................... $2,414,308 $116,763 $ 5,324 $2,525,747 ---------- -------- -------- ---------- ---------- -------- -------- ---------- December 31, 1996: Fixed maturities: Governments.................................. $ 321,574 $ 3,418 $ 1,323 $ 323,669 Public utilities............................. 92,116 2,758 403 94,471 Industrial and miscellaneous................. 1,656,420 38,413 6,527 1,688,306 Other........................................ 8,328 750 25 9,053 ---------- -------- -------- ---------- Total fixed maturities....................... 2,078,438 45,339 8,278 2,115,499 Equity securities............................ 84,144 23,340 1,194 106,290 ---------- -------- -------- ---------- Total...................................... $2,162,582 $68,679 $ 9,472 $2,221,789 ---------- -------- -------- ---------- ---------- -------- -------- ----------
The amortized cost and fair value of available-for-sale investments in fixed maturities at December 31, 1997, by contractual maturity, are shown below (in thousands).
AMORTIZED COST FAIR VALUE ---------- ---------- Due in one year or less............................................... $ 75,748 $ 76,109 Due after one year through five years................................. 849,193 865,006 Due after five years through ten years................................ 543,847 562,900 Due after ten years................................................... 856,801 911,900 ---------- ---------- Total................................................................. $2,325,589 $2,415,915 ---------- ---------- ---------- ----------
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. MORTGAGE LOANS The Company has issued commercial mortgage loans on properties located throughout the United States. Approximately 37% of outstanding principal is concentrated in the states of New York, California and Florida, at December 31, 1997 as compared to concentrated interests in California, Texas and New York of 36% at December 31, 1996. Loan commitments outstanding totaled $34,235,000 at December 31, 1997. INVESTMENTS ON DEPOSIT The Company had fixed maturities carried at $2,548,000 and $2,537,000 at December 31, 1997 and 1996, respectively, on deposit with various governmental authorities as required by law. INVESTMENT IN MANAGED DENTAL INITIATIVE In 1997, the Company acquired a 99% ownership in a managed dental initiative called Dental Health Alliance, Inc. (DHA). Based on an analysis of future DHA profitability, the entire investment was written-off at December 31, 1997. The income statement reflects $13,561,000 of general and administrative expenses related to 1997 DHA losses and ownership write-off. F-9 NOTES TO FINANCIAL STATEMENTS (CONTINUED) FORTIS BENEFITS INSURANCE COMPANY 3. INVESTMENTS (CONTINUED) NET UNREALIZED GAINS (LOSSES) The adjusted net unrealized gains (losses) recorded in shareholder's equity for the year ended December 31 were as follows (in thousands):
1997 1996 1995 --------- --------- --------- Change in unrealized gains (losses) before adjustments............. $ 53,239 $ (83,065) $ 214,452 Adjustments: Increase) decrease in amortization of deferred policy acquisition costs............................................................. (2,096) 3,376 (9,789) Deferred income taxes (expense) benefit............................ (18,820) 31,072 (71,632) --------- --------- --------- Change in net unrealized gains (losses)............................ 32,323 (48,617) 133,031 Net unrealized gains (losses), beginning of year................... 42,060 90,677 (42,354) --------- --------- --------- Net unrealized gains, end of year.................................. $ 74,383 $ 42,060 $ 90,677 --------- --------- --------- --------- --------- ---------
NET INVESTMENT INCOME AND NET REALIZED GAINS ON INVESTMENTS Major categories of net investment income and realized gains on investments for each year were as follows (in thousands):
1997 1996 1995 --------- --------- --------- NET INVESTMENT INCOME Fixed maturities................................................... $ 160,444 $ 141,973 $ 139,062 Equity securities.................................................. 9,306 6,682 2,026 Mortgage loans on real estate...................................... 54,662 52,949 49,227 Policy loans....................................................... 4,144 3,195 2,797 Short-term investments............................................. 2,851 5,175 11,863 Real estate and other investments.................................. 4,635 5,358 4,750 --------- --------- --------- 236,042 215,332 209,725 Expenses........................................................... (7,318) (9,309) (6,188) --------- --------- --------- $ 228,724 $ 206,023 $ 203,537 --------- --------- --------- --------- --------- --------- NET REALIZED GAINS ON INVESTMENTS Fixed maturities................................................... $ 13,827 $ 3,334 $ 50,393 Equity securities.................................................. 26,760 18,281 2,830 Mortgage loans on real estate...................................... 301 (144) (242) Short-term investments............................................. -- 57 (3) Real estate and other investments.................................. 213 4,203 2,102 --------- --------- --------- $ 41,101 $ 25,731 $ 55,080 --------- --------- --------- --------- --------- ---------
Proceeds from sales of investments in fixed maturities were $3,360,682,000, $2,652,887,000, and $2,000,068,000 in 1997, 1996 and 1995, respectively. Gross gains of $30,860,000, $28,606,000 and $61,070,000 and gross losses of $17,033,000, $25,272,000, and $10,677,000 were realized on the sales in 1997, 1996 and 1995, respectively. 4. DEFERRED POLICY ACQUISITION COSTS The changes in deferred policy acquisition costs by product were as follows (in thousands):
INTEREST SENSITIVE AND TRADITIONAL INVESTMENT ACCIDENT LIFE PRODUCTS AND HEALTH TOTAL ----------- --------------- ----------- --------- Balance, January 1, 1996....................... $ 38,532 $ 170,840 $ 28,137 $ 237,509 Acquisition costs deferred..................... -- 66,515 -- 66,515 Acquisition costs amortized.................... (5,375) (19,695) (14,255) (39,325) Reduced amortization of deferred acquisition costs from unrealized losses on available-for-sale securities................. -- 3,376 -- 3,376 ----------- --------------- ----------- --------- Balance, January 1, 1997....................... 33,157 221,036 13,882 268,075 Acquisition costs deferred..................... 37,857 31,837 -- 69,694 Acquisition costs amortized.................... (20,738) (14,501) (8,692) (43,931) Increased amortization of deferred acquisition costs from unrealized gains on available-for-sale securities................. -- (2,096) -- (2,096) ----------- --------------- ----------- --------- Balance, December 31, 1997..................... $ 50,276 $ 236,276 $ 5,190 $ 291,742 ----------- --------------- ----------- --------- ----------- --------------- ----------- ---------
F-10 NOTES TO FINANCIAL STATEMENTS (CONTINUED) FORTIS BENEFITS INSURANCE COMPANY 4. DEFERRED POLICY ACQUISITION COSTS (CONTINUED) Included within total deferred policy acquisition costs at December 31, 1997 is $10,434,000 of present value of future profits (PVP) resulting from acquisitions accounted for as a purchase. All remaining PVP will be amortized in 1998. During 1997, 1996 and 1995, the Company sold portions of its investment portfolio and in accordance with FASB Statement 97, the recognition of the realized net capital gains resulted in additional amortization of deferred acquisition costs of $732,000, $1,894,000 and $4,825,000, respectively. In addition, the Company recorded policyholder dividends payable of $1,095,000 in 1995. 5. PROPERTY AND EQUIPMENT A summary of property and equipment at December 31 for each year follows (in thousands):
1997 1996 --------- --------- Land........................................................................ $ 1,900 $ 1,900 Building and improvements................................................... 24,148 25,133 Furniture and equipment..................................................... 87,537 95,370 --------- --------- 113,585 122,403 Less accumulated depreciation............................................... (70,812) (69,521) --------- --------- Net property and equipment.................................................. $ 42,773 $ 52,882 --------- --------- --------- ---------
6. ACCIDENT AND HEALTH RESERVES Activity for the liability for unpaid accident and health claims and claims adjustment expenses is summarized as follows (in thousands):
YEAR ENDED DECEMBER 31 ------------------------------- 1997 1996 1995 --------- --------- --------- Balance as of January 1, net of reinsurance recoverables........... $ 947,711 $ 928,832 $ 838,810 Add: Incurred losses related to: Current year..................................................... 773,316 865,907 827,261 Prior years...................................................... (59,634) (64,094) (28,520) --------- --------- --------- Total incurred losses.......................................... 713,682 801,813 798,741 Deduct: Paid losses related to: Current year..................................................... 437,405 549,144 492,460 Prior years...................................................... 235,952 233,790 216,259 --------- --------- --------- Total paid losses.............................................. 673,357 782,934 708,719 --------- --------- --------- Balance as of December 31, net of reinsurance recoverables......... $ 988,036 $ 947,711 $ 928,832 --------- --------- --------- --------- --------- ---------
The table above compares to the amounts reported on the balance sheet in the following respects: (1) the table above is presented net of ceded reinsurance and the accident and health reserves reported on the balance sheet are gross of ceded reinsurance; (2) the table above includes claims adjustment expense liabilities that are included in accrued expenses on the balance sheet; and (3) the table above includes accident and health benefits payable which are included with other policy claims and benefits payable reported on the balance sheet. In each of the years presented above, the accident and health insurance line of business experienced overall favorable development on claims reserves established as of the previous year end. The favorable development was a result of lower medical costs due to less uncertainty in the health business and a reduction of loss reserves due to lower than anticipated inflation in medical costs. Management has incorporated the favorable reserve development into its current estimates of reserve levels. Accordingly, future development on December 31, 1997 reserves is not expected to be as favorable as that experienced in the past two years. 7. FEDERAL INCOME TAXES The Company reports its taxable income in a consolidated federal income tax return along with other affiliated subsidiaries of Fortis, Inc. Income tax expense or credits are allocated among the affiliated subsidiaries by applying corporate income tax rates to taxable income or loss determined on a separate return basis according to a Tax Allocation Agreement. Deferred income taxes reflect the net tax effects of temporary differences between the basis of assets and liabilities for financial statement purposes and for income tax purposes. F-11 NOTES TO FINANCIAL STATEMENTS (CONTINUED) FORTIS BENEFITS INSURANCE COMPANY 7. FEDERAL INCOME TAXES (CONTINUED) The significant components of the Company's deferred tax liabilities and assets as of December 31, 1997 and 1996 are as follows (in thousands):
1997 1996 --------- --------- Deferred tax assets: Separate account assets/liabilities....................................... $ 56,620 $ 40,989 Reserves.................................................................. 43,143 51,271 Claims and benefits payable............................................... 15,238 7,764 Accrued liabilities....................................................... 8,785 8,439 Investments............................................................... 4,795 2,648 Other..................................................................... 3,042 1,549 --------- --------- Total deferred tax assets............................................... 131,623 112,660 Deferred tax liabilities: Deferred policy acquisition costs......................................... 72,369 67,850 Unrealized gains.......................................................... 39,015 20,402 Fixed assets.............................................................. 3,914 3,110 Investments............................................................... 1,220 1,942 Other..................................................................... 68 2,348 --------- --------- Total deferred tax liabilities.......................................... 116,586 95,652 --------- --------- Net deferred tax asset.................................................. $ 15,037 $ 17,008 --------- --------- --------- ---------
The Company is required to establish a valuation allowance for any portion of the deferred tax asset that management believes will not be realized. In the opinion of management, it is more likely than not that the Company will realize the benefit of the deferred tax assets, and, therefore, no such valuation allowance has been established. The Company's tax expense (benefit) for the year ended December 31 is shown as follows (in thousands):
1997 1996 1995 --------- --------- --------- Current.............................................................. $ 41,569 $ 32,193 $ 39,660 Deferred............................................................. (6,449) (1,094) (11,769) --------- --------- --------- $ 35,120 $ 31,099 $ 27,891 --------- --------- --------- --------- --------- ---------
Federal income tax payments and refunds resulted in net payments of $58,859,000, $16,434,000, and $40,453,000 in 1997, 1996 and 1995, respectively. The Company's effective income tax rate varied from the statutory federal income tax rate as follows:
1997 1996 1995 --------- --------- --------- Statutory income tax rate............................................ 35.0% 35.0% 35.0% Other, net........................................................... (.6) (.2) (0.9) --------- --------- --------- 34.4% 34.8% 34.1% --------- --------- --------- --------- --------- ---------
8. ASSETS HELD IN SEPARATE ACCOUNTS Separate account assets at December 31 were as follows (in thousands):
1997 1996 ---------- ---------- Premium and annuity considerations for the variable annuity products and variable universal life products for which the contract holder, rather than the Company, bears the investment risk.............................. $2,947,401 $2,344,474 Assets of the separate accounts owned by the Company, at fair value....... 31,221 30,244 ---------- ---------- $2,978,622 $2,374,718 ---------- ---------- ---------- ----------
9. REINSURANCE In the second quarter of 1996, First Fortis Life Insurance Company (First Fortis), an affiliate, received approval from the New York State Insurance Department for a reinsurance agreement with the Company. The agreement, which became effective as of January 1, 1996, decreased First Fortis' long-term disability reinsurance retention from a $10,000 net monthly benefit to a $2,000 net monthly benefit for claims incurred on and after January 1, 1996. The Company has assumed $5,742,000 and $6,144,000 of premium from First Fortis in 1997 and 1996, respectively. The Company has assumed $5,452,000 and $3,599,000 of reserves in 1997 and 1996, respectively, from First Fortis. F-12 NOTES TO FINANCIAL STATEMENTS (CONTINUED) FORTIS BENEFITS INSURANCE COMPANY 9. REINSURANCE (CONTINUED) The maximum amount that the Company retains on any one life is $500,000 of life insurance including accidental death. Amounts in excess of $500,000 are reinsured with other life insurance companies on a yearly renewable term basis. Ceded reinsurance premiums for the year ended December 31 were as follows (in thousands):
1997 1996 1995 --------- --------- --------- Life insurance........................................................ $ 8,159 $ 8,680 $ 4,661 Accident and health insurance......................................... 13,712 6,793 3,410 --------- --------- --------- $ 21,871 $ 15,473 $ 8,071 --------- --------- --------- --------- --------- ---------
Recoveries under reinsurance contracts for the year ended December 31 were as follows (in thousands):
1997 1996 1995 --------- --------- --------- Life insurance........................................................ $ 2,973 $ 7,225 $ 2,489 Accident and health insurance......................................... 14,781 5,993 8,807 --------- --------- --------- $ 17,754 $ 13,218 $ 11,296 --------- --------- --------- --------- --------- ---------
Reinsurance ceded would become a liability of the Company in the event the reinsurers are unable to meet the obligations assumed under the reinsurance agreement. To minimize its exposure to significant losses from reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers. 10. DIVIDEND RESTRICTIONS Dividend distributions to parent are restricted as to amount by state regulatory requirements. The Company had $52,367,000 free from such restrictions at December 31, 1997. Distributions in excess of this amount would require regulatory approval. 11. REGULATORY ACCOUNTING REQUIREMENTS Statutory-basis financial statements are prepared in accordance with accounting practices prescribed or permitted by Minnesota insurance regulatory authorities. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. The NAIC is currently in the process of codifying statutory accounting practices. This project, which is not expected to be completed before 1999, may result in changes to the accounting practices that insurance enterprises use to prepare their statutory-basis financial statements. Insurance enterprises are required by State Insurance Departments to adhere to minimum risk-based capital ("RBC") requirements developed by the NAIC. The Company exceeds the minimum RBC requirements. F-13 NOTES TO FINANCIAL STATEMENTS (CONTINUED) FORTIS BENEFITS INSURANCE COMPANY 11. REGULATORY ACCOUNTING REQUIREMENTS (CONTINUED) Reconciliations of net income and shareholder's equity on the basis of statutory accounting to the related amounts presented in the accompanying statements were as follows (in thousands):
NET INCOME SHAREHOLDER'S EQUITY ------------------------------- -------------------- 1997 1996 1995 1997 1996 --------- --------- --------- --------- --------- Based on statutory accounting practices........ $ 62,593 $ 55,046 $ 30,576 $ 528,671 $ 482,507 Deferred policy acquisition costs.............. 25,763 27,190 15,100 291,742 268,075 Investment valuation differences............... (497) (2,219) 330 80,245 31,326 Deferred and uncollected premiums.............. (107,194) (4,096) -- -- -- Policy reserves................................ 89,895 (19,873) (29,238) (150,649) (131,159) Commissions.................................... (3,171) (1,639) Current income taxes payable................... 6,450 2,386 (1,294) 3,712 (7,895) Deferred income taxes.......................... 6,449 (1,094) 11,769 (520) 17,008 Realized gains on investments.................. 251 2,599 1,938 -- -- Realized gains transferred to the Interest Maintenance Reserve (IMR), net of tax......... 9,644 2,335 31,711 -- -- Amortization of IMR, net of tax................ (6,315) (6,130) (5,261) -- -- Write-off of investment........................ (11,705) -- -- -- -- Pension expense................................ (4,153) -- -- Guaranty Funds................................. -- 3,023 -- Property and equipment......................... -- -- -- 15,520 20,481 Interest maintenance reserve................... -- -- -- 53,348 50,019 Asset valuation reserve........................ -- -- -- 75,939 62,961 Other, net..................................... (900) 664 (1,761) (17,902) (12,650) --------- --------- --------- --------- --------- As reported herein............................. $ 67,110 $ 58,192 $ 53,870 $ 880,106 $ 780,673 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
12. TRANSACTIONS WITH AFFILIATED COMPANIES The Company receives various services from Fortis, Inc. and its affiliates. These services include assistance in benefit plan administration, corporate insurance, accounting, tax, auditing, investment and other administrative functions. The fees paid to Fortis, Inc. for these services for years ended December 31, 1997, 1996 and 1995, were $12,015,000, $13,319,000 and $10,074,00, respectively. In conjunction with the marketing of its variable annuity products, the Company paid $72,105,000, $68,616,000 and $59,308,000 in commissions to its affiliate, Fortis Investors, Inc., for the years ended December 31, 1997, 1996 and 1995, respectively. Administrative expenses allocated for the Company may be greater or less than the expenses that would be incurred if the Company were operating on a separate company basis. Fortis Information Technology (Fortis IT) is a business unit within the Company and is managed by Fortis, Inc. Based upon an agreement established with Fortis Inc., over/under charges are transferred annually to Fortis, Inc. The amounts transferred were $5,149,000 in 1997; $476,000 in 1996 and $0 in 1995. Effective January 1, 1998, Fortis IT operations have been transferred to Fortis, Inc. 13. FAIR VALUE DISCLOSURES VALUATION METHODS AND ASSUMPTIONS The fair values for fixed maturity securities and equity securities are based on quoted market prices, where available. For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements, are estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the investments. Mortgage loans are reported at unpaid principal balance less allowances for possible losses. The fair values of mortgage loans are estimated using discounted cash flow analyses, using interest rates currently being offered for similar loans to borrowers with similar credit ratings. Mortgage loans with similar characteristics are aggregated for purposes of the calculations. It is not practicable to estimate the fair value of policy loans as repayment terms are at the discretion of the policyholder. For short-term investments, the carrying amount is a reasonable estimate of fair value. The fair values for the Company's policy reserves under the investment products are determined using cash surrender value. As the debt was underwritten in the current year, the outstanding balance is a reasonable estimate of fair value. F-14 NOTES TO FINANCIAL STATEMENTS (CONTINUED) FORTIS BENEFITS INSURANCE COMPANY 13. FAIR VALUE DISCLOSURES (CONTINUED) The fair values under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, such that the Company's exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts.
