<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1998.
REGISTRATION NO. 333-_____
& 811-6298
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. [_]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 13 [X]
AUSA LIFE INSURANCE COMPANY, INC.
SEPARATE ACCOUNT B
(Exact Name of Registrant)
AUSA Life Insurance Company, Inc.
(Name of Depositor)
666 Fifth Avenue
New York, New York 10103
(Address of Depositor's Principal Executive Office)
Depositor's Telephone Number: 212-246-5234
Gregory E. Miller-Breetz, Esquire
AUSA Life Insurance Company, Inc.
P.O. Box 32830
400 West Market Street
Louisville, KY 40232
(Name and Address of Agent for Service)
Copy to:
Michael Berenson, Esquire
James Bernstein, Esquire
Jorden Burt Boros Cicchetti Berenson & Johnson LLP
1025 Thomas Jefferson St. N.W. Suite 400 E
Washington, DC 20007-0805
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
It is proposed that this filing will become effective (check appropriate box):
[_] Immediately upon filing pursuant to paragraph (b) of Rule 485.
[_] On ___________ pursuant to paragraph (b)(1)(v) of Rule 485.
[_] 60 days after filing pursuant to paragraph (a)(1) of Rule 485.
[_] On ______ pursuant to paragraph (a)(1) of Rule 485.
[_] 75 days after filing pursuant to paragraph (a)(2) of Rule 485.
[_] On ______ pursuant to paragraph (a)(2) of Rule 485.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a)
shall determine.
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<PAGE>
PURSUANT TO RULE 481
SHOWING LOCATION IN PART A (PROSPECTUS) AND PART B
(STATEMENT OF ADDITIONAL INFORMATION) OF REGISTRATION
STATEMENT OF INFORMATION REQUIRED BY FORM N-4
PART A
<TABLE>
<CAPTION>
ITEM OF
FORM N-4 PROSPECTUS CAPTION
<C> <S> <C>
1. Cover Page........................ Cover Page
2. Definitions....................... Glossary
3. Synopsis.......................... Highlights; Fee Table
4. Condensed Financial Information... Condensed Financial Information
5. General Description of Registrant,
Depositor, and Portfolio
Companies......................... AUSA Life Insurance Company,
Inc.; AUSA Life Insurance
Company, Inc. Separate Account B;
Vanguard Variable Insurance Fund;
Voting Rights
6. Deductions and Expenses........... Charges and Deductions; Taxes;
Vanguard Variable Insurance Fund;
Expenses
7. General Description of Variable
Annuity Contracts................. Contract Features; Distribution
at Death Rules; Voting Rights;
Allocation of Purchase Payments;
Exchanges Among the Portfolios;
Additions, Deletions, or
Substitutions of Investments
8. Annuity Period.................... Annuity Payment Options
9. Death Benefit..................... Death of Annuitant Prior to
Annuity Date
10. Purchases and Contract Value...... Contract Application and Purchase
Payments; Accumulated Value
11. Redemptions....................... Full and Partial Withdrawals;
Annuity Payment Options; Free
Look Period
12. Taxes............................. Federal Tax Considerations
13. Legal Proceedings................. Part B: Legal Proceedings
14. Table of Contents for the
Statement of Additional
Information....................... Table of Contents for the
Vanguard Variable Annuity Plan
Contract Statement of Additional
Information
PART B
<CAPTION>
ITEM OF STATEMENT OF ADDITIONAL
FORM N-4 INFORMATION CAPTION
<C> <S> <C>
15. Cover Page........................ Cover Page
16. Table of Contents................. Table of Contents
17. General Information and History... The Company
18. Services.......................... Part A: Auditors; Safekeeping of
Account Assets; Distribution of
the Contract
19. Purchase of Securities Being
Offered........................... Distribution of the Contract
20. Underwriters...................... Distribution of the Contract
21. Calculation of Performance Data... Performance Information;
Additional Performance Measures
22. Annuity Payments.................. Computations of Variable Annuity
Income Payments
23. Financial Statements.............. Financial Statements
</TABLE>
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
SEPARATE ACCOUNT B
PROSPECTUS
FOR THE
VANGUARD VARIABLE ANNUITY PLAN CONTRACT
OFFERED BY
AUSA LIFE INSURANCE COMPANY, INC.
(A NEW YORK STOCK COMPANY)
OCTOBER 1, 1998
The Vanguard Variable Annuity Plan Contract (the "Contract"), offered through
AUSA Life Insurance Company, Inc. (the "Company"), provides a vehicle for in-
vesting on a tax-deferred basis in nine Portfolios offered by The Vanguard
Group, Inc. The Contract is intended for retirement savings or other long-term
investment purposes.
The minimum Initial Purchase Payment for the Contract is $5,000; there are no
sales loads. The Contract is a flexible-premium deferred variable annuity that
provides a Free Look Period for a minimum of 10 days (20 days for replacement)
during which you may cancel your investment in the Contract.
Your Purchase Payments for the Contract may be allocated among nine
Subaccounts of AUSA Life Insurance Company, Inc. Separate Account B (the "Sep-
arate Account"). Assets of each Subaccount are invested in corresponding Port-
folios of Vanguard Variable Insurance Fund (the "Fund"), an open-end, diversi-
fied investment company offered by The Vanguard Group, Inc. The Fund currently
offers nine Portfolios: the Money Market Portfolio, the High-Grade Bond Port-
folio, the High Yield Bond Portfolio, the Balanced Portfolio, the Equity In-
come Portfolio, the Equity Index Portfolio, the Growth Portfolio, the Interna-
tional Portfolio, and the Small Company Growth Portfolio. Net Purchase
Payments are automatically allocated to the Money Market Portfolio until the
end of your Free Look Period, and are subsequently allocated according to your
instructions.
The Contract's Accumulated Value varies with the investment performance of
the Portfolios you select. You bear all investment risk and investment results
for the Portfolios are not guaranteed.
The Contract offers a number of ways of withdrawing monies at a future date,
including a lump-sum payment and several Annuity Payment Options. Full or par-
tial withdrawals from the Contract may be made at any time before the Annuity
Date, although in many instances withdrawals made prior to age 59 1/2 are sub-
ject to a 10% penalty tax (and a portion may be subject to ordinary income
taxes). If you elect an Annuity Payment Option, Annuity Payments may be re-
ceived on a fixed or variable basis. You also have significant flexibility in
choosing the Annuity Date on which Annuity Payments begin.
This Prospectus sets forth the information you should know before investing
in the Contract; it must be accompanied by the current Prospectus for the Van-
guard Variable Insurance Fund. Please read both Prospectuses carefully and re-
tain them for future reference. A Statement of Additional Information for the
Contract Prospectus, which has the same date as this Prospectus, has also been
filed with the Securities and Exchange Commission, is incorporated herein by
reference and is available free by writing to Vanguard Variable Annuity Cen-
ter, P.O. Box 1103, Valley Forge, PA 19482-1103. The Table of Contents of the
Statement of Additional Information is included at the end of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
HIGHLIGHTS................................................................ 3
Fee Table................................................................. 6
Glossary.................................................................. 9
Condensed Financial Information........................................... 12
Financial Statements...................................................... 12
Yield and Total Return.................................................... 12
The Company and the Separate Account...................................... 13
Vanguard Variable Insurance Fund.......................................... 14
CONTRACT FEATURES......................................................... 16
Free Look Period.......................................................... 16
Contract Application and Purchase Payments................................ 16
Allocation of Purchase Payments........................................... 18
Charges and Deductions.................................................... 19
Accumulated Value......................................................... 20
Dividends and Capital Gains Treatment..................................... 21
Annuity Express(TM)....................................................... 21
Exchanges Among the Portfolios............................................ 21
Full and Partial Withdrawals.............................................. 22
Minimum Balance Requirements.............................................. 23
Designation of a Beneficiary.............................................. 23
Death of Annuitant Prior to Annuity Date.................................. 24
Annuity Date.............................................................. 25
Annuity Payment Options................................................... 25
FEDERAL TAX CONSIDERATIONS................................................ 27
General Information....................................................... 32
</TABLE>
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The Contract is only available in the State of New York.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESMAN, OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON.
2
<PAGE>
HIGHLIGHTS
REFER TO THE GLOSSARY (PAGE 9) FOR A DEFINITION OF ALL CAPITALIZED TERMS.
VANGUARD VARIABLE The Contract provides a vehicle for investing on a tax-
ANNUITY PLAN deferred basis in nine Portfolios offered by The Van-
CONTRACT guard Group, Inc. Monies may be subsequently withdrawn
from the Contract either as a lump sum or as an annuity
income. Because Accumulated Values and, to the extent
Variable Annuity Payments are selected, Annuity Payments
depend on the investment performance of the selected
Portfolios, you bear all investment risk for monies in-
vested under the Contract. The investment performance of
the Portfolios is not guaranteed.
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WHO SHOULD INVEST The Contract is designed for investors seeking long-
term, tax-deferred accumulation of funds, generally for
retirement but also for other long-term investment pur-
poses. The tax-deferred feature of the Contract is most
attractive to investors in high federal and state mar-
ginal tax brackets who have exhausted other avenues of
tax deferral, such as "pre-tax" contributions to employ-
er-sponsored retirement or savings plans. The Contract
is intended for long-term investors.
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INVESTMENT CHOICES Your investment in the Contract may be allocated among
several Subaccounts of the Separate Account. The
Subaccounts in turn invest exclusively in the nine Port-
folios of Vanguard Variable Insurance Fund. The Fund, a
member of The Vanguard Group of Investment Companies,
offers nine Portfolios: the Money Market Portfolio, the
High-Grade Bond Portfolio, the High Yield Bond Portfo-
lio, the Balanced Portfolio, the Equity Income Portfo-
lio, the Equity Index Portfolio, the Growth Portfolio,
the International Portfolio, and the Small Company
Growth Portfolio. The assets of each Portfolio are sepa-
rate, and each Portfolio has distinct investment objec-
tives and policies as described in the accompanying Fund
Prospectus. PAGE 14
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FREE LOOK PERIOD The Contract provides a Free Look Period for a minimum
of 10 days during which you may cancel your investment
in the Contract. To cancel your investment, please re-
turn your Contract to us. When we receive the Contract,
you will be reimbursed for all Purchase Payments and any
corresponding appreciation credited to your account.
PAGE 16
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HOW TO INVEST To invest in the Contract, please complete the accompa-
nying application form. The minimum Initial Purchase
Payment is $5,000; the minimum Portfolio balance is
$1,000; and subsequent Purchase Payments must be at
least $250. You may make subsequent Purchase Payments at
any time before the Contract's Annuity Date, as long as
the Annuitant or Joint Annuitant specified in the Con-
tract is living. Please note that when purchasing a Con-
tract, the Annuitant you name, and the Joint Annuitant
if applicable, must be 75 years of age or less. PAGE 16
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3
<PAGE>
ALLOCATION OF Your Net Purchase Payments are initially allocated to
PURCHASE PAYMENTS the Money Market Portfolio when your Contract is issued.
Subsequently at the end of the Free Look Period, and a
5-day grace period, the then current Accumulated Value
of your Contract is allocated among the Portfolios of
the Fund in accordance with your application instruc-
tions. Requests to change the allocation of subsequent
Net Purchase Payments may be made in writing. PAGE 18
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CHARGES AND The Contract imposes no sales charges. The costs of the
DEDUCTIONS UNDER Contract include mortality and expense risk charges,
THE CONTRACT maintenance and administrative charges which cover the
cost of administering the Contract, and management, ad-
visory and other fees, which reflect the costs of Van-
guard Variable Insurance Fund. There are no charges un-
der the Contract for withdrawals, although withdrawals
made prior to age 59 1/2 may be subject to a 10% penalty
tax. PAGE 19
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EXCHANGES You may make exchanges among the Fund's Portfolios sub-
ject to certain restrictions on excess exchange activi-
ty. These restrictions do not apply, however, to non-
substantive exchanges or to the Money Market Portfolio.
No fee is imposed for exchanges. Exchanges must be for
at least $250, or, if less, for the entire value of the
Portfolio from which the exchange is made. PAGE 21
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FULL AND PARTIAL You may withdraw all or part of the Accumulated Value of
WITHDRAWALS the Contract before the earlier of the Annuity Date or
the Annuitant's death (or the Joint Annuitant's death,
if later). You may establish systematic withdrawals from
your Contract, and receive distributions at regular in-
tervals. Withdrawals made prior to age 59 1/2 may be
subject to a 10% penalty tax. PAGE 22
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DEATH BENEFIT If the Annuitant specified in your Contract dies prior
to the Annuity Date, the Annuitant's named Beneficiary
will receive the Death Benefit under the Contract. The
Death Benefit is the greater of the then-current Accumu-
lated Value of the Contract or the sum of all Purchase
Payments (less any partial withdrawals). Your Benefi-
ciary may elect to receive these proceeds as a lump sum
or as Annuity Payments. PAGE 23
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ANNUITY PAYMENT Beginning on the Annuity Date, you may withdraw monies
OPTIONS from the Contract in the form of an annuity income. As
the Contract Owner you may elect one of several Annuity
Payment Options. The Options provide a wide range of
flexibility in choosing an annuity payment schedule that
meets your particular needs. Annuity Payments may be re-
ceived for a designated period or for life (for either a
single or joint life), with or without a guaranteed num-
ber of payments. Annuity Payments can be fixed, or can
vary with the investment performance of a Portfolio of
the Fund. You may elect a lump-sum payment prior to the
Annuity Date in lieu of Annuity Payments. PAGE 25
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4
<PAGE>
CONTRACT AND If you have questions about your Contract, please tele-
POLICYHOLDER phone the Vanguard Variable Annuity Center (1-800-258-
INFORMATION 4271). Please have ready the Contract number and the
Contract Owner's name when you call. As Contract Owner,
you will receive periodic statements confirming any
transactions that take place, as well as quarterly
statements and an Annual Report.
- -------------------------------------------------------------------------------
5
<PAGE>
FEE TABLE The following table illustrates all expenses that you
would incur as a Contract Owner. The expenses and fees
shown are for the Fund's 1997 fiscal year. The purpose
of this table is to assist you in understanding the var-
ious costs and expenses that you would bear directly or
indirectly as a purchaser of the Contract. The fee table
reflects all expenses for both the Separate Account and
the Fund. For a complete discussion of contract costs
and expenses, see "Charges and Deductions."
<TABLE>
<CAPTION>
SEPARATE
OWNER TRANSACTION EXPENSES ACCOUNT
----------------------------------------------------------
<S> <C>
Sales Load Imposed on Purchases.................. None
Redemption Fees.................................. None
Exchange Fees.................................... None
----------------------------------------------------------
Annual Contract Maintenance Fee*................. $25
</TABLE>
* Applies to Contracts valued at less than $25,000 at
the time of initial purchase and on the last Business
Day of each calendar year.
<TABLE>
<CAPTION>
SEPARATE
ANNUAL SEPARATE ACCOUNT EXPENSES ACCOUNT
----------------------------------------------------------
<S> <C>
Mortality and Expense Risk Charge**.............. .28%
Administrative Expense Charge.................... .10%
---
TOTAL ANNUAL SEPARATE ACCOUNT EXPENSES........... .38%
===
</TABLE>
** This charge is currently reduced to 0.28% of all as-
sets when net assets attributable to the Separate Ac-
count (and Separate Account IV of Peoples Benefit
Life Insurance Company) exceed $2.5 billion. This
charge is further reduced to 0.27% of all assets when
net assets attributable to the Separate Account (and
Separate Account IV of Peoples Benefit Life Insurance
Company) exceed $5 billion. See "Mortality and Ex-
pense--Risk Charge."
<TABLE>
<CAPTION>
HIGH SMALL
MONEY HIGH-GRADE YIELD EQUITY EQUITY COMPANY
ANNUAL FUND MARKET BOND BOND BALANCED INCOME INDEX GROWTH INTERNATIONAL GROWTH
OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management &
Administrative
Expenses............... .15% .21% .21% .19% .23% .20% .20% .22% .23%
Investment Advisory
Fees................... .02 .02 .06 .10 .10 .00 .15 .16 .12
12b-1 Distribution Fees. None None None None None None None None None
Other Expenses
Distribution Costs..... .03 .02 .02 .02 .02 .02 .02 .02 .01
Miscellaneous Expenses. .01 .04 .02 .01 .02 .01 .01 .06 .03
---- ---- ---- ---- ---- ---- ---- ---- ----
Total Other Expenses.... .04 .06 .04 .03 .04 .03 .03 .08 .04
---- ---- ---- ---- ---- ---- ---- ---- ----
TOTAL FUND OPERATING
EXPENSES............. .21% .29% .31% .32% .37% .23% .38% .46% .39%
==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
HIGH- HIGH SMALL
MONEY GRADE YIELD EQUITY EQUITY COMPANY
MARKET BOND BOND BALANCED INCOME INDEX GROWTH INTERNATIONAL GROWTH
TOTAL EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Separate Account
Expenses............... .38% .38% .38% .38% .38% .38% .38% .38% .38%
Total Fund Operating
Expenses............... .21 .29 .31 .32 .37 .23 .38 .46 .39
--- --- --- --- --- --- --- --- ---
GRAND TOTAL, SEPARATE
ACCOUNT AND FUND
OPERATING EXPENSES... .59% .67% .69% .70% .75% .61% .76% .84% .77%
=== === === === === === === === ===
</TABLE>
The following example illustrates the expenses that you
would incur on a $1,000 purchase payment over various
periods, assuming (1) a 5% annual rate of return and (2)
redemption at the end of each period. As noted in the
table above, the Contract imposes no redemption fees of
any kind. Your expenses are identical whether you con-
tinue the Contract or withdraw the entire value of your
Contract at the end of the applicable period as a lump
sum or under one of the Contract's Annuity Payment Op-
tions.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Portfolio............ $ 6 $19 $33 $ 75
High-Grade Bond Portfolio......... 7 22 38 85
High Yield Bond Portfolio......... 7 22 38 86
Balanced Portfolio................ 7 23 40 89
Equity Income Portfolio........... 8 24 42 94
Equity Index Portfolio............ 6 20 35 78
Growth Portfolio.................. 8 25 43 96
International Portfolio........... 9 27 47 105
Small Company Growth Portfolio.... 8 25 43 97
</TABLE>
The Annual Contract Maintenance Fee is reflected in this
example as a percentage equal to the total amount of
fees collected during a year divided by the total aver-
age net assets of the Portfolios during the same year.
The fee is assumed to remain the same in each year of
the above periods. The fee is prorated to reflect only
the remaining portion of the calendar year of purchase.
Thereafter, the fee is deducted on the last business day
of the year for the following year, on a pro rata basis,
from each of the Portfolios you have chosen. For a com-
plete discussion of Contract costs and expenses, see
"Charges and Deductions."
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EX-
PENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN, SUBJECT
TO THE GUARANTEES IN THE CONTRACT.
---------------------------------------------------------
AUTOMATED QUOTES The Vanguard Tele-Account Service provides access to Ac-
cumulation Unit Values (to two decimal places) and total
returns for all Portfolios, and yield information for
the Money Market, High-Grade Bond, and High Yield Bond
Portfolios of the Plan. Contract Owners may utilize this
service for 24-hour access to Plan Portfolio informa-
tion. To access the service you may call
7
<PAGE>
Tele-Account at 1-800-662-6273 (ON-BOARD) and follow the
step-by-step instructions, or speak with a Vanguard as-
sociate at 1-800-522-5555 to request a brochure that ex-
plains how to use the service.
Vanguard's website also has Accumulation Unit Values (to
two decimal places) for all Portfolios. This service can
be utilized from www.vanguard.com by double-clicking on
fund prices.
- -------------------------------------------------------------------------------
8
<PAGE>
GLOSSARY ACCUMULATION UNIT--A measure of your ownership interest
in the Contract prior to the Annuity Date. Analogous,
though not identical, to a share owned in a mutual fund
account.
