<PAGE>
FILE NO. 2-27135
FILE NO. 811-1525
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-3
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
/ / Pre Effective Amendment No.:
/X/ Post Effective Amendment No.: 49
/X/ and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
/X/ Amendment No.: 23
PROVIDENT NATIONAL ASSURANCE COMPANY SEPARATE ACCOUNT B
(Exact Name of Registrant)
PROVIDENT NATIONAL ASSURANCE COMPANY
(Name of Insurance Company)
1 Fountain Square, Chattanooga, Tennessee 37402
(Address Of Insurance Company's Principal Executive Offices)
Insurance Company's Telephone Number (including area code): (423)755-1901
Susan N. Roth
Provident National Assurance Company
1 Fountain Square
Chattanooga, Tennessee 37402
(Name And Address Of Agent For Service)
Approximate Date of Proposed Public Offering: N/A
It is proposed that this filing will become effective (check appropriate box):
/ /immediately upon filing pursuant to Paragraph (b)
/ /pursuant to Paragraph (b)
/X/60 days after filing, pursuant to Paragraph (a)(i)
/ /on , pursuant to Paragraph (a)
/ /75 days after filing, pursuant to Paragraph (a)(ii)
/ /on , pursuant to Paragraph (a)(ii) of Rule 485.
<PAGE>
PROVIDENT NATIONAL ASSURANCE COMPANY SEPARATE ACCOUNT B
<TABLE>
<CAPTION>
PAGE NO. ITEM NO. HEADING IN PROSPECTUS (PART A)
<C> <C> <S>
1 Cover Page
2 2 Definitions
2 3 Synopsis
6 4 Condensed Financial Information
7 5 Description of Insurance Company and the
Separate Account
11 6 Management
12 7 Deductions and Expenses
15 8 Description of Contracts
18 9 Annuity Period
22 10 Death Benefit
23 11 Purchases and Contract Value
25 12 Redemptions
26 13 Taxes
14 Legal Proceedings
STATEMENT OF ADDITIONAL
INFORMATION (PART B)
Cover Page
1 17 Table of Contents
General Information and History of Insurance
3 18 Company and the Accumulation Fund
4 19 Investment Objectives and Policies
6 20 Management
9 21 Investment Advisory Services
11 22 Brokerage Allocation
13 24 Underwriters
14 27 Financial Statements
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
PAGE NO. ITEM NO. OTHER INFORMATION (PART C)
<S> <C> <C>
28(a) Financial Statements and Exhibits
1 28(b) List of Exhibits
1 29 Directors and Officers of the Insurance Company
2 30 Persons Controlled by or under Common Control
with Registrant
2 31 Number of Contractowners
2 32 Indemnification
2 33 Business and Other Connections of Investment
Advisers
2 34 Principal Underwriters
2 35 Location of Accounts and Records
3 36 Management Services
3 37 Undertakings
</TABLE>
2
<PAGE>
- --------------------------------------------------------------------------------
Provident National Assurance Company
Separate Account B
PROSPECTUS
- --------------------------------------------------------------------------------
[ , 1999](R)
CHATTANOOGA, TENNESSEE
423-755-1901
- ----------------------------------------------------
(R)
CHATTANOOGA, TN 37402
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Definitions 2
Synopsis 2
Condensed Financial Information 6
Description of the Company and the Separate Account 7
A.Investment Policies and Restrictions 7
B.Principle Risk Factors 10
Management 11
Deductions and Expenses 12
A.Sales and Administrative Functions and Expenses 12
B.Expense and Mortality and Expense Risk Assumptions 14
C.Brokerage Expenses and Portfolio Turnover 14
General Description of Variable Annuity Contracts 15
Annuity Period 18
Death Benefit 22
Purchases and Contract Value 23
Redemptions 25
Federal Tax Status 26
Changes in Operation of the Separate Account 34
Legal Proceedings 34
Legal Opinion 34
</TABLE>
i
<PAGE>
PROSPECTUS
PROVIDENT NATIONAL ASSURANCE COMPANY SEPARATE ACCOUNT B
VARIABLE ANNUITY CONTRACTS
SOLD BY
PROVIDENT NATIONAL ASSURANCE COMPANY
CHATTANOOGA, TENNESSEE 37402
423-755-1901
This Prospectus describes the following Variable Annuity Contracts
("Contracts") offered by Provident National Assurance Company ("Company"). They
are:
1. Individual Single Purchase Payment Variable Annuity Contract
("Single")
2. Individual Flexible Installment Purchase Payment Variable Annuity
Contracts ("Flexible")
3. Individual Variable Annuity Contracts used to fund IRA's ("IRA")
4. Individual Variable Annuity Contracts used to fund HR-10 Plans
("HR10")
5. Individual Variable Annuity Contracts used to fund Ind. 403(b)
plans ("Ind 403(b)")
6. Group Variable Annuity Contracts used to fund 403(b) plans ("Grp
403(b)")
Note: The public's offering of contracts of Separate Account B and Separate
Account C, which was subsequently merged with Separate Account B, was
discontinued on February 1, 1984.
No further offering of contracts of the Separate Accounts is made hereby.
The information contained herein is intended solely for the information and use
of holders of contracts issued prior to February 1, 1984.
The purchase payments received pursuant to these contracts are invested
in Provident National Assurance Company Separate Account B ("Separate
Account"), a separate account of the Company.
The primary investment objective of the Separate Account is long-term
capital growth. The assets of the Separate Account will usually be invested in
common stock. From time to time, management may decide to invest in preferred
stock and debt obligations. When deemed necessary for defensive purposes, the
Separate Account may hold short-term obligations, such as U.S. Government
securities and certificates of deposit. The contracts are subject to the risks
associated with common stock investment and changing economic conditions. There
can be no assurance that the investment objective will be attained.
This Prospectus sets forth information about the Contracts and the
Separate Account that a prospective investor ought to know before investing. A
Statement of Additional Information about the Company, the Separate Account and
the Contracts has been filed with the Securities and Exchange Commission and is
available, without charge, upon written or oral request received by the Company
at its Home Office located at 1 Fountain Square, Chattanooga, Tennessee 37402.
Please refer to page 35 to examine the Table of Contents of the Statement of
Additional Information.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation
to the contrary is a criminal offense.
Please read this Prospectus carefully and retain it for future
reference.
The date of this Prospectus is , 1999.
The date of the Statement of Additional Information is ,
1999.
1
<PAGE>
DEFINITIONS
Accumulation Unit--an accounting device used to determine the value of a
contract before annuity payments begin. The value of the Accumulation Unit
varies in accordance with the investment experience of the Separate Account.
Annuitant--the person or persons whose life determines the duration of annuity
payments involving life contingencies.
Annuity--a series of payments generally for life or for life with specified
minimums.
Annuity Commencement Date--the date on which annuity payments will begin.
Annuity Unit--an accounting device used to determine the amount of annuity
payments.
Contract Owner--the person or entity with legal rights of ownership of the
annuity contract.
Fixed Annuity--an annuity with payments fixed in amount throughout the annuity
period.
Plan--an employer pension plan, profit sharing plan, or annuity purchase plan
under which benefits are to be provided by the Variable Annuity Contracts
described herein.
Purchase Payments--payments to the Company, after specific deductions, under an
annuity contract.
Variable Annuity--an annuity providing for payments varying in amount in
accordance with the investment experience of the Separate Account.
SYNOPSIS
<TABLE>
<CAPTION>
Ind Grp
Contract Owner Single Flexible IRA HR10 403(b) 403(b)
<S> <C> <C> <C> <C> <C> <C>
Transaction Expenses:
Sales Load Imposed on
Purchases (as a percentage
of purchase payments) 6% 8% 8% 8% 6% 6%
Annual Expenses (as a
percentage of average net assets):
Management Fees .5% .5% .5% .5% .5% .5%
Mortality and Expense Risk Fees .7% .7% .7% .7% .7% .7%
---- ---- ---- ---- ---- ----
Total Annual Expenses 1.2% 1.2% 1.2% 1.2% 1.2% 1.2%
</TABLE>
EXAMPLES
<TABLE>
<CAPTION>
Single
------
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
If you surrender your contract at the end of
the applicable
time period:
You would pay the following expenses on a
$1,000
investment, assuming 5% annual return on
assets: $71.56 $96.01 $122.34 $197.34
If you annuitize at the end of the applicable
time period:
You would pay the following expenses on a
$1,000
investment, assuming 5% annual return on
assets: $71.56 $96.01 $122.34 $197.34
If you do not surrender your contract:
You would pay the following expenses on a
$1,000
investment, assuming 5% annual return on
assets: $71.56 $96.01 $122.34 $197.34
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Flexible
--------
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
If you surrender your contract at the end of
the applicable
time period:
You would pay the following expenses on a
$1,000
investment, assuming 5% annual return on
assets: $91.32 $115.24 $141.01 $214.42
If you annuitize at the end of the applicable
time period:
You would pay the following expenses on a
$1,000
investment, assuming 5% annual return on
assets: $91.32 $115.24 $141.01 $214.42
If you do not surrender your contract:
You would pay the following expenses on a
$1,000
investment, assuming 5% annual return on
assets: $91.32 $115.24 $141.01 $214.42
<CAPTION>
IRA
---
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
If you surrender your contract at the end of
the applicable
Time period:
You would pay the following expenses on a
$1,000
investment, assuming 5% annual return on
assets: $91.32 $115.24 $141.01 $214.42
If you annuitize at the end of the applicable
time period:
You would pay the following expenses on a
$1,000
investment, assuming 5% annual return on
assets: $91.32 $115.24 $141.01 $214.42
If you do not surrender your contract:
You would pay the following expenses on a
$1,000
investment, assuming 5% annual return on
assets: $91.32 $115.24 $141.01 $214.42
<CAPTION>
HR10
----
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
If you surrender your contract at the end of
the applicable
Time period:
You would pay the following expenses on a
$1,000
investment, assuming 5% annual return on
assets: $91.32 $115.24 $141.01 $214.42
If you annuitize at the end of the applicable
time period:
You would pay the following expenses on a
$1,000
investment, assuming 5% annual return on
assets: $91.32 $115.24 $141.01 $214.42
If you do not surrender your contract:
You would pay the following expenses on a
$1,000
investment, assuming 5% annual return on
assets: $91.32 $115.24 $141.01 $214.42
<CAPTION>
Ind. 403(b)
-----------
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
If you surrender your contract at the end of
the applicable
Time period:
You would pay the following expenses on a
$1,000
investment, assuming 5% annual return on
assets: $71.56 $96.01 $122.34 $197.34
If you annuitize at the end of the applicable
time period:
You would pay the following expenses on a
$1,000
investment, assuming 5% annual return on
assets: $71.56 $96.01 $122.34 $197.34
If you do not surrender your contract:
You would pay the following expenses on a
$1,000 investment, assuming 5% annual return
on assets: $71.56 $96.01 $122.34 $197.34
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Grp. 403(b)
-----------
1 year 3 years 5 years 10 years
------ ------- ------- --------
<S> <C> <C> <C> <C>
If you surrender your contract at the end of
the applicable
Time period:
You would pay the following expenses on a
$1,000 investment, assuming 5% annual return
on assets: $71.56 $96.01 $122.34 $197.34
If you annuitize at the end of the applicable
time period:
You would pay the following expenses on a
$1,000 investment, assuming 5% annual return
on assets: $71.56 $96.01 $122.34 $197.34
If you do not surrender your contract:
You would pay the following expenses on a
$1,000 investment, assuming 5% annual return
on assets: $71.56 $96.01 $122.34 $197.34
</TABLE>
The Examples should not be considered a representation of past or future
expenses. Actual expenses may be greater or lesser than those shown. This fee
table is designed to summarize and illustrate all of the deductions and
expenses described on pages 12 and 13 for the contracts offered by this
Prospectus. State premium taxes, as described on page 13 may also apply.
4
<PAGE>
General Information:
The Separate Account is registered under the Investment Company Act of
1940 as an open-end diversified investment company. It is the separate account
through which the Company sets aside, separate and apart from its general
assets, assets attributable to the variable portion of its variable annuity
contracts. Registration under the Investment Company Act of 1940 ("1940 Act")
does not involve supervision of management or investment practices or policies
by the Securities and Exchange Commission.
The variable annuity contracts previously offered by the company in the
Separate Account include group and individual contracts designed for use in
deferred compensation, association, payroll deduction and individual retirement
plans, and contracts designed to provide benefits under annuity plans adopted
by public school systems and certain tax exempt organizations which qualify for
tax deferred treatment under Section 403(b) of the Federal Internal Revenue
Code; as an individual retirement or an individual retirement account adopted
by an individual pursuant to Section 408 of this Code (IRA's) and individual
non-trusteed plans established pursuant to the Self-Employed Individuals Tax
Retirement Act of 1962, as amended (HR-10 plans)
This Prospectus generally describes only the variable portion of
contracts issued by the Company, except where fixed accumulation or fixed
annuity payments are specifically mentioned. Fixed annuities are funded by the
Company's general assets and are not placed in the Separate Account.
The portion of contract values placed in the Separate Account are subject
to the investment risks inherent in any equity investment. These risks include
changing economic conditions as well as the risks inherent in management's
ability to make appropriate investment choices. There is no guarantee under a
variable annuity contract that the variable annuity payments or the
accumulation values will equal or exceed total purchase payments.