(IN THOUSANDS) DECEMBER 31 ---------------------------------------------- 1997 1996 ---------------------- ---------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ---------- ---------- ---------- ---------- Assets: Investments: Securities available-for-sale: Fixed maturities...................................... $2,415,915 $2,415,915 $2,115,499 $2,115,499 Equity securities..................................... 109,832 109,832 106,290 106,290 Mortgage loans on real estate............................. 602,064 661,055 582,869 614,555 Policy loans.............................................. 68,566 68,566 60,722 60,722 Short-term investments.................................... 70,537 70,537 182,817 182,817 Assets held in separate accounts.......................... 2,978,622 2,978,622 2,374,718 2,371,601 Liabilities: Individual and group annuities (subject to discretionary withdrawal).............................................. $ 977,495 $ 945,558 $ 916,754 $ 886,110 Debt...................................................... 26,433 26,433 -- --
14. COMMITMENTS AND CONTINGENCIES The Company is named as a defendant in a number of legal actions arising primarily from claims made under insurance policies. These actions have been considered in establishing policy benefit and loss reserves. Management and its legal counsel are of the opinion that the settlement of these actions will not have a material adverse effect on the Company's financial position or results of operations. 15. RETIREMENT AND OTHER EMPLOYEE BENEFITS The Company is an indirect wholly-owned subsidiary of Fortis, Inc., which sponsors a defined benefit pension plan covering employees and certain agents who meet eligibility requirements as to age and length of service. The benefits are based on years of service and career compensation. Fortis, Inc.'s funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes, and to charge each subsidiary an allocable amount based on its employee census. Pension cost allocated to the Company amounted to approximately $1,594,000, $1,354,000 and $1,179,000 for 1997, 1996 and 1995, respectively. As of January 1, 1997, the Plan's total accumulated benefit obligation determined in accordance with ERISA was approximately $56,838,000. This amount was based on an assumed interest rate of 8.00% and included vested benefits of approximately $54,831,000. The fair market value of the Plan assets as of January 1, 1997 was approximately $60,004,000. The Company participates in a contributory profit sharing plan, sponsored by Fortis, Inc., covering employees and certain agents who meet eligibility requirements as to age and length of service. Benefits are payable to participants on retirement or disability and to the beneficiaries of participants in the event of death. The first three percent of an employee's contribution is matched 200% by the Company. The amount expensed was approximately $3,926,000, $3,913,000 and 3,765,000 for 1997, 1996 and 1995, respectively. In addition to retirement benefits, the Company participates in other health care and life insurance benefit plans ("postretirement benefits") for retired employees, sponsored by Fortis, Inc. Health care benefits, either through a Fortis Inc.-sponsored retiree plan for retirees under age 65 or through a cost offset for individually purchased Medigap policies for retirees over age 65, are available to employees who retire on or after January 1, 1993, at age 55 or older, with 15 years or more service. Life insurance, on a retiree pay all basis, is available to those who retire on or after January 1, 1993. Net postretirement benefit costs allocated to the Company for the years ended December 31, 1997, 1996 and 1995 were $304,000, $290,000 and $287,000, respectively, and includes the expected cost of such benefits for newly eligible or vested employees, interest cost, gains and losses arising from differences between actuarial assumptions and actual experience, and amortization of the transition obligation. The Company made contributions to the plans of approximately $20,000, $8,000 and $0 in 1997, 1996 and 1995, respectively, as claims were incurred. At December 31, 1997 and 1996, the unfunded postretirement benefit obligation for retirees and other fully eligible or vested plan participants was $1,148,000 and $844,000, respectively. The discount rate used in determining the accumulated postretirement benefit obligation was 7.5%. The health care cost trend rate for those under age 65 was 12.8%, graded to 5.5% over 26 years. The health care cost trend rate for those over age 65 was 12.0%, graded to 6.2% over 26 years. F-15 NOTES TO FINANCIAL STATEMENTS (CONTINUED) FORTIS BENEFITS INSURANCE COMPANY 16. DEBT The following is a summary of the debt at December 31, 1997 (in thousands): Mortgage note bearing a floating interest rate of 200 basis points over LIBOR, (5.84% at December 31, 1997) adjustable every six months, principal and interest due monthly, matures July 2001........................................................... $ 3,150 Mortgage note bearing a floating interest rate of 225 basis points over LIBOR (5.84% at December 31, 1997) adjustable every six months, principal and interest due monthly, balloon payment due July 1998............................................... 18,100 Mortgage note bearing interest at 7.60%, principal and interest due monthly, matures October 2002......................................................................... 5,183 --------- $ 26,433 --------- ---------
Maturities of the debt as of December 31, 1997 are as follows (in thousands): 1998.................................................................................. $ 18,222 1999.................................................................................. 126 2000.................................................................................. 136 2001.................................................................................. 3,119 2002.................................................................................. 4,830 --------- 26,433 --------- ---------
These mortgage notes are collateralized by certain real estate investments included in real estate and other investments in the balance sheet. Interest expense paid by the Company during 1997 on this debt was approximately $1,075,000. 17. YEAR 2000 ISSUES (UNAUDITED) The Year 2000 issue is the result of computer programs having been written using two digits rather than four to define a year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than 2000. This could result in the failure of major systems or miscalculations, which could have a material impact on the operations of the Company and any of its businesses or subsidiaries. All of the Company's major businesses are heavily dependent upon internal computer systems, and many have significant interaction with systems of third parties. A comprehensive review of the Company's computer systems and business processes has been conducted to identify the major systems that could be affected by the Year 2000 issue. Steps are being taken to resolve any potential problems including modification to existing software and the purchase of new software. These measures are scheduled to be completed and tested on a timely basis. The Company's goal is to complete internal remediation and testing of each system by early 1999. Factors that could influence the total costs to be incurred by the Company in connection with the Year 2000 issue include the ability of the Company to successfully identify systems containing two-digit year codes, the nature and amount of programming required to fix the affected programs, the related labor and consulting costs for such remediation, and the ability of third parties that interface with the Company to successfully address their Year 2000 issues. The Company is evaluating the Year 2000 readiness of advisors and other third parties whose system failures could have an impact on the Company's operations. The potential materiality of any such impact is not entirely known at this time. The Company is closely monitoring these entities to avoid any unforeseen circumstances. F-16 APPENDIX A--SAMPLE MARKET VALUE ADJUSTMENT CALCULATIONS The formula which will be used to determine the Market Value Adjustment is: 1 + I n/12 ---------- - 1 ( 1 + J + .005 ) Sample Calculation 1: Positive Adjustment Amount withdrawn or transferred $10,000 Existing Guarantee Period 7 years Time of withdrawal or transfer beginning of 3rd year of Existing Guarantee Period Guaranteed Interest Rate (I) 8%* Guaranteed Interest Rate for new 5-year guarantee (J) 7%* Remaining Guarantee Period (N) 60 months Market Value Adjustment 1 + .08 60/12 $10,000 x ------------ - 1] = $234.73 [( 1 + .07 + .005 ) Amount transferred or withdrawn (adjusted for Market Value Adjustment): $10,234.73 Sample Calculation 2: Negative Adjustment Amount withdrawn or transferred $10,000 Existing Guarantee Period 7 years Time of withdrawal or transfer beginning of 3rd year of Existing Guarantee Period Guaranteed Interest Rate (I) 8%* Guaranteed Interest Rate for new 5-year guarantee (J) 9%* Remaining Guarantee Period (N) 60 months Market Value Adjustment: 1 + .08 60/12 $10,000 x ------------ - 1] = - $666.42 [( 1 + .09 + .005 ) Amount transferred or withdrawn (adjusted for Market Value Adjustment): $9,333.58 Sample Calculation 3: Negative Adjustment Amount withdrawn or transferred $10,000 Guarantee Period 7 years Time of withdrawal or transfer beginning of 3rd year of Existing Guarantee Period Guaranteed Interest Rate (I) 8%* Guaranteed Interest Rate for new 5-year guarantee (J) 7.75%* Remaining Guarantee Period (N) 60 months Market Value Adjustment: 1 + .08 60/12 $10,000 x -------------- - 1] = - $114.94 [( 1 + .0775 + .005 ) Amount transferred or withdrawn (adjusted for Market Value Adjustment): $9,885.06 - ------------------------ * Assumed for illustrative purposes only. A-1 APPENDIX B--SAMPLE DEATH BENEFIT CALCULATIONS DATE OF DEATH IS THE 3RD CONTRACT ANNIVERSARY
EXAMPLE 1 EXAMPLE 2 --------- --------- a. Purchase Payments Made Prior to Date of Death............... $ 30,000 $ 30,000 b. Contract Value on Date of Death............................. $ 20,000 $ 32,000 Death Benefit is larger of a, and b.............................. $ 30,000 $ 32,000
DATE OF DEATH IS THE 5TH CONTRACT ANNIVERSARY
EXAMPLE 1 EXAMPLE 2 --------- --------- a. Purchase Payments Made Prior to Date of Death............... $ 30,000 $ 30,000 b. Contract Value on Date of Death............................. $ 34,000 $ 32,000 c. 5 Year Ratchet Option Value................................. $ 34,000 $ 32,000 Death Benefit is larger of a, b, and c........................... $ 34,000 $ 32,000
DATE OF DEATH IS THE 7TH CONTRACT ANNIVERSARY
EXAMPLE 1 EXAMPLE 2 --------- --------- a. Purchase Payments Made Prior to Date of Death............... $ 30,000 $ 30,000 b. Contract Value on Date of Death............................. $ 32,000 $ 40,000 c. 5 Year Ratchet Option Value................................. $ 33,000 $ 32,000 Death Benefit is larger of a, b, and c........................... $ 33,000 $ 40,000
DATE OF DEATH IS THE 10TH CONTRACT ANNIVERSARY
EXAMPLE 1 EXAMPLE 2 --------- --------- a. Purchase Payments Made Prior to Date of Death............... $ 30,000 $ 30,000 b. Contract Value on Date of Death............................. $ 32,000 $ 38,000 c. 5 Year Ratchet Option Value................................. $ 32,000 $ 38,000 Death Benefit is larger of a, b, and c........................... $ 32,000 $ 38,000
B-1 APPENDIX C--EXPLANATION OF EXPENSE CALCULATIONS The expense for a given year is calculated by multiplying the projected beginning of the year policy value by the total expense rate. The total expense rate is the sum of the variable account expense rate plus the total Portfolio expense rate plus the annual administrative charge rate. The policy values are projected by assuming a single payment of $1,000 grows at an annual rate equal to 5% reduced by the total expense rate described above. For example, the 3 year expense for the Growth Stock Series is calculated as follows: Total Variable Account Annual Expenses 1.25% + Total Series Fund Operating Expenses .66% Annual Administrative Charge Rate (See + Below) .05% = Total Expense Rate 1.96%
The Annual Administrative Charge Rate is calculated by dividing the total Annual Contract Charges we collected in 1997 on similar policies by the average policy value in force in 1997 on these similar policies. Year 1 Beginning Policy Value = $1000.00 Year 1 Expense = 1000.00 X 0.0196 = $19.60 Year 2 Beginning Policy Value = $1030.40 Year 2 Expense = 1030.40 X 0.0196 = $20.20 Year 3 Beginning Policy Value = $1061.72 Year 3 Expense = 1061.72 X 0.0196 = $20.81 So the cumulative expenses for years 1-3 for the Growth Stock Series are equal to $19.60 + $20.20 + $20.81 = $60.61 C-1 FORTIS FORTIS FINANCIAL GROUP P.O. BOX 64284 ST. PAUL, MN 55164 BULK RATE U.S. POSTAGE PAID PERMIT NO. 3794 MINNEAPOLIS, MN PROSPECTUS MAY 1, 1998 CERTIFICATES UNDER FLEXIBLE PREMIUM DEFERRED COMBINATION VARIABLE AND FIXED ANNUITY CONTRACTS FORTIS EMPOWER VARIABLE ANNUITY Issued by FORTIS BENEFITS INSURANCE COMPANY STATEMENT OF ADDITIONAL INFORMATION MAY 1, 1998 This Statement of Additional Information is not a Prospectus. It is intended that this Statement of Additional Information be read in conjunction with the Prospectus for certificates under flexible premium deferred combination variable and fixed annuity contracts ("Certificates"), dated May 1, 1998. A copy of the Prospectus may be obtained without charge from Fortis Investors, Inc. 1-800-800-2638, mailing address: P.O. Box 64272, St. Paul, MN 55164. You have the option of receiving benefits under a Certificate through Fortis Benefits' Variable Account D or through Fortis Benefits' Fixed Account. TABLE OF CONTENTS Fortis Benefits and the Variable Account . . . . . . . . . . . . . . . . . 2 Calculation of Annuity Payments. . . . . . . . . . . . . . . . . . . . . . 2 Postponement of Payments . . . . . . . . . . . . . . . . . . . . . . . . . 3 Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 - Safekeeping of Variable Account Assets . . . . . . . . . . . . . . . . 4 - Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 - Principal Underwriter . . . . . . . . . . . . . . . . . . . . . . . . 4 Limitation on Allocations. . . . . . . . . . . . . . . . . . . . . . . . . 4 Taxation Under Certain Retirement Plans. . . . . . . . . . . . . . . . . . 4 Withholding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Variable Account Financial Statements. . . . . . . . . . . . . . . . . . . 9 Appendix A -- Performance Information. . . . . . . . . . . . . . . . . . A-1 In order to supplement the description in the Prospectus, the following provides additional information about the Certificates and other matters which may be of interest to you. Terms used in this Statement of Additional Information have the same meanings as are defined in the Prospectus under the heading "Special Terms Used in This Prospectus." 1 FORTIS BENEFITS AND THE VARIABLE ACCOUNT Fortis Benefits Insurance Company, the issuer of the Certificates, is a Minnesota corporation qualified to sell life insurance and annuity contracts in the District of Columbia and in all states except New York. Fortis Benefits is a wholly-owned subsidiary of Fortis Insurance Company, a stock company organized under the laws of Wisconsin, which itself is a wholly-owned subsidiary of Fortis, Inc. Fortis, Inc. is a corporation based in New York, which manages the United States operations of Fortis AMEV and Fortis AG. Fortis AMEV has been in business since 1847 and is a publicly-traded, multi-national insurance, real estate, and financial services group headquartered in The Netherlands. It is one of the largest holding companies in Europe, with subsidiary companies in twelve countries on four continents. Fortis AMEV is the third largest insurance company in the Netherlands. Fortis AG is a multi-national insurance, real estate and financial services firm that has been in business since 1824. It has subsidiary companies in eight countries. Fortis AG is one of the largest life insurance companies in Belgium. Fortis AMEV and Fortis AG have combined assets of approximately 167 billion. The assets allocated to the Variable Account are the exclusive property of Fortis Benefits. Registration of the Variable Account under the Investment Company Act of 1940 does not involve supervision of the management or investment practices or policies of the Variable Account or of Fortis Benefits by the Securities and Exchange Commission. Fortis Benefits may accumulate in the Variable Account proceeds from charges under the Certificates and other amounts in excess of the Variable Account assets representing reserves and liabilities under Certificates and other variable annuity contracts issued by Fortis Benefits. Fortis Benefits may from time to time transfer to its General Account any of such excess amounts. Best's Insurance Reports has assigned Fortis Benefits a rating of A (Excellent) for financial position and operating performance. Fortis Benefits has a rating of AA from Standard & Poor's. As defined by Standard & Poor's, insurers rated AA offer "excellent financial security." These ratings represent such rating agencies' independent opinion of Fortis Benefits' financial strength and ability to meet policy holder obligations, but have no relevance to the performance and quality of the assets in Subaccounts of the Variable Account. CALCULATION OF ANNUITY PAYMENTS FIXED ANNUITY OPTION The amount of each annuity payment under a Fixed Annuity Option is fixed and guaranteed by Fortis Benefits. Monthly fixed annuity payments will start as of the end of the Valuation Period that contains the Annuity Commencement Date. At that time, the Certificate Value , after any Market Value Adjustment, is computed and that portion of the Certificate Value which will be applied to the Fixed Annuity Option selected is determined. The amount of the first monthly payment under the Fixed Annuity Option selected will be at least as large as would result from using the annuity tables contained in the Certificate to apply such amount of Certificate Value to the annuity form selected. The dollar amounts of any fixed annuity payments after the first are specified during the entire period of annuity payments according to the provisions of the annuity form selected. VARIABLE ANNUITY OPTION ANNUITY UNITS. To the extent a Variable Annuity Option has been selected, we convert the Accumulation Units for each Subaccount of the Variable Account into Annuity Units for each Subaccount at their values determined as of the end of the Valuation Period which contains the Annuity Commencement Date. As of such