ACCUMULATION UNIT VALUE--The value of each Accumulation
Unit which is calculated each Valuation Period. Analo-
gous, though not identical, to the share price (net as-
set value) of a mutual fund.
ACCUMULATED VALUE--The value of all amounts accumulated
under the Contract prior to the Annuity Date, equivalent
to the Accumulation Units multiplied by the Accumulation
Unit Value. Analogous to the current market value of a
mutual fund account.
ANNUITANT--The person or persons whose life is used to
determine the duration of any Annuity Payments and, sub-
ject to the provision dealing with Joint Annuitants,
upon whose death, prior to the Annuity Date, benefits
under the Contract are paid.
ANNUITY DATE--The date on which Annuity Payments begin.
The Annuity Date is always the first day of the month
you specify.
ANNUITY PAYMENT--One of a series of payments made under
an Annuity Payment Option. Annuity Payments are based on
the lifetime or life expectancy of the Annuitant unless,
after the Contract Date, an Annuity Income Option which
pays for a certain period only is elected.
ANNUITY PAYMENT OPTION--One of several ways in which a
series of payments are made after the Annuity Date. Un-
der a Fixed Annuity Option, the dollar amount of each
Annuity Payment does not change over time. Annuity Pay-
ments are based on the Contract's Accumulated Value as
of the Annuity Date. Under a Variable Annuity Option,
the dollar amount of each Annuity Payment may change
over time, depending upon the investment experience of
the Portfolio or Portfolios you choose.
ANNUITY UNIT--Unit of measure used to calculate Variable
Annuity Payments.
BENEFICIARY--The person to whom any benefits are due
upon the Annuitant's death.
BUSINESS DAY--A day when the New York Stock Exchange is
open for trading.
COMPANY ("WE", "US", "OUR")--AUSA Life Insurance Compa-
ny, Inc., a New York stock company.
CONTRACT--The flexible premium variable annuity contract
described in this prospectus.
CONTRACT ANNIVERSARY--Any anniversary of the Contract
Date.
CONTRACT DATE--The date of issue of this Contract.
9
<PAGE>
CONTRACT OWNER ("YOU", "YOUR")--The person or persons
designated as the Contract Owner in the Contract appli-
cation. The term shall also include any person named as
Joint Owner. A Joint Owner shares ownership in all re-
spects with the Owner. The Owner has the right to assign
ownership to a person or party other than himself.
CONTRACT YEAR--A period of 12 months starting with the
Contract Date or any Contract Anniversary.
DEATH BENEFIT--The greater of the then-current Accumu-
lated Value or the sum of all Purchase Payments (less
any partial withdrawals and premium taxes).
FREE LOOK PERIOD--The period during which the Contract
can be cancelled and treated as void from the Contract
Date.
FUND--Vanguard Variable Insurance Fund, Inc., an open-
end, diversified investment company, offered by The Van-
guard Group, Inc., in which the Separate Account in-
vests.
JOINT ANNUITANT--The person other than the Annuitant who
may be designated by the Contract Owner and on whose
life Annuity Payments may also be based.
NET PURCHASE PAYMENT--Any Purchase Payment less the ap-
plicable Premium Tax, if any.
NON-QUALIFIED CONTRACT--A Contract other than a Quali-
fied Contract. Contributions to such a Contract are made
with after-tax dollars.
OWNER'S DESIGNATED BENEFICIARY--The person designated to
receive the Contract Owner's interest in the Contract if
the Contract Owner dies before the entire interest in
the Contract is distributed, as explained in the "IRS-
Required Distribution" section.
PAYEE--The Contract Owner, Annuitant, Beneficiary, or
any other person, estate, or legal entity to whom bene-
fits are to be paid.
PORTFOLIO--The separate investment Portfolios of the
Fund. The Fund currently offers nine Portfolios: the
Money Market Portfolio, the High-Grade Bond Portfolio,
the High Yield Bond Portfolio, the Balanced Portfolio,
the Equity Income Portfolio, the Equity Index Portfolio,
the Growth Portfolio, the International Portfolio, and
the Small Company Growth Portfolio. In this Prospectus,
Portfolio will also be used to refer to the Subaccount
that invests in the corresponding Portfolio.
PREMIUM TAX--A regulatory tax that may be assessed by
your state on the Purchase Payments made into your Con-
tract. The amount which we must pay as Premium Tax will
be deducted from each Purchase Payment or from your Ac-
cumulated Value as it is incurred by us.
PROOF OF DEATH--(a) A certified death certificate; (b) a
certified decree of a court of competent jurisdiction as
to the finding of death; (c) a written statement by a
medical doctor who attended the deceased; or (d) any
other proof satisfactory to the Company.
10
<PAGE>
PURCHASE PAYMENT--Any premium payment--any amount you
invest in the Contract. The minimum Initial Purchase
Payment is $5,000; each Additional Purchase Payment must
be at least $250. Purchase Payments may be made at any
time prior to the Annuity Date as long as the Annuitant
is living.
QUALIFIED CONTRACT--A Contract that qualifies as an in-
dividual retirement annuity under Section 408(b) of the
Internal Revenue Code of 1986, as amended.
SEPARATE ACCOUNT--AUSA Life Insurance Company, Inc. Sep-
arate Account B. The Separate Account consists of assets
that are segregated by AUSA Life Insurance Company, Inc.
and invested in the Fund. The Separate Account is inde-
pendent of the general assets of the Company.
SUBACCOUNT--That portion of the Separate Account that
invests in shares of the Fund's Portfolios. Each
Subaccount will only invest in a single Portfolio. The
investment performance of each Subaccount is linked di-
rectly to the investment performance of one of the nine
underlying Portfolios of the Fund.
VALUATION PERIOD--A period between two successive Busi-
ness Days commencing at the close of business of the
first Business Day and ending at the close of business
of the following Business Day.
- -------------------------------------------------------------------------------
11
<PAGE>
CONDENSED The Accumulation Unit Values and the number of Accumula-
FINANCIAL tion Units outstanding for each Subaccount in 1992
INFORMATION through 1997 are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD DECEMBER 1, 1992 THROUGH DECEMBER
31, 1997*
--------------------------------------------------
HIGH- HIGH SMALL
MONEY GRADE YIELD EQUITY EQUITY COMPANY
MARKET BOND BOND BALANCED INCOME INDEX GROWTH INTERNATIONAL GROWTH
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------
Accumulation unit value
as of:
Start Date*............ 1.061 11.489 10.000 11.098 10.000 11.596 10.000 10.000 10.000
12/31/92............... 1.064 11.656 * 11.514 * 12.039 * * *
12/31/93............... 1.091 12.514 * 12.961 10.488 13.144 10.569 * *
12/31/94............... 1.130 12.290 * 12.815 10.304 13.224 10.964 10.128 *
12/31/95............... 1.191 14.437 * 16.885 14.239 18.073 15.089 11.678 *
12/31/96............... 1.250 14.882 10.871 19.532 16.820 22.098 19.057 13.319 9.725
12/31/97............... 1.314 16.219 12.135 23.946 22.503 29.301 24.034 13.708 10.970
Number of units
outstanding as of:
12/31/92............... 1,660 11 * 9 * 33 * * *
12/31/93............... 4,079 271 * 636 290 440 220 * *
12/31/94............... 5,365 526 * 745 306 534 457 322 *
12/31/95............... 9,080 622 * 766 380 784 620 433 *
12/31/96............... 13,590 689 253 852 525 1,035 906 698 246
12/31/97............... 15,573 912 645 1,035 819 1,392 1,187 833 743
<CAPTION>
(UNITS ARE SHOWN IN
THOUSANDS)
</TABLE>
* Date of commencement of operations for the Money Market Subaccount was De-
cember 1, 1992, for the High-Grade Bond, Balanced, and Equity Index
Subaccounts was December 16, 1992, for the Equity Income and Growth
Subaccounts was June 7, 1993, for the International Subaccount was June 3,
1994, and for the High Yield Bond and Small Company Growth Subaccounts was
June 3, 1996. The information presented above reflects operations of the
Subaccounts as offered through the First Providian Life & Health Insurance
Company Separate Account B, which was acquired intact by the AUSA Life In-
surance Company, Inc. on October 1, 1998.
- -------------------------------------------------------------------------------
FINANCIAL The audited supplemental statutory-basis financial
STATEMENTS statements of the Company and the financial statements
of the Separate Account (as well as the Independent Au-
ditors' Reports thereon) are contained in the Statement
of Additional Information.
- -------------------------------------------------------------------------------
YIELD AND TOTAL From time to time a Portfolio of the Fund may advertise
RETURN its yield and total return investment performance for
various periods, including quarter-to-date, year-to-
date, one year, three year, five year and since incep-
tion. Advertised yields and total returns will be calcu-
lated according to standardized methods prescribed by
the Securities and Exchange Commission ("SEC"), so all
charges and expenses attributable to the Contract will
be included. Including these fees has the effect of de-
creasing the advertised performance of a Portfolio, so
that a Portfolio's investment performance will not be
directly comparable to that of an ordinary mutual fund.
12
<PAGE>
The Company may also advertise total return or other
performance data in non-standard formats which do not
reflect the Annual Contract Maintenance Fee.
Please refer to the Statement of Additional Information
for a description of the method used to calculate a
Portfolio's yield and total return, and a list of the
indexes and other benchmarks used in evaluating a Port-
folio's performance.
The performance measures discussed above are not in-
tended to indicate or predict future performance.
- -------------------------------------------------------------------------------
THE COMPANY AND The Company is a stock life insurance company incorpo-
THE SEPARATE rated under the laws of the State of New York on October
ACCOUNT 3, 1947, with offices at 666 Fifth Avenue, New York, New
York 10103. The Company is principally engaged in offer-
ing life insurance and annuity contracts, and is li-
censed in the District of Columbia and all states except
Hawaii.
AUSA LIFE As of December 31, 1997, the Company had statutory as-
INSURANCE COMPANY, sets of approximately $9.9 billion. The Company is a
INC. wholly owned indirect subsidiary of AEGON USA, Inc.,
which conducts substantially all of its operations
through subsidiary companies engaged in the insurance
business or in providing non-insurance financial servic-
es. All of the stock of AEGON USA, Inc. is indirectly
owned by AEGON n.v. of the Netherlands. AEGON n.v., a
holding company, conducts its business through subsidi-
ary companies engaged primarily in the insurance busi-
ness.
On October 1, 1998, First Providian Life & Health Insur-
ance Company ("First Providian") merged with and into
the Company. First Providian was a stock life insurance
company incorporated under the laws of the State of New
York on March 23, 1970. Upon the merger, First
Providian's existence ceased and the Company became the
surviving company under the name AUSA Life Insurance
Company, Inc. As a result of the merger, the Separate
Account became a separate account of the Company. All of
the Contracts issued by First Providian before the
merger were, at the time of the merger, assumed by the
Company. The merger did not affect any provisions of, or
rights or obligations under, those Contracts. In approv-
ing the merger on May 26, 1998, and May 29, 1998, re-
spectively, the boards of directors of the Company and
First Providian determined that the merger of two finan-
cially strong stock life insurance companies would re-
sult in an overall enhanced capital position and reduced
expenses, which, together, would be in the long-term in-
terests of the Contract Owners. On May 26, 1998, 100% of
the stockholders of the Company voted to approve the
merger, and on May 29, 1998, 100% of the stockholders of
First Providian voted to approve the merger. In addi-
tion, the New York Insurance Department has approved
the merger.
---------------------------------------------------------
AUSA LIFE The Separate Account was established by First Providian
INSURANCE COMPANY, Life & Health Insurance Company, a former affiliate of
INC. SEPARATE the Company, as a separate account under the laws of the
ACCOUNT B State of New York on November 2, 1987. On
13
<PAGE>
October 1, 1998, First Providian Life & Health Insurance
Company, together with the Separate Account, was merged
into the Company. The Separate Account survived the
merger intact.
The Separate Account is a unit investment trust regis-
tered with the SEC under the Investment Company Act of
1940 (the "1940 Act"). Such registration does not sig-
nify that the SEC supervises the management or the in-
vestment practices or policies of the Separate Account.
The assets of the Separate Account are owned by the Com-
pany and the obligations under the Contract are obliga-
tions of the Company. These assets are held separately
from the other assets of the Company and are not charge-
able with liabilities incurred in any other business op-
eration of the Company (except to the extent that assets
in the Separate Account exceed the reserves and other
liabilities of the Separate Account). The Company will
always keep assets in the Separate Account with a value
at least equal to the total Accumulated Value under the
Contracts. Income, gains and losses incurred on the as-
sets in the Separate Account, whether or not realized,
are credited to or charged against the Separate Account
without regard to other income, gains or losses of the
Company. Therefore, the investment performance of the
Separate Account is entirely independent of the invest-
ment performance of the Company's general account assets
or any other separate account maintained by the Company.
The Separate Account has nine Subaccounts, each of which
invests solely in a corresponding Portfolio of the Fund.
Additional Subaccounts may be established at the discre-
tion of the Company. The Separate Account meets the def-
inition of a "separate account" under Rule O-1(e)(1) of
the 1940 Act.
- -------------------------------------------------------------------------------
VANGUARD VARIABLE Vanguard Variable Insurance Fund is an open-end diversi-
INSURANCE FUND fied investment company intended exclusively as an in-
vestment vehicle for variable annuity or variable life
insurance contracts offered by insurance companies.
The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies
with more than 94 distinct portfolios and assets in ex-
cess of $360 billion. Through their jointly owned sub-
sidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund
and the other Funds in the Group obtain at cost virtu-
ally all of their corporate management, administrative,
shareholder accounting and distribution services.
The Fund offers nine Portfolios--a money market portfo-
lio, a high-grade bond portfolio, a high yield bond
portfolio, a balanced portfolio, an equity income port-
folio, an equity index portfolio, a growth portfolio, an
international portfolio, and a small company growth
portfolio--each with distinct investment objectives and
policies.
THE MONEY MARKET PORTFOLIO seeks to provide current in-
come consistent with the preservation of capital and li-
quidity. The Portfolio also seeks to maintain a stable
net asset value of $1.00 per share. The Portfolio in-
vests primarily in high-quality money market instruments
issued by financial institutions, non-financial corpora-
tions, the U.S. Government, state and municipal govern-
ments and their agencies or instrumentalities as well as
14
<PAGE>
repurchase agreements collateralized by such securities.
The Portfolio also invests in Eurodollar obligations
(dollar-denominated obligations issued outside the U.S.
by foreign banks or foreign branches of domestic banks)
and Yankee obligations (dollar-denominated obligations
issued in the U.S. by foreign banks). Vanguard's Fixed
Income Group serves as this Portfolio's investment ad-
viser.
THE HIGH-GRADE BOND PORTFOLIO seeks to parallel the in-
vestment results of the Lehman Brothers Aggregate Bond
Index. The Portfolio invests primarily in a diversified
portfolio of U.S. Government and corporate bonds, and
mortgage-backed securities. Vanguard's Fixed Income
Group serves as this Portfolio's investment adviser.
THE HIGH YIELD BOND PORTFOLIO seeks to provide a high
level of current income by investing in lower-rated debt
securities, which may be regarded as having speculative
characteristics and are commonly referred to as "junk
bonds." Under normal circumstances, at least 80% of the
Portfolio's assets will be invested in high-yield corpo-
rate debt obligations rated at least B by Moody's In-
vestors Service, Inc. or Standard & Poor's Corporation
or, if unrated, of comparable quality as determined by
the Portfolio's adviser, Wellington Management Company.
THE BALANCED PORTFOLIO seeks the conservation of princi-
pal, a reasonable income return and profits without un-
due risk. The Portfolio invests in a diversified portfo-
lio of common stocks and bonds, with common stocks
expected to represent 60% to 70% of the Portfolio's to-
tal assets and bonds to represent 30% to 40%. Wellington
Management Company serves as this Portfolio's investment
adviser.
THE EQUITY INCOME PORTFOLIO seeks to provide a high
level of current income by investing principally in div-
idend-paying equity securities. Newell Associates serves
as this Portfolio's investment adviser.
THE EQUITY INDEX PORTFOLIO seeks to parallel the invest-
ment results of the Standard & Poor's 500 Composite
Stock Price Index (S&P 500). The Portfolio invests in
common stocks included in the S&P 500. Vanguard's Core
Management Group serves as this Portfolio's investment
adviser.
THE GROWTH PORTFOLIO seeks to provide long-term capital
appreciation. The Portfolio invests primarily in equity
securities of seasoned U.S. companies with above average
prospects for growth. Lincoln Capital Management Company
serves as this Portfolio's investment adviser.
THE INTERNATIONAL PORTFOLIO seeks to provide long-term
capital appreciation. The Portfolio invests primarily in
equity securities of companies based outside the United
States. Schroder Capital Management International, Inc.
serves as this Portfolio's investment adviser.
THE SMALL COMPANY GROWTH PORTFOLIO seeks to provide long
term growth in capital by investing primarily in equity
securities of small companies deemed to have favorable
prospects for growth. These securities are primarily
common stocks but may also include securities convert-
ible into common stock. Granahan Investment Management
serves as this Portfolio's investment adviser.
15
<PAGE>
There is no assurance that a Portfolio will achieve its
stated objective.
ADDITIONAL INFORMATION CONCERNING THE INVESTMENT OBJEC-
TIVES AND POLICIES OF THE PORTFOLIOS AND THE INVESTMENT
ADVISORY SERVICES, TOTAL EXPENSES AND CHARGES CAN BE
FOUND IN THE CURRENT PROSPECTUS FOR THE FUND, WHICH AC-
COMPANIES THIS PROSPECTUS. THE FUND PROSPECTUS SHOULD BE
READ CAREFULLY BEFORE ANY DECISION IS MADE CONCERNING
ALLOCATION OF PURCHASE PAYMENTS TO A PORTFOLIO.
The Portfolios may be made available to registered sepa-
rate accounts offering variable annuity and variable
life products of the Company as well as other insurance
companies. Although we believe it is unlikely, a mate-
rial conflict could arise between the interests of the
Separate Account and one or more of the other partici-
pating separate accounts. In the event of a material
conflict, the affected insurance companies agree to take
any necessary steps, including removing their separate
account from the Fund if required by law, to resolve the
matter. See the Fund's Prospectus for more information.
Administrative services are provided by The Vanguard
Group, Inc., The Vanguard Variable Annuity Center, 100
Vanguard Boulevard, Malvern, PA 19355. In addition, The
Continuum Company, Inc., 301 West 11th Street, Kansas
City, MO 64105, provides some subadministrative servic-
es.
- -------------------------------------------------------------------------------
CONTRACT FEATURES
The rights and benefits under the Contract are described
below and in the Contract. The Company reserves the
right to make any modification to conform the Contract
to, or give the Contract Owner the benefit of, any fed-
eral or state statute or any rule or regulation of the
United States Treasury Department.
---------------------------------------------------------
FREE LOOK PERIOD A Free Look Period exists for a minimum of 10 days after
the Contract Owner receives the Contract plus 5 days for
mailing. The Contract permits the Contract Owner to can-
cel the Contract during the Free Look Period by re-
turning the Contract to the agent, person or entity from
whom it was purchased. The contract should be returned
to Vanguard Variable Annuity Center, P.O. Box 1103, Val-
ley Forge, PA 19482-1103. Withdrawals are not permitted
during the Free Look Period. Upon cancellation, the Con-
tract is treated as void from the Contract Date and the
Contract Owner will receive the greater of the Purchase
Payments made under the Contract or the Accumulated
Value of the Contract as of the day the Contract is re-
ceived by the Company.
- -------------------------------------------------------------------------------
CONTRACT Individuals wishing to purchase a Non-Qualified Contract
APPLICATION AND should send a completed application and your Initial
PURCHASE PAYMENTS Purchase Payment to the Variable Annuity Center. Your
Initial Purchase Payment must be equal to or greater
than the $5,000 minimum investment requirement. Further-
more, the named Annuitant and Joint Annuitant must be 75
years of age or less.