All contracts contain the Company's promise that on the annuity
commencement date, the contract owner or annuitant may elect to have provided
an annuity payable for the lifetime of the annuitant provided the initial
monthly annuity payment equals or exceeds $25. If the initial monthly annuity
payment would be less than $25, payment shall be made at less frequent
intervals or the value of the account shall be distributed in a lump sum as
selected by the annuitant. The annuity payment will be based on the contract
value and in case of variable annuity payments, will be affected only by the
investment performance of the Separate Account and not by adverse mortality
experience or by increases in the Company's expenses above those assumed and
for which deductions are provided in the contract. Owners of individual
contracts and participants in group contracts to which variable accumulation
units are credited, have the right to vote on particular questions affecting
the management of the Separate Account. (see Voting Rights, page 16)
Withdrawal or redemption of funds from certain contracts may result in
tax penalties. (see Federal Tax Status, page 26)
5
<PAGE>
CONDENSED FINANCIAL INFORMATION
Per Accumulation Unit Income and Capital Changes:
Year Ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income $ .10 $ .11 $ .13 $ .15 $ .14 $ .12 $ .13 $ .13 $ .12
Expenses .12 .09 .07 .07 .06 .06 .05 .04 .04
--- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Net investment income
(loss) (.02) .02 .06 .08 .08 .06 .08 .09 .08
Net realized and
unrealized gain (loss)
on investments 2.96 1.51 1.44 (.32) 54 (.07) 1.22 (.16) .64
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Net increase (decrease)
in contract owners'
equity 2.94 1.53 1.50 (.24) .62 (.01) 1.30 (.07) .72
Net contract owners'
equity: Beginning of
year 8.44 6.91 5.41 5.65 5.03 5.04 3.74 3.81 3.09
--------- --------- --------- --------- --------- --------- --------- --------- ---------
End of year $11.38 $8.44 $6.91 $5.41 $5.65 $5.03 $5.04 $3.74 $3.81
========= ========= ========= ========= ========= ========= ========= ========= =========
Ratio of expenses to
average contract
owners' equity 1.16% 1.20% 1.21% 1.21% 1.22% 1.21% 1.21% 1.22% 1.21%
Ratio of net investment
income (loss) to
average contract
owners' equity (0.16%) 0.30% 0.89% 1.72% 1.39% 1.36% 1.91% 2.34% 2.36%
Portfolio turnover 25% 28% 101% 70% 57% 35% 42% 58% 104%
Number of accumulation
units outstanding at
end of year 1,310,831 1,538,926 1,767,394 2,097,793 2,242,809 2,655,895 2,854,559 3,031,469 3,667,660
</TABLE>
See notes to financial statements
6
<PAGE>
DESCRIPTION OF THE COMPANY
AND THE SEPARATE ACCOUNT
Provident National Assurance Company ("Company") is a stock life
insurance company organized under the provisions of Chapters 491 and 508 of the
1966 Code of Iowa on June 28, 1967. In accordance with the provisions of the
Iowa Insurance Code, Separate Account B was established by the Company on
August 21, 1967.
On November 27, 1974, all of the outstanding shares of stock of the
Company were purchased by Provident Life and Accident Insurance Company
("Provident"), Chattanooga, Tennessee. Provident was organized in 1887 under
the laws of Tennessee and is engaged in the sale of individual and group life
and accident and health insurance in all states (except New York), the District
of Columbia, the Dominion of Canada and all Canadian provinces and Puerto Rico.
On September 29, 1978, the Company changed its domicile from Des Moines,
Iowa, to Chattanooga, Tennessee, pursuant to Section 56-202(b) of the Tennessee
Code Annotated. As a result of the redomestication, the Company became a
Tennessee corporation. The Company and the Separate Account are subject to
Tennessee insurance laws and regulations. In early 1996, as the result of
corporate restructuring, the Company became a direct wholly-owned subsidiary of
Provident Companies, Inc., whose stock is publicly held and traded on the New
York Stock Exchange. The Home Office of the Company is located at 1 Fountain
Square, Chattanooga, Tennessee.
Income, gains and losses, whether or not realized, resulting from assets
allocated to the Separate Account are, in accordance with applicable variable
annuity contracts, credited to or charged against the Separate Account without
regard to other income gains or losses of the Company. Under the provisions of
Tennessee law, the assets in the Separate Account are not chargeable with
liabilities arising out of any other business the Company may conduct. However,
obligations arising under the contracts are the obligation of the Company. The
Separate Account, though an integral part of the Company, is registered as an
open-end diversified management investment company under the Investment Company
Act of 1940. Under Tennessee law, regulation of the Company by the Insurance
Commissioner of the State of Tennessee includes regulation of the Separate
Account. Registration with the Securities and Exchange Commission does not
involve supervision of management or investment practices or policies of the
Separate Account or the Company by the Commission.
A. Investment Policies and Restrictions
I. Fundamental
The investment policies listed below are, except as noted,
fundamental to the Separate Account and may not be changed without prior
approval by a vote of a majority of the outstanding voting securities.
1. The investment objective of the Separate Account is long-term
capital growth.
To the extent feasible, assets of the Separate Account will
be kept fully invested and amounts will be held in cash only (a)
temporarily, pending investment in accordance with the investment
policy; and (b) to the extent necessary to make normal contract
payments.
7
<PAGE>
The assets of the Separate Account will usually be invested
in a diversified portfolio of equities, which will be primarily
common stocks, with such changes as may seem advisable, from time
to time, to take into account changes in the outlook for
particular industries or companies.
There may be times when management feels that conditions are
such that continued investment in a portfolio made up primarily of
common stocks does not appear to be the best method of seeking the
objective of the Separate Account. At such times, a larger
proportion of the assets may be invested in preferred stocks,
corporate bonds or debentures (which may or may not be convertible
into stocks), stock warrants or options (puts or calls), or real
estate.
Periodically, and in limited amounts, the Separate Account
may hold funds in the form of short-term obligations, such as U.S.
Treasury Bills, bankers' acceptances, certificates of deposit and
commercial paper. This permits a return on cash balances held
prior to investment of these funds in securities.
2. Investments will not be concentrated in particular industries
or groups of industries and no more than 25% of the assets of the
Separate Account will be invested in any one industry.
3. The Separate Account does not intend to engage in the purchase
and sale of interests in real estate, but reserves freedom of
action to do so. However, it will not make any such purchase if
the value of any real estate held plus the amount proposed to be
acquired (subject to the provisions of policy 10 below) amounts to
more than 10% of the value of the Separate Account's assets. The
Separate Account may invest in deeds of trust to real estate or
marketable interests in real estate investment trusts.
4. No purchase or sale of commodities or of commodity contracts
will be made.
5. No money will be borrowed.
6. No loan of funds or other assets will be made, except through
the acquisition of a portion of an issue of bonds, debentures or
other evidence of indebtedness which are publicly distributed.
7. No securities of other issuers will be underwritten.
8. Not more than 5% of the voting securities of any one issuer
will be acquired.
9. No purchase of securities will be made if, as a result of such
purchase, more than the greater of $5,000 or 5% of the total value
of the assets of the Separate Account will be invested in the
securities of any one issuer (other than the United States or its
instrumentalities).
10. The Separate Account will not invest more than 10% of the
value of its assets in securities or other investments (including
real estate and restricted securities) which are subject to legal
or contractual restrictions upon resale or are not otherwise
readily marketable.
8
<PAGE>
Since the inception of the Separate Account, no purchases of
restricted securities have been made. Moreover, management has no
current intention of investing in such securities in the future.
11. No purchase of warrants or options to purchase securities will
be made if, as a result of such purchase, more than 2% of the
assets of the Separate Account will be invested in such warrants
and options.
Since the inception of the Separate Account, no purchases of
warrants or options have been made. Moreover, management has no
current intention of investing in such securities in the future.
12. Dividends from the net investment income and capital gains
distributions of the Separate Account will be retained and
reinvested by the Separate Account.
II. Other
The policies and objectives below may be changed by action of the
Board of Managers.
1. All investments of assets of the Separate Account are
restricted to those permitted under the regulations adopted by the
Tennessee Insurance Commissioner with respect to investments made
by segregated variable annuity accounts established by insurance
companies. Investments of the Separate Account will be in
compliance with the regulations, including the provision that all
common stock investments shall be in stock which is listed or
admitted to trading on a securities exchange registered under the
Securities Exchange Act of 1934 or which is publicly held and has
been traded in the over-the-counter market and as to which current
stock market quotations are readily available.
2. So long as the Company is licensed to do variable annuity
business in the State of New York, the investment of assets of the
Separate Account will be subject to the following restrictions,
unless otherwise permitted by New York law: (a) no investment
shall be made which will result in the ownership of more than 5%
of the total outstanding common stock of any corporation; or (b)
not more than 10% of the aggregate value of the assets of the
Separate Account shall be invested at any time in common stocks
which do not meet the criteria for investments by life insurance
companies under New York law.
3. Purchases will not be made on the margin.
4. Short sales of securities will not be made.
5. Limited amounts of securities of one or more investment
companies may be acquired up to a maximum of 10%, in the
aggregate, of the assets of the Separate Account, provided that no
investment will be made in the securities of any one investment
company if immediately after such investment more than 3% of the
outstanding voting securities of such company will be owned by the
Separate Account nor more than 5% of the value of the Separate
Account's assets will be invested in such company.
9
<PAGE>
6. No investments in the securities of a company will be made for
the purpose of exercising control of management.
7. Purchases will be made for investment purposes and not for
short-term trading purposes. However, freedom of action is
reserved to make such changes in the Separate Account's portfolio
as are considered necessary or desirable, including the
realization of short-term capital appreciation when appropriate.
8. No participation will be made in joint or joint and several
securities trading accounts.
B. Principle Risk Factors
The Separate Account invests in a diversified portfolio of common stocks.
Common stocks are inherently volatile and their prices may decline
substantially at times due to economic, competitive, regulatory, or other
factors. In addition, the portfolio's returns may differ materially from its
benchmark, the S&P 500 index, due to differences in industry weightings and
specific stock weightings. The Separate Account generally invests in mid-to-
large capitalization growth stocks and this class of stocks may also perform
materially differently from the S&P 500 index for long periods of time due
primarily to changes in forecasted relative earnings and interest rates.
10
<PAGE>
MANAGEMENT
The property and business of the Separate Account are managed by a Board
of Managers selected by the owners of the contracts to which variable
accumulation units are credited. A majority of the Separate Account's three
managers are not deemed to be "interested persons" of the Separate Account or
the Company as defined in the 1940 Act.
The Board of Managers has the following responsibilities and duties:
a) to select and approve annually an independent certified public
accountant;
b) to execute and approve annually an agreement providing for sales and
administrative services;
c) to execute and approve annually an agreement providing for investment
advisory services;
d) to recommend any changes in the fundamental investment policies of
the Separate Account; and
e) to authorize all investments of the assets of the Separate Account in
accordance with the fundamental investment policies of the Separate
Account, and to submit semi-annual and annual reports to the contract
owners.
Pursuant to a written agreement, the Company currently acts as Investment
Adviser and Administrative Manager of the Separate Account and also assumes
certain expenses and mortality and expense risks in connection with the
variable annuity contracts.
As Investment Adviser, the Company continuously provides the Board of
Managers with an investment program and recommendations on the purchase and
sale of investments. The Company also places orders for purchases and sales.
The Company is guided by the investment policies and restrictions promulgated
by the Board of Managers of the Separate Account. Moreover, the Board reviews
all actions taken by the Investment Adviser with regard to investments.
The Investment Adviser receives a monthly fee from the Separate Account
equal to approximately 0.50% on an annual basis. No part of the investment
advisory fees are derived from the sales and administrative expense fees
described below.
The investment advisory agreement was last approved on , 1999 by the
Board of Managers. Contract owners of the Separate Account last approved the
investment advisory agreement on April 12, 1977. Amendments to the agreement
were submitted to and approved by the contract owners on April 11, 1978.
The Separate Account is the sole client for whom the Company provides
investment advisory services.
The Investment Advisory Agreement allows the Company to employ, at its
own expense, an Investment Sub-Adviser. An Investment Sub-Advisory Agreement
between the Company and PRIMCO went into effect on June 25, 1998. PRIMCO is
registered with the Securities and Exchange
11
<PAGE>
Commission as an investment adviser. Its principal offices are located at 1
Fountain Square, Chattanooga, Tennessee 37402. PRIMCO is a Tennessee limited
liability company organized in October 1997. It is owned by Provident
Companies, Inc. and two of its subsidiaries, Provident Life and Accident
Insurance Company and The Paul Revere Life Insurance Company. Its predecessor
was The Paul Revere Investment Management Company, with whom it was merged in
1997. The managers of PRIMCO are officers of the Company. The personnel
employed by PRIMCO consist primarily of individuals who previously worked for
Provident Companies, Inc., or its insurance subsidiaries. Thus, the same
personnel who has provided investment services to the Company and the Separate
Account will continue to do so, but they are employed by a different legal
entity.
As well as providing investment management services to the Provident
companies, PRIMCO also provides investment management services to other
insurance companies. As of December 31, 1998, PRIMCO had over $18 billion in
assets under management.
Under the Sub-Advisory Agreement, PRIMCO, subject to the supervision of
the Company and the Board of Managers of the Separate Account, is responsible
for providing investment advisory services to the Company for the Separate
Account in accordance with investment objectives and guidelines provided by the
Company. In providing these services, PRIMCO is authorized to buy, sell,
exchange, convert and otherwise trade in securities in the portfolio, and place
orders for the execution of such transactions with or through such brokers,
dealers, or issuers as it selects. PRIMCO will provide the Company with a value
of the portfolio on a daily basis. PRIMCO will provide such reports to the
Company and the Board of Managers as are reasonably required, and will attend
meetings of the Board of Managers on a quarterly basis.
The Company will pay PRIMCO compensation in the amount of .15% per annum,
based on the average market value of the Separate Account as of the last
business day of each calendar month in the quarter. The fee will be payable
quarterly by the Company.
DEDUCTIONS AND EXPENSES
A. Sales and Administrative Functions and Expenses
I. General
The Company acts as principal underwriter and provides all sales and
administrative services in connection with the contracts and the Separate
Account. The Company deducts a sales and administrative expense fee to cover
these services as set forth below.
As a consequence of an Asset Transfer and Acquisition Agreement entered
into by Provident Companies, Inc., et al. and American General Corporation, et
al., dated as of December 8, 1997, The Variable Annuity Life Insurance Company
became the Administrator of the Separate Account pursuant to the Separate
Account Administrative Services Agreement entered into with VALIC in June 1998.
The change in Administrator does not result in any changes in administrative
and sales fees.