time, any Fixed Account Value to be applied to a Variable Annuity Option is also converted, after any Market Value Adjustment, to Annuity Units in the Subaccounts selected based on the then-current Annuity Unit value. The initial number of Annuity Units in each Subaccount is determined by dividing the amount of the initial monthly variable annuity 2 payment (see "Variable Annuity Option -- Variable Annuity Payments," below) allocable to that Subaccount by the value of one Annuity Unit in that Subaccount as of the time of the conversion. The number of Annuity Units for each Subaccount will remain constant, as long as an annuity remains in force and the allocation among the Subaccounts has not changed. The value of each Subaccount's Annuity Units will vary to reflect the investment experience of the Subaccount as well as charges deducted from the Subaccount. The value of each Subaccount's Annuity Units is equal to the prior value of the Subaccount's Annuity Units multiplied by the net investment factor for that Subaccount (discussed in the Prospectus under "Certificate Value") for the Valuation Period ending on that Valuation Date, with an offset for the 3% assumed interest rate used in the annuity tables of the Certificate. VARIABLE ANNUITY PAYMENTS. Variable annuity payments start at the end of the Valuation Period that contains the Annuity Commencement Date, and will vary in amount as the related Annuity Unit values vary. The amount of the first monthly payment is shown on the annuity tables contained in the Certificate for each $1,000 of Certificate Value applied to the Variable Annuity Option selected as of the end of such Valuation Period. The first variable annuity payment is, in effect, allocated among the Subaccounts in the same proportion as the Certificate Value is allocated among the Subaccounts upon commencement of annuity payments. Payments after the first will vary in amount and are determined on the first Valuation Date of each subsequent monthly period. If the monthly payment under the annuity form selected is based on the value of Annuity Units of a single Subaccount, the monthly payment is found by multiplying the number of the Certificate's Annuity Units for the Subaccount by the Annuity Unit value of such Subaccount as of the first Valuation Date in each monthly period following the Annuity Commencement Date. If the monthly payment under the Variable Annuity Option selected is based upon the value of Annuity Units in more than one Subaccount, this is repeated for each applicable Subaccount. The sum of these payments is the variable annuity payment. GENDER OF ANNUITANT The amount of each annuity payment ordinarily will be higher for a male Annuitant than for a female Annuitant with an otherwise identical Certificate. This is because, statistically, females tend to have longer life expectancies than males. However, there will be no differences between male and female Annuitants in any jurisdiction, including Montana, where such differences are not permitted. We will also make available Certificates with no such differences in connection with certain employer-sponsored benefit plans. Employers should be aware that, under most such plans, Certificates that make distinctions based on gender are prohibited by law. POSTPONEMENT OF PAYMENTS With respect to amounts in the Subaccounts of the Variable Account, payment of any amount due upon a total or partial surrender, death or under an annuity option will ordinarily be made within seven days after all documents required for such payment are received by Fortis Benefits at its Home Office. However, Fortis Benefits may defer the determination, application or payment of any death benefit, transfer, partial or total surrender or annuity payment, to the extent dependent on Accumulation or Annuity Unit Values, for any period during which the New York Stock Exchange is closed (other than customary weekend and holiday closings) or trading on the New York Stock Exchange is restricted as determined by the Securities and Exchange Commission, for any period during which any emergency exists as a result of which it is not reasonably practicable for Fortis Benefits to determine the investment experience for the Certificate, or for such other periods as the Securities and Exchange Commission may by order permit for the protection of investors. 3 SERVICES SAFEKEEPING OF VARIABLE ACCOUNT ASSETS Title to the assets of the Variable Account is held by Fortis Benefits. The assets of the Variable Account are kept segregated and held separate and apart from Fortis Benefits' other assets. Fortis Advisers, Inc., an affiliate of Fortis Benefits, maintains records of all purchases and redemptions of shares of Fortis Series Fund, Inc. held by each of the Subaccounts of the Variable Account. EXPERTS The financial statements of Fortis Benefits Insurance Company appearing in the Prospectus and those of Fortis Benefits Insurance Company Variable Account D, appearing in this Statement of Additional Information and Registration Statement, have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon also appearing in the Prospectus or this Statement of Additional Information, respectively, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. PRINCIPAL UNDERWRITER Fortis Investors, Inc. ("Fortis Investors"), the principal underwriter of the Certificates, is a Minnesota corporation and a member of the Securities Investors Protection Corporation. The offering of the Certificates is continuous, and Fortis Investors does not anticipate discontinuing the offering of the Certificates, although it reserves the right to do so. Certificates generally will be issued for Participants from ages zero to ninety in all states except New York. LIMITATIONS ON ALLOCATIONS Under the Certificate, Fortis Benefits reserves the right to control the amount of any assets in any investment alternative. Pursuant to this authority, Fortis Benefits has established the following administrative procedures for the protection of the interests of all investors participating in Fortis Series' Portfolios: a Participant may not invest, allocate, transfer or exchange Certificate Value into any Subaccount if the value allocated to the Subaccount under the Certificate (and under any other insurance or annuity contracts directly or indirectly controlled by the same person, jointly or individually) would immediately thereafter equal 25% or more of the related Fortis Series Portfolio's net assets. Fortis Benefits reserves the right to modify these procedures at any time. TAXATION UNDER CERTAIN RETIREMENT PLANS Federal income tax information concerning the purchase of Certificates for specific types of retirement plans is set forth below. You should also refer to "Federal Tax Matters" in the Prospectus. The tax information provided is not comprehensive, and you should consult a qualified tax adviser before taking any action in connection with a retirement plan. SECTION 403(b) ANNUITIES FOR EMPLOYEES OF CERTAIN TAX-EXEMPT ORGANIZATIONS OR PUBLIC EDUCATIONAL INSTITUTIONS PURCHASE PAYMENTS. Under Section 403(b) of the Internal Revenue Code ("Code"), payments made by certain employers (i.e., tax-exempt organizations meeting the requirements of Section 501(c)(3) of the Code, or public educational institutions) to purchase Certificates for their employees are excludible from the gross income of employees to the extent that such aggregate purchase payments do not exceed certain limitations prescribed by the Code. This is the case whether the purchase payments are a result of voluntary salary reduction amounts or employer contributions. Salary reduction payments are, however, subject to FICA (social security) taxes. TAXATION OF DISTRIBUTIONS. Distributions from a Section 403(b) tax-deferred annuity are taxed as ordinary income to the recipient as described under "Federal Tax Matters" in the Prospectus. Taxable distributions received before the 4 employee attains age 59 1/2 generally are subject to a 10% penalty tax in addition to regular income tax. Certain distributions are excepted from this penalty tax, including distributions following the employee's death, disability, separation from service after age 55, separation from service at any age if the distribution is in the form of an annuity for the life (or life expectancy) of the employee (or the employee and Beneficiary) and distributions not in excess of deductible medical expenses. In addition, no distributions of voluntary salary reduction amounts will be permitted prior to one of the following events: attainment of age 59 1/2 by the employee or the employee's separation from service, death, disability or hardship. (Hardship distributions will be limited to the lesser of the amount of the hardship or the amount of salary reduction contributions, exclusive of earnings thereon.) REQUIRED DISTRIBUTIONS. Generally, distributions from Section 403(b) annuities must commence not later than April 1 of the calendar year following the calendar year in which the employee attains age 70 1/2, and such distributions must be made over a period that does not exceed the life expectancy of the employee (or the employee and Beneficiary). A penalty tax of 50% would be imposed on any amount by which the minimum required distribution in any year exceeded the amount actually distributed in that year. In addition, in the event that the employee dies before his or her entire interest in the Certificate has been distributed, the employee's entire interest must be distributed in accordance with rules similar to those applicable upon the death of the Participant or Payee in the case of a Non-Qualified Certificate, as described in the Prospectus. Certain of these and other provisions are incorporated in a special endorsement attached to Certificates that are intended to qualify under Section 403(b), and reference should be made to that endorsement for its complete terms. TAX-FREE EXCHANGES AND ROLLOVERS. The Code provides for the tax-free transfer of one Section 403(b) annuity for another Section 403(b) annuity, and the IRS has ruled (Revenue Ruling 90-24) that amounts transferred may qualify as tax-free transfers under certain circumstances. In addition, Section 403(b)(8) of the code permits tax-free rollovers from Section 403(b) programs to individual retirement annuities or other Section 403(b) programs under certain circumstances. SECTION 401 QUALIFIED PENSION, PROFIT-SHARING OR ANNUITY PLANS PURCHASE PAYMENTS. Subject to certain limitations prescribed by the Code, purchase payments made by an employer (or a self-employed individual) under a pension, profit-sharing or annuity plan qualified under Section 401 or Section 403(a) of the Code are generally deductible by the employer and excluded from the taxable income of the employee for federal income tax purposes, whether made under a salary reduction agreement or directly by employer contributions. Salary reduction payments are, however, subject to FICA (social security) taxes. Purchase payments made directly by an employee generally are made on an after-tax basis. TAXATION OF DISTRIBUTIONS. Distributions from Certificates purchased under these qualified plans are taxable as ordinary income, except to the extent allocable to an employee's after-tax contributions, as described under "Federal Tax Matters -- Qualified Plans," in the Prospectus. However, if an employee or other payee receives a "lump sum" distribution, as defined in the Code, from an exempt employees' trust, the taxable portion of the distribution may be subject to special tax treatment. For most individuals receiving lump sum distributions after attaining age 59 1/2, the rate of tax may be determined under a special 5-year income averaging provision. Those who attained age 50 by January 1, 1986 may instead elect to use a 10-year income averaging provision based on the income tax rates in effect for 1986. Taxable distributions received prior to attainment of age 59 1/2 under a Certificate purchased under a qualified plan are subject to the same 10% penalty tax (and the same exceptions) as described above with respect to Section 403(b) annuities. REQUIRED DISTRIBUTIONS. The minimum distribution requirements for these qualified plans are generally the same as described above with respect to Section 403(b) annuities. TAX-FREE ROLLOVERS. If, within 60 days of receipt, an employee who receives a single sum distribution transfers all of the taxable amount received to another plan qualified under Section 401 or 403(a), or to an individual retirement account or annuity as provided for under the Code, the transferred amount will not be taxed in the year of distribution. Certain "partial" distributions may also qualify for tax-free rollover treatment, but only if transferred to 5 an individual retirement account or annuity. However, income tax may be withheld from the distribution unless the distribution is transferred directly from the qualified plan to the individual retirement account or individual retirement annuity. INDIVIDUAL RETIREMENT ANNUITIES PURCHASE PAYMENTS. Individuals may make contributions for individual retirement annuity ("IRA") Contracts. Deductible contributions for any year may be made up to the lesser of $2,000 or 100% of compensation for individuals who (1) are not (and whose spouses are not) active participants in another retirement plan, (2) are unmarried and have adjusted gross income of $25,000 or less, or (3) are married and have adjusted gross income of $40,000 or less. An individual may also establish an IRA for his or her spouse if they file a joint return for the taxable year and his or her spouse earns less than the individual does for that year. The annual purchase payments for both spouses' Contracts cannot exceed the lesser of $4,000 or 100% of the couple's combined earned income, and no more than $2,000 may be contributed to either spouse's IRA for any year. Individuals who are active participants in other retirement plans and whose adjusted gross income (with certain special adjustment) exceed the cut-off point ($25,000 for unmarried, $40,000 for married persons filing jointly, and $0 for married persons filing a separate return) by less than $10,000 are entitled to make deductible IRA contributions in proportionately reduced amounts. For example, a married individual who is an active participant in another retirement plan and files a separate tax return is entitled to a partial IRA deduction if the individual's adjusted gross income is less than $10,000 and no IRA deduction if his or her adjusted gross income is equal to or greater than $10,000. An individual may make non-deductible IRA contributions to the extent of (1) the lesser of $2,000 ($4,000 in the case of a spousal IRA) or 100% of compensation over (2) the IRA deductible contribution made with respect to the individual. An individual may not make any contributions to his/her own IRA for the year in which he/she reaches age 70 1/2 or for any year thereafter. Contributions to a spouse's IRA may not be made for any year in which that spouse reaches age 70 1/2 or for any year thereafter. TAXATION OF DISTRIBUTIONS. Distributions from IRA Contracts are taxed as ordinary income to the recipient, although special rules exist for the tax-free return of non-deductible contributions. In addition, taxable distributions received under an IRA Contract prior to age 59 1/2 are subject to a 10% penalty tax in addition to regular income tax. Certain distributions are exempted from this penalty tax including distributions following the owner's death or disability or distribution in the form of an annuity for the life (or life expectancy) of the owner (or the owner and beneficiary), or distributions not in excess of deductible medical expenses or certain distributions to pay health insurance premiums after an extended period of unemployment. REQUIRED DISTRIBUTIONS. The minimum distribution requirements for IRAs are generally the same as described above with respect to Section 403(b) annuities. Certain of these and other provisions are incorporated in a special endorsement attached to IRA Certificates, and reference should be made to that endorsement for its complete terms. TAX-FREE ROLLOVERS. The Code permits funds to be transferred in a tax-free rollover from a qualified employer pension, profit-sharing, annuity, bond purchase or tax-deferred annuity plan to an IRA Certificate if certain conditions are met, and if the rollover of assets is completed within 60 days after the distribution from the qualified plan is received. In addition, not more frequently than once every twelve months, amounts may be rolled over tax-free from one IRA to another, subject to the 60-day limitation and other requirements. The once-per-year limitation on rollovers does not apply to direct transfers of funds between IRA custodians or trustees. SIMPLIFIED EMPLOYEE PENSION PLANS PURCHASE PAYMENTS. Under Section 408(k) of the Code, employers may establish a type of IRA plan referred to as a simplified employee pension plan (SEP). Employer contributions to a SEP cannot exceed the lesser of $24,000 or 15% of the employee's earned income. Employees of certain small employers may have contributions made to a 6 special kind of SEP (SARSEP) on their behalf on a salary reduction basis if the SARSEP plan was in effect on December 31, 1996. These salary reduction contributions may not exceed $9,500 in 1997, which is indexed for inflation. Employees of tax-exempt organizations and state or local government agencies have never been eligible for the salary reduction type of SEP. TAXATION OF DISTRIBUTIONS. Generally, distribution payments from SEPs are subject to the same distribution rules described above for IRAs. REQUIRED DISTRIBUTIONS. SEP distributions are subject to the same minimum required distribution rules described above for IRAs. TAX-FREE ROLLOVERS. Generally, rollovers and direct transfers may be made to and from SEPs in the same manner as described above for IRAs, subject to the same conditions and limitations. Rollovers to other IRAs, excluding SIMPLE IRAs are also possible. Special rules apply if the rollover is from a SARSEP IRA. SECTION 408(p) SIMPLE IRA PLANS PURCHASE PAYMENTS: Under Section 408(p) of the Code, small employers may establish a type of IRA plan referred to as a Savings Incentive Match Plan for Employees (SIMPLE Plan). An employee may contribute annually through his or her employer a pre-tax salary reduction contribution not to exceed the lesser of $6,000 or 100% of compensation. The employer must annually either (1) match the employee contribution dollar for dollar up to 3% of pay, or (2) make a 2% of pay contribution for each eligible employee regardless of whether the employee makes any salary reduction contribution. In two out of every five