16
<PAGE>
The Contract will be issued and the Initial Net Purchase
Payment will be credited within two Business Days after
acceptance of the application and the Initial Purchase
Payment. Acceptance is subject to the application being
received in good order, and the Company reserves the
right to reject any application or Initial Purchase Pay-
ment.
If the Initial Purchase Payment cannot be credited be-
cause the application is incomplete, the Company will
contact the applicant in writing, explain the reason for
the delay and will refund the Initial Purchase Payment
within five Business Days. As soon as the necessary re-
quirements are fulfilled the Purchase Payment will be
credited.
Additional Purchase Payments may be made at any time
prior to the Annuity Date, as long as the Annuitant or
Joint Annuitant, if applicable, is living. Additional
Purchase Payments must be for at least $250. Additional
Purchase Payments received prior to the close of the New
York Stock Exchange (generally 4:00 p.m. Eastern time)
are credited to the Accumulated Value of the Contract as
of the close of business that same day.
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, we will only accept a
foreign check which has been drawn in U.S. dollars and
has been issued by a foreign bank with a U.S. correspon-
dent bank.
The Contracts are available on a non-qualified basis and
as individual retirement annuities (IRAs) that qualify
for special federal income tax treatment.
Generally, Qualified Contracts may be purchased only in
connection with a "rollover" of funds from another qual-
ified plan or IRA and contain certain other restrictive
provisions limiting the timing and amount of payments to
and distributions from the Qualified Contract.
Total Purchase Payments may not exceed $1,000,000 with-
out prior approval of the Company.
PURCHASING BY WIRE CORESTATES BANK N.A.,
ABA 031000011
MONEY SHOULD BE DEPOSIT ACCOUNT NUMBER 1412652296
WIRED TO: AUSA LIFE INSURANCE COMPANY, INC.
PLEASE CALL:1-800- CONTRACT NUMBER
258-4271 BEFORE CONTRACT REGISTRATION
WIRING
To assure proper receipt, please be sure your bank in-
cludes the contract number Vanguard has assigned you.
For an Initial Purchase Payment, please complete the
Vanguard Variable Annuity Plan application and mail it
to the Vanguard Variable Annuity Center, P.O. Box 1103,
Valley Forge, PA 19482-1103, prior to completing wire
arrangements. Note: Federal funds wire purchase orders
will be accepted only when the New York Stock Exchange
and Custodian Bank are open for business.
---------------------------------------------------------
17
<PAGE>
SECTION 1035 You may exchange your Accumulated Value under an exist-
EXCHANGES ing annuity contract to the Vanguard Variable Annuity
Plan. Section 1035 of the Internal Revenue Code of 1986,
as amended (the "Code"), provides, in general, that no
gain or loss shall be recognized on the exchange of one
annuity contract for another. To complete a "1035 Ex-
change" simply provide all the requested information on
the 1035 Exchange Form and mail it, along with your ap-
plication and current contract, to the Vanguard Variable
Annuity Center. As an accommodation to owners of Van-
guard Variable Annuity Plan contracts, and in accordance
with the Code, we will accept, under certain conditions,
the consolidation of two or more Vanguard Variable Annu-
ity Plan contracts into one. Such exchanges will be ac-
cepted on a case by case basis in order to provide con-
tract owners with consolidated account reporting. In
addition, if applicable, contract owners will be respon-
sible for only one Annual Contract Maintenance Fee. Un-
der no circumstances will an exchange of an existing
Vanguard Variable Annuity Plan contract for an identical
new Vanguard Variable Annuity Plan contract be allowed.
Special rules and procedures apply to Code Section 1035
transactions, particularly if the Contract being ex-
changed was issued prior to August 14, 1982. Prospective
Contract Owners wishing to take advantage of Code Sec-
tion 1035 should consult their tax advisers.
Please note, that an outstanding loan on the contract
that you wish to transfer may create a tax consequence.
Therefore, you are encouraged to settle any outstanding
loans with your current insurance company prior to ini-
tiating a 1035 exchange into the Plan.
- -------------------------------------------------------------------------------
ALLOCATION OF The Contract Owner specifies on the Contract application
PURCHASE PAYMENTS how Purchase Payments will be allocated. The Contract
Owner may allocate each Purchase Payment to one or more
of the Portfolios as long as such portions are
whole number percentages and any allocation made is at
least 10% and at least $1,000.
Allocation instructions for future Purchase Payments may
be changed by the Contract Owner by sending a written
notice to the Vanguard Variable Annuity Center. You may
change your investment by eliminating a Contract Portfo-
lio from your allocations or by adding a new Contract
Portfolio to your list. Please note that you must main-
tain a minimum of $1,000 in each Portfolio to which you
have allocated assets.
During the Free Look Period (which is assumed for this
purpose to be 10 days after the issuance of the Con-
tract), the Initial Net Purchase Payment and additional
Purchase Payments received during the Free Look Period
will be allocated to the Money Market Portfolio. Upon
expiration of the Free Look Period, the Accumulated
Value will remain in the Money Market Portfolio for an
additional 5 day grace period to allow for mail deliv-
ery. Upon the expiration of the Free Look Period and the
5 day grace period (15 days), the Accumulated Value will
then be allocated among the Portfolios in accordance
with the Contract Owner's instructions.
- -------------------------------------------------------------------------------
18
<PAGE>
CHARGES AND The projected expenses for the Contract are substan-
DEDUCTIONS tially below the costs of other variable annuity con-
tracts. For example, based on a $25,000 contract the av-
erage expense ratio of other variable annuity contracts
was 2.09% as of December 31, 1997, compared to .71% for
the Vanguard Variable Annuity Contract (source for com-
petitors' data: Morningstar Performance Report January
1998).
No sales load is deducted from the Initial Purchase Pay-
ment or any Additional Purchase Payments. In addition,
there are no sales charges imposed upon withdrawals.
---------------------------------------------------------
MORTALITY AND The Company imposes a charge as compensation for bearing
EXPENSE RISK certain mortality and expense risks under the Contracts.
CHARGE The annual charge is assessed daily based on the com-
bined net assets of the Separate Account and Separate
Account IV of Peoples Benefit Life Insurance Company in
the Fund according to the following schedule:
<TABLE>
<CAPTION>
RATE FOR
NET ASSETS ALL ASSETS
-------------------------------------- ----------
<S> <C>
Up to $2.5 Billion 0.30%
Over $2.5 Billion and Up To $5 Billion 0.28%
Over $5 Billion 0.27%
</TABLE>
The Company guarantees that these mortality and expense
risk breakpoints will never increase. If this charge is
insufficient to cover actual costs and assumed risks,
the loss will fall on the Company. Conversely, if the
charge proves more than sufficient, any excess will be
added to the Company surplus.
The mortality risk borne by the Company under the Con-
tracts, where one of the life Annuity Payment Options
was selected, is to make monthly annuity payments (de-
termined in accordance with the annuity tables and other
provisions contained in the Contract) regardless of how
long all Annuitants may live. We also assume mortality
risk as a result of our guarantee of a minimum Death
Benefit in the event the Annuitant dies prior to the An-
nuity Date.
The expense risk borne by the Company under the Con-
tracts is that the charges for administrative expenses
which are guaranteed for the life of the Contract may be
insufficient to cover the actual costs of issuing and
administering the Contract.
---------------------------------------------------------
ADMINISTRATIVE An annual administrative charge of .10% of the net asset
CHARGE & value of the Separate Account is assessed daily along
MAINTENANCE FEE with an annual maintenance fee of $25 for Contracts val-
ued at less than $25,000 at the time of initial purchase
and on the last Business Day of each calendar year. It
is important to note that fluctuation in Accumulation
Unit Values due to changes in the market values of secu-
rities may cause an investor's Contract's value to fall
below $25,000. The annual maintenance fee is deducted
proportionately from each Contract's Accumulated Value;
therefore, the $25 fee is assessed per
19
<PAGE>
Contract, not per Portfolio chosen. Your Initial Pur-
chase Payment of less than $25,000 is reduced by an ini-
tial maintenance fee which is pro rated to reflect only
the remaining portion of the calendar year of purchase.
Thereafter, the fee is deducted on the last Business Day
of the year for the following year, on a pro rata basis
from each of the Portfolios you have chosen. These de-
ductions represent reimbursement to the Company for the
costs expected to be incurred over the life of the Con-
tract for issuing and maintaining each Contract and the
Separate Account. Please note that Contracts valued at
$25,000 or more as of the last Business Day of the year
will not be assessed the $25 maintenance fee for the
following year.
---------------------------------------------------------
TAXES Under present laws, the Company will not incur New York
state or local taxes. If there is a change in state or
local tax laws, charges for such taxes may be made. The
Company does not expect to incur any federal income tax
liability attributable to investment income or capital
gains retained as part of the reserves under the Con-
tracts. (See "Federal Tax Considerations," page 27.)
Based upon these expectations, no charge is currently
being made to the Separate Account for corporate federal
income taxes that may be attributable to the Separate
Account.
The Company will periodically review the question of a
charge to the Separate Account for corporate federal in-
come taxes related to the Separate Account. Such a
charge may be made in future years for any federal in-
come taxes incurred by the Company. This might become
necessary if the tax treatment of the Company is ulti-
mately determined to be other than what the Company cur-
rently believes it to be, if there are changes made in
the federal income tax treatment of annuities at the
corporate level, or if there is a change in the
Company's tax status. In the event that the Company
should incur federal income taxes attributable to in-
vestment income or capital gains retained as part of the
reserves under the Contracts, the Accumulated Value of
the Contract would be correspondingly adjusted by any
provision or charge for such taxes.
---------------------------------------------------------
VANGUARD VARIABLE The value of the assets in the Separate Account will re-
INSURANCE FUND flect the fees and expenses paid by the Fund. A complete
EXPENSES description of these expenses is found in the "Fee Ta-
ble" section of this Prospectus and in the "Management
of the Fund" section of the Fund's Statement of Addi-
tional Information.
- -------------------------------------------------------------------------------
ACCUMULATED VALUE At the commencement of the Contract, the Accumulated
Value equals the Initial Net Purchase Payment. Thereaf-
ter, on any Business Day the Accumulated Value equals
the Accumulated Value from the previous Business Day in-
creased by: i) any Additional Net Purchase Payments re-
ceived by the Company and ii) any increase in the Accu-
mulated Value due to investment results of the selected
Portfolio(s) that occur during the Valuation Period; and
reduced by: i) any decrease in the Accumulated Value due
to investment results of the selected Portfolio(s), ii)
a daily charge to cover the mortality and expense risks
assumed by the Company, iii) any charge to cover
20
<PAGE>
the cost of administering the Contract, iv) any partial
withdrawals, and v) Premium Taxes, if any, that occur
during the Valuation Period.
The Accumulated Value is expected to change from Valua-
tion Period to Valuation Period, reflecting the invest-
ment experience of the selected Portfolios of the Fund
as well as the daily deduction of charges. When your Net
Purchase Payments are allocated to a selected Portfolio,
they result in a particular number of Accumulation Units
being credited to your Contract. The number of Accumula-
tion Units credited is determined by dividing the dollar
amount allocated to each Portfolio by the Accumulation
Unit Value for that Portfolio as of the end of the Valu-
ation Period in which the payment is received. The Accu-
mulation Unit Value varies each Valuation Period (i.e.,
each day that there is trading on the New York Stock Ex-
change) with the net rate of return of the Portfolio.
The net rate of return reflects the investment perfor-
mance of the Portfolio for the Valuation Period and is
net of asset charges to the Portfolio.
---------------------------------------------------------
DIVIDENDS AND All dividends and capital gains earned will be rein-
CAPITAL GAINS vested and reflected in the Accumulation Unit Value.
TREATMENT Only in this way can these earnings remain tax deferred.
- -------------------------------------------------------------------------------
ANNUITY The Annuity Express service allows you to transfer funds
EXPRESS(TM) automatically from your checking or statement savings
account to one or more Portfolios in your Contract. You
may purchase into existing Portfolios (if the $1,000
minimum balance requirement has been met) monthly, quar-
terly, semiannually, or annually. The minimum automatic
purchase is $50 and the maximum is $100,000.
- -------------------------------------------------------------------------------
EXCHANGES AMONG Should your investment goals change, you may exchange
THE PORTFOLIOS the Accumulated Value among the Portfolios of the Fund.
Requests for exchanges may be made in writing and, if
received prior to the close of the New York Stock Ex-
change (generally 4:00 p.m. Eastern time) are processed
at the close of business that same day. Requests re-
ceived after the close of the Exchange are processed the
next Business Day.
The Contract's exchange privilege is not intended to af-
ford Contract Owners a way to speculate on short-term
movements in the market. Accordingly, in order to pre-
vent excessive use of the exchange privilege that may
potentially disrupt the management of the Fund and in-
crease transaction costs, the Separate Account has es-
tablished a policy of limiting excessive exchange activ-
ity.
Because excessive exchanges can potentially disrupt the
management of the Portfolios and increase transaction
costs, exchange activity is limited to two substantive
exchanges (at least 30 days apart) from each Portfolio
(except the Money Market Portfolio) during any 12 month
period. "Substantive" means either a dollar amount large
enough to have a negative impact on a Portfolio or a se-
ries of movements between Portfolios. This restriction
does not limit non-substantive exchanges and does not
apply to exchanges from
21
<PAGE>
the Money Market Portfolio. All exchanges must be for at
least $250 or, if less, the Accumulated Value in the
Portfolio. However, the Company and the Fund reserve the
right to revise or terminate the exchange privilege,
limit the amount of or reject any exchange, as deemed
necessary, at any time.
---------------------------------------------------------
AUTOMATIC The Automatic Exchange Service allows you to move money
EXCHANGES automatically among the Portfolios of the Fund. You may
exchange fixed amounts or percentages of your Portfolio
balance either monthly, quarterly, semiannually or annu-
ally into existing (the $1,000 minimum balance require-
ment has been met) Portfolios. Exchanges at regular in-
tervals or "dollar-cost averaging" can be used, for
example, to move money from a money market portfolio
into a stock or bond portfolio. The minimum exchange
amount is $250. The Automatic Exchange Service may be
established by completing a Vanguard Variable Annuity
Plan Automatic Exchange Service Application Form or
writing a letter of instruction. You may change the
transfer amount or cancel this service in writing.
Please note that the Automatic Exchange Service cannot
be used to establish a new Portfolio, and will not be
activated until the Free Look Period has expired.
- -------------------------------------------------------------------------------
FULL AND PARTIAL
WITHDRAWALS At any time before the Annuity Date and while the Annui-
tant or Joint Annuitant is living, the Contract Owner
may make a partial or full withdrawal of the Contract to
receive all or part of the Accumulated Value by sending
a written request to the Variable Annuity Center. Full
or partial withdrawals may only be made before the Annu-
ity Date and all partial withdrawal requests must be for
at least $250. (See "Federal Tax Considerations,"
page 27.)
You can make a withdrawal by writing to the Variable An-
nuity Center. Your written request should include your
Contract number, social security number, withdrawal
amount, the signature of all owners, and federal tax
withholding election (IF NO WITHHOLDING ELECTION IS CHO-
SEN, WE WILL BE REQUIRED TO WITHHOLD 10%). Your proceeds
will normally be distributed within two Business Days
after the receipt of the request but in no event will it
be later than seven calendar days, subject to postpone-
ment in certain circumstances (see "Deferment of Pay-
ment" page 27).
---------------------------------------------------------
SYSTEMATIC You may establish an automatic withdrawal of a specific
WITHDRAWALS amount, a percentage of the balance, or accumulated
earnings from your Contract, and receive distributions
on a monthly, quarterly, semiannual, or annual schedule.
Once established, a check will be sent to your Contract
address, bank account or as you direct. Please note that
each systematic withdrawal, like any other partial with-
drawal, is subject to federal income taxes on the earn-
ings, and may be subject to a 10% tax imposed by the IRS
on withdrawals made prior to age 59 1/2.
A minimum Contract balance of $10,000, and Portfolio
balance of $1,000 are required to establish a systematic
withdrawal program for your Con-
22
<PAGE>
tract. The minimum automatic withdrawal amount is $250.
Changes to the withdrawal amount, percentage, or the
frequency of distributions may be made by telephone. Any
other changes, including a change in the destination of
the check, must be requested in writing, and should in-
clude signatures of all Contract owners. To cancel the
systematic withdrawal program, the Contract owner(s)
needs to submit a letter of instruction with the appro-
priate signatures.
To establish a systematic withdrawal program for your
Contract, simply complete the Vanguard Variable Annuity
Plan Systematic Withdrawal Program Application Form.
Please note that the completed form must be signed by
all Contract owners, and must be signature guaranteed if
you are directing the withdrawal checks to an address
other than the Contract address.
Payments under the Contract of any amounts derived from
premiums paid by check may be delayed until such time as
the check has cleared your bank. If, at the time the
Contract Owner requests a full or partial withdrawal, he
or she has not provided the Company with a written elec-
tion not to have federal income taxes withheld, the Com-
pany must by law withhold such taxes from the taxable
portion of any full or partial withdrawal and remit that
amount to the federal government. Moreover, the Internal
Revenue Code provides that a 10% penalty tax will be im-
posed on certain early withdrawals. (See "Federal Tax
Considerations," page 27.)
Since the Contract Owner assumes the instrument risk
with respect to amounts allocated to the Separate Ac-
count, the total amount paid upon withdrawal of the
Conmtract (taking into account any prior withdrawals)
may be more or less than the total Purchase Payments
made.
- -------------------------------------------------------------------------------
MINIMUM BALANCE Due to the relatively high cost of maintaining smaller
REQUIREMENTS accounts, the Company reserves the right to transfer the
balance in any Portfolio account that falls below
$1,000, due to a partial withdrawal or exchange, to the
remaining Portfolios held under that Contract, on a pro
rata basis. In the event that the entire value of the
Contract falls below $1,000, you may be notified that
the Accumulated Value of your account is below the Con-
tract's minimum requirement. You would then be allowed
60 days to make an additional investment before the ac-
count is liquidated. Proceeds would be promptly paid to
the Contract Owner. The full proceeds would be taxable
as a withdrawal. A full withdrawal will result in an au-
tomatic termination of the Contract.
- -------------------------------------------------------------------------------
DESIGNATION OF A The Contract Owner may select one or more Beneficiaries,
BENEFICIARY who would receive benefits upon the death of the Annui-
tant, and name them in the application. The
beneficiary(ies), as named on the application, will
serve as the beneficiary designation. Thereafter, while
the Annuitant or Joint Annuitant is living, the Contract
Owner may change the Beneficiary by written notice. Such
change will take effect on the date the notice is signed
by the Contract Owner but will not affect any payment
made or other action taken before the Company acknowl-
edges the notice. The Contract Owner may also make the
designation of Beneficiary irrevocable by sending writ-
ten
23
<PAGE>
notice to, and obtaining approval from, the Company.
Changes in the Beneficiary may then be made only with
the consent of the designated irrevocable Beneficiary.
If the Annuitant dies prior to the Annuity Date, the
following will apply unless the Contract Owner has made
other provisions:
(a) If there is more than one Beneficiary, each will
share in the Death Benefits equally;
(b) If one or two or more Beneficiaries has already
died, that share of the Death Benefit will be paid
equally to the survivor(s);
(c) If no Beneficiary is living, the proceeds will be
paid to the Contract Owner;
(d) If a Beneficiary dies at the same time as the Annui-
tant, the proceeds will be paid as though the Bene-
ficiary had died first. If a Beneficiary dies within
15 days after the Annuitant's death and before the
Company receives due proof of the Annuitant's death,
proceeds will be paid as though the Beneficiary had
died first.
If a Beneficiary who is receiving Annuity Payments dies,
any remaining Payments Certain will be paid to that
Beneficiary's named Beneficiary(ies) when due. If no
Beneficiary survives the Annuitant, the right to any
amount payable will pass to the Contract Owner. If the
Contract Owner is the Annuitant, this right will pass to
his or her estate.