Administrative expense includes such items as fees and expenses of the
Board of Managers, salaries, rent, postage, telephone, travel, legal, actuarial
and accounting fees, custodian fees, printing, office equipment, stationery and
plan administration cost. The charge for administrative expense is
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<PAGE>
designed only to reimburse the Company for its actual administrative expense,
and the Company does not expect to recover from the charge or any modification
thereof any amount above its accumulated expenses in administering the
contracts.
When applicable, a deduction will be made for premium taxes imposed by
some states or municipalities. These taxes currently range from .5% to a
maximum of 3.5%.
II. Tax Qualified Contracts
Under contracts subject to Sections 401, 403(b) and 408 of the Code, the
annuity purchase rates and the deductions for sales and administrative
expenses, the investment advisory fee and the contingency fees, as contained in
the contracts when issued, will be applicable to cumulative purchase payments
made under the contract up to $100,000. Purchase payments made thereafter may
be made only upon approval by the Company and will be subject to terms and
conditions as required by the Company. The group contracts may not be modified
during the first contract year.
Under the individual contract used to fund IRA's and HR-10 plans, the
Company deducts a sales and administrative fee of 8.0% from each purchase
payment (of which 7.0% is for sales expense and 1.0% is for administrative
expense).
Under the individual or group contract used to fund plans qualifying
under Section 403(b) of the Code, the Company deducts sales and administrative
expense fees in accordance with the following schedule:
<TABLE>
<CAPTION>
Cumulative Portion Portion For
Purchase Percentage For Sales Administrative
Payment Deduction Expense Expense
---------- ---------- --------- --------------
<S> <C> <C> <C>
First $10,000 6.0% 5.0% 1.0%
Balance 4.0% 3.0% 1.0%
</TABLE>
III.Non Tax Qualified Contracts
Under non tax qualified single purchase payment variable annuity
contracts, the sales and administrative expense fee is calculated as follows:
<TABLE>
<CAPTION>
Single Portion Portion For
Purchase Percentage For Sales Administrative
Payment Deduction Expense Expense
-------- ---------- --------- --------------
<S> <C> <C> <C>
First $25,000 6.0% 4.5% 1.5%
Next $25,000 5.0% 4.0% 1.0%
Next $25,000 3.0% 2.5% 0.5%
Balance 2.0% 1.5% 0.5%
</TABLE>
Under non tax qualified flexible installment purchase payment variable
annuity contracts, the sales and administrative expense fee is calculated as
follows:
<TABLE>
<CAPTION>
Single Portion Portion For
Purchase Percentage For Sales Administrative
Payment Deduction Expense Expense
-------- ---------- --------- --------------
<S> <C> <C> <C>
First $25,000 8.0% 7.0% 1.0%
Next $25,000 6.0% 5.0% 1.0%
Next $25,000 5.0% 4.0% 1.0%
Balance 4.0% 3.0% 1.0%
</TABLE>
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<PAGE>
IV. Underwriting Agreement
The Company furnishes sales and administrative services to the Separate
Account pursuant to a written agreement which was last approved on February 3,
1998 by the Board of Managers of the Separate Account, including a majority of
members who are not parties to the Agreement nor interested persons of such
party, at a meeting called for the purpose of voting on such approval. The
Agreement was last submitted to and approved by the contract owners on April
12, 1977.
B. Expense and Mortality and Expense Risk Assumptions
Although variable annuity payments made under the contracts will vary in
accordance with the investment performance of the Separate Account, the
payments will not be affected by (a) the Company's actual expenses, if greater
or lesser than the deductions provided for in the contract, or (b) the
Company's actual mortality experience among annuitants after retirement.
The Company provides an expense assurance by assuming the risk that the
administrative fee may be insufficient to cover the actual administrative
costs.
The Company also assumes the risk that actual mortality of annuitants may
be less than was assumed in calculating the annuity rates. The contingent
mortality assurance provided by the Company under the contracts is the
Company's contractual obligation to continue to make monthly annuity payments,
determined in accordance with the annuity tables and other provisions contained
in the contracts, to each annuitant regardless of how long he lives and
regardless of how long all annuitants as a group live. This obligation assures
an annuitant that neither his longevity nor an improvement in life expectancy
generally will have any adverse effect on the monthly annuity payments he will
receive under the contract and relieves the annuitant from the risk that he
will outlive the funds which he has accumulated for retirement. The assurance
is based on the Company's actuarial determination of expected mortality rates
among annuitants. If the future proves that the Company's actuarial
determination of expected mortality rates among annuitants was erroneous
because, as a group, their longevity is longer than anticipated, the Company
must provide amounts from its general funds to fulfill its contractual
obligation. In that event, the Company may incur a loss. Conversely, if
longevity among annuitants is lower than anticipated, a gain may result to the
Company. The Company also provides a minimum death benefit.
For providing expense assurances and for the assumption of the mortality
risks, a charge of approximately .70% on an annual basis is deducted from the
current net asset value of the Separate Account per valuation day.
C. Brokerage Expenses and Portfolio Turnover
PRIMCO has responsibility for placing orders for the purchase and sale of
portfolio securities of the Separate Account under the Investment Sub-Advisory
Agreement. With respect to such purchases and sales, the primary objective is
to obtain the most favorable prices and execution of orders on behalf of the
Separate Account. With respect to transactions executed in the over-the-counter
market, PRIMCO will deal only with principal market makers unless more
favorable prices are otherwise available.
PRIMCO does not expect to use any one particular broker or dealer but,
subject to obtaining the best prices and executions, brokers who provide
statistical information and supplemental research
14
<PAGE>
to PRIMCO for pricing and appraisal services utilized by PRIMCO may receive
orders for transactions. It is not possible to determine the exact value of
such statistical information and supplemental research provided to PRIMCO. Such
information and research is used by PRIMCO for the benefit of all its
investment accounts and no allocation of services or the costs therefore is
made nor is such an allocation possible.
The advisory fee paid by the Company to PRIMCO will not be reduced as a
consequence of PRIMCO's receipt of brokerage and research services. To the
extent that the Separate Account's portfolio transactions are used to obtain
such services, the brokerage commissions paid by the Separate Account will
exceed those that might otherwise be paid by an amount which cannot be
determined. Such services are useful and of value to PRIMCO in serving both the
Separate Account and other clients and conversely such service obtained by
placement of brokerage business of other clients would be useful to PRIMCO in
carrying out its obligations to the Separate Account. While such services are
not expected to reduce the expenses of PRIMCO, through the use of the services,
PRIMCO avoids the additional expense which would be incurred if it should
attempt to develop comparable information through its own staff. Stated as a
percentage of gross purchase payments received, brokerage commissions
aggregated [ %] for the year-ended December 31, 1998.
The Separate Account will purchase securities for long-term capital
growth and not for short-term trading purposes, although in certain
circumstances (such as during periods of pronounced market instability) it may
sell securities held for a short period if considered necessary or desirable.
Accordingly, the Separate Account's annual rate of turnover ordinarily will not
exceed 50%. In 1998, the portfolio turnover rate was 6%.
GENERAL DESCRIPTION OF VARIABLE ANNUITY CONTRACTS
The Company is registered with the Securities and Exchange Commission as
a broker dealer and is a member of the National Association of Securities
Dealers, Inc. The public offering of contracts of the Separate Account was
discontinued on February 1, 1984. No further offering of contracts of the
Separate Account is made hereby.
The information contained herein is intended solely for the information
and use of holders of contracts issued prior to February 1, 1984.
Types of Contracts
An individual contract is offered for IRA's, nontransferable deferred
annuities and individual non-trusteed HR-10 plans. The contracts offered for
use in plans qualifying under Section 403(b) of the Code are an individual
contract, under which the contract owner and annuitant are the same, and a
group contract under which a master contract is issued to the employer who is
the contract holder and which covers all participating employees, each of whom
receives a certificate which summarizes the provisions of the master group
contract and evidences his participation in the contract.
Single purchase payment variable annuity contracts and flexible
installment purchase payment variable annuity contracts, each available only on
an individual basis are also offered. Purchase payments under flexible purchase
payment variable annuity contracts may be made at such intervals as desired,
but are usually made on an annual, semi-annual, quarterly or monthly basis.
15
<PAGE>
Voting Rights
Contract owners will have the right to vote at annual meetings of
contract owners on the following matters:
1. Initial approval of and any amendment to an investment advisory
agreement or sub-advisory agreement;
2. Ratification of the selection of independent public accountants for
Separate Account B;
3. Election of members to the Board of Managers of Separate Account B;
4. Any change in the fundamental investment policies of Separate Account
B or other policies requiring contract owners' approval (see
Investment Objectives and Policies, 1. Fundamental, page ); and
5. The transaction of such other business as may properly come before
the meeting.
The number of votes which a contract owner may cast prior to the time
annuity payments begin is equal to the dollar value of the accumulation units
in the variable portion of his contract as of the record date, each dollar of
value representing one vote and each fraction of a dollar of value representing
a like fraction of a vote. Contract values will be rounded to the nearest cent
to determine the total vote a contract owner may be entitled to cast. After
annuity payments begin, a contract owner or annuitant may cast one vote for
each dollar and a fraction of a vote for each fraction of a dollar (rounded to
the nearest cent) of the value of the valuation reserves maintained by the
Company in Separate Account B with respect to the annuitant under the contract,
pursuant to the Tennessee Insurance Code and regulations thereunder. Once
annuity payments begin, the total number of votes which the annuitant may cast
will generally decrease during the payment period.
The determination of the number of votes to be cast will be made as of a
date (record date) within 90 days prior to the meeting of contract owners, and
the contract owner will receive at least 20 days written notice of the meeting
and of the number of votes to which he is entitled. The contract owner will be
entitled to vote only if he was the owner on the record date and on the date of
the meeting.
Combined Fixed and Variable Benefits
In addition to fully variable benefits, the contracts permit purchase
payments (in increments of 10%) to be applied to provide all, only a portion or
none of the benefits as variable annuity accumulations with the balance (which
is not held in Separate Account B) being applied to provide fixed-dollar
annuity accumulations.
Transfers Between Accounts
The contract owner may direct the transfer of the value of all or a
portion of the accumulation units between the fixed-dollar annuity portion of
the contract and the variable annuity portion. Such transfers shall not be
permitted more often than once each contract year. Such transfers shall be
effected without the imposition of additional sales and administrative expense
charges.
16
<PAGE>
Assignment
In general, assignment of a contract or an annuitant's account is not
permitted. No assignment shall be binding on the Company until it is received
by the Company at its Home Office in Chattanooga, Tennessee.
Contract Modifications
The contracts provide that the sales and administrative fees, the annuity
purchase rates, the investment advisory fee and the contingency fees, as
contained in the contract when issued, will be applicable for cumulative
purchase payments up to $100,000. In addition, modifications to these
provisions may not be made to the group contract during the first contract
year. Payments in excess of $100,000 under any contract may be made only upon
approval by the Company and will be subject to such terms and conditions as are
required by the Company at that time. Contract owners or annuitants not covered
prior to any modification will be subject to these terms and conditions.
The contract owner, in the case of an individual contract, or the
contract holder, in the case of a group contract, and the Company may by
agreement in writing change the terms of the contract in order to conform to
the requirements of Sections 401, 403(b) or 408 of the Code or such section or
sections as may from time to time revise or replace Sections 401, 403(b) or
408, or where applicable, to permit the deduction of contributions made by the
contract owner under Section 404 of the Code or such section or sections as may
from time to time revise or replace Section 404. The changes may be made
retroactive to the effective date of the contract or to any date thereafter.
The Company further reserves the right to unilaterally effect such
changes in the contract as may be required by any federal, state or other body
which may have jurisdiction over the provisions of the contract.
Inactive Annuitant's Account
In the case of the group contract, if the contract is terminated or the
annuitant ceases to be employed by the contract holder, the annuitant may:
A. Elect to have the value of his individual account transferred to an
individual annuity contract on a form then regularly issued by the
Company under which benefits and provisions are most nearly similar
to those provided by the certificate issued under this contract;
B. If he is at least 50 years of age, elect commencement of an annuity
under one of the annuity options described on page 19;
C. If he becomes an eligible annuitant under a similar contract issued
by the Company, elect to transfer the value of his individual account
to a certificate issued under such contract;
D. Elect to receive the termination value of his individual account in a
single sum; or
E. Elect to rollover the termination value into an IRA.
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<PAGE>
In the event no election is made within 90 days of the cessation of
purchase payments, (A) will automatically take effect.
If the annuitant ceased to have purchase payments remitted by the
contract holder, but remains in his employ, he shall be deemed an inactive
annuitant until such time as purchase payments are resumed, annuity payments
commence or the account is surrendered.
Experience Rating
The Company may make a determination of actual sales and administrative
costs applicable to each group contract on an annual basis. If such calculation
is made and the actual costs exceed the amount deducted for sales and
administrative expense, no additional deduction is made from the value of the
contract. If, however, the amount deducted for such expense exceeds actual
costs, the Company may at its discretion allocate all, a portion or none of
such excess as an experience rating credit. To date, the Company has not
experience rated any contract.
ANNUITY PERIOD
The variable annuity payments to the annuitant are determined on the
basis of (a) the mortality table specified in the contract which reflects the
age and sex of the annuitant and the type of annuity payment option selected,
and (b) the investment performance of Separate Account B. The dollar amount of
the variable annuity payments will not be affected by adverse mortality
experience or by an increase in the Company's expenses in excess of the sales
and administrative expenses provided for in the contract. The dollar amount of
the payments will, however, reflect investment gains and losses and investment
income of Separate Account B occurring both before and after retirement, and
thus the payments will vary with the investment experience of Separate Account
B.
Election of Retirement Date and Form of Annuity
Annuity payments will begin on the date and under the annuity options as
provided for in the contract.
When not specified in the plan (except an individual retirement annuity
and an individual retirement account), the date on which annuity payments are
to begin and the form of the options chosen are to be elected in writing at
least 30 days prior to the date annuity payments are to begin. The date may be
the first of any month between the annuitant's 50th and 75th birthdays. (To
avoid penalties for premature distributions to an owner-employee under an HR-10
plan, or with respect to an IRA, the date selected must be no earlier than age
59 1/2.) The option may be any of those shown below.