years, the employer has the option to reduce the matching contribution as low as 1% of pay but advance notice must be provided to employees. TAXATION OF DISTRIBUTIONS: Generally, distributions from SIMPLE IRA Plans are subject to the same distribution rules described above for IRAs. However, if an individual withdraws any amount from his SIMPLE IRA Plan within the first two years of his or her commencement of participation in the employer's SIMPLE IRA Plan, the 10% penalty tax for premature distribution, if such tax applies, will be increased to 25%. REQUIRED DISTRIBUTIONS: SIMPLE distributions are subject to the same minimum distribution rules described above for IRAs. TAX-FREE ROLLOVERS: Generally, rollovers and direct transfers may be made to and from SIMPLE IRAs in the same manner as described above for IRAs, subject to the same conditions and limitations. Rollovers or transfers to other IRAs, other than SIMPLE IRAs, are also possible but only after the second anniversary of commencement of participation in the employer's SIMPLE IRA Plan. SECTION 457 UNFUNDED DEFERRED COMPENSATION PLANS OF PUBLIC EMPLOYERS AND TAX-EXEMPT ORGANIZATIONS PURCHASE PAYMENTS. Under Section 457 of the Code, all individuals who perform services for a state or local government or governmental agency may participate in a deferred compensation program. Other tax-exempt employers may establish unfunded deferred compensation plans under Section 457 for employees and/or independent contractors. Though not actually a qualified plan as that term is normally used, this type of program allows individuals to defer the receipt of compensation that otherwise would be currently payable and therefore to defer the payment of federal income taxes on such amounts. Assuming that the program meets the requirements to be considered an eligible deferred compensation plan (an "EDCP"), an individual may contribute (and thereby defer from current income for tax purposes) the lesser of $7,500 or 33-1/3% of the individual's includible compensation. (Includible compensation means compensation from the employer which would be currently includible in gross income for federal tax 7 purposes.) In addition, during the last three years before an individual attains normal retirement age, additional "catch-up" deferrals are permitted. The amounts which are deferred may be used by the employer to purchase the Certificates offered by this Prospectus. The Certificate is owned by the employer and is subject to the claims of the employer's creditors. The employee has no rights or interest in the Certificate and is entitled only to payment in accordance with the EDCP provisions. TAXATION OF DISTRIBUTIONS. Amounts received by an individual from an EDCP are includible in gross income for the taxable year in which such amounts are paid or otherwise made available. DISTRIBUTIONS BEFORE SEPARATION FROM SERVICE. Distributions generally are not permitted under an EDCP prior to separation from service or reaching age 70 1/2, except in cases of severe financial hardship. Hardship distributions are includible in the gross income of the individual in the year in which paid. REQUIRED DISTRIBUTIONS. The distribution requirements for these qualified plans are generally the same as described above with respect to Section 403(b) annuities. However, if distributions do not commence before the employee's death, the entire interest in the Certificate must be distributed within 15 years if the beneficiary is not the employee's surviving spouse. TAX-FREE TRANSFERS. The Code permits the tax-free direct transfer of EDCP amounts to another EDCP, subject to certain conditions. Any transfer must be with employer consent PRIVATE EMPLOYER UNFUNDED DEFERRED COMPENSATION PLANS PURCHASE PAYMENTS. Private taxable employers may establish unfunded, non-qualified deferred compensation plans for a select group of management or highly compensated employees and/or for independent contractors. Certain arrangements of tax-exempt employers entered into prior August 16, 1986, and not subsequently modified, are also subject to the rules for private taxable employer deferred compensation plans discussed below. (Unfunded deferred compensation plans of other tax-exempt employers are generally subject to the requirements of Section 457.) These types of programs allow individuals to defer receipt of up to 100% of compensation which would otherwise be includible in income and therefore to defer the payment of federal income taxes on such amounts. Purchase payments made by the employer, however are not immediately deductible by the employer, and the employer is currently taxed on any increase in Certificate Value. Deferred compensation plans represent a contractual promise on the part of the employer to pay current compensation at some future time. The Certificate is owned by the employer and is subject to the claims of the employer's creditors. The individual has no right or interest in the Certificate and is entitled only to payment from the employer's general assets in accordance with plan provisions. TAXATION OF DISTRIBUTIONS. Amounts received by an individual from a private employer deferred compensation plan are includible in gross income for the taxable year in which such amounts are paid or otherwise made available. EXCESS DISTRIBUTIONS--15% TAX. Certain persons, particularly those who participate in more than one tax-qualified retirement plan, may be subject to an additional tax of 15% on certain excess aggregate distributions from those plans. In general, excess distributions are taxable distributions for all tax qualified plans in excess of a specified annual limit for payments made in the form of an annuity (currently $160,000) or five times the annual limit for lump sum distributions. 8 WITHHOLDING Annuity payments and other amounts received under Certificates are subject to income tax withholding unless the recipient elects not to have taxes withheld. The amounts withheld will vary among recipients depending on the tax status of the individual and the type of payments from which taxes are withheld. Notwithstanding the recipient's election, withholding may be required with respect to certain payments to be delivered outside the United States and, with respect to certain distributions from certain types of qualified retirement plans, unless the proceeds are transferred directly to another qualified retirement plan. Moreover, special "backup withholding" rules may require Fortis Benefits to disregard the recipient's election if the recipient fails to supply Fortis Benefits with a "TIN" or taxpayer identification number (social security number for individuals), or if the Internal Revenue Service notifies Fortis Benefits that the TIN provided by the recipient is incorrect. OTHER INFORMATION Fortis Benefits relies upon an SEC No-action letter dated December 22, 1988 providing relief from certain restrictions provided in the Investment Company Act of 1940 relative to restrictions on redemptions and it complies with its conditions. The computer systems Fortis Benefits uses to process policy transactions and valuations need to be adjusted to be able to continue to administer its policies after Year 2000. Fortis Benefits is devoting all resources necessary to make these systems modifications and expects that the necessary changes will be completed on time and in a way that will result in no disruption to its policy servicing operations. However, as is the case with most system conversion projects, risks and uncertainties exist, due in part to reliance on third party vendors. Nonperformance by any of these entitites, or other unforeseen circumstances, could have a material adverse impact on operations. Fortis Benefits is closely monitoring these entities to avoid any unforseen circumstances. VARIABLE ACCOUNT FINANCIAL STATEMENTS 9 Report of Independent Auditors Board of Directors Fortis Benefits Insurance Company We have audited the accompanying statement of net assets of Fortis Benefits Insurance Company Variable Account D (comprising, respectively, the Fortis Series Fund, Inc.'s Growth Stock, U.S. Government Securities, Money Market, Asset Allocation, Diversified Income, Global Growth, Aggressive Growth, Growth & Income, High Yield, Global Asset Allocation, Global Bond, International Stock, Value, S & P 500 and Blue Chip Stock Subaccounts; the Norwest Select Fund's ValuGrowth, Intermediate Bond, Small Company Stock and Income Equity Subaccounts; the Scudder Variable Life Investment Fund's International Subaccount; the Alliance Variable Product Series' Money Market, International and Premier Growth Subaccounts; the SAFECO Resource Series' Growth and Equity Subaccounts; the Federated Insurance Series' U.S. Government Securities II, High Income Bond Fund II, Utility II and American Leaders II Subaccounts; the Lexington Funds, Inc.'s Natural Resources Trust and Emerging Markets Subaccounts; the MFS Variable Insurance Trusts' Emerging Growth, High Income and World Government Subaccounts; the Montgomery Variable Fund's Emerging Markets and Growth Subaccounts; the Strong Variable Insurance Funds' Discovery II, Government Securities II, Advantage II and International II 10 Subaccounts; the American Century Investments' VP Balanced and VP Growth Subaccounts; the Van Eck Worldwide Insurance Trust's Worldwide Bond Fund and Worldwide Hard Assets Fund Subaccounts; which are for the year ended December 31, 1997 and the period from February 1, 1996 to December 31, 1996, the Federated Insurance Series' U.S. Government Securities II Subaccount; the Neuberger & Berman, Inc.'s AMT Limited Maturity Bond and AMT Partners Subaccounts; and INVESCO, Inc.'s Health & Sciences, Industrial Income and Technology Subaccounts which are for the period from May 1, 1997 to December 31, 1997. These financial statements are the responsibility of the management of Fortis Benefits Insurance Company. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1997 by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of each of the portfolio subaccounts constituting Fortis Benefits Insurance Company Variable Account D at December 31, 1997, and the changes in its net assets for the periods described in the first paragraph, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Minneapolis, Minnesota March 27, 1998 11 Fortis Benefits Insurance Company Variable Account D Statement of Net Assets December 31, 1997
ATTRIBUTABLE TO FORTIS BENEFITS NET ASSETS AT INSURANCE SHARES COST MARKET VALUE COMPANY - ---------------------------------------------------------------------------------------------------------------------------------- Investments in Fortis Series Fund, Inc.: Growth Stock 14,375,006 $ 319,371,939 $ 526,688,738 $ - U.S. Government Securities 12,436,321 133,641,350 132,824,879 - Money Market 4,418,694 48,519,928 48,737,748 - Asset Allocation 24,886,252 369,053,147 438,465,903 - Diversified Income 8,183,245 96,070,615 98,063,099 - Global Growth 13,579,667 192,589,384 275,542,311 - Aggressive Growth 6,280,567 79,209,399 86,757,870 - Growth & Income 11,433,483 159,110,074 214,442,986 - High Yield 5,030,852 51,098,901 54,179,260 - Global Asset Allocation 3,466,188 40,992,002 46,053,856 3,929,345 Global Bond 1,765,333 19,093,344 18,796,550 5,498,223 International Stock 4,743,824 56,508,624 63,379,379 3,929,653 Value 3,534,352 43,077,826 47,432,774 989,974 S & P 500 5,973,876 77,839,842 89,188,764 5,305,433 Blue Chip Stock 4,414,170 55,644,996 65,094,254 5,199,878 Investments in Norwest Select Fund: ValuGrowth 1,255,007 17,561,630 21,661,424 - Intermediate Bond 830,073 9,156,722 9,180,606 - Small Company Stock 901,726 11,658,864 11,506,028 1,673,475 Income Equity 2,910,000 34,946,322 39,808,806 - Investments in Scudder Variable Life Investment Fund International 438,322 5,596,162 6,184,726 - Investments in Alliance Variable Product Series: Money Market 7,052,507 7,052,507 7,052,507 - International 176,819 2,624,996 2,655,816 - Premier Growth 95,455 1,984,749 2,003,592 - NET ASSET VALUE FOR ATTRIBUTABLE TO ACCUMULATION VARIABLE ANNUITY VARIABLE UNITS CONTRACTS PER ANNUITY OUTSTANDING ACCUMULATION UNIT CONTRACTS - ------------------------------------------------------------------------------------------------------------- Investments in Fortis Series Fund, Inc.: Growth Stock $ 526,688,738 157,557,760 $ 3.34 U.S. Government Securities 132,824,879 7,743,923 17.15 Money Market 48,737,748 31,691,981 1.54 Asset Allocation 438,465,903 156,035,843 2.81 Diversified Income 98,063,099 49,942,498 1.96 Global Growth 275,542,311 14,220,295 19.38 Aggressive Growth 86,757,870 6,551,667 13.24 Growth & Income 214,442,986 11,003,248 19.49 High Yield 54,179,260 4,194,544 12.92 Global Asset Allocation 42,124,511 2,918,483 14.43 Global Bond 13,298,327 1,123,401 11.84 International Stock 59,449,726 4,239,821 14.02 Value 46,442,800 3,402,217 13.65 S & P 500 83,883,331 5,698,661 14.72 Blue Chip Stock 59,894,376 4,149,587 14.43 Investments in Norwest Select Fund: ValuGrowth 21,661,424 1,260,231 17.19 Intermediate Bond 9,180,606 740,789 12.39 Small Company Stock 9,832,553 611,312 16.08 Income Equity 39,808,806 2,920,566 13.63 Investments in Scudder Variable Life Investment Fund International 6,184,726 437,666 14.13 Investments in Alliance Variable Product Series: Money Market 7,052,507 649,382 10.86 International 2,655,816 245,490 10.82 Premier Growth 2,003,592 127,363 15.73
12 Fortis Benefits Insurance Company Variable Account D Statement of Net Assets (continued)
ATTRIBUTABLE NET ASSET TO VALUE FOR FORTIS ATTRIBUTABLE VARIABLE BENEFITS TO ACCUMULATION ANNUITY NET ASSETS AT INSURANCE VARIABLE UNIT CONTRACTS PER SHARES COST MARKET VALUE COMPANY ANNUITY OUTSTANDING ACCUMULATION CONTRACTS UNITS ------------------------------------------------------------------------------------ Investments in SAFECO Resource Series: Growth 159,934 $4,246,527 $3,734,465 $ - $3,734,465 255,499 $14.62 Equity 57,151 1,477,843 1,439,067 - 1,439,067 118,412 12.15 Investments in Federated Insurance Series: U.S. Government Securities II 20,249 212,638 213,422 - 213,422 19,937 10.70 High Income Bond Fund II 235,896 2,533,079 2,583,066 - 2,583,066 207,634 12.44 Utility II 115,477 1,602,778 1,650,178 - 1,650,178 121,810 13.55 American Leaders II 162,682 3,094,027 3,193,445 - 3,193,445 212,945 15.00 Investments in Lexington Funds, Inc.: Natural Resources Trust 77,554 1,209,583 1,156,327 - 1,156,327 90,147 12.83 Emerging Markets 71,797 625,202 639,707 - 639,707 77,056 8.30 Investments in MFS Variable Insurance Trust: Emerging Growth 258,277 4,073,740 4,168,592 - 4,168,592 303,026 13.76 High Income 54,983 650,542 679,037 - 679,037 55,017 12.34 World Government 10,612 108,301 108,348 - 108,348 10,694 10.13 Investments in Montgomery Variable Funds: Emerging Markets 62,209 665,132 657,547 - 657,547 62,541 10.51 Growth 126,112 1,765,250 1,903,023 - 1,903,023 115,144 16.53 Investments in Strong Variable Insurance Funds: Discovery II 19,683 247,313 236,792 - 236,792 21,234 11.15 Government Securities II - - - - - - - Advantage II - - - - - - - International II 35,494 339,380 330,805 - 330,805 36,547 9.05 Investments in American Century Investments: VP Balanced 68,765 565,613 566,623 - 566,623 44,869 12.63 VP Growth 14,644 149,824 141,757 - 141,757 15,651 9.06
13 Fortis Benefits Insurance Company Variable Account D Statement of Net Assets (continued)
ATTRIBUTABLE NET ASSET TO FORTIS ATTRIBUTABLE ACCUMULATIO VALUE FOR NET ASSETS AT BENEFITS TO VARIABLE N UNITS VARIABLE SHARES COST MARKET VALUE INSURANCE ANNUITY OUTSTANDING ANNUITY COMPANY CONTRACTS CONTRACTS PER ACCUMULATION UNIT -------------------------------------------------------------------------------------------- Investments in Van Eck Worldwide Insurance Trust: Worldwide Bond Fund 25,351 $ 277,884 $ 278,607 $ - $ 278,607 26,552 $10.49 Worldwide Hard Assets Fund 84,227 1,381,845 1,323,208 - 1,323,208 135,426 9.77 Investments in Neuberger & Berman, Inc.: AMT Limited Maturity Bond 23,809 334,594 336,187 - 336,187 32,024 10.50 AMT Partners 28,668 573,526 590,553 - 590,553 47,329 12.48 Investments in INVESCO, Inc.: Health & Sciences 13,819 149,889 153,663 - 153,663 13,820 11.12 Industrial Income 19,806 351,069 337,492 - 337,492 27,808 12.14 Technology 14,713 174,352 168,898 - 168,898 14,794 11.42 ---------------------------------------------------------------------- Totals $1,859,213,254 $2,332,292,685 $26,525,981 $2,305,766,704 469,532,644 ---------------------------------------------------------------------- ----------------------------------------------------------------------
SEE ACCOMPANYING NOTES. 14 Fortis Benefits Insurance Company Variable Account D Statement of Changes in Net Assets Year ended December 31, 1997
FORTIS FORTIS U.S. FORTIS FORTIS FORTIS FORTIS GROWTH GOVERNMENT MONEY FORTIS ASSET DIVERSIFIED GLOBAL AGGRESSIVE STOCK SECURITIES MARKET ALLOCATION INCOME GROWTH GROWTH ------------------------------------------------------------------------------------------- OPERATIONS Dividend income $ 49,675 $9,784,129 $2,375,151 $ 60,002,739 $ 6,905,359 $ - $ 1,231 Mortality and expense and policy advance charges (7,089,187) (1,875,555) (750,583) (5,433,367) (1,307,512) (3,682,512) (1,052,753) Net realized gain (loss) on investments 20,147,178 (347,001) 820,447 6,303,022 177,507 5,836,551 102,856 Net unrealized appreciation (depreciation) of investments during the period 41,012,209 2,402,114 (304,737) 7,447,945 2,515,054 12,455,062 2,161,309 ------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 54,119,875 9,963,687 2,140,278 68,320,339 8,290,408 14,609,101 1,212,643 CAPITAL TRANSACTION Purchase of Variable Account units 11,292,630 5,975,823 49,678,086 25,706,170 3,115,896 19,063,321 14,369,199 Redemption of Variable Account units (53,729,345) (38,528,792) (58,875,709) (27,015,058) (14,932,392) (19,838,860) (5,395,939) Mortality and expense charges redeemed 7,089,187 1,875,555 750,583 5,433,367 1,307,512 3,682,512 1,052,753 Funding of subaccount by Fortis Benefits Insurance Company - - - - - - - Redemption of Fortis Benefits Insurance Company investment in subaccount - - - - - - - Dividend income distribution to Fortis Benefits Insurance Company - - - - - - - Net increase (decrease) from capital ------------------------------------------------------------------------------------------- transactions (35,347,528) (30,677,414) (8,447,040) 4,124,479 (10,508,984) 2,906,973 10,026,013 Net assets at beginning of period 507,916,391 153,538,606 55,044,510 366,021,085 100,281,675 258,026,237 75,519,214 ------------------------------------------------------------------------------------------- Net assets at end of period $526,688,738 $132,824,879 $48,737,748 $438,465,903 $ 98,063,099 $275,542,311 $86,757,870 ------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- SEE ACCOMPANYING NOTES.