If a Life Annuity with Period Certain Option was elect-
ed, and if the Annuitant dies on or after the Annuity
Date, any unpaid Payments Certain will be paid to the
Beneficiary.
- -------------------------------------------------------------------------------
DEATH OF ANNUITANT Subject to the provisions dealing with Joint Annuitants,
PRIOR TO ANNUITY if the Annuitant dies prior to the Annuity Date, an
DATE amount will be paid as proceeds to the Beneficiary. If
the Annuitant or Joint Annuitant dies prior to the Annu-
ity Date, the survivor shall become the sole Annuitant.
The Death Benefit is calculated and is payable upon re-
ceipt of due Proof of Death of the Annuitant as well as
proof that the Annuitant died prior to the Annuity Date.
Upon receipt of this proof, the Death Benefit will be
paid within seven days, or as soon thereafter as the
Company has sufficient information about the Beneficiary
to make the payment. The Beneficiary may receive the
amount payable in a lump sum cash benefit or under one
of the Annuity Payment Options.
A lump sum cash benefit will equal the greater of: (a)
the Accumulated Value as of the date of due Proof of
Death and proof that the Annuitant died prior to the An-
nuity Date or (b) the sum of Purchase Payments less the
sum of all partial withdrawals and premium taxes, if
any. An Annuity Payment will be based on the greater of:
(a) the Accumulated Value on the Annuity Date elected by
the Beneficiary and approved by the Company or (b) the
sum of Purchase Payments less the sum of all partial
withdrawals and premium taxes, if any. The Contract
Owner may elect an Annuity Payment Op-
24
<PAGE>
tion for the Beneficiary or, if no such election was
made by the Contract Owner and a cash benefit has not
been paid, the Beneficiary may make this election after
the Annuitant's death.
For a discussion of the consequences of the death of the
Contract Owner, if different from the Annuitant, see
"Distribution-at-Death Rules," page 30.
- -------------------------------------------------------------------------------
ANNUITY DATE The Contract Owner may specify an Annuity Date in the
application, which can be no later than the first day of
the month after the Annuitant's 85th birthday, without
the Company's prior approval. If no Annuity Date is
specified in the application, the Annuity will begin re-
ceiving Annuity Payments on the first day of the month
after ten full years from the date of this Contract, or
the first day of the month which follows the Annuitant's
65th birthday, whichever is later. The Annuity Date is
the date that Annuity Payments are scheduled to commence
under the Contract, unless the Contract has been surren-
dered or an amount has been paid as proceeds to the des-
ignated Beneficiary prior to that date.
The Contract Owner may advance or defer the Annuity
Date. However, the Annuity Date may not be advanced to a
date prior to 30 days after the date of receipt of a
written request or, without the Company's prior approv-
al, deferred to a date beyond the Annuitant's 85th
birthday. An Annuity Date may only be changed by written
request during the Annuitant's or Joint Annuitant's
lifetime and must be made at least 30 days before the
then-scheduled Annuity Date. The Annuity Date and Annu-
ity Payment Options available for Qualified Contracts
may also be controlled by endorsements, the plan or ap-
plicable law.
- -------------------------------------------------------------------------------
ANNUITY PAYMENT All Annuity Payment Options (except the Designated Pe-
OPTIONS riod Annuity Option) are offered as "Variable Annuity
Options." This means that Annuity Payments, after the
initial payment, will reflect the investment experience
of the Portfolio or Portfolios chosen by the Contract
Owner. All Annuity Payment Options are offered as "Fixed
Annuity Options." This means that the amount of each
payment will be set on the Annuity Date and will not
change. If you choose a Fixed Option, your investment
will be moved out of the underlying Vanguard Portfolios
and into the general account of AUSA Life Insurance Com-
pany, Inc. If you do not wish to receive your payments
on an annuity basis, you may take a lump sum payment at
anytime before the annuity date. The lump sum value is
equal to the Accumulation Value. The following Annuity
Payment Options are available under the Contract:
LIFE ANNUITY--Available as either a Fixed or Variable
Option. Monthly Annuity Payments are paid for the life
of an Annuitant, ceasing with the last Annuity Payment
due prior to the Annuitant's death.
JOINT AND LAST SURVIVOR ANNUITY--Available as either a
Fixed or Variable Option. Monthly Annuity Payments are
paid for the life of two Annuitants and thereafter for
the life of the survivor, ceasing with the last Annuity
Payment due prior to the survivor's death.
25
<PAGE>
LIFE ANNUITY WITH PERIOD CERTAIN--Available as either a
Fixed or Variable Option. Monthly Annuity Payments are
paid for the life of an Annuitant, with a Period Certain
of not less than 120, 180, or 240 months, as elected.
INSTALLMENT OR UNIT REFUND LIFE ANNUITY--Available as
either a Fixed (Installment Refund) or Variable (Unit
Refund) Option. Monthly Annuity Payments are paid for
the life of an Annuitant, with a Period Certain deter-
mined by dividing the Accumulated Value by the First An-
nuity Payment.
DESIGNATED PERIOD ANNUITY--Only available as a Fixed Op-
tion. Monthly Annuity Payments are paid for a Period
Certain as elected, which may be from 10 to 30 years.
In the event that an Annuity Payment Option is not se-
lected, the Company will make monthly Annuity Payments
that will go on for as long as the Annuitant lives (120
payments guaranteed) in accordance with the Life Annuity
with Period Certain Option and the annuity benefit sec-
tions of the Contract. That portion of the Accumulated
Value that has been held in a Portfolio prior to the An-
nuity Date will be applied under a Variable Annuity Op-
tion based on the performance of that Portfolio. Subject
to approval by the Company, the Contract Owner may se-
lect any other Annuity Payment Option then being offered
by the Company. Annuity Payments are guaranteed to be
not less than as provided by the Annuity Tables for the
first payment under a Variable Option and each payment
under a Fixed Option, and the Annuity Payment Option
elected by the Contract Owner. The minimum payment, how-
ever, is $100. If the Accumulated Value is less than
$5,000, the Company has the right to pay that amount in
a lump sum. From time to time, the Company may require
proof that the Annuitant, Joint Annuitant, or Contract
Owner is living. Annuity Payment Options are not avail-
able to: (1) an assignee; or (2) any other than a natu-
ral person, except with the consent of the Company.
The Company may, at the time of election of an Annuity
Payment Option, offer more favorable rates in lieu of
the guaranteed rates specified in the Annuity Tables
found in the Contract.
The value of Variable Annuity Payments will reflect the
investment experience of the chosen Portfolio. On or af-
ter the Annuity Date, the Annuity Payment Option is ir-
revocable. Only one Variable Annuity Option may be cho-
sen from among those made available by the Company per
each Portfolio. The annuity tables, which are contained
in the Contract and are used to calculate the value of
Variable Annuity Payments, are based on an assumed in-
terest rate of 4%. If the actual net investment experi-
ence exactly equals the assumed interest rate, then the
Variable Annuity Payments will remain the same (equal to
the first Annuity Payment). However, if actual invest-
ment experience exceeds the assumed interest rate, the
Variable Annuity Payments will increase; conversely,
they will decrease if the actual experience is lower.
If an Annuity Payment Option is chosen that depends on
the continuation of the life of the Annuitant or of a
Joint Annuitant, proof of birth date may be required be-
fore Annuity Payments begin. For Annuity Payment Options
26
<PAGE>
involving life income, the actual age of the Annuitant
or of a Joint Annuitant will affect the amount of each
payment. Since payments to older Annuitants are expected
to be fewer in number, the amount of each Annuity Pay-
ment shall be greater.
If at the time of any Annuity Payment the Contract Owner
has not provided the Company with a written election not
to have federal income taxes withheld, the Company must
by law withhold such taxes from the taxable portion of
such Annuity Payment and remit that amount to the fed-
eral government.
The value of all payments, both fixed and variable, will
be greater for shorter guaranteed periods than for
longer guaranteed periods, and greater for life annui-
ties than for joint and survivor annuities, because they
are expected to be made for a shorter period.
After the Annuity Date, the Contract Owner may change
the Portfolio funding the Variable Annuity Payments by
written request. Because excessive exchanges can poten-
tially disrupt the management of the Portfolios and in-
crease transaction costs, exchange activity is limited
to two substantive exchanges (at least 30 days apart)
from the Portfolios (except the Money Market Portfolio)
during any 12-month period. "Substantive" means either a
dollar amount large enough to have a negative impact on
a Portfolio or a series of movements between Portfolios.
The method of computation of Variable Annuity Payments
is described in more detail in the Statement of Addi-
tional Information.
If you choose an Annuity Payment Option and the postal
or other delivery service is unable to deliver checks to
the Payee's address of record, no interest will accrue
on amounts represented by uncashed Annuity Payment
checks. It is the Payee's responsibility to keep the
Company informed of the Payee's current address of rec-
ord.
---------------------------------------------------------
DEFERMENT OF Payment of any cash withdrawal or lump-sum death benefit
PAYMENT due from the Separate Account will occur within seven
days from the date the election becomes effective, ex-
cept that the Company may be permitted to defer such
payment if: (1) the New York Stock Exchange is closed
for other than usual weekends or holidays, or trading on
the Exchange is otherwise restricted; or (2) an emer-
gency exists as defined by the SEC, or the SEC requires
that trading be restricted; or (3) the SEC permits a de-
lay for the protection of Contract Owners.
- -------------------------------------------------------------------------------
FEDERAL TAX CONSIDERATIONS
INTRODUCTION The ultimate effect of federal income taxes on the
amounts paid for the Contract, on the investment returns
on assets held under a Contract, on Annuity Payments,
and on the economic benefits to the Contract Owner, An-
nuitant or Beneficiary, depends on the terms of the Con-
tract, the Company's tax status and upon the tax status
of the individuals concerned. The following discussion
is general in nature and is not intended as tax advice.
You
27
<PAGE>
should consult a tax adviser regarding the tax conse-
quences of purchasing a Contract. No attempt is made to
consider any applicable state or other tax laws. More-
over, the discussion is based upon the Company's under-
standing of the federal income tax laws as they are cur-
rently interpreted. No representation is made regarding
the likelihood of continuation of the federal income tax
laws, the Treasury Regulations, or the current interpre-
tations by the Internal Revenue Service. We reserve the
right to make uniform changes on the Contract to the ex-
tent necessary to continue to qualify the Contract as an
annuity. For a discussion of federal income taxes as
they relate to the Fund, please see the accompanying
Prospectus for the Fund.
---------------------------------------------------------
TAXATION OF Section 72 of the Code governs taxation of annuities. In
ANNUITIES IN general, a Contract Owner is not taxed on increases in
GENERAL value under a Contract until some form of withdrawal or
distribution is made under it. However, under certain
circumstances, the increase in value may be subject to
current federal income tax. (See "Contracts Owned by
Non-Natural Persons", page 31, and "Diversification
Standards", page 31.)
Section 72 provides that the proceeds of a full or par-
tial withdrawal from a Contract prior to the Annuity
Date will be treated as taxable income to the extent the
amounts held under the Contract exceed the "investment
in the Contract", as that term is defined in the Code.
The "investment in the Contract" can generally be de-
scribed as the cost of the Contract, and generally con-
stitutes all purchase payments paid for the Contract
less any amounts received under the Contract that are
excluded from the individual's gross income. The taxable
portion is taxed at ordinary income tax rates. For pur-
poses of this rule, a pledge or assignment of a Contract
is treated as a payment received on account of a partial
withdrawal of a Contract.
Upon receipt of a full or partial withdrawal or an Annu-
ity Payment under the Contract, you will be taxed if the
value of the Contract exceeds the investment in the Con-
tract. Ordinarily, the taxable portion of such payments
will be taxed at ordinary income tax rates. Partial
withdrawals are generally taken out of earnings first
and then your purchase payments in the Contract.
For Fixed Annuity Payments, in general, the taxable por-
tion of each payment is determined by using a formula
known as the "exclusion ratio", which establishes the
ratio that the investment in the Contract bears to the
total expected amount of Annuity Payments for the term
of the Contract. That ratio is then applied to each pay-
ment to determine the non-taxable portion of the pay-
ment. The remaining portion of each payment is taxed at
ordinary income tax rates. For Variable Annuity Pay-
ments, in general, the taxable portion is determined by
a formula that establishes a specific dollar amount of
each payment that is not taxed. The dollar amount is de-
termined by dividing the investment in the Contract by
the total number of expected periodic payments. The re-
maining portion of each payment is taxed at ordinary in-
come tax rates. Once the excludible portion of Annuity
Payments to date equals the investment in the Contracts,
the balance of the Annuity Payments will be fully tax-
able.
28
<PAGE>
Generally, the entire amount distributed from a Quali-
fied Contract is taxable to the Owner. In the case of
Qualified Contracts with after tax contributions, the
Owner is entitled to exclude the portion of each with-
drawal or annuity payment constituting a return of after
tax contributions. Once all of your after tax contribu-
tions have been returned to you on a non-taxable basis,
subsequent withdrawals or annuity payments are fully
taxable as ordinary income. Since the Company has no
knowledge of the amount of after tax contributions you
have made, you will need to make this computation in the
preparation of your federal income tax return.
Withholding of federal income taxes on all distributions
is required unless the recipient elects not to have any
amounts withheld and properly notifies the Company of
that election. In certain situations, taxes will be
withheld on distributions to non-resident aliens at a
30% flat rate unless an exemption from withholding ap-
plies under the applicable tax treaty.
With respect to amounts withdrawn or distributed before
the taxpayer reaches age 59 1/2, a penalty tax is im-
posed equal to 10% of the taxable portion of amounts
withdrawn or distributed. However, the penalty tax will
not apply to withdrawals: (i) made on or after the death
of the Contract Owner (or where the Contract Owner is
not an individual, the death of the primary Annuitant,
who is defined as the individual the events in whose
life are of primary importance in affecting the timing
and payment under the Contract); (ii) attributable to
the taxpayer's becoming disabled within the meaning of
Code Section 72(m)(7); (iii) that are part of a series
of substantially equal periodic payments made at least
annually for the life (or life expectancy) of the tax-
payer, or joint lives (or joint life expectancies) of
the taxpayer and his Beneficiary; (iv) from a qualified
plan; (v) allocable to investment in the Contract before
August 14, 1982; (vi) under a qualified funding asset
(as defined in Code Section 130(d)); (vii) under an im-
mediate annuity contract as defined in Section 72(u)(4);
or (viii) that are purchased by an employer on termina-
tion of certain types of qualified plans and that are
held by the employer until the employee separates from
service. Other tax penalties may apply to certain dis-
tributions as well as to certain contributions and other
transactions under a qualified contract.
If the penalty tax does not apply to a withdrawal as a
result of the application of item (iii) above, and the
series of payments are subsequently modified (other than
by reason of death or disability), the tax for the year
in which the modification occurs will be increased by an
amount (as determined under Treasury Regulations) equal
to the penalty tax that would have been imposed but for
item (iii) above, plus interest for the deferral period.
The foregoing rule applies if the modification takes
place (a) before the close of the period that is five
years from the date of the first payment and after the
taxpayer attains age 59 1/2, or (b) before the taxpayer
reaches age 59 1/2. The tax penalty may also not apply
to distributions from Qualified Contracts issued under
Section 408(b) of the Code used to pay qualified higher
education expenses or the acquisition costs (up to
$10,000) involved in the purchase of a principal resi-
dence by a first-time homebuyer.
---------------------------------------------------------
29
<PAGE>
THE COMPANY'S TAX The Company is taxed as a life insurance company under
STATUS Part I of Subchapter L of the Code. Since the Separate
Account is not a separate entity from the Company and
its operations form a part of the Company, it will not
be taxed separately as a "regulated investment company"
under Subchapter M of the Code. Investment income and
realized capital gains on the assets of the Separate Ac-
count are reinvested and taken into account in determin-
ing the Accumulation Value. Under existing federal in-
come tax law, the Separate Account's investment income,
including realized net capital gains, is not taxed to
the Company. The Company reserves the right to make a
deduction for taxes should they be imposed with respect
to such items in the future.
---------------------------------------------------------
DISTRIBUTION-AT- In order to be treated as an annuity contract, a con-
DEATH RULES tract must, generally, provide the following two distri-
bution rules: (a) if any Contract Owner dies on or after
the Annuity Date and before the entire interest in the
Contract has been distributed, the remaining portion of
such interest must be distributed at least as rapidly as
the method in effect on the Contract Owner's death; and
(b) if any Contract Owner dies before the Annuity Date,
the entire interest in the Contract must generally be
distributed within five years after the date of death.
To the extent such interest is payable to a Designated
Beneficiary, however, such interest may be annuitized
over the life of that Designated Beneficiary or over a
period not extending beyond the life expectancy of that
Beneficiary, so long as distributions commence within
one year after the Contract Owner's death. If the Desig-
nated Beneficiary is the spouse of the Contract Owner,
the Contract (together with the deferred tax on the ac-
crued and future income thereunder) may be continued un-
changed in the name of the spouse as Contract Owner. The
term Designated Beneficiary means the natural person
named by the Contract Owner as a beneficiary and to whom
ownership of the Contract passes by reason of the Con-
tract Owner's death.
If the Contract Owner is not an individual, death of the
"primary Annuitant" (as defined under the Code) is
treated as the death of the Contract Owner. The primary
Annuitant is the individual who is of primary importance
in affecting the timing or the amount of payout under a
Contract. In addition, when the Contract Owner is not an
individual, a change in the primary Annuitant is treated
as the death of the Contract Owner. Finally, in the case
of Joint Contract Owners, the distribution will be re-
quired at the death of the first of the Contract Owners.
---------------------------------------------------------
TRANSFERS OF Any transfer of a Non-Qualified Contract prior to the
ANNUITY CONTRACTS Annuity Date for less than full and adequate considera-
tion will generally trigger tax on the gain in the Con-
tract to the Contract Owner at the time of such trans-
fer. The investment in the Contract of the transferee
will be increased by any amount included in the Contract
Owner's income. This provision, however, does not apply
to those transfers between spouses or incident to a di-
vorce which are governed by Code Section 1041(a).
---------------------------------------------------------
30
<PAGE>
CONTRACTS OWNED BY Where the Contract is held by a non-natural person (for
NON-NATURAL example, a corporation), the Contract is generally not
PERSONS treated as an annuity contract for federal income tax
purposes, and the income on that Contract (generally the
increase in the net Accumulated Value less the payments)
is includible in taxable income each year. The rule does
not apply where the non-natural person is only a nominal
owner such as a trust or other entity acting as an agent
for a natural person. The rule also does not apply where
the Contract is acquired by the estate of a decedent,
where the Contract is a qualified funding asset for
structured settlements, where the Contract is purchased
by an employer on behalf of an employee upon termination
of a qualified plan, and in the case of an immediate an-
nuity as defined under the Code.
---------------------------------------------------------
ASSIGNMENTS A transfer of ownership of a Contract or the designation
of an Annuitant or other Beneficiary who is not also the
Contract Owner may result in tax consequences to the
Contract Owner, Annuitant or Beneficiary that are not
discussed herein. A Contract Owner contemplating such a
transfer or assignment of a Contract should contact a
tax adviser with respect to the potential tax effects of
such a transaction.
---------------------------------------------------------
MULTIPLE CONTRACTS All non-qualified annuity contracts issued by the same
RULE company (or affiliate) to the same Contract Owner during
any calendar year are to be aggregated and treated as
one contract for purposes of determining the amount in-
cludible in the taxpayer's gross income. Thus, any
amount received under any Contract prior to the Con-
tract's Annuity Date, such as a partial withdrawal, will
be taxable (and possibly subject to the 10% penalty tax)
to the extent of the combined income in all such con-
tracts. The Treasury Department has specific authority
to issue regulations that prevent the avoidance of Code
Section 72(e) through the serial purchase of annuity
Contracts or otherwise. In addition, there may be other
situations in which the Treasury may conclude that it
would be appropriate to aggregate two or more Contracts
purchased by the same Contract Owner. The aggregation
rules do not apply to immediate annuities as defined un-
der Section 72(u)(4) of the Code. Accordingly, a Con-
tract Owner should consult a tax adviser before purchas-
ing more than one Contract or other annuity contracts.