A participant under an IRA or an owner-employee under an HR-10 plan must
elect to begin receiving benefits before the end of the tax year in which he
reaches age 70 1/2 or become subject to a Code requirement that his entire
interest be distributed in a lump sum. If no such election to begin receiving
benefits is made by persons participating in plans qualifying under Section
403(b) of the Code, benefits will be payable beginning at age 65 under the
second option (as described below) with 120 monthly payments guaranteed.
No election of any option for any payee may be made under these contracts
unless such election will produce a first monthly payment of at least $25 to
that payee. If a combination benefit is
18
<PAGE>
elected, no election may be made unless the first monthly payment from each
account would be $25 to the payee. If, at any time, any payment to be made to
any payee in either account becomes less than $25 the Company shall have the
right to change the frequency of payments to such intervals as will result in
the payment of at least $25 per account per payment.
Optional Annuity Forms
Option 1--Life Annuity. An annuity payable monthly during the lifetime of
the annuitant, ceasing with the last payment due prior to the death of the
annuitant. This option offers the maximum level of monthly payments since there
is no assurance of a minimum number of payments or provision for a death
benefit for beneficiaries. It would be possible under this option for the
annuitant to receive only one annuity payment if he died prior to the due date
of the second annuity payment, two if he died prior to the third annuity
payment date, etc.
Option 2--Life Annuity with 120 or 180 Monthly Payments Guaranteed. An
annuity payable monthly during the lifetime of the annuitant, ceasing with the
last payment due prior to the death of the annuitant but with the assurance
that if, at the death of the annuitant, payments have been made for less than
120 or 180 months as elected, annuity payments will be continued during the
remainder of said period to the designated beneficiary. The beneficiary may
elect to receive the present value of such remaining guaranteed payments in a
lump sum at any time. If the beneficiary dies while receiving annuity payments,
the present value of the then current dollar amount of the remaining guaranteed
number of annuity payments will be paid in a lump sum to the estate of the
beneficiary, or to the contingent beneficiary if one has been selected.
Option 3--Unit Refund Life Annuity. An annuity payable monthly during the
lifetime of the payee, ceasing with the last payment due prior to the death of
the payee; provided that at the death of the payee, the beneficiary will
receive an additional payment of the then dollar value of a number of annuity
units equal to the excess, if any, of (a) over (b) where (a) is the total
dollar amount applied under the option divided by the annuity unit value at the
date of commencement of annuity payments, and (b) is the number of annuity
units represented by each monthly payment multiplied by the number of monthly
payments made. For example, if $20,000 were applied on the annuity commencement
date to the purchase of the annuity under this option, the annuity unit value
on that date was $2, the number of annuity units represented by each monthly
annuity payment was 61, fifteen installments were made prior to the date of
death and the value of an annuity unit on the date of the annuitant's death was
$2.10, the amount paid to the beneficiary would be:
[$20,000-(61)(15)] X $2.10,
$2
which would be (10,000-915) X $2.10 or 9,085 X $2.10 or $19,078.50.
Option 4--Joint and Last Survivor Annuity. An annuity payable monthly
during the joint lifetime of the annuitant and a designated second person and
thereafter during the remaining lifetime of the survivor, ceasing with the last
payment due prior to the death of the survivor. It would be possible under this
option for the annuitants to receive only one annuity payment if both die prior
to the due date of the second annuity payment, two if they died prior to the
third annuity payment date, etc.
Option 5--Payments for a Designated Period. An amount payable monthly for
a number of years selected which may be from 1 to 30 years.
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<PAGE>
Option 6--Payments of a Specified Dollar Amount. Fixed payments of a
specified dollar amount (not less than $75 per $1,000 of termination value)
until the amount of such value is exhausted.
Option 7--Interest Income. The termination value is left on deposit with
the Company in its General Account and interest is paid thereon at the rate of
3% per year, with interest payments being made annually, semi-annually,
quarterly or monthly, as requested. Principal is paid on request in the manner
described under Surrender for Redemption, page .
Under individual retirement annuity and individual retirement account
plans, Options 2, 3 and 4 above are restricted by Section 408 of the Code to
require that anticipated payments under these options not exceed the life
expectancy of the annuitant or the life expectancy of the annuitant and the
annuitant's spouse. Under such plans, Option 4 is available only for the
annuitant and the annuitant's spouse.
If one of the first four options is elected, the person electing the
option may further elect to have the termination value, less any premium taxes
then payable, applied to provide a variable annuity, a fixed-dollar annuity or
a combination of both. When a transfer of accumulation units from one account
to another is required, such request must be received by the Company at least
one year prior to the annuity commencement date. Transfers from the General
Account to Separate Account B and from Separate Account B to the General
Account shall be effected without the imposition of additional sales or
administrative expense fees. Selection of Options 5, 6 and 7 would result in a
loss of mortality assurance charges which have been paid during the
accumulation period and annuity periods since none of these options are based
on the life of the annuitant. Upon election of Option 7, which is available
only on a fixed dollar basis, funds attributable to an annuitant's interest in
Separate Account B are transferred to the Company's General Account. All of the
other options are available on a fixed, variable or combined fixed and variable
basis.
These options are available on a fixed, variable or a combined fixed and
variable basis. Subject to agreement by the Company and compliance with Code
requirements, arrangements may be made for a form of annuity on a variable or
fixed annuity basis other than those set forth above.
Determination of Amount of First Monthly Annuity Payment
The amount of the first monthly payment will be determined by the
termination value of the contract, the form of annuity selected and the sex and
adjusted age of the annuitant.
The termination value of the contract or a participant's account is
determined by multiplying the value of an accumulation unit as of the close of
business on the fifth valuation day immediately preceding the date the first
annuity payment is due, by the number of accumulation units credited to the
annuitant as of the former date. The termination value will be reduced by any
state premium taxes then payable. When imposed, such premium taxes currently
range from 0.5% to 2.00%.
The contracts contain tables indicating the dollar amount of the first
monthly payment under each optional form of annuity for each $1,000 of the
termination value of the contract and a formula for determining the adjusted
age. These are determined from the Progressive Annuity Table which assumes
births in the year 1900 and a net investment return of 3 1/2% per annum. The
first monthly annuity payment is determined by multiplying the termination
value of the contract or account (expressed in thousands) by the amount of the
first monthly payment per $1,000 of value, in accordance with the tables in the
contract.
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<PAGE>
The contracts contain a provision that the first monthly payment will not
be less than 103% of the first monthly payment available under a then currently
issued single purchase payment annuity, if a single purchase payment were made
equal to the value which is being applied under the contract to provide annuity
benefits. This provision assures the annuitant that if, at retirement, the
annuity rates then applicable to new single purchase payment annuity contracts
are significantly more favorable than those provided in this contract, he will
be given the option of selecting the new annuity rates. In the case of the
variable annuity, any such changes in annuity purchase rates would be based
upon changes in mortality and expense experience and not upon changes in the
assumed investment return.
Assumed Investment Return
The assumed investment return in the annuity purchase rates for both the
contracts is 3 1/2%. Subject to the agreement of the Company, the contract
owner may select an assumed investment return rate up to the maximum permitted
by state law or regulation. The assumed investment return is used to determine
the first monthly payment. It should not be inferred that such rate of return
will bear any relationship to the actual net investment experience of the
Separate Account. The maximum rate currently permitted by the Company is 6%.
The variable annuity payment will remain level during periods when the
net investment return is equal to the assumed investment return, increase
during periods when the net investment return exceeds the assumed investment
return and decrease during periods when the net investment return is less than
the assumed investment return. An assumed investment return greater than 3 1/2%
would produce a higher initial variable annuity payment but a more slowly
rising series of subsequent payments in a period during which the value of the
annuity units in increasing or a more rapidly falling series of subsequent
payments in a period during which the value of the annuity unit is decreasing.
An assumed investment rate of less than 3 1/2% (not available under these
contracts) would have the opposite effect.
Determination of Amount of Second and Subsequent Monthly Annuity Payments
The amount of the first monthly variable annuity payment (as determined
above) is divided by the value of an annuity unit as of the close of business
on the fifth valuation day immediately preceding the date on which the payment
is due, to determine the number of annuity units represented by the first
payment. The number of annuity units remains fixed during the annuity period
and in each subsequent month the dollar value of the variable annuity payment
is determined by multiplying this fixed number of annuity units by the then
value of an annuity unit (as of the close of business on the fifth valuation
day before payment) calculated as set forth below.
Illustration of Determination of Annuity Payments
Assume an annuitant on the date of his retirement has 40,000 accumulation
units credited to the contract or account and that the value of an accumulation
unit on the fifth valuation day prior to the annuity commencement date is
$1.150000 producing a total value of $46,000. Assume also that the annuitant
elects an option for which the table in his contract indicates the first
monthly payment is $6.57 per $1,000 of value applied. The annuitant's first
monthly payment would then be 46 multiplied by $6.57 or $302.22.
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<PAGE>
Assume further that the annuity unit value as of the close of business on
the fifth valuation day immediately preceding the date on which the first
annuity payment is made is $1.100000. By dividing this into the first monthly
payment of $302.22, the number of annuity units represented by that payment is
determined to be 274.745. The value of this same number of annuity units will
be paid in each subsequent month.
Assume further that the annuity unit value as of the close of business on
the fifth valuation day immediately preceding the date on which the second
monthly payment is due is $1.105000. The second monthly payment is then
determined by multiplying the fixed number of annuity units (274.745) by the
current annuity unit value ($1.105000) which produces a second monthly payment
of $303.59.
Value of an Annuity Unit
The value of an annuity unit was established at $1.00 on December 1,
1967, and for any date thereafter is determined in the same manner as is the
value of an accumulation unit except that the result of each such daily
determination is multiplied, in the case of the annuity unit, by a factor of
.999861, to neutralize the assumed net investment return of 3 1/2% per annum
already built into the annuity tables contained in the contract, thus
preventing the crediting of "double interest". Similar adjustments are made for
assumed investment returns other than 3 1/2%. For example, if on a given
valuation day, Separate Account B had investment income of $4,000, net realized
capital gains of $6,000 and net unrealized capital losses of $3,000, and on the
preceding valuation day the value of an annuity unit was $1.150000 and the
total value of the asset of Separate Account B was $5,000,000, the value of an
annuity unit on that day would be $1.151555 X .999861, or $1.151395 (compare
Value of an Accumulation Unit, page 23).
In determining the value of the assets of Separate Account B each
security included on the New York Stock Exchange-Composite Transactions is
valued at the last reported sale price next preceding valuation. If there has
been no sale on such day, then the value of such security is taken to be the
average between the reported bid and asked prices at the time as of which the
value is being ascertained. Any security not traded on a securities exchange
but traded in the over-the-counter market is valued at the last quoted bid
price. Any securities or other assets for which market quotations are not
readily available are valued at fair value as determined in good faith by the
Board of Managers.
DEATH BENEFIT
In the event the annuitant dies during the accumulation period and upon
receipt of proof of death by the Company, a death benefit will be payable equal
to the greater of (a) the termination value of his fixed and variable
individual accounts or (b) 100% of the total purchase payments (before any
deductions therefrom) made under the contract.
If one or more partial surrenders occurred prior to the death of the
annuitant, then the total purchase payments made on his behalf will, for
purposes of calculating the minimum death benefit, be reduced in the same
proportion as the number of accumulation units cancelled bears to the number of
accumulation units credited to the contract prior to such partial surrender(s).
In lieu of payment in one sum, the contract owner may elect that the
death benefit be applied under any one of the Optional Annuity Forms described
below to provide annuity payments to the
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beneficiary. If the contract owner has not made such an election, the
beneficiary may do so after the death of the annuitant. The contract owner or
the beneficiary, whichever selects the optional method of settlement, may
designate contingent beneficiaries to receive any further amounts due should
the first beneficiary die before completion of the specified payments.
Under an IRA, if the annuitant dies before receiving the entire interest
under his contract, or if the distribution has commenced to the annuitant's
spouse and such spouse dies before the entire interest has been distributed,
then the remaining interest must, within five years after the death of the
annuitant or annuitant's spouse, be (1) distributed to the annuitant's
beneficiary or the annuitant's spouse's beneficiary or (2) used to purchase an
immediate annuity for such beneficiary which will be payable for the life of
said beneficiary or a term certain not extending beyond the life expectancy of
said beneficiary.
The manner in which the annuity payments to the beneficiary are
determined and in which they may vary from month to month are the same as
applicable to the annuitant as described under Annuity Period, below.
PURCHASES AND CONTRACT VALUE
Purchase Payments
The usual minimum purchase payment for an annuitant under contracts used
to qualify under Section 403(b) of the Code is $10. The usual maximum issue
age is 60, but inclusion of annuitants at higher ages will be considered under
certain circumstances. In the case of IRA's, the minimum purchase payment is
$50 and the minimum anticipated purchase payments must equal at least $600
annually. In all other cases minimum payment requirements, if any, are
specified in the respective plans.
Crediting Accumulation Units
During the period prior to the time annuity payments begin, the Company
receives purchase payments, deducts the sales and administrative expense fees,
together with such premium taxes as may be applicable, and credits the balance
of the purchase payment to the contract in accumulation units (see Sales and
Administrative Functions and Expenses, page 12). The number of accumulation
units credited is determined by the valuation of an accumulation unit next
computed after the purchase payment is received. If a purchase payment
accompanies an application, the Company will, within five business days,
either (a) process and accept the application, issue the contract or
certificate and credit the accumulation units; or (b) reject the application
and return the purchase payment.
The value of a contract or an individual's account, at any time during
the accumulation period, can be determined by multiplying the number of
accumulation units credited to such contract or account by the current
accumulation unit value. Each contract owner will be advised periodically of
the number of accumulation units credited to the contract, the current
accumulation unit value and the total value of the contract.
Value of an Accumulation Unit
Accumulation units are valued for each day on which the New York Stock
Exchange is open.