15 Fortis Benefits Insurance Company Variable Account D Statement of Changes in Net Assets (continued) Year ended December 31, 1997
FORTIS GLOBAL FORTIS FORTIS FORTIS GROWTH FORTIS HIGH ASSET GLOBAL INTERNATIONAL FORTIS & INCOME YIELD ALLOCATION BOND STOCK FORTIS VALUE S & P 500 ----------------------------------------------------------------------------------------------- OPERATIONS Dividend income $ 6,654,164 $ 71,851 $ 2,358,159 $ 805,285 $ 2,559,479 $ 2,718,491 $ 1,361,090 Mortality and expense and policy advance charges (2,311,419) (641,985) (489,857) (172,763) (684,830) (377,532) (607,630) Net realized gain (loss) on investments 1,120,673 85,907 218,706 (68,168) 309,917 61,399 831,297 Net unrealized appreciation (depreciation) of investments during the period 33,449,045 4,156,960 2,537,910 (676,900) 2,974,721 3,471,343 9,928,599 ----------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 38,912,463 3,672,733 4,624,918 (112,546) 5,159,287 5,873,701 11,513,356 CAPITAL TRANSACTIONS Purchase of Variable Account units 56,082,796 14,037,885 9,248,738 2,704,435 16,326,079 29,249,997 82,381,056 Redemption of Variable Account units (4,951,613) (3,986,387) (1,791,957) (2,463,332) (2,103,233) (695,317) (23,769,708) Mortality and expense charges redeemed 2,311,419 641,983 489,857 172,763 684,830 377,532 607,630 Funding of subaccount by Fortis Benefits Insurance Company - - - - - - - Redemption of Fortis Benefits Insurance Company investment in subaccount - - - - - - - Dividend income distribution to Fortis Benefits Insurance Company - - (193,973) (128,042) (157,141) (21,662) (79,618) ----------------------------------------------------------------------------------------------- Net increase (decrease) from capital transactions 53,442,602 10,693,483 7,752,665 285,824 14,750,535 28,910,550 59,139,360 Net assets at beginning of period 122,087,921 39,813,044 33,676,273 18,623,272 43,469,557 12,648,523 18,536,048 ----------------------------------------------------------------------------------------------- Net assets at end of period $214,442,986 $54,179,260 $46,053,856 $18,796,550 $63,379,379 $47,432,774 $89,188,764 ----------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. 16 Fortis Benefits Insurance Company Variable Account D Statement of Changes in Net Assets (continued) Year ended December 31, 1997
NORWEST NORWEST FORTIS BLUE NORWEST INTERMEDIATE SMALL NORWEST SCUDDER ALLIANCE CHIP VALUGROWTH BOND COMPANY INCOME INTERNATIONAL MONEY MARKET STOCK STOCK EQUITY ------------------------------------------------------------------------------------------ OPERATIONS Dividend income $ 293,654 $ 579,724 $ 633,659 $ 1,503,400 $ 330,791 $ 89,071 $375,670 Mortality and expense and policy advance charges (447,570) (221,359) (101,678) (95,073) (305,439) (66,114) (33,431) Net realized gain (loss) on investments 107,559 104,535 2,550 25,285 38,572 40,064 - Net unrealized appreciation (depreciation) of investments during the period 8,118,339 2,305,264 165,968 (863,445) 4,243,198 164,076 - ------------------------------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations 8,071,982 2,768,164 700,499 570,167 4,307,122 227,097 342,239 CAPITAL TRANSACTIONS Purchase of Variable Account units 42,777,440 8,653,105 3,293,135 5,021,855 25,830,279 2,768,738 168,171,990 Redemption of Variable Account units (832,257) (476,484) (779,906) (276,048) (309,223) (302,454)(167,088,962) Mortality and expense charges redeemed 447,570 221,359 101,678 95,073 305,439 66,114 33,431 Funding of subaccount by Fortis Benefits Insurance Company - - - - - - - Redemption of Fortis Benefits Insurance Company investment in subaccount - - - - - - - Dividend income distribution to Fortis Benefits Insurance Company (58,517) - - - - - - ------------------------------------------------------------------------------------------ Net increase (decrease) from capital transactions 42,334,236 8,397,980 2,614,907 4,840,880 25,826,495 2,532,398 1,116,459 Net assets at beginning of period 14,688,036 10,495,280 5,865,200 6,094,981 9,675,189 3,425,231 5,593,809 ------------------------------------------------------------------------------------------ Net assets at end of period $65,094,254 $21,661,424 $9,180,606 $11,506,028 $39,808,806 $6,184,726 $7,052,507 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. 17 Fortis Benefits Insurance Company Variable Account D Statement of Changes in Net Assets (continued) Year ended December 31, 1997
FEDERATED ALLIANCE U.S. FEDERATED ALLIANCE PREMIER SAFECO SAFECO GOVERNMENT HIGH INCOME FEDERATED INTERNATIONAL GROWTH GROWTH EQUITY SECURITIES II* BOND FUND II UTILITY II --------------------------------------------------------------------------------------- OPERATIONS Dividend income $ 19,713 $ 954 $ 506,511 $ 102,844 $ 3,957 $ 67,548 $ 4,035 Mortality and expense and policy advance charges (4,653) (4,656) (4,146) (4,251) (265) (3,413) (1,118) Net realized gain (loss) on investments 524,319 185,183 260,166 21,442 (1,381) 120,901 48,748 Net unrealized appreciation (depreciation) of investments during the period 25,774 12,341 (501,499) (19,125) 784 31,419 44,341 --------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 565,153 193,822 261,032 100,910 3,095 216,455 96,006 CAPITAL TRANSACTIONS Purchase of Variable Account units 65,480,879 13,005,720 13,595,285 4,689,201 1,957,483 7,473,177 8,386,519 Redemption of Variable Account units (63,692,893) (11,432,296) (10,315,753) (3,551,876) (1,747,421) (6,024,386) (7,031,477) Mortality and expense charges redeemed 4,653 4,656 4,146 4,251 265 3,413 1,118 Funding of subaccount by Fortis Benefits Insurance Company - - - - - - - Redemption of Fortis Benefits Insurance Company investment in subaccount - - - - - - - Dividend income distribution to Fortis Benefits Insurance Company - - - - - - - --------------------------------------------------------------------------------------- Net increase (decrease) from capital transactions 1,792,639 1,578,080 3,283,678 1,141,576 210,327 1,452,204 1,356,160 Net assets at beginning of period 298,024 231,690 189,755 196,581 - 914,407 198,012 --------------------------------------------------------------------------------------- Net assets at end of period $ 2,655,816 $ 2,003,592 $ 3,734,465 $ 1,439,067 $ 213,422 $ 2,583,066 $ 1,650,178 --------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------
* For the period from May 1, 1997 to December 31, 1997. SEE ACCOMPANYING NOTES. 18 Fortis Benefits Insurance Company Variable Account D Statement of Changes in Net Assets (continued) Year ended December 31, 1997
LEXINGTON FEDERATED NATURAL LEXINGTON MONTGOMERY AMERICAN RESOURCES EMERGING MFS EMERGING MFS HIGH MFS WORLD EMERGING LEADERS II TRUST MARKETS GROWTH INCOME GOVERNMENT MARKETS --------------------------------------------------------------------------------------- OPERATIONS Dividend income $ 11,802 $ 37,809 $ 238 $ 5,222 $ - $ 3,011 $ 585 Mortality and expense and policy advance charges (6,487) (4,044) (1,766) (8,094) (3,208) (888) (2,178) Net realized gain (loss) on investments 366,916 147,314 22,277 278,077 64,089 (9,538) 17,971 Net unrealized appreciation (depreciation) of investments during the period 87,367 (60,160) 13,703 124,482 28,378 (237) (9,020) --------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 459,598 120,919 34,452 399,687 89,259 (7,652) 7,358 CAPITAL TRANSACTIONS Purchase of Variable Account units 20,909,386 7,675,556 10,873,736 50,380,648 2,109,055 4,223,973 7,351,843 Redemption of Variable Account units (18,677,016) (7,422,947) (10,335,967) (48,657,063) (1,917,469) (4,151,384) (6,894,401) Mortality and expense charges redeemed 6,487 4,044 1,766 8,094 3,208 888 2,178 Funding of subaccount by Fortis Benefits Insurance Company - - - - - - - Redemption of Fortis Benefits Insurance Company investment in subaccount - - - - - - - Dividend income distribution to Fortis Benefits Insurance Company - - - - - - - --------------------------------------------------------------------------------------- Net increase (decrease) from capital transactions 2,238,857 256,653 539,535 1,731,679 194,794 73,477 459,620 Net assets at beginning of period 494,990 778,755 65,720 2,037,226 394,984 42,523 190,569 --------------------------------------------------------------------------------------- Net assets at end of period $ 3,193,445 $1,156,327 $ 639,707 $ 4,168,592 $ 679,037 $ 108,348 $ 657,547 --------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. 19 Fortis Benefits Insurance Company Variable Account D Statement of Changes in Net Assets (continued) Year ended December 31, 1997
STRONG STRONG AMERICAN AMERICAN MONTGOMERY DISCOVERY GOVERNMENT STRONG STRONG CENTURY VP CENTURY GROWTH FUND II SECURITIES II ADVANTAGE II INTERNATIONAL II BALANCED VP GROWTH ----------------------------------------------------------------------------------------- OPERATIONS Dividend income $ 80,509 $ - $ 4,238 $ 6,644 $ 25,600 $ 8,363 $ 2,139 Mortality and expense and policy advance charges (2,758) (673) (446) (122) (2,462) (1,284) (355) Net realized gain (loss) on investments 110,597 6,584 1,688 6,199 (1,178) (65,865) 32,718 Net unrealized appreciation (depreciation) of investments during the period 156,818 (12,707) 277 1,352 (11,451) 51 (7,181) ----------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 345,166 (6,796) 5,757 14,073 10,509 (58,735) 27,321 CAPITAL TRANSACTIONS Purchase of Variable Account units 4,720,065 1,491,187 192,449 40,789 13,896,848 9,336,521 5,761,482 Redemption of Variable Account units (4,059,313) (1,339,858) (267,953) (356,157) (13,937,360) (8,825,530) (5,717,321) Mortality and expense charges redeemed 2,758 673 446 122 2,462 1,284 355 Funding of subaccount by Fortis Benefits Insurance Company - - - - - - - Redemption of Fortis Benefits Insurance Company investment in subaccount - - - - - - - Dividend income distribution to Fortis Benefits Insurance Company - - - - - - - ----------------------------------------------------------------------------------------- Net increase (decrease) from capital transactions 663,510 152,002 (75,058) (315,246) (38,050) 512,275 44,516 Net assets at beginning of period 894,347 91,586 69,301 301,173 358,346 113,083 69,920 ----------------------------------------------------------------------------------------- Net assets at end of period $ 1,903,023 $ 236,792 $ - $ - $ 330,805 $ 566,623 $ 141,757 ----------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. 20 Fortis Benefits Insurance Company Variable Account D Statement of Changes in Net Assets (continued) Year ended December 31, 1997
VAN ECK NEUBERGER & VAN ECK WORLDWIDE BERMAN AMT NEUBERGER & WORLDWIDE HARD ASSETS LIMITED BERMAN AMT BOND FUND FUND MATURITY BOND* PARTNERS* ------------------------------------------------------------- OPERATIONS Dividend income $ 1,403 $ 21,541 $ - $ - Mortality and expense and policy advance charges (1,009) (4,933) (742) (1,259) Net realized gain (loss) on investments 15,991 176,670 8,178 12,902 Net unrealized appreciation (depreciation) of investments during the period 325 (76,669) 1,593 17,027 ------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 16,710 116,609 9,029 28,670 CAPITAL TRANSACTIONS Purchase of Variable Account units 2,437,708 13,173,938 3,132,473 1,237,645 Redemption of Variable Account units (2,213,520) (12,443,877) (2,806,057) (677,021) Mortality and expense charges redeemed 1,009 4,933 742 1,259 Funding of subaccount by Fortis Benefits Insurance Company - - - - Redemption of Fortis Benefits Insurance Company investment in subaccount - - - - Dividend income distribution to Fortis Benefits Insurance Company - - - - ------------------------------------------------------------- Net increase (decrease) from capital transactions 225,197 734,994 327,158 561,883 Net assets at beginning of period 36,700 471,605 - - ------------------------------------------------------------- Net assets at end of period $ 278,607 $ 1,323,208 $ 336,187 $ 590,553 ------------------------------------------------------------- ------------------------------------------------------------- INVESCO INVESCO HEALTH& INDUSTRIAL INVESCO COMBINED SCIENCES* INCOME* TECHNOLOGY* VARIABLE ACCOUNT ------------------------------------------------------------- OPERATIONS Dividend income $ 1,508 $ 23,677 $ - $ 100,392,623 Mortality and expense and policy advance charges (293) (361) (393) (27,814,406) Net realized gain (loss) on investments (3,047) 5,339 1,683 38,273,799 Net unrealized appreciation (depreciation) of investments during the period 3,774 (13,577) (5,452) 137,496,762 ------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 1,942 15,078 (4,162) 248,348,778 CAPITAL TRANSACTIONS Purchase of Variable Account units 664,230 512,375 1,293,756 871,752,580 Redemption of Variable Account units (512,802) (190,322) (1,121,089) (684,463,505) Mortality and expense charges redeemed 293 361 393 27,814,406 Funding of subaccount by Fortis Benefits Insurance Company - - - - Redemption of Fortis Benefits Insurance Company investment in subaccount - - - - Dividend income distribution to Fortis Benefits Insurance Company - - - (638,953) ------------------------------------------------------------- Net increase (decrease) from capital transactions 151,721 322,414 173,060 214,464,528 Net assets at beginning of period - - - 1,869,479,379 ------------------------------------------------------------- Net assets at end of period $ 153,663 $ 337,492 $ 168,898 $2,332,292,685 ------------------------------------------------------------- -------------------------------------------------------------
* For the period from May 1, 1997 to December 31, 1997. SEE ACCOMPANYING NOTES. 21 Fortis Benefits Insurance Company Variable Account D Statement of Changes in Net Assets Year ended December 31, 1996
FORTIS U.S. FORTIS FORTIS GROWTH GOVERNMENT FORTIS MONEY FORTIS ASSET DIVERSIFIED FORTIS GLOBAL STOCK SECURITIES MARKET ALLOCATION INCOME GROWTH ---------------------------------------------------------------------------------------- OPERTIONS Dividend income $ 1,755,003 $ 11,268,567 $ 1,961,696 $ 18,389,804 $ 7,814,749 $ 349,640 Mortality and expense and policy advance charges (6,383,239) (2,182,582) (304,880) (4,666,220) (1,375,570) (2,982,707) Net realized gain (loss) on investments 6,173,815 (229,036) 875,419 4,730,794 94,162 1,304,350 Net unrealized appreciation (depreciation) of investments during the period 62,258,164 (8,049,967) (396,193) 17,669,052 (3,883,159) 34,010,868 ------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 63,803,743 806,982 2,136,042 36,123,430 2,650,182 32,682,151 CAPITAL TRANSACTIONS Purchase of Variable Account units 40,354,935 9,792,095 53,529,569 35,139,069 4,487,798 56,339,715 Redemption of Variable Account units (19,671,112) (32,995,603) (38,173,512) (27,343,627) (12,133,337) (4,633,717) Mortality and expense charges redeemed 6,383,239 2,182,582 304,880 4,666,220 1,375,570 2,982,707 Funding of subaccount by Fortis Benefits Insurance Company - - - - - - Redemption of Fortis Benefits Insurance Company investment in subaccount - - - - - - Dividend income distribution to Fortis Benefits Insurance Company - - - - - - Net increase (decrease) from capital ------------------------------------------------------------------------------------- transactions 27,067,062 (21,020,926) 15,660,937 12,461,662 (6,269,969) 54,688,705 Net assets at beginning of period 417,045,586 173,752,550 37,247,531 317,435,993 103,901,462 170,655,381 ------------------------------------------------------------------------------------- Net assets at end of period $507,916,391 $153,538,606 $ 55,044,510 $366,021,085 $100,281,675 $258,026,237 ------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. 22 Fortis Benefits Insurance Company Variable Account D Statement of Changes in Net Assets (continued) Year ended December 31, 1996
FORTIS FORTIS GLOBAL FORTIS AGGRESSIVE FORTIS GROWTH FORTIS HIGH ASSET FORTIS GLOBAL INTERNATIONAL GROWTH & INCOME YIELD ALLOCATION BOND STOCK ---------------------------------------------------------------------------------------- OPERATIONS Dividend income $ 130,127 $ 3,357,159 $ 3,381,726 $ 1,354,041 $ 900,099 $ 1,318,016 Mortality and expense and policy advance charges (818,660) (1,187,861) (431,670) (300,249) (142,264) (377,251) Net realized gain (loss) on investments 1,462,499 214,625 60,612 62,447 11,779 153,762 Net unrealized appreciation (depreciation) of investments during the period 311,941 14,270,467 (261,534) 2,171,960 394,408 3,249,452 ---------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 1,085,907 16,654,390 2,749,134 3,288,199 1,164,022 4,343,979 CAPITAL TRANSACTIONS Purchase of Variable Account units 45,154,232 51,705,892 14,950,454 15,032,759 8,709,675 24,843,475 Redemption of Variable Account units (9,407,569) (1,795,563) (3,738,286) (743,168) (2,924,096) (2,013,891) Mortality and expense charges redeemed 818,660 1,187,861 431,670 300,249 142,264 377,251 Funding of subaccount by Fortis Benefits Insurance Company - - - 2,944,303 5,030,752 2,926,075 Redemption of Fortis Benefits Insurance Company investment in subaccount - - - - - - Dividend income distribution to Fortis Benefits Insurance Company - - - (142,728) (218,365) (101,798) ---------------------------------------------------------------------------------------- Net increase (decrease) from capital transactions 36,565,323 51,098,190 11,643,838 17,391,415 10,740,230 26,031,112 Net assets at beginning of period 37,867,984 54,335,341 25,420,072 12,996,659 6,719,020 13,094,466 ---------------------------------------------------------------------------------------- Net assets at end of period $75,519,214 $122,087,921 $39,813,044 $33,676,273 $18,623,272 $43,469,557 ---------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES. 23 Fortis Benefits Insurance Company Variable Account D Statement of Changes in Net Assets (continued) Year ended December 31, 1996