---------------------------------------------------------
DIVERSIFICATION To comply with certain diversification regulations (the
STANDARDS "Regulations"), which were issued in final form on March
2, 1989, under Code Section 817(h), after a start up pe-
riod, each Subaccount of the Separate Account will be
required to diversify its investments. The Regulations
generally require that on the last day of each quarter
of a calendar year, no more than 55% of the value of
each Subaccount of the Separate Account 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 repre-
sented by any four investments. A "look-through" rule
applies that suggests that each Subaccount of the Sepa-
rate Account will be tested for compliance with the per-
centage limitations by looking through to the assets of
the Portfolio of the Fund in which each
31
<PAGE>
such division invests. All securities of the same issuer
are treated as a single investment. As a result of the
1988 Act, each government agency or instrumentality will
be treated as a separate issuer for purposes of
those limitations.
In connection with the issuance of temporary diversifi-
cation regulations in 1986, the Treasury announced that
such regulations did not provide guidance concerning the
extent to which Contract Owners may direct their invest-
ments to particular divisions of a separate account. It
is possible that regulations or revenue rulings may be
issued in this area at some time in the future. It is
not clear, at this time, what these regulations or rul-
ings would provide. It is possible that when the regula-
tions or rulings are issued, the Contracts may need to
be modified in order to remain in compliance. For these
reasons, the Company reserves the right to modify the
Contracts, as necessary, to prevent the Contract Owner
from being considered the owner of assets of the Sepa-
rate Account.
We intend to comply with the Regulations to assure that
the Contracts continue to be treated as annuity con-
tracts for federal income tax purposes.
---------------------------------------------------------
QUALIFIED Qualified Contracts to provide for retirement may gener-
INDIVIDUAL ally be purchased only in connection with a "rollover"
RETIREMENT of funds from another individual retirement annuity
ANNUITIES (IRA) or qualified plan. IRA Contracts must contain spe-
cial provisions and are subject to limitations on con-
tributions and the timing of when distributions can be
made. Tax penalties may apply to contributions in excess
of specified limits, loans or reassignments, distribu-
tions that do not meet specified requirements, or in
other circumstances. Anyone desiring to purchase a Qual-
ified Contract should consult a personal tax adviser.
- -------------------------------------------------------------------------------
GENERAL The Company retains the right, subject to any applicable
INFORMATION law, to make certain changes. The Company reserves the
right to eliminate the shares of any of the Portfolios
ADDITIONS, and to substitute shares of another Portfolio of the
DELETIONS, OR Fund, or of another registered open-end management in-
SUBSTITUTIONS OF vestment company, if the shares of the Portfolios are no
INVESTMENTS longer available for investment, or, if in the Company's
judgment, investment in any Portfolio would be inappro-
priate in view of the purposes of the Separate Account.
To the extent required by the 1940 Act, substitutions of
shares attributable to a Contract Owner's interest in a
Portfolio will not be made until SEC approval has been
obtained and the Contract Owner has been notified of the
change.
New Portfolios may be established when marketing, tax,
investment, or other conditions so warrant. Any new
Portfolios will be made available to existing Contract
Owners on a basis to be determined by the Company. The
Company may also eliminate one or more Portfolios if
marketing, tax, investment or other conditions so war-
rant.
In the event of any such substitution or change, the
Company may, by appropriate endorsement, make such
changes in the Contracts as may be necessary or appro-
priate to reflect such substitution or change. Further-
more, if deemed to be in the best interests of persons
having voting rights under the
32
<PAGE>
Contracts, the Separate Account may be operated as a
management company under the 1940 Act or any other form
permitted by law, may be deregistered under such Act in
the event such registration is no longer required, or
may be combined with one or more other separate ac-
counts.
---------------------------------------------------------
DISTRIBUTOR OF THE The Vanguard Group, Inc., through its wholly-owned sub-
CONTRACTS sidiary, Vanguard Marketing Corp., is the principal dis-
tributor of the Contract. For these services, the Fund
paid a fee of less than .02% of the Fund's average net
assets for the 1997 fiscal year. This fee is guaranteed
not to exceed .20% of the Fund's average month-end net
assets. A complete description of these services is
found in the "Management of the Fund" section of the
Fund's Prospectus and in the Fund's Statement of Addi-
tional Information. The principal business address for
The Vanguard Group, Inc. is The Vanguard Variable Annu-
ity Center, 100 Vanguard Boulevard, Malvern, PA 19355.
---------------------------------------------------------
VOTING RIGHTS The Fund does not hold regular meetings of shareholders.
The Directors of the Fund may call special meetings of
shareholders as may be required by the 1940 Act or other
applicable law. To the extent required by law, the Port-
folio shares held in the Separate Account will be voted
by the Company at shareholder meetings of the Fund in
accordance with instructions received from persons hav-
ing voting interests in the corresponding Portfolio.
Fund shares as to which no timely instructions are re-
ceived or shares held by the Company as to which Con-
tract Owners have no beneficial interest will be voted
in proportion to the voting instructions that are re-
ceived with respect to all Contracts participating in
that Portfolio. Voting instructions to abstain on any
item to be voted upon will be applied on a pro rata ba-
sis to reduce the votes eligible to be cast.
Prior to the Annuity Date, the Contract Owner holds a
voting interest in each Portfolio to which the Accumu-
lated Value is allocated. The number of votes which are
available to a Contract Owner will be determined by di-
viding the Accumulated Value attributable to a Portfolio
by the net asset value per share of the applicable Port-
folio. After the Annuity Date, the person receiving An-
nuity Payments under any variable annuity option has the
voting interest. The number of votes after the Annuity
Date will be determined by dividing the reserve for such
Contract allocated to the Portfolio by the net asset
value per share of the corresponding Portfolio. After
the Annuity Date, the votes attributable to a Contract
decrease as the reserves allocated to the Portfolio de-
crease. In determining the number of votes, fractional
shares will be recognized.
The number of votes of the Portfolio that are available
will be determined as of the date coincident with the
date established by that Portfolio for determining
shareholders eligible to vote at the meeting of the
Fund. Voting instructions will be solicited by written
communication prior to such meeting in accordance with
procedures established by the Fund.
---------------------------------------------------------
33
<PAGE>
YEAR 2000 MATTERS In October, 1996, the Company adopted and currently has
in place a Year 2000 Assessment and Planning Project
(the "Plan") to review and analyze existing hardware and
software systems, as well as voice and data communica-
tions systems, to determine if they are Year 2000 com-
patible. The Plan provides for a management process that
ensures that when a particular system, or software ap-
plication, is determined to be "non-compliant" the
proper steps are in place to either remedy the "non-com-
pliance" or cease using the particular system or soft-
ware. The Plan also provides that the Chief Information
Officer report to the Board of Directors as to the sta-
tus of the efforts under the Plan on a regular and rou-
tine basis. The Company has engaged the services of a
third-party provider that is specialized in Year 2000
issues to work on the project.
The Plan has four specific objectives: (1) to develop an
inventory of all applications; (2) to evaluate all ap-
plications in the inventory to determine the most pru-
dent manner to move them to Year 2000 compliance, if re-
quired; (3) to estimate budgets, resources and schedules
for the migration of the "affected" applications to Year
2000 compliance; and (4) to define testing and deploy-
ment requirements to successfully manage validation and
re-deployment of any changed code. It is anticipated
that all compliance issues will be resolved by December
1998.
As of the date of this Prospectus, the Company has iden-
tified and made available what it believes are the ap-
propriate resources of hardware, people, and dollars,
including the engagement of outside third parties, to
assure that the Plan will be completed.
The Year 2000 computer problem, and its resolution, is
complex and multifaceted, and the success of a response
plan cannot be conclusively known until the Year 2000 is
reached (or an earlier date to the extent that the sys-
tems or equipment addresses Year 2000 data prior to the
Year 2000). Even with appropriate and diligent pursuit
of a well conceived response plan, including testing
procedures, there is no certainty that any company will
achieve complete success. Further, notwithstanding its
efforts or results, the Company's ability to function
unaffected to and through the year 2000 may be adversely
affected by actions (or failures to act) of third par-
ties beyond its knowledge or control.
---------------------------------------------------------
AUDITORS Ernst & Young LLP serves as independent auditors for the
Separate Account and the Company and will audit their
financial statements annually.
---------------------------------------------------------
LEGAL MATTERS Jorden Burt Boros Cicchetti Berenson & Johnson LLP, of
Washington, D. C., has provided legal advice relating to
the federal securities laws applicable to the issue and
sale of the Contracts. All matters of New York law per-
taining to the validity of the Contract and the
Company's right to issue such Contracts have been passed
upon by Gregory E. Miller-Breetz, Esquire, on behalf of
the Company.
- -------------------------------------------------------------------------------
34
<PAGE>
TABLE OF CONTENTS FOR THE VANGUARD VARIABLE ANNUITY PLAN CONTRACT
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE CONTRACT............................................................ B-2
Computation of Variable Annuity Income Payments........................ B-2
Exchanges.............................................................. B-3
Joint Annuitant........................................................ B-3
GENERAL MATTERS......................................................... B-3
Non-Participating...................................................... B-3
Misstatement of Age or Sex............................................. B-3
Assignment............................................................. B-3
Annuity Data........................................................... B-4
Annual Report.......................................................... B-4
Incontestability....................................................... B-4
Ownership.............................................................. B-4
DISTRIBUTION OF THE CONTRACT............................................ B-4
PERFORMANCE INFORMATION................................................. B-4
Money Market Subaccount Yields......................................... B-4
30-Day Yield for Non-Money Market Subaccounts.......................... B-5
Standardized Average Annual Total Return for Non-Money Market
Subaccounts........................................................... B-5
ADDITIONAL PERFORMANCE MEASURES......................................... B-7
Non-Standardized Cumulative Total Return and Non-Standardized Average
Annual Total Return................................................... B-7
Non-Standardized Total Return Year-to-Date............................. B-8
Non-Standardized One Year Return....................................... B-8
SAFEKEEPING OF ACCOUNT ASSETS........................................... B-9
THE COMPANY............................................................. B-9
STATE REGULATION OF THE COMPANY......................................... B-9
RECORDS AND REPORTS..................................................... B-10
LEGAL PROCEEDINGS....................................................... B-10
OTHER INFORMATION....................................................... B-10
FINANCIAL STATEMENTS.................................................... B-10
</TABLE>
35
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
SEPARATE ACCOUNT B
STATEMENT OF ADDITIONAL INFORMATION
FOR THE
VANGUARD VARIABLE ANNUITY PLAN CONTRACT
OFFERED BY
AUSA LIFE INSURANCE COMPANY, INC.
(A NEW YORK STOCK COMPANY)
ADMINISTRATIVE OFFICES
4 MANHATTANVILLE ROAD
PURCHASE, NEW YORK 10577
----------------
This Statement of Additional Information expands upon subjects discussed in
the current Prospectus for the Vanguard Variable Annuity Plan Contract (the
"Contract") offered by AUSA Life Insurance Company, Inc. (the "Company"). You
may obtain a copy of the Prospectus dated October 1, 1998 by calling 1-800-
522-5555, or writing to Vanguard Variable Annuity Center, P.O. Box 1103, Val-
ley Forge, PA 19482-1103. Terms used in the current Prospectus for the Con-
tract are incorporated in this Statement.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE
READ ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE CONTRACT.
OCTOBER 1, 1998
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
----------------- ----
<S> <C>
THE CONTRACT............................................................ B-2
Computation of Variable Annuity Income Payments........................ B-2
Exchanges.............................................................. B-3
Joint Annuitant........................................................ B-3
GENERAL MATTERS......................................................... B-3
Non-Participating...................................................... B-3
Misstatement of Age or Sex............................................. B-3
Assignment............................................................. B-3
Annuity Data........................................................... B-4
Annual Report.......................................................... B-4
Incontestability....................................................... B-4
Ownership.............................................................. B-4
DISTRIBUTION OF THE CONTRACT............................................ B-4
PERFORMANCE INFORMATION................................................. B-4
Money Market Subaccount Yields......................................... B-4
30-Day Yield for Non-Money Market Subaccounts.......................... B-5
Standardized Average Annual Total Return for Non-Money Market
Subaccounts........................................................... B-5
ADDITIONAL PERFORMANCE MEASURES......................................... B-7
Non-Standardized Cumulative Total Return and Non-Standardized
Average Annual Total Return........................................... B-7
Non-Standardized Total Return Year-to-Date............................. B-8
Non-Standardized One Year Return....................................... B-8
SAFEKEEPING OF ACCOUNT ASSETS........................................... B-9
THE COMPANY............................................................. B-9
STATE REGULATION OF THE COMPANY......................................... B-9
RECORDS AND REPORTS..................................................... B-10
LEGAL PROCEEDINGS....................................................... B-10
OTHER INFORMATION....................................................... B-10
FINANCIAL STATEMENTS.................................................... B-10
</TABLE>
B-1
<PAGE>
THE CONTRACT
In order to supplement the description in the Prospectus, the following pro-
vides additional information about the Contract which may be of interest to
Contract Owners.
COMPUTATION OF VARIABLE ANNUITY INCOME PAYMENTS
Variable Annuity Income Payments are computed as follows. First, the Accumu-
lated Value (or the portion of the Accumulated Value used to provide variable
payments) is applied under the Annuity Table contained in the Contract corre-
sponding to the Annuity Option elected by the Contract Owner and based on an
assumed interest rate of 4%. This will produce a dollar amount which is the
first monthly payment. The Company may, at the time Annuity Income Payments
are computed, offer more favorable rates in lieu of the guaranteed rates spec-
ified in the Annuity Table.
The amount of each Annuity Payment after the first is determined by means of
Annuity Units. The number of Annuity Units is determined by dividing the first
Annuity Payment by the Annuity Unit value for the selected Subaccount on the
Annuity Date. The number of Annuity Units for the Subaccount then remains
fixed, unless an exchange of Annuity Units (as set forth below) is made. After
the first Annuity Payment, the dollar amount of each subsequent Annuity Pay-
ment is equal to the number of Annuity Units multiplied by the Annuity Unit
value for the Subaccount on the due date of the Annuity Payment.
The Annuity Unit value for each Subaccount was initially established at
$10.00 on the day money was first deposited in that Subaccount. The Annuity
Unit value for any subsequent Business Day is equal to (a) times (b) times
(c), where:
(a) the Annuity Unit value for the immediately preceding Business Day;
(b) the Net Investment Factor for the day;
(c) the investment result adjustment factor (.99989255 per day), which recog-
nizes an assumed interest rate of 4% per year used in determining the An-
nuity Payment amounts.
The Net Investment Factor is a factor applied to a Subaccount that reflects
daily changes in the value of the Subaccount due to:
(a) any increase or decrease in the value of the Subaccount due to investment
results;
(b) a daily charge for the mortality and expense risks assumed by the Company
corresponding to an annual rate according to the following schedule:
<TABLE>
<CAPTION>
RATE FOR
NET ASSETS* ALL ASSETS
----------- ----------
<S> <C>
Up to $2.5 Billion................................................ 0.30%
Over $2.5 Billion and Up To $5 Billion............................ 0.28%
Over $5 Billion................................................... 0.27%
</TABLE>
- --------
* Based on combined net assets of the Separate Account and Separate Account IV
of Peoples Benefit Life Insurance Company.
(c) a daily charge for the cost of administering the Contract corresponding
to an annual charge of .10%.
(d) an annual charge of $25 for maintenance of Contracts valued at less than
$25,000 at time of initial purchase and on the last business day of each
year.
The Annuity Tables contained in the Contract are based on the 1983 Table "A"
Mortality Table projected for mortality improvement to the year 2000 using
Projection Scale G and an interest rate of 4% a year.
B-2
<PAGE>
EXCHANGES
After the Annuity Date, if a Variable Annuity Option has been chosen, the
Contract Owner may, by written request, exchange the current value of the ex-
isting Subaccount to Annuity Units of any other Subaccount then available. The
request for the exchange must be received, however, at least 10 Business Days
prior to the first payment date on which the exchange is to take effect. This
exchange shall result in the same dollar amount of Annuity Payment on the date
of exchange. The Contract Owner is limited to two substantive exchanges (at
least 30 days apart) from a Portfolio (except the Money Market Portfolio) in
any Contract Year, and the value of the Annuity Units exchanged must provide a
monthly Annuity Payment of at least $100 at the time of the exchange. "Sub-
stantive" means either a dollar amount large enough to have a negative impact
on a Portfolio or a series of movements between Portfolios.
Exchanges will be made using the Annuity Unit value for the Subaccounts on
the date the request for exchange is received by the Company. On the exchange
date, the Company will establish a value for the current Subaccount by multi-
plying the Annuity Unit value by the number of Annuity Units in the existing
Subaccount, and compute the number of Annuity Units for the new Subaccount by
dividing the Annuity Unit value of the new Subaccount into the value previ-
ously calculated for the existing Subaccount.
JOINT ANNUITANT
The Contract Owner may, in the Contract Application or by written request at
least 30 days prior to the Annuity Date, name a Joint Annuitant. Such Joint
Annuitant must meet the Company's underwriting requirements. If approved by
the Company, the Joint Annuitant shall be named on the Contract Schedule or
added by endorsement. An Annuitant or Joint Annuitant may not be replaced.
The Annuity Date shall be determined based on the date of birth of the Annui-
tant. If the Annuitant or Joint Annuitant dies prior to the Annuity Date, the
survivor shall be the sole Annuitant. Another Joint Annuitant may not be des-
ignated. Payment to a Beneficiary shall not be made until the death of the
surviving Annuitant.
GENERAL MATTERS
NON-PARTICIPATING
The Contracts are non-participating. No dividends are payable and the Con-
tracts will not share in the profits or surplus earnings of the Company.
MISSTATEMENT OF AGE OR SEX
The Company may require proof of age and sex before making Annuity Payments.
If the Annuitant's stated age, sex or both in the Contract are incorrect, the
Company will change the Annuity Benefits payable to those which the Purchase
Payments would have purchased for the correct age and sex. In the case of cor-
rection of the stated age or sex after payments have commenced, the Company
will: (1) in the case of underpayment, pay the full amount due with the next
payment; or (2) in the case of overpayment, deduct the amount due from one or
more future payments.
ASSIGNMENT
Any Nonqualified Contract may be assigned by the Contract Owner prior to the
Annuity Date and during the Annuitant's lifetime. The Company is not responsi-
ble for the validity of any assignment. No assignment will be recognized until
the Company receives written notice thereof. The interest of any Beneficiary
which the assignor has the right to change shall be subordinate to the inter-
est of an assignee. Any amount paid to the assignee shall be paid in one sum,
notwithstanding any settlement agreement in effect at the time assignment was
executed. The Company shall not be liable as to any payment or other settle-
ment made by the Company before receipt of written notice.
B-3
<PAGE>
ANNUITY DATA
The Company will not be liable for obligations which depend on receiving in-
formation from a Payee until such information is received in a form satisfac-
tory to the Company.
ANNUAL REPORT
Once each Contract Year, the Company will send the Contract Owner an annual
report of the current Accumulated Value allocated to each Subaccount; and any
Purchase Payments, charges, exchanges or withdrawals during the year. This re-
port will also give the Contract Owner any other information required by law
or regulation. The Contract Owner may ask for a report like this at any time.
INCONTESTABILITY
This Contract is incontestable from the Contract Date, subject to the "Mis-
statement of Age or Sex" provision.