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The value of an accumulation unit was established at $1.00 on October 1,
1967. This value is redetermined on each valuation day, as follows: the net
increase or decrease, expressed as a percentage, in the value of the securities
and other assets in Separate Account B for that day, resulting from investment
income, realized and unrealized capital gains and losses, and the daily
deductions for the investment advisory fee and for the contingency fees, is
applied to increase or decrease the value of an accumulation unit as determined
on the preceding valuation day. For example, if on a given valuation day
Separate Account B had an investment income of $4,000, net realized capital
gains of $6,000 and net unrealized capital losses of $3,000, and on the
preceding valuation day the value of an accumulation unit was $1.150000 and the
total value of the assets of Separate Account B was $5,000,000, the value of an
accumulation unit on that day would be
$1.150000 plus $4,000 + $6,000 - $3,000
$5,000,000 -.0000481
X $1.150000, or
$1.150000 + (.001400-.000048) X 1.150000; which would be
$1.150000 + $.001555, or $1.151555.
The value of a contract varies with the performance of the investments of
Separate Account B and there is no assurance that such value will equal or
exceed the purchase payments made.
In determining the value of the assets of Separate Account B each
security included on the New York Stock Exchange-Composite Transactions is
valued at the last reported sale price next preceding valuation. If there has
been no sale on such day, then the value of such security is taken to be the
average between the reported bid and asked prices at the time as of which the
value is being ascertained. Any security not traded on a securities exchange
but traded in the over-the-counter market is valued at the last quoted bid
price. Any securities or other assets for which market quotations are not
readily available are valued at fair value as determined in good faith by the
Board of Managers. The Company reserves the right to make valuations at times
when the New York Stock Exchange is closed, but in no event will valuation be
performed more often than 253 times per calendar year. When the New York Stock
Exchange is closed, securities or other assets are valued at fair value as
determined in good faith by the Board of Managers.
Suspension of the Group Contract
The group contract provides for suspension on any contract anniversary if
the contract owner fails to consent to a modification as provided for in the
contract. Effective with such suspension, no new annuitants may be covered, but
further purchase payments will be accepted as they apply to annuitants covered
prior to such suspension.
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REDEMPTIONS
At any time during the accumulation period and prior to the commencement
of annuity payments: (a) for contracts used in IRA's the annuitant may
surrender the contract for redemption; (b) for contracts under HR-10 plans, the
annuitant may surrender the contract for redemption to the extent permitted in
the plan; and (c) for contracts used in plans qualifying under Section 403(b)
of the Code, an annuitant may surrender the contract or certificate for
redemption. Surrender for redemption is effected by sending a written request
for surrender to the Company accompanied by the contract or certificate. There
is no charge or fee for surrender for redemption.
When surrendering a contract or certificate for redemption, an annuitant
may avail himself of the following options:
A. If the annuitant is at least 50 years of age, the termination value
(as determined below) may be used to provide annuity payments
beginning immediately under the selected option (but see Federal Tax
Status, page , as to IRA's and HR-10 plans);
B. Without regard to the age of the annuitant, a lump sum payment may be
received in an amount equal to the termination value. The termination
value is computed by the Company (as of the close of business on the
day on which the notice of intent to surrender for redemption,
together with the contract or certificate is received at the Home
Office of the Company, or if that day is a holiday, or if the notice
is received after the close of business on the New York Stock
Exchange, on the next valuation day) by multiplying the number of
accumulation units credited to the annuitant by the value of an
accumulation unit at that time. Payment of the termination value will
be made within seven days after the notice to surrender for
redemption, together with the contract or certificate, is received at
the Home Office of the Company. The right of redemption or the date
of payment upon redemption may be postponed only at times when the
New York Stock Exchange is closed (other than for holidays or
weekends), or in the event the Securities and Exchange Commission
determines either that trading on the New York Stock Exchange is
restricted or that an emergency has been determined by the Securities
and Exchange Commission to exist, or for such other periods as the
Securities and Exchange Commission may by order permit.
In addition, when permitted by the plan and/or the provisions of the
Code, a portion of the termination value of the contract or participant's
account may be surrendered subject to the following limitations:
A. No more than one such partial surrender for redemption may be allowed
on behalf of any annuitant in any one contract year; and
B. No partial surrender for redemption will be permitted as a result of
which the current value of the accumulation units remaining in the
contract falls below $10.
For IRA's if annuity payments have not commenced prior to the close of
the annuitant's tax year in which he attains age 70 1/2, then, not later than
the close of such tax year, the Company will distribute in one sum to the
annuitant the annuitant's entire interest in the contract.
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FEDERAL TAX STATUS
What are some of the federal tax consequences which affect these contracts?
A. General
SINCE THE TAX LAW IS COMPLEX AND SINCE TAX CONSEQUENCES WILL VARY
ACCORDING TO THE ACTUAL STATUS OF THE CONTRACT OWNER INVOLVED AND THE TYPE OF
PLAN UNDER WHICH THE CONTRACT IS PURCHASED, LEGAL AND TAX ADVICE MAY BE NEEDED
BY A PERSON, TRUSTEE, OR OTHER ENTITY CONTEMPLATING THE PURCHASE OF A CONTRACT
DESCRIBED HEREIN.
It should be understood that any detailed description of the federal
income tax consequences regarding the purchase of these contracts cannot be
made in this Prospectus and that special tax rules may be applicable with
respect to certain purchase situations not discussed herein. In addition, no
attempt is made here to consider any applicable state or other tax laws. For
detailed information, a qualified tax adviser should always be consulted. The
discussion here and in Appendix I commencing on page 32 is based on the
Company's understanding of existing federal income tax laws as they are
currently interpreted.
B. Taxation of the Company and the Separate Account
The separate account is taxed as part of the Company which is taxed as a
life insurance company in accordance with the Internal Revenue Code of 1986, as
amended (the "Code"), Accordingly, the separate account will not be taxed as a
"regulated investment company" under subchapter M of Chapter 1 of the Code.
Investment income and any realized capital gains on the assets of the separate
account are reinvested and are taken into account in determining the value of
the Accumulation and Annuity Units (See "Value of an Accumulation Unit," page
23). As a result, such investment income and realized capital gains are
automatically applied to increase reserves under the contract.
No taxes are due on interest, dividends and short-term or long-term
capital gains earned by the separate account with respect to qualified or non-
qualified contracts.
C. Taxation of Annuities--General Provisions Affecting Purchasers Other than
Qualified Retirement Plans
Section 72 of the Code governs the taxation of annuities in general.
1. Non-Natural Persons, Corporations, Etc.
Section 72 contains provisions for contract owners which are non-natural
persons. Non-natural persons include corporations, trusts, and partnerships.
The annual net increase in the value of the contract is currently includable in
the gross income of a non-natural person unless the non-natural person holds
the contract as an agent for a natural person. There is an exception from
current inclusion for certain annuities held in tax-qualified retirement
arrangements, certain annuities held by structured settlement companies,
certain annuities held by an employer with respect to a terminated tax-
qualified retirement plan and certain immediate annuities. A non-natural person
which is a tax-exempt entity for federal tax purposes will not be subject to
income tax as a result of this provision.
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If the contract owner is not an individual, the primary annuitant shall
be treated as the contract owner for purposes of making distributions which are
required to be made upon the death of the contract owner. If there is a change
in the primary annuitant, such change; shall be treated as the death of the
contract owner.
2. Other Contract Owners (Natural Persons).
A contract owner is not taxed on increases in the value of the contract
until an amount is received or deemed received, e.g., in the form of a lump sum
payment (full or partial value of a contract) or as annuity payments under the
settlement option elected.
The provisions of Section 72 of the Code concerning distributions are
summarized briefly below. Also summarized are special rules affecting
distributions from contracts obtained in a tax-free exchange for other annuity
contracts or life insurance contracts which were purchased prior to August 14,
1982.
a. Distributions Prior to the Annuity Commencement Date.
i. Total premium payments, less amounts received which were not
includable in gross income equal the "investments in the contract"
under Section 72 of the Code.
ii. To the extent that the value of the contract (ignoring any
surrender charges except on a full surrender) exceeds the
"investment in the contract," such excess constitutes the "income
on the contract."
iii. Any amount received or deemed received prior to the annuity
commencement date (e.g., upon a partial surrender) is deemed. to
come first from any such "income on the contract" and then from
"investment in the contract," and for these purposes such
"income on the contract" shall be computed by reference to any
aggregation rule in subparagraph 2.c., below. As a result, any
such amount received or deemed received (1) shall be includable
in gross income to the extent that such amount does not exceed
any such "income on the contract," and (2) shall not be
includable in gross income to the extent that such amount does
exceed any such "income on the contract." If at the time that
any amount is received or deemed received there is no "income on
the contract" (e.g., because the gross value of the contract
does not exceed the "investment in the contract" and no
aggregation rule applies), then such amount received or deemed
received will not be includable in gross income, and will simply
reduce the "investment in the contract."
iv. The receipt of any amount as a loan under the contract or the
assignment or pledge of any portion of the value of the contract
shall be treated as an amount received for purposes of this
subparagraph a. and the next subparagraph b.
v. In general, the transfer of the contract, without full and
adequate consideration, will be treated as an amount received for
purposes of this subparagraph a. and the next subparagraph b. This
transfer rule does not apply, however, to certain transfers of
property between spouses or incident to divorce.
b. Distributions After Annuity Commencement Date.
Annuity payments made periodically after the annuity commencement
date are includable in gross income to the extent the payments exceed
the amount determined by the application of the ratio of the "investment
in the contract" to the total amount of the payments to be made after
the annuity commencement date (the "exclusion ratio").
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i. When the total of amounts excluded from income by application of
the exclusion ratio is equal to the investment in the contract as
of the annuity commencement date, any additional payments
(including surrenders) will be entirely includable in gross
income.
ii. If the annuity payments cease by reason of the death of the
annuitant and, as of the date of death, the amount of annuity
payments excluded from gross income by the exclusion ratio does
not exceed the investment in the contract as of the annuity
commencement date, then the remaining portion of unrecovered
investment shall be allowed as a deduction for the last taxable
year of the annuitant.
iii. Generally, nonperiodic amounts received or deemed received after
the annuity commencement date are not entitled to any exclusion
ratio and shall be fully includable in gross income. However,
upon a full surrender after such date, only the excess of the
amount received (after any surrender charge) over the remaining
"investment in the contract" shall be includable in gross income
(except to the extent that the aggregation rule referred to in
the next subparagraph c. may apply).
c. Aggregation of Two or More Annuity Contracts.
Contracts issued after October 21, 1988, by the same insurer (or
affiliated insurer) to the same contract owner within the same calendar
year (other than certain contracts held in connection with a tax-
qualified retirement arrangement) will be treated as one annuity
contract for the purpose of determining the taxation of distributions
prior to the annuity commencement date. An annuity contract received in
a tax-free exchange for another annuity contract or life insurance
contract may be treated as a new contract for this purpose. The Company
believes that for any annuity subject to such aggregation, the values
under the contracts and the investment in the contracts will be added
together to determine the taxation under subparagraph 2.a., above, of
amounts received or deemed received prior to the annuity commencement
date. Withdrawals will first be treated as withdrawals of income until
all of the income from all such contracts is withdrawn. As of the date
of this Prospectus, there are no regulations interpreting this
provision.
d. 10% Penalty Tax--Applicable to Certain Withdrawals and Annuity
Payments.
i. If any amount is received or deemed received on the contract
(before or after the annuity commencement date), the Code applies
a penalty tax equal to 10% of the portion of the amount includable
in gross income, unless an exception applies.
ii. The 10% penalty tax will not apply to the following distributions
(exceptions vary based upon the precise plan involved):
1. Distributions made on or after the date the recipient has
attained the age of 59 1/2.
2. Distributions made on or after the death of the holder or
where the holder is not an individual, the death of the
primary annuitant.
3. Distributions attributable to a recipient's becoming disabled.
4. A distribution that is part of a scheduled series of
substantially equal periodic payments for the life (or life
expectancy) of the recipient (or the joint lives or life
expectancies of the recipient and the recipient's
beneficiary).
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5. Distributions of amounts which are allocable to the
"investment in the contract" prior to August 14, 1982, (see
next subparagraph c.).
e. Special Provisions Affecting Contacts Obtained through a Tax-Free
Exchange of Other Annuity or Life Insurance Contracts Purchased prior
to August 14, 1982.
If the contract was obtained by a tax-free exchange of a life
insurance or annuity contract purchased prior to August 14, 1982, then
any amount received or deemed received prior to the annuity commencement
date shall be deemed to come (1) first from the amount of the
"investment in the contract" prior to August 14, 1982 ("pre-8/14/82
investment") carried over from the prior contract, (2) then from the
portion of the "income on the contract" (carried over to, as well as
accumulating in, the successor contract) that is attributable to such
pre-8/14/82 investment, (3) then from the remaining "income on the
contract," and (4) last from the remaining "investment in the contract."
As a result, to the extent that such amount received or deemed received
does not exceed such pre-8/14/82 investment, such amount is not
includable in gross income. In addition, to the extent: that such amount
received or deemed received does not exceed the sum of (a) such pre-
8/14/82 investment and (b) the "income on the contract" attributable
thereto, such amount is not subject to the 10% penalty tax. In all other
respects, amounts received or deemed received from such post-exchange
contracts are generally subject to the rules described in this
subparagraph 3.
f. Required Distributions
i. Death Of Contract Owner Or Primary Annuitant
Subject to the alternative election or spouse beneficiary
provisions in ii. or iii., below:
1. If any contract owner dies on or after the annuity commencement
date and before the entire interest in the contract has been
distributed, the remaining portion of such interest shall be
distributed at least as rapidly as under the method of
distribution being used as of the date of such death;
2. If any contract owner dies before the annuity commencement date,
the entire interest in the contract will be distributed within
five years after such death; and
3. If the contract owner is not an individual, then for purposes of
1. or 2, above, the primary annuitant under the contract shall be
treated as the contract owner, and any change in the primary
annuitant shall be treated as the death of the contract owner. The
primary annuitant is the individual, the events in the life of
whom are of primary importance in affecting the timing or amount
of the payout under the contract.
ii. Alternative Election to Satisfy Distribution Requirements
If any portion of the interest of a contract owner described in
i., above, is payable to or for the benefit of a designated
beneficiary, such beneficiary may elect to have the portion
distributed over a period that does not extend beyond the life or
life expectancy of the beneficiary. The election and payments must
begin within a year of the death.