FORTIS NORWEST NORWEST FORTIS BLUE CHIP NORWEST INTERMEDIATE SMALL COMPANY FORTIS VALUE* S & P 500* STOCK* VALUGROWTH BOND STOCK ---------------------------------------------------------------------------------------- OPERATIONS Dividend income $ 67,900 $ 102,931 $ 50,146 $ 82,203 $ 266,665 $ 512,352 Mortality and expense and policy advance charges (50,034) (58,475) (42,346) (106,853) (59,335) (36,673) Net realized gain (loss) on investments 4,138 79,382 101,880 55,679 2,306 8,076 Net unrealized appreciation (depreciation) of investments during the period 883,605 1,420,323 1,330,919 1,308,423 (240,519) 722,953 ---------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 905,609 1,544,161 1,440,599 1,339,452 (30,883) 1,206,708 CAPITAL TRANSACTIONS Purchase of Variable Account units 11,049,449 14,397,817 12,543,584 4,632,105 3,468,748 3,069,610 Redemption of Variable Account units (62,025) (990,762) (2,873,938) (340,655) (700,061) (128,442) Mortality and expense charges redeemed 50,034 58,475 42,346 106,853 59,335 36,673 Funding of subaccount by Fortis Benefits Insurance Company 710,000 3,550,000 3,550,000 - - 1,038,350 Redemption of Fortis Benefits Insurance Company investment in subaccount - - - - - - Dividend income distribution to Fortis Benefits Insurance Company (4,544) (23,643) (14,555) - - - ---------------------------------------------------------------------------------------- Net increase (decrease) from capital transactions 11,742,914 16,991,887 13,247,437 4,398,303 2,828,022 4,016,191 Net assets at beginning of period - - - 4,757,525 3,068,061 872,082 ---------------------------------------------------------------------------------------- Net assets at end of period $12,648,523 $18,536,048 $14,688,036 $10,495,280 $5,865,200 $6,094,981 ---------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------
* For the period from May 1, 1996 to December 31, 1996. SEE ACCOMPANYING NOTES. 24 Fortis Benefits Insurance Company Variable Account D Statement of Changes in Net Assets (continued) Year ended December 31, 1996
NORWEST ALLIANCE ALLIANCE INCOME SCUDDER MONEY ALLIANCE PREMIER SAFECO EQUITY* INTERNATIONAL MARKET*** INTERNATIONAL*** GROWTH*** GROWTH** -------------------------------------------------------------------------------------- OPERATIONS Dividend income $ 73,375 $ 47,233 $ 102,380 $ 1,304 $ 24,242 $ 14,945 Mortality and expense and policy advance charges (42,286) (37,291) (10,300) (544) (671) (48) Net realized gain (loss) on investments 3,546 7,053 - 1,004 28,494 (6,108) Net unrealized appreciation (depreciation) of investments during the period 619,284 312,160 - 5,046 6,502 (10,564) -------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 653,919 329,155 92,080 6,810 58,567 (1,775) CAPITAL TRANSACTIONS Purchase of Variable Account units 9,076,709 1,328,103 29,009,905 3,914,735 1,256,492 441,504 Redemption of Variable Account units (97,725) (80,771) (23,518,476) (3,624,065) (1,084,040) (250,022) Mortality and expense charges redeemed 42,286 37,291 10,300 544 671 48 Funding of subaccount by Fortis Benefits Insurance Company - - - - - - Redemption of Fortis Benefits Insurance Company investment in subaccount - - - - - - Dividend income distribution to Fortis Benefits Insurance Company - - - - - - -------------------------------------------------------------------------------------- Net increase (decrease) from capital transactions 9,021,270 1,284,623 5,501,729 291,214 173,123 191,530 Net assets at beginning of period - 1,811,453 - - - - -------------------------------------------------------------------------------------- Net assets at end of period $9,675,189 $3,425,231 $ 5,593,809 $ 298,024 $ 231,690 $ 189,755 -------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------
* For the period from May 1, 1996 to December 31, 1996. ** For the period from December 1, 1996 to December 31, 1996. *** For the period from February 1, 1996 to December 31, 1996. SEE ACCOMPANYING NOTES. 25 Fortis Benefits Insurance Company Variable Account D Statement of Changes in Net Assets (continued) Year ended December 31, 1996
LEXINGTON FEDERATED FEDERATED NATURAL LEXINGTON SAFECO HIGH INCOME FEDERATED AMERICAN RESOURCES EMERGING EQUITY** BOND FUND II*** UTILITY II*** LEADERS II*** TRUST*** MARKETS*** ------------------------------------------------------------------------------------ OPERATIONS Dividend income $ 17,950 $ 20,894 $ 2,018 $ 3,741 $ 1,130 $ - Mortality and expense and policy advance charges (26) (1,205) (203) (869) (909) (253) Net realized gain (loss) on investments - 6,428 11,122 22,746 33,868 (583) Net unrealized appreciation (depreciation) of investments during the period (19,651) 18,570 3,058 12,051 6,904 801 ------------------------------------------------------------------------------------ Net increase (decrease) in net assets resulting from operations (1,727) 44,687 15,995 37,669 40,993 (35) CAPITAL TRANSACTIONS Purchase of Variable Account units 198,282 1,538,226 1,026,928 1,372,344 2,056,140 1,131,006 Redemption of Variable Account units - (669,711) (845,114) (915,892) (1,319,287) (1,065,504) Mortality and expense charges redeemed 26 1,205 203 869 909 253 Funding of subaccount by Fortis Benefits Insurance Company - - - - - - Redemption of Fortis Benefits Insurance Company investment in subaccount - - - - - - Dividend income distribution to Fortis Benefits Insurance Company - - - - - - ------------------------------------------------------------------------------------ Net increase (decrease) from capital transactions 198,308 869,720 182,017 457,321 737,762 65,755 Net assets at beginning of period - - - - - - ------------------------------------------------------------------------------------ Net assets at end of period $196,581 $ 914,407 $ 198,012 $ 494,990 $ 778,755 $ 65,720 ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------
** For the period from December 1, 1996 to December 31, 1996. *** For the period from February 1, 1996 to December 31, 1996. SEE ACCOMPANYING NOTES. 26 Fortis Benefits Insurance Company Variable Account D Statement of Changes in Net Assets (continued) Year ended December 31, 1996
MONTGOMERY STRONG STRONG MFS EMERGING MFS HIGH MFS WORLD EMERGING MONTGOMERY DISCOVERY GOVERNMENT GROWTH*** INCOME*** GOVERNMENT*** MARKETS*** GROWTH*** FUND II*** SECURITIES II*** -------------------------------------------------------------------------------------------- OPERATIONS Dividend income $ 8,097 $ 21,440 $ - $ 391 $ 41,303 $ 6,715 $ 1,630 Mortality and expense and policy advance charges (3,876) (1,019) (116) (375) (1,779) (544) (671) Net realized gain (loss) on investments 148,625 12,701 2,897 (499) 42,751 (5,280) 2,051 Net unrealized appreciation (depreciation)of investments during the period (29,630) 116 283 1,434 (19,045) 2,186 (276) -------------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 123,216 33,238 3,064 951 63,230 3,077 2,734 CAPITAL TRANSACTIONS Purchase of Variable Account units 21,176,704 672,340 262,500 801,303 2,961,408 321,349 743,861 Redemption of Variable Account units (19,266,570) (311,613) (223,157) (612,060) (2,132,070) (233,384) (677,965) Mortality and expense charges redeemed 3,876 1,019 116 375 1,779 544 671 Funding of subaccount by Fortis Benefits Insurance Company - - - - - - - Redemption of Fortis Benefits Insurance Company investment in subaccount - - - - - - - Dividend income distribution to Fortis Benefits Insurance Company - - - - - - - -------------------------------------------------------------------------------------------- Net increase (decrease) from capital transactions 1,914,010 361,746 39,459 189,618 831,117 88,509 66,567 Net assets at beginning of period - - - - - - - -------------------------------------------------------------------------------------------- Net assets at end of period $ 2,037,226 $ 394,984 $ 42,523 $ 190,569 $ 894,347 $ 91,586 $ 69,301 -------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------
*** For the period from February 1, 1996 to December 31, 1996. SEE ACCOMPANYING NOTES. 27 Fortis Benefits Insurance Company Variable Account D Statement of Changes in Net Assets (continued) Year ended December 31, 1996
VAN ECK VAN ECK STRONG STRONG AMERICAN AMERICAN WORLDWIDE WORLDWIDE COMBINED ADVANTAGE INTERNATIONAL CENTURY VP CENTURY BOND HARD ASSETS VARIABLE II*** II*** BALANCED*** VP GROWTH*** FUND*** FUND*** ACCOUNT ----------------------------------------------------------------------------------------- OPERATIONS Dividend income $ 5,379 $ 1,058 $ 140 $ 113 $ 468 $ 3,629 $ 53,462,399 Mortality and expense and policy (48) (26) (1,205) (203) (869) (1,505) (21,613,710) advance charges Net realized gain (loss) on investments 1,416 15,704 2,990 (5,589) (109) (3,564) 15,488,353 Net unrealized appreciation (depreciation) of investments during the period (1,352) 2,576 959 (886) 398 18,031 128,100,118 ----------------------------------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations 5,395 19,312 2,884 (6,565) (112) 16,591 175,437,160 CAPITAL TRANSACTIONS Purchase of Variable Account units 1,277,539 4,776,591 651,649 1,563,734 63,735 2,385,593 499,209,661 Redemption of Variable Account units (981,809) (4,437,583) (542,655) (1,487,452) (27,792) (1,932,084) (227,006,165) Mortality and expense charges redeemed 48 26 1,205 203 869 1,505 21,613,710 Funding of subaccount by Fortis Benefits Insurance Company - - - - - - 19,749,480 Redemption of Fortis Benefits Insurance Company investment in subaccount - - - - - - - Dividend income distribution to Fortis Benefits Insurance Company - - - - - - (505,633) ----------------------------------------------------------------------------------------- Net increase (decrease) from capital transactions 295,778 339,034 110,199 76,485 36,812 455,014 313,061,053 Net assets at beginning of period - - - - - - 1,380,981,166 ----------------------------------------------------------------------------------------- Net assets at end of period $ 301,173 $ 358,346 $ 113,083 $ 69,920 $ 36,700 $ 471,605 $1,869,479,379 ----------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------
*** For the period from February 1, 1996 to December 31, 1996. SEE ACCOMPANYING NOTES. 28 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements December 31, 1997 1. GENERAL FORTIS BENEFITS INSURANCE COMPANY Variable Account D (the Account) was established as a segregated asset account of Fortis Benefits Insurance Company (Fortis Benefits) on October 14, 1987 under Minnesota law. The Account is registered under the Investment Company Act of 1940 as a unit investment trust. Fortis Benefits was founded in 1910. At the end of 1997, Fortis Benefits had approximately $94 billion of total life insurance in force. Fortis Benefits is a Minnesota corporation and is qualified to sell life insurance and annuity contracts in the District of Columbia and in all states except New York. Fortis Benefits is an indirectly wholly-owned subsidiary of Fortis, Inc., which is itself indirectly owned 50% by N.V. AMEV and 50% by Compagnie Financiere et de Reassurance du Group AG ("Group AG"). Fortis, Inc. manages the United States operations for these two companies. N.V. AMEV is a diversified financial services company headquartered in Utrecht, The Netherlands, where its insurance operations began in 1847. Group AG is a diversified financial services company headquartered in Brussels, Belgium, where its insurance operations began in 1824. N.V. AMEV and Group AG have merged their operating companies under the trade name of Fortis. The Fortis group of companies is active in insurance, banking, and financial services, and real estate development in The Netherlands, Belgium, the United States, Western Europe, and the Pacific Rim. The Fortis group of companies had assets in excess of $167 billion at the end of 1997. There were forty-nine subaccounts that had activity in 1997, forty-seven of these subaccounts are active, and two are inactive as of December 31, 1997. The investment objectives and policies of each of the Account's subaccounts are as follows. 29 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements December 31, 1997 ACTIVE SUBACCOUNTS FORTIS SERIES FUND, INC. - - GROWTH STOCK SUBACCOUNT--seeks growth of capital through short-term and long-term appreciation. 30 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 1. GENERAL (CONTINUED) FORTIS SERIES FUND, INC. (CONTINUED) - - U.S. GOVERNMENT SECURITIES SUBACCOUNT--seeks to earn a high level of current income consistent with prudent investment risk. - - MONEY MARKET SUBACCOUNT--seeks high level of capital stability and liquidity and, to the extent consistent with these objectives, a high level of current income. - - ASSET ALLOCATION SUBACCOUNT--seeks favorable overall rates of return on capital, primarily through increased ownership of equity securities during periods when stock market conditions appear favorable, and short-term and long-term debt instruments during periods when stock market conditions are less favorable. - - DIVERSIFIED INCOME SUBACCOUNT--seeks high level of current income by investing primarily in a diversified portfolio of government securities and investment grade corporate bonds. - - GLOBAL GROWTH SUBACCOUNT--seeks growth of capital through long-term capital appreciation, through ownership of equity securities, allocated among diverse international markets. - - AGGRESSIVE GROWTH SUBACCOUNT--seeks long-term capital appreciation in equity securities. - - GROWTH & INCOME SUBACCOUNT--seeks growth of capital and current income, through ownership of equity securities that provide an income component and the potential for growth. - - HIGH YIELD SUBACCOUNT--seeks maximum total return through current income and capital appreciation, through ownership of a diversified portfolio of high-yielding fixed-income securities. 31 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 1. GENERAL (CONTINUED) FORTIS SERIES FUND, INC. (CONTINUED) - - GLOBAL ASSET ALLOCATION SUBACCOUNT--seeks favorable overall rates of return on capital, primarily through increased ownership of foreign and domestic equity securities during periods when stock market conditions appear favorable, and short-term and long-term foreign and domestic debt instruments during periods when stock market conditions are less favorable. - - GLOBAL BOND SUBACCOUNT--seeks total return from current income and capital appreciation, by investing in a global portfolio of high quality fixed income securities. - - INTERNATIONAL STOCK SUBACCOUNT--seeks capital appreciation by investing primarily in equity securities of non-United States companies. - - VALUE SUBACCOUNT--seeks growth of capital through short and long-term capital appreciation. Investing in equity securities based on the "Value" philosophy. - - S&P 500 SUBACCOUNT--seeks growth of capital by replicating the total return of the Standard & Poor's 500 Composite Stock Price Index. - - BLUE CHIP STOCK SUBACCOUNT--seeks capital appreciation by investing primarily in large and medium-sized blue chip companies. NORWEST SELECT FUNDS - - VALUGROWTH SUBACCOUNT--seeks growth of capital by investing principally in medium and large capitalization companies that possess above-average growth characteristics and attractive valuations. - - INTERMEDIATE BOND SUBACCOUNT--seeks income through investing primarily in a diversified portfolio of government and corporate bonds in an evenly balanced maturity structure. 32 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 1. GENERAL (CONTINUED) NORWEST SELECT FUNDS (CONTINUED) - - SMALL COMPANY STOCK SUBACCOUNT--seeks growth of capital by investing primarily in the common stock of small and medium size domestic companies, in the early stage of development or may produce goods and services which have a favorable prospect for growth. - - INCOME EQUITY SUBACCOUNT--seeks income by investing primarily in the common stock of large domestic companies that are perceived to have above-average return potential based on current market valuations. SCUDDER VARIABLE LIFE INVESTMENT FUND - - INTERNATIONAL SUBACCOUNT--seeks long-term growth of capital primarily through diversified holdings of marketable foreign securities. ALLIANCE VARIABLE PRODUCT SERIES - - MONEY MARKET SUBACCOUNT--seeks income by investing in money market securities, with less than one year until maturity, and meets the objective of safety of principal, excellent liquidity and maximum current income to the extent consistent with the first two objectives. - - INTERNATIONAL SUBACCOUNT--seeks to obtain a total return on its assets from long-term growth of capital principally through a broad portfolio of marketable securities of established foreign companies. - - PREMIER GROWTH SUBACCOUNT--seeks growth of capital by pursuing aggressive investment policies, investments will be based upon their potential for capital appreciation. 