OWNERSHIP
The Owner of the Contract on the Contract Date is the Annuitant, unless oth-
erwise specified in the application. The Owner may specify a new Owner by
written notice at any time thereafter. The term Owner also includes any person
named as a Joint Owner. A Joint Owner shares ownership in all respects with
the Owner. During the Annuitant's lifetime all rights and privileges under
this Contract may be exercised solely by the Owner. Upon the death of the Own-
er(s), Ownership is retained by the surviving Joint Owner or passes to the
Owner's Designated Beneficiary, if one has been designated by the Owner. If no
Owner's Designated Beneficiary is designated or if no Owner's Designated Bene-
ficiary is living, the Owner's Designated Beneficiary is the Owner's estate.
From time to time the Company may require proof that the Owner is still liv-
ing.
DISTRIBUTION OF THE CONTRACT
The Vanguard Group, Inc. through its wholly-owned subsidiary, Vanguard Mar-
keting Corporation, is the principal distributor of the Contracts. For these
services, the Fund paid a fee of .02% of the Funds' average net assets for its
1997 fiscal year. This fee is guaranteed not to exceed .20% of the Fund's av-
erage month-end net assets. A complete description of these services is found
in the "Management of the Fund" section of the Fund's Prospectus and in the
Fund's Statement of Additional Information.
PERFORMANCE INFORMATION
Performance information for the Subaccounts including the yield and effective
yield of the Money Market Subaccount, the yield of the remaining Subaccounts,
and the total return of all Subaccounts, may appear in reports or promotional
literature to current or prospective Contract Owners.
MONEY MARKET SUBACCOUNT YIELDS
Current yield for the Money Market Subaccount will be based on the change in
the value of a hypothetical investment (exclusive of capital changes) over a
particular 7-day period, less a pro-rata share of Subaccount expenses accrued
over that period (the "base-period"), and stated as a percentage of the in-
vestment at the start of the base period (the "base period return"). The base
period return is then annualized by multiplying by /365/7/, with the resulting
yield figure carried to at least the nearest hundredth of one percent.
B-4
<PAGE>
Calculation of "effective yield" begins with the same "base period return"
used in the calculation of yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
Effective Yield = [(Base Period Return+1)/365/7/]-1
The yield of the Money Market Subaccount for the 7-day period ended December
31, 1997, was 5.24%.
30-DAY YIELD FOR NON-MONEY MARKET SUBACCOUNTS
Quotations of yield for the remaining Subaccounts will be based on all in-
vestment income per Unit earned during a particular 30-day period, less ex-
penses accrued during the period ("net investment income"), and will be com-
puted by dividing net investment income by the value of a Unit on the last day
of the period, according to the following formula:
YIELD = 2[(a-b+1)/6/-1]
cxd
Where:
[a] equals the net investment income earned during the period by the Series
attributable to shares owned by a Subaccount
[b] equals the expenses accrued for the period (net of reimbursements)
[c] equals the average daily number of Units outstanding during the period
[d] equals the maximum offering price per Accumulation Unit on the last day
of the period
Yield on the Subaccount is earned from the increase in net asset value of
shares of the Series in which the Subaccount invests and from dividends de-
clared and paid by the Series, which are automatically reinvested in shares of
the Series.
The yield of each Subaccount for the 30-day period ended December 31, 1997,
is set forth below. Yields are calculated daily for each Subaccount. Premiums
and discounts on asset-backed securities are not amortized.
<TABLE>
<S> <C>
High-Grade Bond Subaccount............................................. 5.73%
High Yield Bond Subaccount............................................. 8.14%
Balanced Subaccount.................................................... 3.26%
Equity Income Subaccount............................................... 2.33%
Equity Index Subaccount................................................ 1.15%
Growth Subaccount...................................................... 0.41%
International Subaccount............................................... --
Small Company Growth Subaccount........................................ 0.15%
</TABLE>
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN FOR NON-MONEY MARKET SUBACCOUNTS
When advertising performance of the Subaccounts, the Company will show the
"Standardized Average Annual Total Return," calculated as prescribed by the
rules of the SEC, for each Subaccount. The Standardized Average Annual Total
Return is the effective annual compounded rate of return that would have pro-
duced the cash redemption value over the stated period had the performance re-
mained constant throughout. The calculation assumes a single $1,000 payment
made at the beginning of the period and full redemption at the end of the pe-
riod. It reflects the deduction of all applicable sales loads, the Annual Con-
tract Maintenance Fee and all other Portfolio, Separate Account and Contract
level charges except Premium Taxes, if any. In calculating performance infor-
mation, the Annual Contract Maintenance Fee is reflected as a percentage equal
to the total amount of fees collected during a year divided by the total aver-
age net assets of the Portfolios during the same year. The fee is assumed to
remain the same in each year of the applicable period. The fee is prorated to
reflect only the
B-5
<PAGE>
remaining portion of the calendar year of purchase. Thereafter, the fee is de-
ducted on the last business day of the year for the following year, on a pro
rata basis, from each of the Portfolios you have chosen.
Quotations of average annual total return for any Subaccount will be ex-
pressed in terms of the average annual compounded rate of return of a hypo-
thetical investment in a Contract over a period of one, three, five and 10
years (or, if less, up to the life of the Subaccount) and year-to-date and
quarter-to-date, calculate pursuant to the formula:
P(1+T)/n/ = ERV
Where:
(1) [P] equals a hypothetical Initial Purchase Payment of $1,000
(2) [T] equals an average annual total return
(3) [n] equals the number of years
(4) [ERV] equals the ending redeemable value of a hypothetical $1,000 Pur-
chase Payment made at the beginning of the period (or fractional portion
thereof)
The following tables show the average annual total return for the Subaccounts
for the period beginning at the inception of each Subaccount and ending on De-
cember 31, 1997.
<TABLE>
<CAPTION>
YEAR YEAR ENDED SINCE
1 YEAR 3 YEARS 5 YEARS TO DATE 12/31/97 INCEPTION*
------ ------- ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
High-Grade Bond
Subaccount............. 8.97% 5.11% 4.26% 8.97% 8.97% 4.13%
High Yield Bond
Subaccount............. 11.62% -- -- 11.62% 11.62% 13.04%
Balanced Subaccount..... 22.58% 23.14% 15.73% 22.58% 22.58% 14.08%
Equity Income
Subaccount............. 33.77% 29.71% -- 33.77% 33.77% 19.39%
Equity Index Subaccount. 32.58% 30.34% 19.43% 32.58% 32.58% 17.43%
Growth Subaccount....... 26.10% 29.88% -- 26.10% 26.10% 21.13%
International
Subaccount............. 2.91% 10.59% -- 2.91% 2.91% 9.18%
Small Company Growth
Subaccount............. 12.79% -- -- 12.79% 12.79% 6.03%
</TABLE>
- --------
* Since Inception:
Equity Index Subaccount, Balanced Subaccount, and High-Grade Bond
Subaccount--December 16, 1992
Equity Income Subaccount and Growth Subaccount--June 7, 1993
International Subaccount--June 3, 1994
High Yield Bond Subaccount and Small Company Growth Subaccount--June 3,
1996
<TABLE>
<CAPTION>
MONTH-
TO- QUARTER 6 MONTHS-
DATE TO-DATE TO-DATE
------ ------- ---------
<S> <C> <C> <C>
High-Grade Bond Subaccount.......................... 1.03% 2.74% 6.05%
High Yield Bond Subaccount.......................... 1.29% 2.27% 6.04%
Balanced Subaccount................................. 1.61% 2.77% 9.06%
Equity Income Subaccount............................ 2.62% 5.93% 14.22%
Equity Index Subaccount............................. 1.07% 2.72% 10.27%
Growth Subaccount................................... 1.53% 4.05% 7.28%
International Subaccount............................ 0.50% 9.61% 11.42%
Small Company Growth Subaccount..................... 1.00% 8.22% 9.59%
</TABLE>
All total return figures reflect the deduction of the administrative charge,
and the mortality and expense risk charge. The SEC requires that an assumption
be made that the Contract Owner surrenders the entire Contract at the end of
the 1-, 5- and 10-year periods (or, if less, up to the life of the Subaccount)
for which performance is required to be calculated.
B-6
<PAGE>
Performance information for a Subaccount may be compared, in reports and pro-
motional literature, to: (i) the Standard & Poor's 500 Stock Index ("S&P
500"), Dow Jones Industrial Average ("DJIA"), Donoghue Money Market Institu-
tional Averages, or other indices that measure performance of a pertinent
group of securities so that investors may compare a Subaccount's results with
those of a group of securities widely regarded by investors as representative
of the securities markets in general; (ii) other groups of variable annuity
separate accounts or other investment products tracked by Lipper Analytical
Services, a widely-used independent research firm which ranks mutual funds and
other investment companies by overall performance, investment objectives, and
assets, or tracked by other services, companies, publications, or persons who
rank such investment companies on overall performance or other criteria; and
(iii) the Consumer Price Index (measure for inflation) to assess the real rate
of return from an investment in the Contract. Unmanaged indices may assume the
reinvestment of dividends but generally do not reflect deductions for adminis-
trative and management costs and expenses.
Performance information for any Subaccount reflects only the performance of a
hypothetical Contract under which Accumulation Value is allocated to a
Subaccount during a particular time period on which the calculations are
based. Performance information should be considered in light of the investment
objectives and policies, characteristics and quality of the portfolio of the
Fund in which the Subaccount invests, and the market conditions during the
given time period, and should not be considered as a representation of what
may be achieved in the future.
Reports and marketing materials may, from time to time, include information
concerning the rating of AUSA Life Insurance Company, Inc. as determined by
A.M. Best, Moody's, Standard & Poor's or other recognized rating services. Re-
ports and promotional literature may also contain other information including
(i) the ranking of any Subaccount derived from rankings of variable annuity
separate accounts or other investment products tracked by Lipper Analytical
Services or by other rating services, companies, publications, or other per-
sons who rank separate accounts or other investment products on overall per-
formance or other criteria, and (ii) the effect of tax deferred compounding on
a Subaccount's investment returns, or returns in general, which may be illus-
trated by graphs, charts, or otherwise, and which may include a comparison, at
various points in time, of the return from an investment in a Contract (or re-
turns in general) on a tax-deferred basis (assuming one or more tax rates)
with the return on a taxable basis.
ADDITIONAL PERFORMANCE MEASURES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN AND NON-STANDARDIZED AVERAGE ANNUAL
TOTAL RETURN
The Company may show Non-Standardized Cumulative Total Return (i.e., the per-
centage change in the value of an Accumulation Unit) for one or more
Subaccounts with respect to one or more periods. The Company may also show
Non-Standardized Average Annual Total Return (i.e., the average annual change
in Accumulation Unit Value) with respect to one or more periods. For one year
and periods less than one year, the Non-Standardized Cumulative Total Return
and the Non-Standardized Average Annual Total Return are effective annual
rates of return and are equal. For periods greater than one year, the Non-
Standardized Average Annual Total Return is the effective annual compounded
rate of return for the periods stated. Because the value of an Accumulation
Unit reflects the Separate Account and Portfolio expenses (see Fee Table in
the Prospectus), the Non-Standardized Cumulative Total Return and Non-Stan-
dardized Average Annual Total Return also reflect these expenses. However,
these percentages do not reflect the Annual Contract Maintenance Fee or Pre-
mium Taxes (if any), which, if included, would reduce the percentages reported
by the Company.
B-7
<PAGE>
NON-STANDARDIZED CUMULATIVE TOTAL RETURN
FOR PERIOD ENDING 12/31/97
<TABLE>
<CAPTION>
MONTH- SINCE
TO- QUARTER- 6 MONTHS- ONE SUBACCOUNT
DATE TO-DATE TO-DATE YEAR INCEPTION
------ -------- --------- ------ ----------
<S> <C> <C> <C> <C> <C>
High-Grade Bond
Subaccount............. 1.03% 2.74% 6.05% 8.98% 41.17%
High Yield Bond
Subaccount............. 1.29% 2.27% 6.05% 11.63% 21.35%
Balanced Subaccount..... 1.61% 2.77% 9.07% 22.60% 115.77%
Equity Income
Subaccount............. 2.62% 5.94% 14.23% 33.78% 125.03%
Equity Index Subaccount. 1.67% 2.73% 10.27% 32.59% 152.68%
Growth Subaccount....... 1.53% 4.05% 7.29% 26.12% 140.34%
International
Subaccount............. 0.50% -9.60% -11.47% 2.92% 37.08%
Small Company Growth
Subaccount............. -0.99% -8.22% 9.60% 12.80% 9.70%
</TABLE>
NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURNS
FOR PERIOD ENDING 12/31/97
<TABLE>
<CAPTION>
SINCE
SUBACCOUNT
ONE YEAR THREE YEAR FIVE YEAR INCEPTION
-------- ---------- --------- ----------
<S> <C> <C> <C> <C>
High-Grade Bond Subaccount.......... 8.98% 9.69% 6.83% 7.51%
High Yield Bond Subaccount.......... 11.63% -- -- 13.06%
Balanced Subaccount................. 22.60% 23.17% 15.77% 14.13%
Equity Income Subaccount............ 33.78% 29.74% -- 19.43%
Equity Index Subaccount............. 32.59% 30.37% 19.47% 17.48%
Growth Subaccount................... 26.12% 29.90% -- 21.17%
International Subaccount............ 2.92% 10.62% -- 9.22%
Small Company Growth Subaccount..... 12.80% -- -- 6.05%
</TABLE>
NON-STANDARDIZED TOTAL RETURN YEAR-TO-DATE
The Company may show Non-Standardized Total Return Year-to-Date as of a par-
ticular date, or simply Total Return YTD, for one or more Subaccounts with re-
spect to one or more non-standardized base periods commencing at the beginning
of a calendar year. Total Return YTD figures reflect the percentage change in
actual Accumulation Unit Values during the relevant period. These percentages
reflect a deduction for the Separate Account and Portfolio expenses, but do
not include the Annual Contract Maintenance Fee or Premium Taxes (if any),
which, if included, would reduce the percentages reported by the Company.
<TABLE>
<CAPTION>
TOTAL RETURN YTD
AS OF 12/31/97
----------------
<S> <C>
High-Grade Bond Subaccount.................................. 8.98%
High Yield Bond Subaccount.................................. 11.63%
Balanced Subaccount......................................... 22.60%
Equity Income Subaccount.................................... 33.78%
Equity Index Subaccount..................................... 32.59%
Growth Subaccount........................................... 26.12%
International Subaccount.................................... 2.92%
Small Company Growth Subaccount............................. 12.80%
</TABLE>
NON-STANDARDIZED ONE YEAR RETURN
The Company may show Non-Standardized One Year Return, for one or more
Subaccounts with respect to one or more non-standardized base periods commenc-
ing at the beginning of a calendar year (or date of inception,
B-8
<PAGE>
if during the relevant year) and ending at the end of such calendar year. One
Year Return figures reflect the percentage change in actual Accumulation Unit
Values during the relevant period. These percentages reflect a deduction for
the Separate Account and Portfolio expenses, but do not include the Annual
Contract Maintenance Fee or Premium Taxes (if any), which if included would
reduce the percentages reported by the Company.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
High-Grade Bond Subaccount.......... 8.98% 3.08% 17.47% 3.19% 8.92% 5.70%
High Yield Bond Subaccount.......... 11.63% -- -- -- -- --
Balanced Subaccount................. 22.60% 15.68% 31.76% -1.13% 12.56% 6.59%
Equity Income Subaccount............ 33.78% 18.13% 38.19% -1.76% -- --
Equity Index Subaccount............. 32.59% 22.27% 36.67% 0.61% 9.18% 6.77%
Growth Subaccount................... 26.12% 26.29% 37.62% 3.74% -- --
International Subaccount............ 2.92% 14.05% 15.31% -- -- --
Small Company Growth Subaccount..... 12.80% -- -- -- -- --
</TABLE>
SAFEKEEPING OF ACCOUNT ASSETS
Title to assets of the Separate Account is held by the Company. The assets
are kept physically segregated and held separate and apart from the Company's
general account assets. Records are maintained of all purchases and redemp-
tions of eligible Portfolio shares held by each of the Subaccounts.
THE COMPANY
On October 1, 1998, First Providian Life & Health Insurance Company ("First
Providian") merged with and into the Company. First Providian was a stock life
insurance company incorporated under the laws of the State of New York on
March 23, 1970. Upon the merger, First Providian's existence ceased and the
Company became the surviving company under the name AUSA Life Insurance Compa-
ny, Inc. As a result of the merger, the Separate Account became a separate ac-
count of the Company. All of the Contracts issued by First Providian before
the merger were, at the time of the merger, assumed by the Company. The merger
did not affect any provisions of, or rights or obligations under, those Con-
tracts. In approving the merger on May 26, 1998, and May 29, 1998, respective-
ly, the boards of directors of the Company and First Providian determined that
the merger of two financially strong stock life insurance companies would re-
sult in an overall enhanced capital position and reduced expenses, which, to-
gether, would be in the long-term interests of the Contract Owners. On May 26,
1998, 100% of the stockholders of the Company voted to approve the merger, and
on May 29, 1998, 100% of the stockholders of First Providian voted to approve
the merger. In addition, the New York Insurance Department has approved the
merger.
The Company is a wholly-owned indirect subsidiary of AEGON USA, Inc., which
in turn is wholly owned by AEGON U.S. Holding Corporation, a wholly owned sub-
sidiary of AEGON International n.v. AEGON International n.v. is a wholly owned
subsidiary of AEGON n.v. Vereniging AEGON (a Netherlands membership associa-
tion) has a 53.63% interest in AEGON n.v.
STATE REGULATION OF THE COMPANY
The Company is subject to the laws of New York governing insurance companies
and to regulation by the New York Department of Insurance. An annual statement
in a prescribed form is filed with the Department of Insurance each year cov-
ering the operation of the Company for the preceding year and its financial
condition as of the end of such year. Regulation by the Department of Insur-
ance includes periodic examination to determine the Company's contract liabil-
ities and reserves so that the Department may determine if the items are cor-
rect. The Company's books and accounts are subject to review by the Department
of Insurance at all times. In addition, the Company is subject to regulation
under the insurance laws of other jurisdictions in which it may operate.
B-9
<PAGE>
RECORDS AND REPORTS
All records and accounts relating to the Separate Account will be maintained
by the Company or by its administrator, The Vanguard Group, Inc. As presently
required by the Investment Company Act of 1940 and regulations promulgated
thereunder, the Company will mail to all Contract Owners at their last known
address of record, at least semiannually, reports containing such information
as may be required under that Act or by any other applicable law or regula-
tion.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account is a party or to
which the assets of the Separate Account are subject. The Company is not in-
volved in any litigation that is of material importance in relation to its to-
tal assets or that relates to the Separate Account.
OTHER INFORMATION
A Registration Statement has been filed with the Securities and Exchange Com-
mission, under the Securities Act of 1933 as amended, with respect to the Con-
tracts discussed in this Statement of Additional Information. Not all of the
information set forth in the Registration Statement, amendments and exhibits
thereto has been included in this Statement of Additional Information. State-
ments contained in this Statement of Additional Information concerning the
content of the Contracts and other legal instruments are intended to be summa-
ries. For a complete statement of the terms of these documents, reference
should be made to the instruments filed with the Securities and Exchange Com-
mission.
FINANCIAL STATEMENTS
The audited financial statements of the Separate Account for the years ended
December 31, 1997 and December 31, 1996, including the Report of Independent
Auditors thereon, are included in this Statement of Additional Information.
The audited supplemental statutory-basis financial statements of the Company
for the years ended December 31, 1997, December 31, 1996, and December 31,
1995, including the Report of Independent Auditors thereon, which are also in-
cluded in this Statement of Additional Information, should be distinguished
from the financial statements of the Separate Account and should be considered
only as bearing on the ability of the Company to meet its obligations under
the Contracts. They should not be considered as bearing on the investment per-
formance of the assets held in the Separate Account.
B-10
<PAGE>
SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS
AUSA LIFE INSURANCE COMPANY, INC.