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iii. Spouse Beneficiary
If any portion of the interest of a contract owner is payable to or
for the benefit of his or her spouse, and the annuitant or
contingent annuitant is living, such spouse shall be treated as
the contract owner of such portion for purposes of section i.,
above.
3. Diversification Requirements.
Section 817 of the Code provides that a variable annuity contract will
not be treated as an annuity contract for any period during which the
investments made by the separate account or underlying fund are not adequately
diversified in accordance with regulations prescribed by the Treasury
Department. If a contract is not treated as an annuity contract, the contract
owner will be subject to income tax on the annual increases in cash value.
The Treasury Department has issued diversification regulations which
generally require, among other things, that no more than 55% of the value of
the total assets of the segregated asset account underlying a variable contract
is represented by any one investment, no more than 70% is represented by any
two investments, no more than 80% is represented by any three investments, and
no more than 90% is represented by any four investments. In determining whether
the diversification standards are met, all securities of the same issuer, all
interests in the same real property project, and all interests in the same
commodity are each treated as a single investment. In addition, in the case of
government securities, each government agency or instrumentality shall he
treated as a separate issuer.
A separate account must be in compliance with the diversification
standards on the last day of each calendar quarter or within 30 days after the
quarter ends. If an insurance company inadvertently fails to meet the
diversification requirements, the company may comply within a reasonable period
and avoid the taxation of contract income on an ongoing basis. However, either
the company or the contract owner must agree to pay the tax due for the period
during which the diversification requirements were not met.
The Company monitors the diversification of investments in the separate
accounts and tests for diversification as required by the Code. The Company
intends to administer all contracts subject to the diversification requirements
in a manner that will maintain adequate diversification.
4. Ownership of the Assets in the Separate Account.
In order for a variable annuity contract to qualify for tax deferral,
assets in the segregated asset accounts supporting the variable contract must
be considered to be owned by the insurance company and not by the variable
contract owner for tax purposes. The Internal Revenue Service ("IRS") has
issued several rulings which discuss investor control. The IRS has ruled that
certain incidents of ownership by the contract owner, such as the ability to
select and control investments in a separate account, could cause the contract
owner to be treated as the owner of the assets for tax purposes.
Further, in the explanation to the temporary Section 817 diversification
regulations, the Treasury Department noted that the temporary regulations "do
not provide guidance concerning the circumstances in which investor control of
the investments of a segregated asset account may cause the investor, rather
than the insurance company, to be treated as the owner of the assets in the
account." The explanation further indicates that "the temporary regulations
provide that in appropriate cases a segregated asset account may include
multiple sub-accounts , but do not specify
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the extent to which policyholders may direct their investments to particular
sub-accounts without being treated as the owners of the underlying assets.
Guidance on this and other issues will be provided in regulations or revenue
rulings under Section 817(d), relating to the definition of variable contract."
The final regulations issued under Section 817 do not provide guidance
regarding investor control, and as of the date of this Prospectus, no other
such guidance has been issued. Further, the Company does not know if or in what
form such guidance will be issued. In addition, although regulations are
generally issued with prospective effect, it. is possible that regulations may
be issued with retroactive effect. Due to the lack of specific guidance
regarding the issue of investor control, there is necessarily some uncertainty
regarding whether a contract owner could be considered the owner of the assets
for tax purposes. The Company reserves the right to modify the contracts as
necessary, to prevent contract owners from being considered the owners of the
assets in the separate accounts.
D. Federal Income Tax Withholding
The portion of a distribution which is taxable income to the recipient
will be subject to federal income tax withholding, pursuant to Section 3405, of
the Code, The application of this provision is summarized below:
1. Non-Periodic Distributions.
The portion of a non-periodic distribution which constitutes taxable
income will be subject to federal income tax withholding unless the recipient
elects not to have taxes withheld. If an election not to have taxes withheld is
not provided, 10% of the taxable distribution will be withheld as federal
income tax. Election forms will be provided at the time distributions are
requested. If the necessary election forms are not submitted to the Company,
the Company will automatically withhold 10% of the taxable distribution.
2. Periodic Distributions (distributions payable over a period greater
than one year).
The portion of a periodic distribution which constitutes taxable income
will be subject to federal income tax withholding as if the recipient were
married claiming three exemptions, unless the recipient elects otherwise. A
recipient may elect not to have income taxes withheld or to have income taxes
withheld at a different rate by providing a completed election form. Election
forms will be provided at the time distributions are requested.
E. General Provisions Affecting Qualified Retirement Plans
The contract may be used for a number of tax-qualified retirement plans.
If the contract is being purchased with respect to some form of tax-qualified
retirement. plan, please refer to Appendix I, commencing an page 32, for
information relative to the types of plans for which it may be used and the
general explanation of the tax features of such plans.
F. Annuity Purchases By Nonresident Aliens And Foreign Corporations
The discussion above provides general information regarding U.S. federal
income tax consequences to annuity purchasers that are U.S. citizens or
residents. Purchasers that are not U.S. citizens or residents will generally be
subject to U.S. federal income tax and withholding on annuity distributions at
a 30% rate, unless a lower treaty rate applies. In addition, purchasers may be
subject to state premium tax, other state and/or municipal taxes, and taxes
that may be imposed by the purchaser's country of citizenship or residence.
Prospective purchasers are advised to consult with a qualified tax advisor
regarding U.S., state, and foreign taxation with respect to an annuity
purchase.
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Appendix I
Information Regarding Tax-Qualified Retirement Plans
The tax rules applicable to tax qualified contract owners, including
restrictions on contributions and distributions, taxation of distributions, and
tax penalties, vary according to the type of plan as well as the terms and
conditions of the plan itself. Various tax penalties may apply to contributions
in excess of specified limits, to distributions in excess of specified limits,
distributions which do not satisfy certain requirements and certain other
transactions with respect to qualified plans. Accordingly, this summary
provides only general information about the tax rules associated with use of
the contract by a qualified plan. Contract owners, plan participants, and
beneficiaries are cautioned that the rights and benefits of any person to
benefits are controlled by the terms and conditions of the plan regardless of
the terms and conditions of the contract. Some qualified plans are subject to
distribution and other requirements which are not incorporate into the
Company's administrative procedures. Owners, participants and beneficiaries are
responsible for determining that contributions, distributions and other
transactions comply with applicable law. Because of the complexity of these
rules, owners, participants and beneficiaries are encouraged to consult their
own tax advisers as to specific tax consequences.
A. Tax-Qualified Pension or Profit-Sharing Plans
Provisions of the Code permit eligible employers to establish tax-
qualified pension or profit sharing plans (described in Section 401(a) and
401(k), if applicable, and exempt from taxation under Section 501 (a) of the
Code), and Simplified Employee Pension Plans (described in Section 408(k)).
Such plans are subject to limitations on the amount that may be contributed,
the persons who may be eligible and the time when distributions must commence.
Employers intending to use these contracts in connection with such plans should
seek competent tax and other legal advice.
B. Tax Sheltered Annuities Under Section 403(b)
Section 403(b) of the Code permits public school employees and employees
of certain types of charitable, educational and scientific organizations
specified in Section 501(c) (3) of the Code to purchase annuity contracts, and,
subject to certain limitations, exclude such contributions from gross income.
Generally, such contributions may not exceed the lesser of $10,000 or 20% of
the employee's "includable compensation" for his most recent full year
employment, subject to other adjustments. Special provisions may allow some
employees to elect a different overall limitation.
Tax-sheltered annuity programs under Section 403(b) are subject to a
prohibition against distributions from the contract attributable to
contributions made pursuant to a salary reduction agreement unless such
distribution is made:
(1) after the participating employee attains age 59 1/2;
(2) upon separation from service;
(3) upon death or disability; or
(4) in the case of hardship (and in the case of hardship, any income
attributable to such contributions may not be distributed).
Generally, the above restrictions do not apply to distributions
attributable to cash values or other amounts held under a Section 403(b)
contract as of December 31, 1988.
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C. Individual Retirement Annuities Under Section 408
Section 408 of the Code permits eligible individuals to establish
individual retirement programs through the purchase of Individual Retirement
Annuities ("IRAs"). IRAs are subject to limitations on the amount that may be
contributed, the contributions that. may be deducted from taxable income, the
persons who may be eligible and the time when distributions may commence. Also
distributions from certain qualified plans may be "rolled-over" on a tax-
deferred basis to an IRA.
D. Tax Penalties
Distributions from retirement plans are generally taxed under Section 72
of the Code. Under these rules, a portion of each distribution may be
excludable from income. The excludable amount is the portion of the
distribution which bears the same ratio as the after-tax contributions bear to
the expected return.
1. Premature Distribution
Distributions from a qualified plan before the participant attains age 59
1/2 are generally subject to an additional tax equal to 10% of the taxable
portion of the distribution. The 10% penalty does not apply to distributions
made after the employee's death, on account of disability, for eligible medical
expenses and distributions in the form of a life annuity and, except in the
case of an IRA, certain distributions after separation from service after age
55. For these purposes "life annuity" means a scheduled series of substantially
equal periodic payments for the life or life expectancy of the participant (or
the joint lives or life expectancies of the participant and beneficiary).
2. Minimum Distribution Tax
If the amount distributed is less than the minimum required distribution
for the year, the participant is subject to a 50% tax on the amount that was
not properly distributed.
An individual's interest in a tax-qualified retirement plan must
generally be distributed, or begin to be distributed, not later than April 1 of
the calendar year following the later of (i) the calendar year in which the
individual attains age 70 1/2 or (ii) the calendar year in which the individual
retires from service with the employer sponsoring the plan ("required beginning
date"). However, the required beginning date for an individual who is a five
(5) percent owner (as defined in the Code), or who is the owner of an IRA, is
April 1 of the calendar year following the calendar year in which the
individual attains age 70 1/2. The entire interest of the participant must be
distributed beginning no later than this required beginning date over a period
which may not extend beyond a maximum of the life expectancy of the participant
and a designated beneficiary. Each annual distribution must equal or exceed a
"minimum distribution amount" which is determined by dividing the account
balance by the applicable life expectancy. This account balance is generally
based upon the account value as of the close of business on the last day of the
previous calendar year. In addition, minimum distribution incidental benefit
rules may require a larger annual distribution.
If an individual dies before reaching his or her required beginning date,
the individual's entire interest must generally be distributed within five
years of the individual's death. However, this rule will be deemed satisfied,
if distributions begin before the close of the calendar year following the
individual's death to a designated beneficiary (or over a period not extending
beyond the life expectancy of the beneficiary). If the beneficiary is the
individual's surviving spouse, distributions may be delayed until the
individual would have attained age 70 1/2.
33
<PAGE>
If an individual dies after reaching his or her required beginning date
or after distributions have commenced, the individual's interest must generally
be distributed at least as rapidly as under the method of distribution in
effect at the time of the individual's death.
3. Withholding
In general, distributions from IRAs are subject to regular wage
withholding rules.
Periodic distributions from other tax-qualified retirement plans that are
made for a specified period of ten years or for the life or life expectancy of
the participant (or the joint lives or life expectancies of the participant and
the beneficiary) are generally subject to federal income tax withholding as if
the recipient were married claiming three exemptions, unless the recipient
elects otherwise. The recipient of periodic distributions may generally elect
not to have withholding apply or to have income taxes withheld at a different
rate by providing a completed election form.
Other distributions from such other tax-qualified retirement plans are
generally subject to mandatory income tax withholding at the flat rate of 20%
unless such distributions are:
(1) the non-taxable portion of the distribution;
(2) required minimum distributions; or
(3) direct transfer distributions.
Direct transfer distributions are direct payments to an IRA or to
another eligible retirement plan under Section 401 (a) (31) of the Code.
CHANGES IN OPERATION OF THE SEPARATE ACCOUNT
The Company reserves the right, subject to compliance with applicable
law, (1) to operate the Separate Account as a management investment company
under the 1940 Act or in any other form permitted by law, (2) to deregister the
Separate Account under the 1940 Act in accordance with the requirements of the
1940 Act and (3) to substitute the shares of any other registered investment
company for the Fund shares held by the Separate Account, in the event that
Fund shares are unavailable for Separate Account investment, or if the Company
shall determine that further investment in such fund shares is inappropriate in
view of the purpose of the Separate Account. In no event will the changes
described above be made without notice to contract owners in accordance with
the 1940 Act.
The company reserves the right, subject to compliance with applicable
law, to change the name of the Separate Account.
LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Company or
the Separate Account is a party or of which property of either of them is
subject.
LEGAL OPINION
Legal matters relating to Federal securities laws applicable to the
contracts as well as all matters relating to Federal income tax laws and the
insurance laws of Tennessee and other states in which contracts have been
offered, have been passed upon by Susan N. Roth, Vice President and Secretary
of the Company.
34
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TO BE USED WITH [ , 1999] PROSPECTUS
PROVIDENT NATIONAL ASSURANCE COMPANY SEPARATE ACCOUNT B
VARIABLE ANNUITY CONTRACTS
SOLD BY
PROVIDENT NATIONAL ASSURANCE COMPANY
Chattanooga, Tennessee 37402 (423) 755-1901
This Statement of Additional Information should be used to supplement
information provided by the [ , 1999] Prospectus, which describes
Variable Annuity Contracts ("Contracts") offered by Provident National
Assurance Company ("Company").
This Statement of Additional Information is not a Prospectus. The
Statement of Additional Information should be read with the Prospectus. The
Prospectus sets forth information about the contracts and the Provident
National Assurance Company Separate Account B ("Separate Account") that an
investor ought to know. The Prospectus may be obtained, without charge, upon
written or oral request received by the Company at its Home Office located at 1
Fountain Square, Chattanooga, Tennessee 37402. Please refer to the Table of
Contents for a cross-reference index to the Prospectus.