33 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 1. GENERAL (CONTINUED) SAFECO RESOURCE SERIES - - GROWTH SUBACCOUNT--seeks growth of capital and the increased income that ordinarily follows from such growth. - - EQUITY SUBACCOUNT--seeks long-term growth of capital and reasonable income by investing principally in common stocks. FEDERATED INSURANCE SERIES - - U.S. GOVERNMENT SECURITIES II SUBACCOUNT--seeks to provide current income, by investing at least 65% of the value of the assets in securities of the U.S. Government, its agencies or instrumentalities. - - HIGH INCOME BOND FUND II SUBACCOUNT--seek high current income, by investing primarily in a professionally managed, diversified portfolio of fixed income securities. - - UTILITY II SUBACCOUNT--seeks high current income and moderate capital appreciation, by investing primarily in a professionally managed diversified portfolio of equity and debt securities of utility companies. - - AMERICAN LEADERS II SUBACCOUNT--seeks long-term capital growth, by investing the majority of its assets in common stock of "blue chip" companies. LEXINGTON FUNDS, INC. - - NATURAL RESOURCES TRUST SUBACCOUNT--seeks long-term growth of capital through investments primarily in common stocks of companies that own or develop natural resources and other basic commodities, or supply goods and services to such companies. - - EMERGING MARKETS SUBACCOUNT--seeks long-term growth of capital primarily through investment in equity securities and equivalents of companies domiciled in, or doing business in, emerging countries and emerging markets. 34 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 1. GENERAL (CONTINUED) MFS VARIABLE INSURANCE TRUST - - EMERGING GROWTH SUBACCOUNT--seeks long-term growth of capital through investment in common stock of companies that are early in their life cycle, with potential to become major enterprises. - - HIGH INCOME SUBACCOUNT--seeks high current income through investing, primarily in a professionally managed diversified portfolio of fixed income securities, some of which may involve equity features. - - WORLD GOVERNMENT SUBACCOUNT--seeks growth of capital, with moderate current income through investment in an internationally diversified portfolio consisting primarily of debt securities and, to a lesser extent, equity securities. MONTGOMERY VARIABLE FUNDS - - EMERGING MARKETS SUBACCOUNT--seeks long-term growth of capital primarily through investment in equity securities and equivalents of companies domiciled in, or doing business in, emerging countries and emerging markets. - - GROWTH SUBACCOUNT--seeks capital appreciation by investing at least 65% of its assets in the equity securities of domestic companies. STRONG VARIABLE INSURANCE FUNDS - - DISCOVERY II SUBACCOUNT--seeks capital growth by investing in securities that are believed to represent growth opportunities. - - INTERNATIONAL II SUBACCOUNT--seeks capital growth by investing primarily in equity securities of issuers located outside of the United States. 35 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 1. GENERAL (CONTINUED) AMERICAN CENTURY INVESTMENTS - - VP BALANCED SUBACCOUNT--seeks capital growth and current income by investing in a combination of common stocks (and other equity equivalents) and fixed income securities. - - VP GROWTH SUBACCOUNT--seeks capital growth by investing in common stocks that have a better than average potential for appreciation. VAN ECK WORLDWIDE INSURANCE TRUST - - WORLDWIDE BOND FUND SUBACCOUNT--seeks high return through a flexible policy of investing globally, primarily in debt securities. - - WORLDWIDE HARD ASSETS FUND SUBACCOUNT--seeks long-term capital appreciation by investing in equity and debt securities of companies engaged in the exploration, development, production and distribution of gold and other natural resources, such as strategic and other metals, minerals, forest products, oil, natural gas and coal. NEUBERGER & BERMAN, INC. - - AMT LIMITED MATURITY BOND SUBACCOUNT--seeks to provide the highest current income consistent with low risk by primarily investing in U.S. Government and Agency securities and investment grade debt securities issued by financial institutions, corporations and others. - - AMT PARTNERS SUBACCOUNT--seeks capital growth, by investing principally in common stock of any other equity securities of established companies. INVESCO VARIABLE INVESTMENTS FUNDS, INC. - - HEALTH & SCIENCES SUBACCOUNT--seeks capital appreciation by investing in equity securities of companies that develop, produce or distribute products or services related to health care. 36 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 1. GENERAL (CONTINUED) INVESCO VARIABLE INVESTMENTS FUNDS, INC. (CONTINUED) - - INDUSTRIAL INCOME SUBACCOUNT--seeks the best possible current income while following sound investment practices. The fund normally invests 65% of its total assets in dividend-paying common stock, and an additional 10% in equity securities that do not pay a regular dividend, with the remainder being invested in corporate bonds. - - TECHNOLOGY SUBACCOUNT--seeks capital appreciation by investing in equity securities of companies in technology-related industries. INACTIVE SUBACCOUNTS STRONG VARIABLE INSURANCE FUNDS - - GOVERNMENT SECURITIES II SUBACCOUNT--seeks total return by investing for a high level of current income with a moderate degree of share-price fluctuation. - - ADVANTAGE II SUBACCOUNT--seeks current income with a very low degree of share-price fluctuation, by investing primarily in ultra short-term investment-grade debt obligations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The assets of the Account are segregated from Fortis Benefits' other assets. The operations of the Account are part of Fortis Benefits. The following is a summary of significant accounting policies consistently followed by the Account in the preparation of its financial statements. INVESTMENT TRANSACTIONS Capital gain distributions from subaccounts are recorded on the ex-dividend date and reinvested upon receipt. 37 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 2. Summary of Significant Accounting Policies (continued) INVESTMENT INCOME Dividend income from subaccounts is recorded on the ex-dividend date and reinvested upon receipt. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of net assets at the date of the financial statements and the reported amounts of net increase and decrease in net assets from operations during the reporting period. Actual results could differ from these estimates. 3. INVESTMENTS Investment in shares of the Fortis Series Fund, Inc. Subaccounts are stated at market value, which is based on the percentage owned by the Account of the net asset value of the respective portfolios of these Series. The Series' net asset value is based on market quotations of the securities held in the portfolio. Investment in the other subaccounts is valued at the net asset (market) value per share at the close of business on December 31, 1997, as reported by the respective mutual fund. The cost of investments sold and redeemed is determined on the average cost method. Unrealized appreciation or depreciation of investments represents the Account's share of the subaccounts' undistributed net investment income, undistributed realized gains or losses and unrealized appreciation or depreciation. 38 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 3. INVESTMENTS (CONTINUED) Purchases and sales of shares of the Fund are recorded on the trade date. The number of shares and aggregate cost of purchases, including reinvested dividends and realized capital gains, and average cost of investments sold or redeemed were as follows:
YEAR ENDED DECEMBER 31, 1997 SHARES -------------------------------- COST OF COST OF SALES/ PURCHASED SOLD PURCHASES REDEMPTIONS ------------------------------------------------------------------------ Fortis Series Fund, Inc.: Growth Stock 335,736 1,531,197 $ 11,342,305 $ 33,582,166 U.S. Government Securities 1,516,213 3,606,464 15,759,952 38,875,792 Money Market 4,699,565 5,310,661 52,053,237 58,055,261 Asset Allocation 4,812,001 1,449,334 85,708,909 20,712,037 Diversified Income 865,982 1,255,212 10,021,255 14,754,885 Global Growth 995,381 999,116 19,063,321 14,002,309 Aggressive Growth 1,136,613 420,068 14,370,430 5,293,083 Growth & Income 3,670,172 288,495 62,736,960 3,830,940 High Yield 1,365,421 386,498 14,109,736 3,900,480 Global Asset Allocation 869,773 147,998 11,606,897 1,767,225 Global Bond 309,549 239,582 3,509,720 2,659,542 International Stock 1,405,870 168,466 18,885,558 1,950,457 Value 2,474,886 56,145 31,968,488 655,579 S & P 500 6,117,672 1,766,129 83,742,146 23,018,029 Blue Chip Stock 3,219,587 67,752 43,071,094 783,215 Norwest Select Fund: ValuGrowth 552,655 28,517 9,232,829 371,949 Intermediate Bond 353,877 70,931 3,926,794 777,355 Small Company Stock 451,498 19,700 6,525,255 250,763 Income Equity 2,067,474 24,292 26,161,070 270,651 Scudder Variable Life Investment Fund: International 201,696 21,882 2,857,809 262,389 Alliance Variable Product Series: Money Market 168,743,834 167,088,962 168,547,660 167,088,962 International 4,259,167 4,102,363 65,500,592 63,168,574 Premier Growth 659,976 579,278 13,006,674 11,247,113 SAFECO Resource Series: Growth 558,931 408,849 14,101,796 10,055,588 Equity 200,558 150,645 4,792,045 3,530,435 Federated Insurance Series: U.S. Government Securities II 189,579 169,330 1,961,440 1,748,802 High Income Bond Fund II 717,728 571,130 7,540,725 5,903,485
39 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 3. INVESTMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997 (CONTINUED) SHARES -------------------------------- COST OF COST OF SALES/ PURCHASED SOLD PURCHASES REDEMPTIONS ------------------------------------------------------------------------ Federated Insurance Series (continued): Utility II 654,493 555,782 $ 8,390,554 $ 6,982,730 American Leaders II 1,176,026 1,045,781 20,921,188 18,310,100 Lexington Funds, Inc.: Natural Resources Trust 514,330 491,272 7,713,365 7,275,632 Emerging Markets 1,022,290 957,013 10,873,974 10,313,690 MFS Variable Insurance Trust: Emerging Growth 3,384,527 3,280,119 50,385,870 48,378,986 High Income 180,043 161,398 2,109,055 1,853,381 World Government 415,944 409,351 4,226,984 4,160,922 Montgomery Variable Funds: Emerging Markets 610,961 569,631 7,352,428 6,876,431 Growth 360,865 307,287 4,800,574 3,948,716 Strong Variable Insurance Funds: Discovery II 122,063 110,861 1,491,187 1,333,274 Government Securities II 19,685 26,896 196,687 266,265 Advantage II 4,923 35,492 47,433 349,958 International II 1,239,125 1,235,541 13,922,448 13,938,538 American Century Investments: VP Balanced 1,182,715 1,128,948 9,344,884 8,891,395 VP Growth 566,923 559,107 5,763,621 5,684,603 Van Eck Worldwide Insurance Trust: Worldwide Bond Fund 227,792 205,747 2,439,111 2,197,529 Worldwide Hard Assets Fund 807,446 751,425 13,195,479 12,267,207 Neuberger & Berman, Inc.: AMT Limited Maturity Bond 226,730 202,921 3,132,473 2,797,879 AMT Partners 62,683 34,016 1,237,645 664,119 INVESCO, Inc.: Health & Sciences 63,755 49,852 665,738 515,849 Industrial Income 30,556 10,750 536,052 184,983 Technology 114,405 99,648 1,293,756 1,119,404
40 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 3. INVESTMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996 SHARES -------------------------------- COST OF COST OF SALES/ PURCHASED SOLD PURCHASES REDEMPTIONS ------------------------------------------------------------------------ Fortis Series Fund, Inc.: Growth Stock 1,370,049 636,480 $ 42,109,938 $ 13,497,297 U.S. Government Securities 2,026,793 3,066,517 21,060,662 33,224,639 Money Market 5,073,668 3,484,284 55,491,265 37,298,093 Asset Allocation 3,197,739 1,656,181 53,528,873 22,612,833 Diversified Income 1,059,188 1,005,530 12,302,547 12,039,175 Global Growth 3,199,292 254,987 56,689,355 3,329,367 Aggressive Growth 3,211,708 654,509 45,284,359 7,945,070 Growth & Income 3,941,717 123,779 55,063,051 1,580,938 High Yield 1,807,146 365,643 18,332,180 3,677,674 Global Asset Allocation 1,559,894 73,695 16,386,800 823,449 Global Bond 1,364,526 280,803 9,609,774 3,130,682 International Stock 2,507,267 175,126 26,161,491 1,961,927 Value 1,116,954 3,953 11,117,349 62,431 S & P 500 1,704,862 90,342 14,500,748 935,023 Blue Chip Stock 1,529,208 271,863 12,593,730 2,786,613 Norwest Select Fund: ValuGrowth 353,709 25,400 4,714,308 284,976 Intermediate Bond 348,598 64,140 3,735,413 697,755 Small Company Stock 383,591 9,976 3,581,962 120,366 Income Equity 862,403 9,655 9,150,084 94,179 Scudder Variable Life Investment Fund: International 102,501 6,404 1,375,336 73,718 Alliance Variable Product Series: Money Market 29,112,285 23,518,475 29,112,285 23,518,476 International 267,100 245,510 3,916,039 3,623,061 Premier Growth 85,058 69,550 1,280,734 1,055,546 SAFECO Resource Series: Growth 22,197 12,345 456,449 256,130 Equity 9,848 - 216,232 - Federated Insurance Series: High Income Bond Fund II 157,321 67,532 1,559,120 663,283 Utility II 90,922 74,159 1,028,946 833,992 American Leaders II 95,526 62,716 1,376,085 893,146 Lexington Funds, Inc.: Natural Resources Trust 152,853 98,312 2,057,270 1,285,419 Emerging Markets 113,436 106,965 1,131,006 1,066,087
41 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 3. INVESTMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996 (CONTINUED) SHARES -------------------------------- COST OF COST OF SALES/ PURCHASED SOLD PURCHASES REDEMPTIONS ------------------------------------------------------------------------ MFS Variable Insurance Trust: Emerging Growth 1,578,769 1,407,439 $ 21,184,801 $ 19,117,945 High Income 63,722 27,858 693,780 298,912 World Government 25,429 21,388 262,500 220,260 Montgomery Variable Funds: Emerging Markets 76,490 58,302 801,694 612,559 Growth 247,860 176,044 3,002,711 2,089,319 Strong Variable Insurance Funds: Discovery II 30,107 21,579 328,064 238,664 Government Securities II 77,845 70,643 745,491 675,914 Advantage II 127,142 97,506 1,282,918 980,393 International II 426,367 397,453 4,777,649 4,457,879 American Century Investments: VP Balanced 81,810 72,450 651,789 539,665 VP Growth 151,040 144,527 1,563,847 1,481,863 Van Eck Worldwide Insurance Trust: Worldwide Bond Fund 6,378 2,578 64,203 27,683 Worldwide Hard Assets Fund 146,445 118,292 2,389,222 1,928,520
Fortis Benefits' investment in the subaccounts represented the following number of shares of the Funds held and aggregate cost of amounts invested at December 31, 1997:
COST OF SHARES SHARES ---------------------------- Fortis Series Fund, Inc.: Global Asset Allocation 295,737 $ 3,040,051 Global Bond 516,382 5,230,947 International Stock 294,127 3,002,830 Value 73,766 752,487 S & P 500 355,359 3,584,178 Blue Chip Stock 352,534 3,534,435 Norwest Select Fund: Small Company Stock 131,150 1,389,185