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................. 1
Audited Supplemental Financial Statements
Supplemental Balance Sheets--Statutory Basis............................. 2
Supplemental Statements of Operations--Statutory Basis................... 3
Supplemental Statements of Changes in Capital and Surplus--Statutory
Basis................................................................... 4
Supplemental Statements of Cash Flows--Statutory Basis................... 5
Notes to Supplemental Financial Statements--Statutory Basis.............. 6
</TABLE>
F-i
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
AUSA Life Insurance Company, Inc.
We have audited the accompanying supplemental statutory-basis balance sheets
of AUSA Life Insurance Company, Inc. (reflecting the consolidation of AUSA
Life Insurance Company, Inc. and First Providian Life and Health Insurance
Company as described in Note 1) as of December 31, 1997 and 1996 and the
related supplemental statutory-basis statements of operations, changes in
capital and surplus, and cash flows for each of the three years in the period
ended December 31, 1997. The supplemental financial statements give
retroactive effect to the merger of AUSA Life Insurance Company, Inc. and
First Providian Life and Health Insurance Company on October 1, 1998, which
has been accounted for using the pooling of interests method as described in
the notes to the supplemental financial statements. These supplemental
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As described in Note 1 to the supplemental financial statements, the Company
presents its financial statements in conformity with accounting practices
prescribed or permitted by the Department of Insurance of the State of New
York, which practices differ from generally accepted accounting principles.
The variances between such practices and generally accepted accounting
principles also are described in Note 1. The effects on the supplemental
financial statements of these variances are not reasonably determinable but
are presumed to be material.
In our opinion, because of the effects of the matters described in the
preceding paragraph, the supplemental financial statements referred to above
do not present fairly, in conformity with generally accepted accounting
principles, the financial position of AUSA Life Insurance Company, Inc. at
December 31, 1997 and 1996, or the results of its operations or its cash flows
for each of the three years in the period ended December 31, 1997.
Also, in our opinion, the supplemental financial statements referred to above
present fairly, in all material respects, the financial position of AUSA Life
Insurance Company, Inc. at December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, after giving retroactive effect to the merger of First
Providian Life and Health Insurance Company, as described in the notes to the
supplemental financial statements, in conformity with accounting practices
prescribed or permitted by the Department of Insurance of the State of New
York.
Ernst & Young LLP
Des Moines, Iowa
October 1, 1998
F-1
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
SUPPLEMENTAL BALANCE SHEETS--STATUTORY BASIS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
----------- ----------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments..................... $ 68,131 $ 28,114
Bonds............................................... 3,988,635 3,698,483
Stocks:
Preferred......................................... 1,792 1,945
Common, at market (cost: $118 in 1997 and $13 in
1996)............................................ 144 18
Mortgage loans on real estate....................... 495,009 618,633
Real estate acquired in satisfaction of debt, at
cost less accumulated depreciation ($1,816 in 1997
and $1,087 in 1996)................................ 45,695 58,100
Policy loans........................................ 3,046 2,916
Other invested assets............................... 22,414 3,454
----------- ----------
Total cash and invested assets.................. 4,624,866 4,411,663
Short-term note receivable from affiliate............. 9,594 361
Premiums deferred and uncollected..................... 6,316 6,450
Accrued investment income............................. 69,989 65,806
Federal income taxes recoverable...................... -- 221
Other assets.......................................... 7,609 5,231
Separate account assets............................... 5,630,093 4,862,449
----------- ----------
Total admitted assets........................... $10,348,467 $9,352,181
=========== ==========
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life.............................................. $ 103,370 $ 50,870
Annuity........................................... 911,075 845,093
Accident and health............................... 16,547 17,904
Policy and contract claim reserves:
Life.............................................. 5,456 4,835
Accident and health............................... 11,125 12,818
Other policyholders' funds.......................... 3,181,719 3,088,311
Remittances and items not allocated................. 35,267 16,289
Asset valuation reserve............................. 67,324 46,878
Interest maintenance reserve........................ 25,882 14,316
Payable to affiliates............................... 2,247 8,109
Short-term note payable to affiliate................ -- 600
Deferred income..................................... 13,421 18,023
Payable under assumption reinsurance agreement...... 56,952 67,217
Other liabilities................................... 8,400 12,719
Federal income taxes due or accrued................. 1,010 --
Separate account liabilities........................ 5,608,364 4,829,292
----------- ----------
Total liabilities............................... 10,048,159 9,033,274
Commitments and contingencies
Capital and surplus:
Common stock, $125 par value, 20 shares authorized,
issued and outstanding............................. 2,500 2,500
Paid-in surplus..................................... 319,180 319,180
Special surplus fund................................ 1,607 1,473
Unassigned surplus (deficit)........................ (22,979) (4,246)
----------- ----------
Total capital and surplus....................... 300,308 318,907
----------- ----------
Total liabilities and capital and surplus....... $10,348,467 $9,352,181
=========== ==========
</TABLE>
See accompanying notes.
F-2
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
SUPPLEMENTAL STATEMENTS OF OPERATIONS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net
of reinsurance:
Life.................................. $ 71,899 $ 21,120 $ 21,273
Annuity............................... 1,199,470 1,092,033 1,161,710
Accident and health................... 39,999 52,831 59,270
Net investment income................... 341,540 339,460 333,722
Amortization of interest maintenance
reserve................................ 3,392 2,326 2,348
Commissions and expense allowances on
reinsurance ceded...................... 374 438 418
Other income............................ 17,240 10,739 8,786
---------- ---------- ----------
1,673,914 1,518,947 1,587,527
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health
benefits............................. 39,045 50,647 51,972
Surrender benefits.................... 1,175,051 864,643 835,335
Other benefits........................ 14,316 11,699 9,402
Increase (decrease) in aggregate
reserves for policies and contracts:
Life................................ 52,500 2,492 2,902
Annuity............................. 65,982 53,136 114,330
Accident and health................. (1,357) (1,063) 702
Other............................... 580 609 609
Increase in liability for premium and
other deposit type funds............. 92,280 93,893 229,485
---------- ---------- ----------
1,438,397 1,076,056 1,244,737
Insurance expenses:
Commissions........................... 79,099 87,938 95,944
General insurance expenses............ 92,613 83,885 73,727
Taxes, licenses and fees.............. 3,717 3,335 2,527
Net transfers to separate accounts.... 42,490 255,672 154,080
Other expenses........................ 181 145 58
---------- ---------- ----------
218,100 430,975 326,336
---------- ---------- ----------
1,656,497 1,507,031 1,571,073
---------- ---------- ----------
Gain from operations before federal income
taxes and net realized capital gains
(losses) on investments.................. 17,417 11,916 16,454
Federal income tax expense................ 5,247 5,719 10,147
---------- ---------- ----------
Gain from operations before net realized
capital gains (losses) on investments.... 12,170 6,197 6,307
Net realized capital gains (losses) on
investments (net of related federal
income taxes and amounts transferred to
interest maintenance reserve)............ 831 (12,107) (3,377)
---------- ---------- ----------
Net income (loss)......................... $ 13,001 $ (5,910) $ 2,930
========== ========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
SUPPLEMENTAL STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SPECIAL UNASSIGNED TOTAL
COMMON PAID-IN SURPLUS SURPLUS CAPITAL AND
STOCK SURPLUS FUND (DEFICIT) SURPLUS
------ -------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995...... $2,500 $278,180 $1,285 $ 12,195 $294,160
Capital contribution.......... -- 41,000 -- -- 41,000
Net income for 1995........... -- -- -- 2,930 2,930
Net unrealized capital
losses....................... -- -- -- (447) (447)
Change in non-admitted
assets....................... -- -- 72 (985) (913)
Change in reserves due to
change in valuation basis.... -- -- -- 132 132
Surplus effect of
reinsurance.................. -- -- -- (70) (70)
Change in liability for
reinsurance in unauthorized
companies.................... -- -- -- (51) (51)
Change in asset valuation
reserve...................... -- -- -- (10,608) (10,608)
Seed money contributed to
separate account, net of
redemptions.................. -- -- -- (1,000) (1,000)
Change in surplus in separate
account...................... 3,121 3,121
------ -------- ------ -------- --------
Balance at December 31, 1995.... 2,500 319,180 1,357 5,217 328,254
Net loss for 1996............. -- -- -- (5,910) (5,910)
Net unrealized capital
losses....................... -- -- -- (460) (460)
Change in non-admitted
assets....................... -- -- 116 437 553
Change in liability for
reinsurance in unauthorized
companies.................... -- -- -- (42) (42)
Change in asset valuation
reserve...................... -- -- -- (6,217) (6,217)
Seed money contributed to
separate account, net of
redemptions.................. -- -- -- (12,500) (12,500)
Change in surplus in separate
account...................... -- -- -- 14,783 14,783
Prior year federal income tax
adjustment................... -- -- -- 446 446
------ -------- ------ -------- --------
Balance at December 31, 1996.... 2,500 319,180 1,473 (4,246) 318,907
Net income for 1997........... -- -- -- 13,001 13,001
Net unrealized capital
losses....................... -- -- -- (2,710) (2,710)
Change in non-admitted
assets....................... -- -- 134 (8,617) (8,483)
Change in liability for
reinsurance in unauthorized
companies.................... -- -- -- 29 29
Change in asset valuation
reserve...................... -- -- -- (20,446) (20,446)
Seed money withdrawn from
separate account, net of
redemptions.................. -- -- -- 11,700 11,700
Change in surplus in separate
account...................... -- -- -- (11,749) (11,749)
Prior year federal income tax
adjustment................... -- -- -- 59 59
------ -------- ------ -------- --------
Balance at December 31, 1997.... $2,500 $319,180 $1,607 $(22,979) $300,308
====== ======== ====== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
SUPPLEMENTAL STATEMENTS OF CASH FLOWS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums and other considerations, net
of reinsurance....................... $ 1,340,757 $ 1,177,613 $ 1,251,733
Net investment income................. 340,150 345,153 332,660
Life and accident and health claims... (40,151) (52,590) (50,718)
Surrender benefits and other fund
withdrawals.......................... (1,175,051) (864,643) (835,335)
Other benefits to policyholders....... (14,290) (11,697) (9,387)
Commissions, other expenses and other
taxes................................ (184,457) (193,405) (188,487)
Net transfer to separate account...... (43,309) (257,467) (154,087)
Federal income taxes paid............. (4,704) (4,490) (10,583)
Other, net............................ (3,744) (14,431) 7,360
----------- ----------- -----------
Net cash provided by operating
activities....................... 215,201 124,043 343,156
INVESTING ACTIVITIES
Proceeds from investments sold,
matured or repaid:
Bonds and preferred stocks.......... 968,184 777,107 645,889
Common stocks....................... -- 5,288 2,957
Mortgage loans on real estate....... 179,810 165,460 138,243
Real estate......................... 25,104 -- 4,953
Policy loans........................ 16 4 --
----------- ----------- -----------
1,173,114 947,859 792,042
Cost of investments acquired:
Bonds and preferred stocks.......... (1,260,122) (1,101,918) (1,127,375)
Common stocks....................... (103) (589) (5,174)
Mortgage loans on real estate....... (60,722) (42,118) (54,140)
Real estate......................... -- (521) --
Policy loans........................ (146) (153) (150)
Other............................... (17,805) (2,695) (995)
----------- ----------- -----------
(1,338,898) (1,147,994) (1,187,834)
----------- ----------- -----------
Net cash used in investing
activities....................... (165,784) (200,135) (395,792)
FINANCING ACTIVITIES
Issuance (payment) of intercompany
notes, net........................... (9,400) (19,200) 14,600
Capital contribution.................. -- -- 41,000
----------- ----------- -----------
Net cash provided by (used in)
financing activities................. (9,400) (19,200) 55,600
----------- ----------- -----------
Increase (decrease) in cash and short-
term investments..................... 40,017 (95,292) 2,964
Cash and short-term investments at
beginning of year...................... 28,114 123,406 120,442
----------- ----------- -----------
Cash and short-term investments at end
of year................................ $ 68,131 $ 28,114 $ 123,406
=========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
AUSA Life Insurance Company, Inc. ("the Company") is a stock life insurance
company and is a wholly-owned subsidiary of First AUSA Life Insurance Company
("First AUSA") which, in turn, is a wholly-owned subsidiary of AEGON USA
("AEGON"). AEGON is a wholly-owned subsidiary of AEGON N.V., a holding company
organized under the laws of The Netherlands. On December 31, 1993, the Company
entered into an assumption reinsurance agreement with Mutual of New York
("MONY") to transfer certain group pension business of MONY to the Company.
In July 1996, the Company completed a merger with International Life Investors
Insurance Company ("ILI"), a wholly-owned subsidiary of Life Investors
Insurance Company of America, another wholly-owned subsidiary of First AUSA,
whereby ILI was merged directly into the Company. The Company received assets
of $688,233 and liabilities of $635,189. The difference between assets and
liabilities was transferred directly to capital and surplus. In accordance
with National Association of Insurance Commissioners ("NAIC") statutory
accounting principles, all prior period financial statements presented have
been restated as if the merger took place at the beginning of such periods.
Historical book values carried over from the separate companies to the
combined entity.
On October 1, 1998, the Company completed a merger with First Providian Life
and Health Insurance Company ("FPLH"), an indirect wholly-owned subsidiary of
Commonwealth General Corporation which, in turn, is an indirect wholly-owned
subsidiary of AEGON, whereby FPLH was merged directly into the Company. For
the purposes of this presentation, these supplemental financial statements
give retroactive effect as if the merger had occurred on January 1, 1995 in
conformity with the practices of the NAIC and accounting practices prescribed
or permitted by the Department of Insurance of the State of New York. This
merger was accounted for under the pooling of interests method of accounting
and, accordingly, the historical book values carried over from the separate
companies to the combined entity. The financial information is not necessarily
indicative of the results that would have been recorded had the merger
actually occurred on January 1, 1995, nor is it indicative of future results.
These financial statements do not extend through to the date of the merger;
however, they will become the historical financial statements of the Company
after financial statements covering the date of the merger have been issued.
Summarized financial information for the Company and FPLH prior to the merger
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
The Company.......................... $1,585,260 $1,454,207 $1,535,596
FPLH................................. 88,654 64,740 51,931
---------- ---------- ----------
Combined............................... $1,673,914 $1,518,947 $1,587,527
========== ========== ==========
Net income (loss):
The Company.......................... $ 3,503 $ (13,714) $ (5,049)
FPLH................................. 9,498 7,804 7,979
---------- ---------- ----------
Combined............................... $ 13,001 $ (5,910) $ 2,930
========== ========== ==========
</TABLE>
F-6
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
----------- ----------
<S> <C> <C>
Assets:
The Company...................................... $ 9,951,625 $9,028,321
FPLH............................................. 396,842 323,860
----------- ----------
Combined........................................... $10,348,467 $9,352,181
=========== ==========
Liabilities:
The Company...................................... $ 9,745,504 $8,794,341
FPLH............................................. 302,655 238,933
----------- ----------
Combined........................................... $10,048,159 $9,033,274
=========== ==========
Capital and surplus:
The Company...................................... $ 206,121 $ 233,980
FPLH............................................. 94,187 84,927
----------- ----------
Combined........................................... $ 300,308 $ 318,907
=========== ==========
</TABLE>
Nature of Business
The Company primarily sells group fixed and variable annuities and group life
coverages. The Company is licensed in 49 states and the District of Columbia
and is actively in the process of becoming licensed in all 50 states. Sales of
the Company's products are primarily through brokers.
Basis of Presentation
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Significant estimates and assumptions are utilized in the calculation of
aggregate policy reserves, policy and contract reserves, guarantee fund
assessment accruals and valuation allowances on investments. It is reasonably
possible that actual experience could differ from the estimates and
assumptions utilized which could have a material impact on the financial
statements.
The accompanying financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Department of Insurance of
the State of New York, which practices differ in some respects from generally
accepted accounting principles. The more significant of these differences are
as follows: (a) bonds are generally reported at amortized cost rather than
segregating the portfolio into held-to-maturity (reported at amortized cost),
available-for-sale (reported at fair value), and trading (reported at fair
value) classifications; (b) acquisition costs of acquiring new business are
charged to current operations as incurred rather than deferred and amortized
over the life of the policies; (c) policy reserves on traditional life
products are based on statutory mortality rates and interest which may differ
from reserves based on reasonable assumptions of expected mortality, interest,
and withdrawals which include a provision for possible unfavorable deviation
from such assumptions; (d) policy reserves on certain investment products use
discounting methodologies utilizing statutory interest rates rather than full
account values; (e) reinsurance amounts are netted against the corresponding
asset or liability rather than shown as gross amounts on the balance sheet;
(f) deferred income taxes are not provided for the difference between the
financial statement and income tax bases of assets and liabilities; (g) net
realized gains or losses attributed to changes in the level of interest rates
in the market are deferred and amortized over the remaining life of the bond
or mortgage loan, rather than recognized as gains or losses in the statement
of operations when the sale is completed; (h) declines in the estimated
realizable value of investments are provided for through the establishment of
a formula-determined statutory investment reserve (reported as a liability),
changes to which are charged directly to surplus, rather than through
recognition in the statement of operations for declines in value, when such
declines are judged to be other than temporary; (i) certain assets designated
as "non-admitted assets" have been charged to surplus rather than being
F-7
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
reported as assets; (j) revenues for universal life and investment products
consist of premiums received rather than policy charges for the cost of
insurance, policy administration charges, amortization of policy initiation
fees and surrender charges assessed; (k) pension expense is recorded as
amounts are paid; (l) adjustments to federal income taxes of prior years are
charged or credited directly to unassigned surplus, rather than reported as a
component of expense in the statement of operations; and (m) gains or losses
on dispositions of business are charged or credited directly to unassigned
surplus rather than being reported in the statement of operations. The effects
of these variances have not been determined by the Company.
The National Association of Insurance Commissioners (NAIC) currently is in the
process of recodifying statutory accounting practices, the result of which is
expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is not expected to be completed
before 1999, will likely change, to some extent, prescribed statutory
accounting practices and may result in changes to the accounting practices
that the Company uses to prepare its statutory-basis financial statements.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with remaining maturity of one year or less when purchased
to be cash equivalents.
Investments
Investments in bonds (except those to which the Securities Valuation Office of
the NAIC has ascribed a value), mortgage loans on real estate and short-term
investments are reported at cost adjusted for amortization of premiums and
accrual of discounts. Amortized costs for bonds and mortgage loans on real
estate that were acquired through the reinsurance agreement, described
earlier, were initially recorded at market value, consistent with the
aforementioned agreement and as prescribed by the Department of Insurance of
the State of New York. Amortization is computed using methods which result in
a level yield over the expected life of the security. The Company reviews its
prepayment assumptions on mortgage and other asset backed securities at
regular intervals and adjusts amortization rates retrospectively when such
assumptions are changed due to experience and/or expected future patterns.
Investments in preferred stocks in good standing are reported at cost.
Investments in preferred stocks not in good standing are reported at the lower
of cost or market. Common stocks, which may include shares of mutual funds
(money market and other), are carried at market. Real estate is reported at
cost less allowances for depreciation. Depreciation is computed principally by
the straight-line method. Policy loans are reported at unpaid principal. Other
invested assets consist principally of investments in various joint ventures
and are recorded at equity in underlying net assets. Other "admitted assets"
are valued, principally at cost, as required or permitted by New York
Insurance Laws.
Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for
anticipated losses in the event of default by issuers of certain invested
assets. These amounts are determined using a formula prescribed by the NAIC
and are reported as a liability. The formula for the AVR provides for a
corresponding adjustment for realized gains and losses. Under a formula
prescribed by the NAIC, the Company defers, in the Interest Maintenance
Reserve (IMR), the portion of realized gains and losses on sales of fixed
income investments, principally bonds and mortgage loans, attributable to
changes in the general level of interest rates and amortizes those deferrals
over the remaining period to maturity of the security.