The date of this Statement of Additional Information is [ ]
The date of the Prospectus is [ ]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
General Information and History
of the Company and
the Separate Account........................................................ 3
Investment Objectives and Policies.......................................... 4
Management:
Board of Managers of the
Separate Account............................................................ 6
Directors and Principal Officers
of the Company.............................................................. 6
Remuneration of the Board of Managers...................................... 8
Remuneration of the Directors
and Principal Officers of
the Company................................................................. 8
Election of the Board of Managers.......................................... 8
Investment Advisory Services
Investment Advisory Agreement.............................................. 9
Sales and Administrative
Services Agreement.......................................................... 9
Investment Sub-Advisory Agreement.......................................... 10
Ownership and Control...................................................... 11
Brokerage Allocation........................................................ 11
Underwriters................................................................ 13
Report of Independent Auditors..............................................
Financial Statements of the Separate Account................................
Report of Independent Auditors..............................................
Financial Statements of Provident National Assurance Company................
</TABLE>
i
<PAGE>
WHERE THIS INFORMATION
CAN BE FOUND IN THE
PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<S> <C>
General Information and History
of the Company and
the Separate Account........................................................ 3
Investment Objective and Policies........................................... 4
Management:
Board of Managers of the
Separate Account............................................................ 6
Investment Advisory Services:
Investment Advisory Agreement.............................................. 9
Sales and Administrative
Services Agreement.......................................................... 9
Investment Sub-Advisory Agreement.......................................... 10
Brokerage Allocation........................................................ 11
Annuity Payments............................................................ 20
Purchase and Pricing of Contracts........................................... 23
</TABLE>
ii
<PAGE>
GENERAL INFORMATION AND HISTORY OF
THE COMPANY AND THE
SEPARATE ACCOUNT
The Company serves as insurer and principal underwriter, and as
investment adviser to the Separate Account. Provident National Assurance
Company ("Company") is a stock life insurance company organized under the
provisions of Chapters 491 and 508 of the 1966 Code of Iowa on June 28, 1967.
In accordance with the provisions of the Iowa Insurance Code, the Separate
Account was established by the Company on August 21, 1967.
On November 27, 1974, all of the outstanding shares of stock of the
Company were purchased by Provident Life and Accident Insurance Company
("Provident"), Chattanooga, Tennessee. Provident was organized in 1887 under
the laws of Tennessee and is engaged in the sale of individual and group life
and accident and health insurance in all states (except New York), the District
of Columbia, the Dominion of Canada and all Canadian provinces and Puerto Rico.
On September 29, 1978, the Company changed its domicile from Des Moines,
Iowa, to Chattanooga, Tennessee, pursuant to Section 56-202(b) of the Tennessee
Code Annotated. As a result of the redomestication, the Company became a
Tennessee corporation. The Company and the Separate Account are subject to
Tennessee insurance laws and regulations. In early 1996, as the result of
corporate restructuring, the Company became a direct wholly-owned subsidiary of
Provident Companies, Inc., whose stock is publicly held and traded on the New
York Stock Exchange. The Home Office of the Company is located at 1 Fountain
Square, Chattanooga, Tennessee.
Under the provisions of Tennessee law, the assets in the Separate Account
are not chargeable with liabilities arising out of any other business the
Company may conduct. The Separate Account, though an integral part of the
Company, is registered as an open-end diversified management investment company
under the Investment Company Act of 1940. Under Tennessee law, regulation of
the Company by the Insurance Commissioner of the State of Tennessee includes
regulation of the Separate Account. Registration with the Securities and
Exchange Commission does not involve supervision of management or investment
practices or policies of the Separate Account or the Company by the Commission.
The Company is taxed as a life insurance company under Sub-Chapter L of
the Internal Revenue Code. Although the operations of the Separate Account are
accounted for separately from other operations of the Company for purposes of
federal taxation, the Separate Account is not separately taxed as a regulated
investment company or otherwise as a taxable entity separate from the Company.
Under existing federal income tax laws, the income (consisting primarily of
interest, dividends and net capital gains) of the Separate Account, to the
extent that it is applied to increase reserves under variable annuity
contracts, is not taxable to the Company.
The Rules and Regulations of the Separate Account provide for a three-
member Board of Managers, members being elected at annual meetings for one-year
terms. A majority of the Board of Managers will not be "interested persons" as
defined in Section 2(a) of the 1940 Act.
Investment custodial services are provided through an agreement between
the Company and Chase Manhattan Bank, N.A., 3 Chase MetroTech Center, 6th
Floor, Brooklyn, New York 11245. The Separate Account's independent certified
public accountant is Ernst & Young LLP, 300 Krystal Bldg., One Union Square,
Chattanooga, Tennessee 37402.
3
<PAGE>
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
contracts and the Separate Account discussed in the Prospectus. Not all of the
information set forth in the Registration Statement, amendments and exhibits
thereto has been included in the Prospectus. Statements contained in the
Prospectus concerning the content of the contracts and legal instruments are
only summaries. For a complete statement of the terms of these documents,
reference should be made to the instruments filed with the Commission.
The laws and regulations of the states in which the Company is licensed
contain various requirements as to the amounts of stockholder's equity which
the Company is required to maintain. The Company's statutory capital and
surplus of [$ ] and [$ ] as of December 31, 1998 and 1997,
respectively, is in compliance with the requirements of all such states. The
Company is subject to various state insurance regulatory restrictions that
limit the maximum amounts of dividends available for payment without prior
approval. Under current law, during 1999, approximately [$ ] will be
available for payment of dividends by the Company without state insurance
regulatory approval. Dividends in excess of this amount may only be paid with
regulatory approval. Statutory net income for 1998, 1997 and 1996 was
[$ ], [$ ], and [$ ] respectively. The Company declared and
paid dividends to its parent, Provident Companies, Inc. of [$ ] in 1998,
[$ ] in 1997, and [$ ] in 1996.
The public offering of contracts of the Separate Account was discontinued
on February 1, 1984. No further offering of the contracts of the Separate
Account is made hereby.
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of the Separate Account is long-term
capital growth. The assets of the Separate Account will usually be invested in
a diversified portfolio of equities, which will be primarily common stocks,
with such changes as may seem advisable, from time to time, to take into
account changes in the outlook for particular industries or companies.
There may be times when management feels that conditions are such that
continued investment in a portfolio made up primarily of common stocks does not
appear to be the best method of seeking the objective of the Separate Account.
At such times, a larger proportion of the assets may be invested in preferred
stocks, corporate bonds or debentures (which may or may not be convertible into
stocks), stock warrants or options (puts or calls), or real estate.
Periodically, and in limited amounts, the Separate Account may hold funds
in the form of short-term obligations, such as U.S. Treasury Bills, bankers'
acceptances, certificates of deposit and commercial paper. This permits a
return on cash balances held prior to investment of these funds in securities.
As the contracts are subject to the risks associated with common stock
investments and changing economic conditions, there can be no assurance that
the investment objective will be attained. Please refer to the Prospectus for a
description of all fundamental and non-fundamental investment policies.
Fundamental investment policies may not be changed without the approval
of a majority in interest of the owners of annuity contracts to which variable
accumulation units are credited. A majority in interest of the owners of
variable annuity contracts means the vote of (a) 67% or more of
4
<PAGE>
the vote of the contract owners present and entitled to vote at the meeting, if
contract owners who hold with the power to vote over 50% of the variable
accumulation units outstanding are present or represented by proxy; or (b) more
than 50% of the variable accumulation units outstanding, whichever is less.
Non-fundamental investment policies may be changed by a vote of the Board of
Managers.
Changes in the Separate Account's investments are reviewed by the Board of
Managers. The aggregate portfolio turnover rates for the years 1998, 1997 and
1996 were [ ]%, 25% and, 28%, respectively.
5
<PAGE>
MANAGEMENT
A. Board of Managers of the Separate Account
The property and business of the Separate Account are managed by a Board
of Managers elected by the owners of contracts to which variable accumulation
units are credited. A majority of the Separate Account's three managers, namely
Messrs. Blaine and Law, are not deemed to be "interested persons" of the
Separate Account or the Company as defined in the Investment Company Act of
1940 ("1940 Act").
<TABLE>
<CAPTION>
Principal Occupations During Past 5
Name and Address Age Years
<C> <C> <S>
David G. Fussell* 51 Chairman of the Board; Vice President,
1 Fountain Square Securities, Provident Companies, Inc.,
Chattanooga, TN 37402 Provident Life and Accident Insurance
Company, Provident Life and Casualty
Insurance Company
Henry E. Blaine # 69 Board Member; President, Chief
2418 90th Street, N.W. Operating Officer, Chief Financial
Bradenton, Florida 34209 Officer and Member of the Board,
Bedminster Bio Corp.; B & B
Enterprises, Partner
H. Grant Law, Jr. # 52 Board Member; President, Newton
213 W. Fleetwood Drive Chevrolet, Inc.; President, Newton
Lookout Mountain, TN 37350 Oldsmobile--GMC Truck Mitsubishi, Inc.
</TABLE>
* NOTE: Interested person of the Separate Account as that term is defined
in the Investment Company Act of 1940.
# NOTE: Member: Audit Committee
B. Directors and Principal Officers of the Company
The following table shows the names, addresses, and principal occupations
of all directors and principal executive officers of the Company as of December
31, 1998.
<TABLE>
<CAPTION>
Name and Address Age Principal Occupation
<C> <C> <S>
J. Harold Chandler 49 Chairman, President and Chief Executive Officer, the
Company; Chairman, President and Chief Executive
Officer, and Director, Provident; Director, AmSouth
Bancorporation; Director, Herman Miller, Inc.;
Director, Healthsource, Inc.
Thomas R. Watjen 44 Vice Chairman and Chief Financial Officer, and
Director, the Company; Vice Chairman and Chief
Financial Officer, Provident
Robert O. Best 49 Executive Vice President, and Chief Information
Officer/Client Services, the Company; Provident
F. Dean Copeland 60 Executive Vice President and General Counsel, the
Company; Provident
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Name and Address Age Principal Occupation
<C> <C> <S>
Thomas B. Heys, Jr. 52 Executive Vice President,
Institutional Sales, the Company;
Provident
Peter C. Madeja 40 Executive Vice President, the Company;
Executive Vice President, Provident;
President and CEO of GENEX Services,
Inc.
Jeffrey F. Olingy 49 Executive Vice President, Sales
Support, the Company; Provident
Ralph A. Rogers, Jr. 50 Senior Vice President and Treasurer,
the Company; Provident
Robert Greving 47 Senior Vice President and Actuary, the
Company; Provident
Vicki W. Corbett 46 Vice President and Controller, the
Company; Provident
Susan N. Roth 40 Secretary, the Company; Provident
William L. Armstrong 62 Director, the Company; Chairman of
Ambassador Media Corporation; Chairman
of Cherry Creek Mortgage Company,
Inc.; Chairman of El Paso Mortgage
Company; Chairman of Centennial State
Mortgage Company; Chairman of Frontier
Real Estate, Inc.; Chairman of
Frontier Title, LLC; Chairman of
Transland Financial Services, Inc.;
Director, Storage Technology
Corporation; Director, Helmerich and
Payne, Inc.
William H. Bolinder 55 Director, the Company; Chairman,
Zurich Insurance Company; Chairman,
Zurich Group
Charlotte M. Heffner 61 Director, the Company; Trustee of The
Maclellan Foundation
Hugh B. Jacks 64 Director, the Company; President,
Potential Enterprises, Inc.
Hugh O. Maclellan, Jr. 59 Director, the Company; President, The
Maclellan Foundation; Director,
SunTrust Bank; Director, Covenant
Transport
A.S. (Pat) MacMillan 55 Director, the Company; Chief Executive
Officer, Team Resources, Inc.;
Trustee, the Maclellan Foundation
C. William Pollard 60 Director, the Company; Chairman of the
Board, The ServiceMaster Company;
Director, Herman Miller, Inc.;
Director, Coro, Inc.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Name and Address Age Principal Occupation
<C> <C> <S>
Scott L. Probasco, Jr. 70 Director, the Company; Chairman, Executive
Committee, SunTrust Bank; Director, Chattem, Inc.;
Director, SunTrust Banks, Inc.; Director, Coca Cola
Enterprises
Steven S Reinemund 51 Director, the Company; Chairman and Chief Executive
Officer, Frito-Lay, Inc; Director, PepsiCo.;
Director, The ServiceMaster Company
Burton E. Sorensen 69 Director, the Company; Director, The ServiceMaster
Company
</TABLE>
C. Remuneration of the Board of Managers
The Separate Account is responsible for payment of fees and expenses of
the members of the Board of Managers as well as expenses for audit of the
Separate Account. All other expenses or services relative to the operation of
the Separate Account are paid for by the Company for which it deducts certain
amounts from purchase payments and from the Separate Account (See Prospectus,
page [ ]). Members of the Board of Managers who are also active or retired
officers, directors or employees of the Company do not receive any fees from
the Separate Account. These members are deemed to be interested persons and
receive direct remuneration or an indirect benefit as active or retired
officers and/or stockholders of the Company. The total aggregate remuneration
paid by the Separate Account to all members of the Board of Managers for the
fiscal year ended December 31, 1998 was $4,000. This amount represents
consideration paid for attendance at meetings of the Board of Managers.
Reimbursement for expenses incurred may also be made if and when applicable.
COMPENSATION TABLE
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Pension or
Retirement Total Compensation
Aggregate Benefits Accrued Estimated From Registrant
Name of Person, Compensation As Part of Fund Annual Benefits and Fund Complex
Position From Registrant Expenses Upon Retirement Paid to Directors
<S> <C> <C> <C> <C>
David G.
Fussell $0 $0 $0 $0
Chairman
Henry E.
Blaine $2,000 $0 $0 $2,000
Member
H. Grant
Law, Jr. $2,000 $0 $0 $2,000
Member
</TABLE>
D. Election of the Board of Managers
The Board of Managers of the Separate Account is elected annually by the
owners of contracts for which reserves are maintained in the Separate Account.
Under the terms of the 1940 Act, the Separate Account must have a Board of
Managers, not more than sixty-percent of the members of which are deemed to be
"interested persons" of the Separate Account or its Investment
Adviser/Principal Underwriter as defined in the 1940 Act. Two members of the
Board of Managers whose terms continue, namely Mr. Blaine and Mr. Law, are not
deemed to be "interested persons" as defined in the 1940 Act.