42 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 4. ORGANIZATIONAL EXPENSES AND OTHER CHARGES ORGANIZATION EXPENSES Fortis Benefits assumed all organizational expenses of the Account. PREMIUM TAXES Where premium taxes or similar assessments are imposed by states or other jurisdiction upon receipt of purchase payments, Fortis Benefits pays such taxes on behalf of the contract owner and then will deduct a charge for these amounts from the contract value upon surrender, death of the annuitant or contract owner, or annuitization of the contract. In jurisdiction where premium taxes or similar assessments are imposed at the time annuity payments begin, Fortis Benefits will deduct a charge on a pro rata basis from the contract value at that time. POLICY ADMINISTRATION CHARGE A $35 annual policy administrative charge is deducted each contract year from value of each Opportunity Variable Annuity and Masters Variable Annuity and $30 for each Norwest Passage Variable Annuity and Value Advantage Plus Variable Annuity on each anniversary of the contract date and upon total surrender of the contract. This charge will be waived during the accumulation period if the contract value at the end of the contract year (or upon total surrender) is $25,000 or more, for the Opportunity Variable Annuity, Masters Variable Annuity and Norwest Passage Variable Annuity. MORTALITY AND EXPENSE RISK CHARGE Fortis Benefits assesses each subaccount of the Opportunity Variable Annuity, Masters Variable Annuity and Norwest Passage Variable Annuity a daily charge for mortality and expense risk at an annual rate of 1.25% of the net assets. For the Value Advantage Plus Variable Annuity the mortality and expense risk charge is assessed at an annual rate of 0.45%. 43 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 4. ORGANIZATIONAL EXPENSES AND OTHER CHARGES (CONTINUED) ADMINISTRATIVE CHARGE Fortis Benefits assesses each subaccount of the Opportunity Variable Annuity and Masters Variable Annuity a daily charge for administrative expense at annual rate of 0.10% of the net assets. For the Norwest Passage Variable Annuity the mortality and expense risk charge is assessed at an annual rate of 0.15%. SURRENDER CHARGE FREE SURRENDERS The following amounts can be withdrawn from the contract without a surrender charge: - - Any purchase payments received more than five years prior to the surrender date for Opportunity Variable Annuity and seven years for Master Variable Annuity and have not been previously surrendered. - - In any contract year, up to 10% of the purchase payments received less than five years prior to the surrender date for Opportunity Variable Annuity and seven years prior to the surrender date for Masters Variable Annuity. - - For Master Variable Annuity any earnings that have not been previously surrendered. - - For Value Advantage Plus Variable Annuity there is no surrender charge. AMOUNT OF SURRENDER CHARGE Surrender charges apply only if the amount being withdrawn exceeds the sum of the amounts listed above under Free Surrenders. The surrender charge is based on a percentage of the amount of purchase payments surrendered. The percentage of payments is set at 5% during the first five years on the Opportunity Variable Annuity and Norwest Passage Variable Annuity contracts with a sliding scale down to zero by the end of the fifth year, and is set at 7% during the first seven years of the Master Variable Annuity contracts, with a sliding scale down to zero by the end of the seventh year. Surrender charges collected by Fortis Benefits were $3,567,880 and $2,727,170 in 1997 and 1996, respectively. 44 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 5. FEDERAL INCOME TAXES The operations of the Account form part of, and are taxed with, the operations of Fortis Benefits, which is taxed as a life insurance company under the Internal Revenue Code. As a result, the net asset value of the subaccounts are not affected by income taxes on income distributions received by the subaccounts. 6. RELATED PARTY TRANSACTIONS Fortis Advisers, Inc. (a wholly-owned subsidiary of Fortis, Inc.) provides investment management services to Fortis Series Fund, Inc. in exchange for investment advisory and management fees. Investment advisory and management fees are based on each portfolio's daily net assets and decrease in reduced percentages as average daily net assets increase. The fees represent an investment expense to Fortis Series Fund, Inc. which reduces the portfolios' net assets. The fees charged by Fortis Advisers, Inc. are not available on an individual variable account basis. Fees for all variable accounts to which Fortis Advisers, Inc. provided investment management services amounted to $14,415,172 and $11,076,174 in 1997 and 1996, respectively. 7. YEAR 2000 ISSUE (UNAUDITED) The Year 2000 issue is the result of computer programs having been written using two digits rather than four to define a year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than 2000. This could result in the failure of major systems or miscalculations, which could have a material impact on the operations of the Account. The Account has no computer systems of its own but is dependent upon the systems of Fortis Benefits, Fortis Advisers and certain other third parties. 45 Fortis Benefits Insurance Company Variable Account D Notes to Financial Statements (continued) 7. YEAR 2000 ISSUE (UNAUDITED) (CONTINUED) A comprehensive review of Fortis Benefits' and Fortis Advisers' computer systems and business processes has been conducted to identify the major systems that could be affected by the Year 2000 issue. Steps are being taken to resolve any potential problems including modification to existing software and the purchase of new software. These measures are scheduled to be completed and tested on a timely basis. Fortis Benefits' and Fortis Advisers' goal is to complete internal remediation and testing of each system by early 1999. The Year 2000 readiness of the unaffiliated investment managers and other third parties whose system failures could have an impact on the Account's operations is currently being evaluated. The potential materiality of any such impact is not known at this time. 46 APPENDIX A Fortis Benefits may advertise its relative performance as compiled by outside organizations. Following is a list of ratings services which may be referred to in advertisements, along with the category in which the applicable Subaccount is included:
RATING SERVICE CATEGORY PORTFOLIO NAME RATING SERVICE CATEGORY International Stock Morningstar Publications, Inc. Foreign Stock Subaccount Lipper Analytical Services, Inc. International Fund Variable Annuity Research & Data Service International Stock Global Growth Morningstar Publications, Inc. World Stock Subaccount Lipper Analytical Services, Inc. Global Fund Variable Annuity Research & Data Service International Stock Global Asset Morningstar Publications, Inc. International Hybrid Allocation Subaccount Lipper Analytical Services, Inc. Global Flexible Portfolio Variable Annuity Research & Data Service Balanced/International Aggressive Growth Morningstar Publications, Inc. Small Growth Subaccount Lipper Analytical Services, Inc. Small Cap Fund Variable Annuity Research & Data Service Aggressive Growth Small Cap Value Morningstar Publications, Inc. Small Value Subaccount Lipper Analytical Services, Inc. Small Cap Fund Variable Annuity Research & Data Service Small Company Funds GrowthStock Morningstar Publications, Inc. Mid Cap Growth Subaccount Lipper Analytical Services, Inc. Mid Cap Fund Variable Annuity Research & Data Service Growth Mid Cap Stock Morningstar Publications, Inc. Mid Cap Blend Subaccount Lipper Analytical Services, Inc. Mid Cap Fund Variable Annuity Research & Data Service All Equity Funds Large Cap Growth Morningstar Publications, Inc. Large Blend Subaccount Lipper Analytical Services, Inc. Growth Fund Variable Annuity Research & Data Service Growth Blue Chip Stock Morningstar Publications, Inc. Large Blend Subaccount Lipper Analytical Services, Inc. Growth Fund Variable Annuity Research & Data Service Growth S&P 500 Index Morningstar Publications, Inc. Large Blend Subaccount Lipper Analytical Services, Inc. S& P 500 Index Fund Variable Annuity Research & Data Service Growth and Income Funds
A-1
Growth & Income Morningstar Publications, Inc. Mid Cap Blend Subaccount Lipper Analytical Services, Inc. Growth & Income Variable Annuity Research & Data Service Growth and Income Value Subaccount Morningstar Publications, Inc. Large Blend Lipper Analytical Services, Inc. Growth & Income Variable Annuity Research & Data Service Equity-Income Asset Allocation Morningstar Publications, Inc. Domestic Hybrid Subaccount Lipper Analytical Services, Inc. Flexible Portfolio Variable Annuity Research & Data Service Balanced Global Bond Morningstar Publications, Inc. International Bond Subaccount Lipper Analytical Services, Inc. Global Income Variable Annuity Research & Data Service International Bonds High Yield Morningstar Publications, Inc. High Yield Bond Subaccount Lipper Analytical Services, Inc. High Current Yield Variable Annuity Research & Data Service Corporate Bond High Yield Diversified Income Morningstar Publications, Inc. Intermediate-Term Bond Subaccount Lipper Analytical Services, Inc. Corp Debt BBB Rated Variable Annuity Research & Data Service Corporate Bond General Funds U.S. Government Morningstar Publications, Inc. Intermediate Government Subaccount Lipper Analytical Services, Inc. Intermediate U.S. Govt. Variable Annuity Research & Data Service Government Bond General Funds Money Market Morningstar Publications, Inc. Money Market Subaccount Lipper Analytical Services, Inc. Money Market Variable Annuity Research & Data Service Money Market
A-2 PART II. INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The estimated expenses of the issuance and distribution of the Contracts, other than commissions on sales of the Contracts are as follows: Amount ------ Securities and Exchange Commission registration fee $13,275 Printing and engraving $ 1,500 Accounting fees and expenses $ 1,500 Legal fees and expenses $ 3,000 Item 14. Indemnification of Directors and Officers Section 300.083 of Minnesota Law General Provision provides in part that a corporation organized under such law shall have power to indemnify anyone made, or threatened to be made, a party to a threatened, pending or completed proceeding, whether civil or criminal, administrative or investigative, because he is or was a director or officer of the corporation, or served as a director or officer of another corporation at the request of the corporation. Indemnification in such a proceeding may extend to judgments, penalties, fines and amounts paid in settlement, as well as to reasonable expenses, including attorneys' fees and disbursements. In a civil proceeding, there can be no indemnification under the statute, unless it appears that the person seeking indemnification has acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the corporation and its shareholders and unless such person has received no improper personal benefit; in a criminal proceeding, the person seeking indemnification must also have no reasonable cause to believe his conduct was unlawful. Article VI Section 5 of the By-laws of the Fortis Benefits Insurance Company provides as follows: Section 5. The Company shall indemnify (including therein the prepayment of expenses) any person who is or was a director, officer or employee, or who is or was serving at the request of the Company as a director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise for expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him with respect to any threatened, pending or completed action, suit or proceedings against him by reason of the fact that he is or was such a director, officer or employee to the extent and in the manner permitted by law. Section 12 of the Principal Underwriter agreement incorporated as exhibit 1 to this registration statement (which is incorporated herein by this reference) provides that Fortis Investors, Inc. and Fortis Benefits will indemnify each other, and each other's officers, directors and controlling persons, with respect to certain types of misstatements or omissions in connection with the offer and sale of the Certificates. Certain officers, directors or controlling persons of Fortis Investors, Inc. are also officers, directors and controlling persons of Fortis Benefits. Pursuant to the Principal Underwriter and Servicing Agreement, Fortis Investors has agreed to indemnify Variable Account D, Fortis Benefits, and each of its officers, directors and controlling persons for damages and expenses (1) arising out of certain material misstatements and omissions in connection with the offer and sale of the Contracts, if the misstatement or omission was based on information furnished by Fortis Investors or (2) otherwise arising out of Fortis Investors' negligence, bad faith, willful misfeasance or reckless disregard of its responsibilities. Pursuant to its Dealer Sales Agreements, a form of which is filed as Exhibit 3(b) to this registration statement and is incorporated herein by this reference, firms that sell the contracts agree to indemnify Fortis Benefits, Fortis Investors, the Separate Account, and their officers, directors, employees, agents, and controlling persons from liabilities and expenses arising out of the wrongful conduct or omissions of said selling firm or its officers, directors, employees, controlling persons or agents. Item 15. Recent Sales of Unregistered Securities The Registrant discovered that its registration of the dollar amounts of sales in the non-unitized interest in the fixed account had inadvertently been exceeded, resulting in unregistered sales of $61,164,136 between February 27, 1995 and October 25, 1995. The Registrant claims no exemption for such excess and has provided a Notice of Rescission rights to those individuals who purchased unregistered securities. The principal underwriter of such securities was Fortis Investors, Inc., an affiliated broker/dealer. Item 16. Exhibits and Financial Statement Schedule a. Exhibits 1. (a) Form of Principal Underwriter and Servicing Agreement (incorporated by reference from Form N-4 Registration Statement of Fortis Benefits and its Variable Account D filed on January 11, 1994, File No. 33-73986); (b) Form of Amendment to Principal Underwriting (incorporated by reference from Form N-4 Registration Statement of Fortis Benefits and its Variable Account D filed on January 11, 1994, File No. 33-73986). 2. Form of Asset Transfer and Acquisition Agreement dated August 28, 1991 and supplement thereto dated October 1, 1991 (incorporated by reference from Form 8-K filed on October 16, 1991 (as amended by Form 8 filed on October 21, 1991), File No. 33-37576). 3. (a) Articles of Incorporation of Fortis Benefits Insurance Company (Incorporated by reference from Form S-6 Registration Statement of Fortis Benefits and its Variable Account C filed on March 17, 1986, File No. 33-03919); (b) By-laws of Fortis Benefits Insurance Company (Incorporated by reference from Form S-6 Registration Statement of Fortis Benefits and its Variable Account C filed on March 17, l986, File No. 33-03919); (c) Amendment to Articles of Incorporation and By-laws dated November 21, 1991 (Incorporated by reference from Post-Effective Amendment No. 1 to the Form N-4 Registration Statement of Fortis Benefits and its Variable Account D filed on March 2, 1992, File No. 33-37577). 4. (a) Form of Combination Fixed and Variable Group Annuity Contract (Incorporated by reference from Pre-Effective Amendment No. 1 to Form N-4 Registration Statement filed April 24, 1998 File No. 333- 43799); (b) Form of Application to be used in connection with Certificate filed as Exhibit 4(b)--(Incorporated by reference from Pre-Effective Amendment No. 1 to Form N-4 Registration Statement filed April 24, 1998 File No. 333-43799); (c) Form of IRA Endorsement (Incorporated by reference from Pre- Effective Amendment No. 1 to the From N-4 Registration Statement of Fortis Benefits and its Variable Account D filed on March 28, 1991, File No. 33-37577); (d) Form of Section 403(b) Annuity Endorsement (Incorporated by reference from Pre-Effective Amendment No. 1 to Form N-4 Registration Statement of Western Life and its Variable Account D filed on March 28, 1991). (e) Annuity Contract Exchange Form (Incorporated by reference from Pre-Effective Amendment No. 1 to the Form N-4 Registration Statement of Fortis Benefits and its Variable Account D filed on April 18, 1988, File No. 33-19421). 5. Opinion and consent of David A. Peterson, Esq., Assistant General Counsel of Fortis Benefits Insurance Company, as to the legality of the securities being registered--included with original filing on this Form S-1 Registration Statement filed January 9, 1998. 23. Consent of Ernst & Young--filed herewith. 24. Power of Attorney for Messrs. Freedman, Pollock, and Clayton (incorporated by reference from Form S-6 Registration Statement of Fortis Benefits and its Variable Account C filed on December 17, 1993, File No. 33-73138). B. Financial Statement Schedules--None. Item 17. Undertakings The Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement, including (but not limited to) any addition or deletion of a managing underwriter. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the indemnification provision described in response to Item 14, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will governed by the final adjudication of such issue. SIGNATURES As required by the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has caused this amended Registration Statement to be signed on its behalf in the City of St. Paul, State of Minnesota on this 17th day of April, 1998. FORTIS BENEFITS INSURANCE COMPANY (Registrant) By: /s/ Robert Brian Pollock ----------------------------------- Robert Brian Pollock, President As required by the Securities Act of 1933 and the Investment Company Act of 1940, this Registration Statement has been signed by the following persons, in the capacities indicated, on April 17th, 1998. Signature Title With Fortis Benefits - --------- -------------------------- * Chairman of the Board --------------------------------- Allen Royal Freedman * Director --------------------------------- J. Kerry Clayton * Director --------------------------------- Thomas Michael Keller Director --------------------------------- Arie Aristide Fakkert /s/ Dean C. Kopperud Director --------------------------------- Dean C. Kopperud /s/ Robert Brian Pollock President and Director --------------------------------- (Chief Executive Officer) Robert Brian Pollock /s/ Michael John Peninger Senior Vice President, Controller and --------------------------------- Treasurer (Principal Accounting Officer Michael John Peninger and Principal Financial Officer) *By: /s/ Robert Brian Pollock ------------------------------ Robert Brian Pollock Attorney-in-Fact EXHIBIT INDEX Item Number Description - ------ ----------- 23. Consent of Auditors EX-23 2 EXHIBIT 23 Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 27, 1998 on the financial statements of Fortis Benefits Insurance Company and our report dated March 27, 1998 on the financial statements of Fortis Benefits Insurance Company Variable Account D in Amendment No. 2 to the Registration Statement (Form S-1 No. 333-43805) and related Prospectus and Statement of Additional Information of Fortis Benefits Insurance Company for the registration of flexible premium deferred combination variable and fixed annuity contracts. /s/ Ernst & Young LLP Minneapolis, Minnesota May 1, 1998 -----END PRIVACY-ENHANCED MESSAGE-----