8
<PAGE>
INVESTMENT ADVISORY SERVICES
Investment Advisory Agreement
The Company currently serves as investment adviser to the Separate
Account pursuant to an Investment Advisory Agreement, which was approved by
contract owners on February 3, 1998. The agreement must be renewed each year by
a majority of the Separate Account's Board of Managers who are not parties to
the agreement or interested persons of any such party.
Under the agreement, the Company agrees to provide "investment advisory
services" to the Separate Account. In that connection, it is required
specifically to provide the Board of Managers continuously with an investment
program for its approval or rejection and, if rejected, to submit another
program for consideration.
Pursuant to the agreement, the Company is responsible for all duties
related to the investment, reinvestment and safekeeping of the assets of the
Separate Account and for all expenses attributable to performing its investment
advisory services, including costs of compensating officers and employees of
the Company connected with providing investment advisory services to the
Separate Account.
In connection with the Company's obligations under the agreement, the
Company bears the cost of all services and expenses attributable to the
maintenance and operation of the Separate Account (other than costs relating to
the administration and distribution of the variable annuity contracts, which
are provided for in the current Sales and Administration Agreement for the
Separate Account). These costs include, among other things: fees paid to PRIMCO
pursuant to the Investment Sub-Advisory Agreement between the Company and
PRIMCO as described below; fees required by federal and state securities
regulatory authorities and the National Association of Securities Dealers,
Inc.; costs of maintaining the books and records of the Separate Account;
outside legal, accounting, actuarial and other professional costs; costs of
determining the net asset value of the Separate Account; and other out-of-
pocket expenses relating to the Separate Account, including salaries, rent,
postage, telephone, travel, office equipment and stationery. All brokerage
commissions and other fees relating to purchases and sales of investments for
the Separate Account are paid out of the assets of the Separate Account.
For its advisory services to the Separate Account under the agreement,
the Company charges an amount which equals, on an annual basis, 0.50% of the
average daily net asset value of the Separate Account. This charge is paid
weekly by the Separate Account. At December 31, 1998, the net asset value for
the Separate Account was [$ ]. For the fiscal years ended December 31,
1998, 1997 and 1996, the Company received fees under the agreement aggregating
[$ ], [$ ], and [$ ], respectively.
Sales and Administrative Services Agreement
The Company also acts as principal underwriter and performs
administrative functions pursuant to a Sales and Administrative Services
Agreement between the Company and the Separate Account dated [ ]
and re-executed on [ ].
As a consequence of an Asset Transfer and Acquisition Agreement entered
into by Provident Companies, Inc., et. al. and American General Corporation,
et. al., dated as of December 8, 1997,
9
<PAGE>
The Variable Annuity Life Insurance Company became the Administrator of the
Separate Account pursuant to the Separate Account Administrative Services
Agreement dated May 15, 1998 between the Company and The Variable Annuity Life
Insurance Company. The change in Administrator will not result in any changes
in administrative and sales fees.
Under the agreement, the Company acts as principal underwriter and
performs administrative functions relative to variable annuity contracts,
receiving as compensation the sales and administration charge deducted from
purchase payments as described in the Prospectus. The total sales and
administration charges received by the Company in 1998, 1997 and 1996 were
[$ ], [$ ], and [$ ], respectively.
The Company also received [$ ], [$ ], and [$ ], from
the Separate Account during 1998, 1997 and 1996, respectively, as its charge
for assuming the mortality and expense risks under its variable annuity
contracts, this representing a charge on each valuation date of an amount
which, on an annual basis, equals .70% of the average daily net asset value of
the Separate Account as permitted under the Sales and Administrative Services
Agreement. At the present time the Company believes there are no statutory or
regulatory limitations on the expenses that may be deducted from the Separate
Account, but the Company assures that all expense deductions, other than for
taxes, will not exceed 2% annually based upon the average daily net asset value
of the Separate Account.
Investment Sub-Advisory Agreement
Under the Investment Advisory Agreement between the Separate Account and
the Company, the Company is specifically authorized to employ one or more sub-
advisers in connection with the services to be performed and obligations to be
assumed by the Company. Pursuant thereto, the Company entered into an
Investment Sub-Advisory Agreement ("Sub-Agreement") with PRIMCO which was
approved by a majority of contract owners on June 25, 1998. The Sub-Advisory
Agreement is subject to the same terms for approval, renewal and termination as
the Agreement itself.
Under the Sub-Advisory Agreement, PRIMCO, subject to the supervision of
the Company and the Board of Managers of the Separate Account, is responsible
for providing investment advisory services to the Company for the Separate
Account in accordance with investment objectives and guidelines provided by the
Company. In providing these services, PRIMCO is authorized to buy, sell,
exchange, convert and otherwise trade in securities in the portfolio, and place
orders for the execution of such transactions with or through such brokers,
dealers, or issuers as it selects. PRIMCO provides the Company with a value of
the portfolio on a daily basis. PRIMCO provides such reports to the Company and
the Board of Managers as are reasonably required and attends meetings of the
Board of Managers on a quarterly basis.
For providing such investment sub-advisory services, the Company pays
PRIMCO compensation in the amount of .15% per annum, based on the average
market value of the Separate Account as of the last business day of each
calendar month in the quarter. The fee is payable quarterly by the Company.
PRIMCO is a Tennessee limited liability company organized in October
1997. It is owned by Provident Companies, Inc. and two of its subsidiaries,
Provident Life and Accident Insurance Company ("Provident Life") and The Paul
Revere Life Insurance Company ("Paul Revere Life").
10
<PAGE>
PRIMCO is registered with the SEC as an investment adviser. Its principal
offices are located at 1 Fountain Square, Chattanooga, Tennessee 37402. Its
predecessor was The Paul Revere Investment Management Company, with whom it was
merged in 1997. The managers of PRIMCO are also officers of the Company. The
members of the Board of Governors of PRIMCO are officers of the Company. The
personnel employed by PRIMCO consist primarily of individuals who were
previously employed in the investment operations of Provident Companies, Inc.
or its insurance subsidiaries. Thus, the same personnel who has provided
investment services to the Company and to the Separate Account will continue to
do so, but they are employed by a different legal entity.
As well as providing investment management services to the Provident
companies, PRIMCO also provides investment management services to other
insurance companies. As of December 31, 1997, PRIMCO had over $18 billion in
assets under management.
Ownership and Control
As of December 31, 1998, the members of the Board of Managers of the
Separate Account and the directors and principal officers of the Company as a
group, through their ownership of individual variable annuity contracts, owned
beneficially and of record no units.
BROKERAGE ALLOCATION
PRIMCO, a sub-adviser to the Company, selects the securities for purchase
and sale by the Separate Account. Changes in the Separate Account's investments
are reviewed by the Board of Managers.
The Company has no set formula for the distribution of brokerage business
in connection with the placing of orders for the purchase and sale of
investments. The primary consideration in placing portfolio security
transactions with broker/dealers is execution at the most favorable prices and
in the most effective manner possible.
PRIMCO attempts to achieve this result by selecting broker/dealers to
execute portfolio transactions on behalf of the Separate Account and its other
clients on the basis of their professional capability, the value and quality of
the brokerage services and the level of their brokerage commissions. In the
case of securities traded in the over-the-counter market (where no stated
commissions are paid but prices include a dealer's markup or markdown), PRIMCO
normally seeks to deal directly with the primary market makers, unless in its
opinion, best execution is available elsewhere. In the case of such securities
purchased from underwriters, the cost of such securities generally includes a
fixed underwriting commission or concession. From time to time soliciting
dealer fees may be available to PRIMCO on the tender of Separate Account
portfolio securities in so-called Tender or Exchange Offers. Such soliciting
dealer fees will be, in effect, recaptured for the Separate Account by PRIMCO
to the extent possible. At present no other recapture agreements are in effect.
Brokerage business is not allocated based on the sale of variable annuity
contracts.
Under the Sub-Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, PRIMCO may cause the Separate Account to pay a
broker/dealer who provides brokerage and research services to the Separate
Account and to PRIMCO, an amount of commission for effecting a securities
transaction for the Separate Account in excess of the amount other
broker/dealers would have charged for the transaction. PRIMCO may do this if it
determines in
11
<PAGE>
good faith that the greater commission is reasonable in relation to the value
of the brokerage research services provided by the executing broker/dealer
viewed in terms of either a particular transaction or PRIMCO's overall
responsibility to the Separate Account or to its other clients. Not all such
services are useful or of value in advising the Separate Account.
The term "broker and research services" includes advice as to the value
of the securities, the advisability of investing in, purchasing or selling
securities and the availability of securities or of purchasers or sellers of
securities.
It also includes furnishing analysis reports and reports concerning
issues, industries, securities, economic factors, trends, portfolio strategies,
performance of accounts, as well as effecting securities transactions and
performing functions incidental thereto such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of
PRIMCO, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker/dealer might charge
may be paid to broker/dealers who were selected to execute transactions on
behalf of the Separate Account and PRIMCO's other clients.
This could occur, in part, when a broker/dealer provides advice as to the
availability of securities or purchasers or sellers of securities and services
in effecting securities transactions and performing functions incidental
thereto such as clearance and settlement.
Broker/dealers may be willing to furnish statistical research and other
factual information or services ("research") to PRIMCO for no consideration
other than brokerage and underwriting commissions. Securities may be bought or
sold through such broker/dealers but, at present, unless otherwise directed by
the Separate Account, a commission higher than one charged, will not be paid to
such a firm solely because it provided such "research" to PRIMCO.
PRIMCO's investment management personnel attempt to evaluate the quality
of "research" provided by brokers. Results of this effort are sometimes used by
PRIMCO as a consideration in selection of brokers to execute portfolio
transactions. However, PRIMCO is unable to quantify the amount of commission
which was paid as a result of such "research" because a substantial number of
transactions were effected through brokers who provide "research" but were
selected principally because of their execution capabilities.
In certain instances, there may be securities which are suitable for the
Separate Account's portfolio as well as that of one or more of the other
clients of PRIMCO. Investment decisions for the Separate Account and for
PRIMCO's other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be held by or bought or sold for
other clients. Likewise, a particular security may be bought for one or more
clients when one or more other clients are selling that same security. Some
simultaneous transactions are unavoidable because several clients have similar
investment objectives. When two or more clients are simultaneously engaged in
the purchase or sale of the same security, the securities are allocated among
clients in a manner believed to be equitable to each. It is recognized in some
cases this system could have a detrimental effect on the price or volume of the
securities as far as the Separate Account is concerned. In other cases, it is
believed that the Separate Account's ability to participate in volume
transactions will produce better transaction results for the Separate Account.
12
<PAGE>
Brokerage commissions paid in the years ended December 31, 1998, 1997 and
1996 amounted to [ ], [$ ], and [$ ], respectively. Brokerage
commissions were paid to [ ] brokers in 1998. No brokerage commission was paid
to any broker who was or is an affiliated person of the Company, the Separate
Account or PRIMCO.
[Note -- In response to Item 22(d); please provide the requested
information re: any directed brokerage transactions. If applicable, please
respond to Item 22(c).]
UNDERWRITERS
The Company is the principal underwriter for contracts offered by the
Prospectus. The Company did not receive any underwriting commissions for the
sale of these contracts.
13
<PAGE>
SIGNATURES
As required by (the Securities Act of 1933 and) the Investment Company
Act of 1940 the Registrant certifies that it meets the requirements of
Securities Act Rule 486(b) for effectiveness of this Registration Statement
and) has caused this Registration Statement to be signed on its behalf, in the
City of Chattanooga, and State of Tennessee on the .
PROVIDENT NATIONAL ASSURANCE
COMPANY SEPARATE ACCOUNT B
------------------------
David G. Fussell
Chairman, Board of Managers
PROVIDENT NATIONAL ASSURANCE
COMPANY
------------------------
J. Harold Chandler
President and Chief Executive Officer
II-1
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman and Member of
______________________________________ Board of Managers
David G. Fussell (Principal Executive
Officer and Principal
Financial Accounting
Officer)
Member of the Board
______________________________________
Henry E. Blaine
Member of the Board of
______________________________________ Managers
H. Grant Law, Jr.
</TABLE>
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the registrant has duly caused this post-
effective amendment to its registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized in the City of Chattanooga, State of
Tennessee, on the .
PROVIDENT NATIONAL ASSURANCE COMPANY
-------------------------
J. Harold Chandler
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this post-
effective amendment to its registration statement has been signed below by the
following persons on , in the capacities indicated.
<TABLE>
<S> <C> <C>
President and Chief Executive Officer
______________________________________ (Principal Executive Officer)
J. Harold Chandler
Vice Chairman and Chief
______________________________________ Financial Officer, Director
Thomas R. Watjen
Director
______________________________________
William L. Armstrong
Director
______________________________________
William H. Bolinder
Director
______________________________________
Charlotte M. Heffner
Director
______________________________________
Hugh B. Jacks
Director
______________________________________
Hugh O. Maclellan, Jr.
Director
______________________________________
A. S. MacMillan
Director
______________________________________
C. William Pollard
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C> <C>
Director
______________________________________
Scott L. Probasco, Jr.
Director
______________________________________
Steven S. Reinemund
Director
______________________________________
Burton E. Sorensen
</TABLE>
II-4
<PAGE>
EXHIBIT 99.13A
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated , with respect to the financial
statements of Provident National Assurance Company and of our reports
dated , with respect to the financial statements and financial statement
schedules of Provident National Assurance Company Separate Account B in this
Post-Effective Amendment No. under the Securities Act of 1933 and
Amendment No. under the Investment Company Act of 1940 to the Registration
Statement and in the Disclosure Statement.
ERNST & YOUNG LLP
<PAGE>
EXHIBIT 99.13B
Consent of Counsel
I hereby consent to the use of my name in the disclosure statement included
as part of this Post-Effective Amendment No. to this Registration Statement
and to the reference made to me under the caption "Legal Opinion" in such
disclosure statement.
SUSAN N. ROTH
Chattanooga, Tennessee
- -------------------------