Interest income is recognized on an accrual basis. The Company does not accrue
income on bonds in default, mortgage loans on real estate in default and/or
foreclosure or which are delinquent more than twelve months, or real estate
where rent is in arrears for more than three months. Further, income is not
accrued when collection is uncertain. At December 31, 1997, 1996 and 1995, the
Company excluded investment income due and accrued of $473, $469 and $216,
respectively, with respect to such practices.
F-8
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
The Company uses interest rate swaps as part of its overall interest rate risk
management strategy for certain life insurance and annuity products. The
Company entered into an interest rate swap contract to modify the interest
rate characteristics of the underlying liabilities. The net interest effect of
such swap transactions is reported as an adjustment of interest income from
the hedged items as incurred.
Deferred income for unrealized gains and losses on the securities valued at
market at the time of the assumption reinsurance agreement (described in Note
4) are returned to MONY at the time of realization pursuant to the agreement.
Aggregate Policy Reserves
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will provide,
in the aggregate, reserves that are greater than or equal to the minimum
required by law.
The aggregate policy reserves for life insurance policies are based
principally upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary
Mortality Tables. The reserves are calculated using interest rates ranging
from 2.50 to 6.50 percent and are computed principally on the Net Level
Premium Valuation and the Commissioners' Reserve Valuation Methods. Reserves
for universal life policies are based on account balances adjusted for the
Commissioners' Reserve Valuation Method.
Deferred annuity reserves are calculated according to the Commissioners'
Annuity Reserve Valuation Method including excess interest reserves to cover
situations where the future interest guarantees plus the decrease in surrender
charges are in excess of the maximum valuation rates of interest. Reserves for
immediate annuities and supplementary contracts with life contingencies are
equal to the present value of future payments assuming interest rates ranging
from 3.00 to 8.25 percent and mortality rates, where appropriate, from a
variety of tables.
Accident and health policy reserves are equal to the greater of the gross
unearned premiums or any required midterminal reserves plus net unearned
premiums and the present value of amounts not yet due on both reported and
unreported claims.
Policy and Contract Claim Reserves
Claim reserves represent the estimated accrued liability for claims reported
to the Company and claims incurred but not yet reported through the statement
date. These reserves are estimated using either individual case-basis
valuations or statistical analysis techniques. These estimates are subject to
the effects of trends in claim severity and frequency. The estimates are
continually reviewed and adjusted as necessary as experience develops or new
information becomes available.
Separate Accounts
Assets held in trust for purchases of separate account contracts and the
Company's corresponding obligation to the contract owners are shown separately
in the balance sheets. Income and gains and losses with respect to these
assets accrue to the benefit of the policyholders and, accordingly, the
operations of the separate accounts are not included in the accompanying
financial statements.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures about
Fair Value of Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statutory-basis balance sheet, for which it is practicable to estimate that
value. SFAS No. 119, Disclosures About Derivative Financial Instruments and
Fair Value of Financial Instruments, requires additional disclosures about
derivatives. In
F-9
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived fair
value estimates cannot be substantiated by comparisons to independent markets
and, in many cases, could not be realized in immediate settlement of the
instrument. SFAS No. 107 and No. 119 exclude certain financial instruments and
all nonfinancial instruments from their disclosure requirements and allow
companies to forego the disclosures when those estimates can only be made at
excessive cost. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and short-term investments: The carrying amounts reported in the
statutory-basis balance sheet for these instruments approximate their fair
values.
Investment securities: Fair values for fixed maturity securities (including
redeemable preferred stocks) are based on quoted market prices, where
available. For fixed maturity securities not actively traded, fair values
are estimated using values obtained from independent pricing services or,
in the case of private placements, are estimated by discounting expected
future cash flows using a current market rate applicable to the yield,
credit quality, and maturity of the investments. The fair values for equity
securities are based on quoted market prices.
Mortgage loans and policy loans: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans is assumed to equal its carrying
value.
Investment contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash
flow calculations, based on interest rates currently being offered for
similar contracts with maturities consistent with those remaining for the
contracts being valued.
Interest rate swap: Estimated fair value of the interest rate swaps are
based upon the pricing differential for similar swap agreements.
Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure
to changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.
The following sets forth a comparison of the fair values and carrying values
of the Company's financial instruments subject to the provisions of Statement
of Financial Accounting Standards No. 107 and No. 119:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1997 1996
--------------------- ----------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds.................... $3,988,635 $4,083,280 $3,698,483 $ 3,736,999
Preferred stocks......... 1,792 1,892 1,945 1,940
Common stock............. 144 144 18 18
Mortgage loans on real
estate.................. 495,009 504,947 618,633 619,479
Interest rate swap....... -- 391 -- --
Policy loans............. 3,046 3,046 2,916 2,916
Cash and short-term
investments............. 68,131 68,131 28,114 28,114
Separate account assets.. 5,630,093 5,640,386 4,862,449 4,862,099
LIABILITIES
Investment contract
liabilities............. 4,091,938 4,011,465 3,932,668 3,804,240
Separate account
annuities............... 5,594,880 5,577,854 4,814,853 4,784,574
</TABLE>
F-10
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS
The carrying value and estimated market value of investments in debt securities
were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Bonds:
United States Government
and agencies........... $ 102,628 $ 943 $ 255 $ 103,316
State, municipal and
other government....... 60,427 1,413 1,761 60,079
Public utilities........ 251,071 4,943 892 255,122
Industrial and
miscellaneous.......... 2,301,979 66,409 5,867 2,362,521
Foreign corporate*...... 22,363 474 557 22,280
Mortgage-backed
securities and asset-
backed................. 1,250,167 32,779 2,984 1,279,962
---------- -------- ------- ----------
3,988,635 106,961 12,316 4,083,280
Preferred stocks.......... 1,792 100 -- 1,892
---------- -------- ------- ----------
$3,990,427 $107,061 $12,316 $4,085,172
========== ======== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Bonds:
United States Government
and agencies........... $ 152,410 $ 1,236 $ 1,112 $ 152,534
State, municipal and
other government....... 30,121 925 36 31,010
Public utilities........ 229,732 2,086 2,977 228,841
Industrial and
miscellaneous.......... 2,156,463 38,067 15,854 2,178,676
Foreign corporate*...... 5,556 -- -- 5,556
Mortgage-backed
securities and asset-
backed................. 1,124,201 22,579 6,398 1,140,382
---------- ------- ------- ----------
3,698,483 64,893 26,377 3,736,999
Preferred stocks.......... 1,945 5 10 1,940
---------- ------- ------- ----------
$3,700,428 $64,898 $26,387 $3,738,939
========== ======= ======= ==========
</TABLE>
- -------
*Substantially all are U. S. dollar denominated.
The carrying value and estimated market value of bonds at December 31, 1997, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
CARRYING FAIR
VALUE VALUE
---------- ----------
<S> <C> <C>
Due in one year or less............................ $ 138,325 $ 138,396
Due after one year through five years.............. 1,388,726 1,415,687
Due after five years through ten years............. 964,444 988,714
Due after ten years................................ 246,973 260,521
---------- ----------
2,738,468 2,803,318
Mortgage-backed and asset-backed securities........ 1,250,167 1,279,962
---------- ----------
$3,988,635 $4,083,280
========== ==========
</TABLE>
F-11
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
A detail of net investment income is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Interest on bonds and notes.................. $285,730 $267,510 $246,462
Mortgage loans............................... 57,659 83,511 98,653
Real estate.................................. 13,976 7,225 2,400
Dividends on equity investments.............. 223 220 269
Interest on policy loans..................... 168 154 152
Derivative instruments....................... 100 -- --
Other investment gain (loss)................. 1,543 (5,482) (3,765)
-------- -------- --------
Gross investment income...................... 359,399 353,138 344,171
Investment expenses.......................... 17,859 13,678 10,449
-------- -------- --------
Net investment income........................ $341,540 $339,460 $333,722
======== ======== ========
</TABLE>
Proceeds from sales and maturities of debt securities and related gross
realized gains and losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Proceeds................................... $968,184 $777,107 $645,889
======== ======== ========
Gross realized gains....................... $ 19,165 $ 9,697 $ 9,668
Gross realized losses...................... (11,997) (12,291) (16,405)
-------- -------- --------
Net realized gains (losses)................ $ 7,168 $ (2,594) $ (6,737)
======== ======== ========
</TABLE>
At December 31, 1997, investments with an aggregate carrying value of $3,970
were on deposit with regulatory authorities or were restrictively held in bank
custodial accounts for the benefit of such regulatory authorities as required
by statute.
Realized investment gains (losses) and changes in unrealized gains (losses) for
investments are summarized below:
<TABLE>
<CAPTION>
REALIZED
----------------------------
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Debt securities............................ $ 7,168 $ (2,594) $ (6,737)
Common stock............................... -- 244 --
Preferred stock............................ (7) (44) --
Short-term investments..................... (6) (115) (26)
Mortgage loans on real estate.............. 287 (12,415) (3,650)
Real estate................................ 4,059 -- (628)
Other invested assets...................... 5,035 6,872 11,109
-------- -------- --------
16,536 (8,052) 68
Tax effect................................. (747) 87 343
Transfer to interest maintenance reserve... (14,958) (4,142) (3,788)
-------- -------- --------
Total realized gains (losses).............. $ 831 $(12,107) $ (3,377)
======== ======== ========
<CAPTION>
CHANGE IN UNREALIZED
----------------------------
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Debt securities............................ $ 56,129 $(87,888) $266,783
Equity securities.......................... 21 (190) 74
-------- -------- --------
Change in unrealized appreciation.......... $ 56,150 $(88,078) $266,857
======== ======== ========
</TABLE>
F-12
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Gross unrealized gains and gross unrealized losses on equity securities at
December 31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Unrealized gains........................................ $ 38 $ 16 $206
Unrealized losses....................................... (12) (11) (11)
---- ---- ----
Net unrealized gains.................................... $ 26 $ 5 $195
==== ==== ====
</TABLE>
During 1997, the Company issued mortgage loans with interest rates ranging
from 8.10% to 8.72%. The maximum percentage of any one loan to the value of
the underlying real estate at origination was 85%. No mortgage loans were non-
income producing for the previous twelve months and, accordingly, no accrued
interest related to these mortgage loans was excluded from investment income.
During 1997, the Company refinanced the mortgage loans of one property with an
aggregate carrying value of $24,888 to reduce the interest rates, as a result
of the current interest rate environment. The Company requires all mortgage
loans to carry fire insurance equal to the value of the underlying property.
During 1997, 1996 and 1995, there were $4,427, $28,929 and $14,264,
respectively, in foreclosed mortgage loans that were transferred to real
estate. At December 31, 1997 and 1996, the Company held a mortgage loan loss
reserve in the asset valuation reserve of $20,191 and $8,368, respectively.
The mortgage loan portfolio is diversified by geographic region and specific
collateral property type as follows:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION
-----------------------
DECEMBER 31,
--------------
1997 1996
------ ------
<S> <C> <C>
Pacific................. 20% 2%
South Atlantic.......... 20 37
Mid-Atlantic............ 16 5
E. North Central........ 16 21
Mountain................ 15 15
New England............. 7 10
W. North Central........ 2 5
W. South Central........ 2 5
E. South Central........ 2 --
</TABLE>
<TABLE>
<CAPTION>
PROPERTY TYPE DISTRIBUTION
--------------------------
DECEMBER 31,
--------------
1997 1996
------ ------
<S> <C> <C>
Office.................. 30% 42%
Apartment............... 23 10
Retail.................. 19 30
Other................... 15 17
Industrial.............. 13 1
</TABLE>
At December 31, 1997, the Company had the following investments, excluding U.
S. Government guaranteed or insured issues, which individually represented
more than ten percent of capital and surplus and the asset valuation reserve:
<TABLE>
<CAPTION>
CARRYING
DESCRIPTION OF SECURITY VALUE
----------------------- --------
<S> <C>
Bonds:
Chase Manhattan Corp........................................... $37,953
</TABLE>
The Company utilizes an interest rate swap agreement as part of its efforts to
hedge and manage fluctuations in the market value of its investment portfolio
attributable to changes in general interest rate levels and to manage duration
mismatch of assets and liabilities. The contract or notional amounts of those
instruments reflect the extent of involvement in the various types of
financial instruments.
The Company's exposure to credit risk is the risk of loss from a counterparty
failing to perform according to the terms of the contract. That exposure
includes settlement risk (i.e., the risk that the counterparty defaults after
the Company
F-13
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
has delivered funds or securities under terms of the contract) that would
result in an accounting loss and replacement cost risk (i.e., the cost to
replace the contract at current market rates should the counterparty default
prior to settlement date). Credit loss exposure resulting from nonperformance
by a counterparty for commitments to extend credit is represented by the
contractual amounts of the instruments.
At December 31, 1997 and 1996, the Company's outstanding financial instruments
with on and off-balance sheet risks, shown in notional amounts, are summarized
as follows:
<TABLE>
<CAPTION>
NOTIONAL
AMOUNT
------------
1997 1996
------- ----
<S> <C> <C>
Derivative securities:
Interest rate swaps:
Receive fixed--pay floating.............................. $50,800 $--
</TABLE>
4. REINSURANCE
The Company reinsures portions of risk on certain insurance policies which
exceed its established limits, thereby providing a greater diversification of
risk and minimizing exposure on larger risks. The Company remains contingently
liable with respect to any insurance ceded, and this would become an actual
liability in the event that the assuming insurance company became unable to
meet its obligation under the reinsurance treaty.
Premiums earned reflect the following reinsurance assumed and ceded amounts
for the year ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Direct premiums....................... $1,309,731 $1,185,163 $1,244,902
Reinsurance assumed................... 6,905 9,962 37,423
Reinsurance ceded..................... (5,268) (29,141) (40,072)
---------- ---------- ----------
Net premiums earned................... $1,311,368 $1,165,984 $1,242,253
========== ========== ==========
</TABLE>
The Company received reinsurance recoveries in the amounts of $1,992, $1,758
and $1,417 during 1997, 1996 and 1995, respectively.
The aggregate reserves for policies and contracts were reduced for reserve
credits for reinsurance ceded at December 31, 1997 and 1996 of $153,092 and
$157,421, respectively.
On December 31, 1993, the Company and MONY entered into an assumption
reinsurance agreement whereby all of the general account liabilities were
novated to the Company from MONY as state approvals were received.
In accordance with the agreement, MONY will receive payments relating to the
performance of the assets and liabilities that exist at the date of closing
for a period of nine years. These payments will be reduced for certain
administrative expenses as defined in the agreement. The Company will
recognize operating gains and losses on renewal premiums received after
December 31, 1993 of the business in-force at December 31, 1993, and on all
new business written after that date. At the end of nine years, the Company
will purchase from MONY the remaining transferred business inforce based upon
a formula described in the agreement. At December 31, 1997 and 1996, the
Company owed MONY $56,952 and $67,217, respectively, which represents the
amount earned by MONY under the gain sharing calculation and certain fees for
investment management services for the respective years.
In connection with the transaction, MONY purchased $150,000 and $50,000 in
Series A and Series B notes, respectively, of AEGON. The proceeds were used to
enhance the surplus of the Company. Both the Series A and Series B notes bear
a market rate of interest and mature in nine years from the date of closing.
F-14
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
AEGON provides general and administrative services for the transferred
business under a related agreement with MONY. The agreement specifies
prescribed rates for expenses to administer the business up to certain levels.
In addition, AEGON also provides investment management services on the assets
underlying the new business written by the Company while MONY continues to
provide investment management services for assets supporting the remaining
policy liabilities which were transferred at December 31, 1993.
On October 1, 1995, the Company entered into a reinsurance agreement with a
non-affiliate. As a result, the Company received $4,242 of assets, including
$38 of cash, and $4,312 of liabilities. The difference between the assets and
the liabilities of $70 was charged directly to unassigned surplus.
5. INCOME TAXES
The Company files a separate federal income tax return.
Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to gain from operations before federal
income taxes and net realized capital gains (losses) on investments primarily
due to differences in the statutory and tax treatment of certain investments,
deferred policy acquisition costs, dividends received deduction, carryforward
(utilization) of operating loss, and IMR amortization.
Federal income tax expense (benefit) differs from the amount computed by
applying the statutory federal income tax rate to realized gains (losses) due
to the agreement between MONY and the Company, as discussed in Note 4 to the
financial statements. In accordance with this agreement, these gains and
losses are included in the net payments MONY will receive relating to the
performance of the assets that existed at the date of closing. Accordingly,
income taxes relating to gains and losses on such assets are not provided for
on the income tax return filed by the Company.
Prior to 1984, as provided for under the Life Insurance Company Tax Act of
1959, a portion of statutory income was not subject to current taxation but
was accumulated for income tax purposes in a memorandum account referred to as
the policyholders' surplus account. No federal income taxes have been provided
for in the financial statements on income deferred in the policyholders'
surplus account ($2,428 at December 31, 1997). To the extent dividends are
paid from the amount accumulated in the policyholders' surplus account, net
earnings would be reduced by the amount of tax required to be paid. Should the
entire amount in the policyholders' surplus account become taxable, the tax
thereon computed at current rates would amount to approximately $850.
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $19,155 which expire through 2011.
An examination by the Internal Revenue Service is underway for years 1993-
1995.
F-15
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
6. POLICY AND CONTRACT ATTRIBUTES
A portion of the Company's policy reserves and other policyholders' funds
relate to liabilities established on a variety of the Company's products that
are not subject to significant mortality or morbidity risk; however, there may
be certain restrictions placed upon the amount of funds that can be withdrawn
without penalty. The amount of reserves on these products, by withdrawal
characteristics, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1997 1996
------------------ ------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Subject to discretionary
withdrawal with market value
adjustment....................... $ 910,528 9% $ 834,176 9%
Subject to discretionary
withdrawal at book value less
surrender charge................. 1,045,807 11 1,619,210 18
Subject to discretionary
withdrawal at market value....... 2,950,639 30 2,361,359 27
Subject to discretionary
withdrawal at book value (minimal
or no charges or adjustments).... 2,616,308 27 1,951,742 22
Not subject to discretionary
withdrawal provision............. 2,317,823 23 2,139,682 24
---------- --- ---------- ---
9,841,105 100% 8,906,169 100%
=== ===
Less reinsurance ceded............ 152,726 157,039
---------- ----------
Total policy reserves on
annuities and deposit fund
liabilities.................. $9,688,379 $8,749,130
========== ==========
</TABLE>
F-16
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Separate and variable account assets held by the Company represent contracts
where the benefit is determined by the performance of the investments held in
the separate account. Information regarding the separate accounts of the
Company as of and for the years ended December 31, 1997, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
GUARANTEED NON-GUARANTEED
SEPARATE SEPARATE
ACCOUNT ACCOUNT TOTAL
---------- -------------- ----------
<S> <C> <C> <C>
Premiums, deposits and other
considerations for the year ended
December 31, 1997.................. $ 147,638 $ 648,056 $ 795,694
========== ========== ==========
Reserves for separate accounts with
assets as of December 31, 1997 at:
Fair value........................ $2,204,931 $2,767,245 $4,972,176
Amortized cost.................... 622,703 -- 622,703
---------- ---------- ----------
Total........................... $2,827,634 $2,767,245 $5,594,879
========== ========== ==========
Premiums, deposits and other
considerations for the year ended
December 31, 1996.................. $ -- $ 747,506 $ 747,506
========== ========== ==========
Reserves for separate accounts with
assets as of December 31, 1996 at:
Fair value........................ $2,022,843 $2,178,445 $4,201,288
Amortized cost.................... 613,565 -- 613,565
---------- ---------- ----------
Total........................... $2,636,408 $2,178,445 $4,814,853
========== ========== ==========
Premiums, deposits and other
considerations for the year ended
December 31, 1995.................. $ -- $ 553,110 $ 553,110
========== ========== ==========
Reserves for separate accounts with
assets as of December 31, 1995 at:
Fair value........................ $2,147,500 $1,557,952 $3,705,452
Amortized cost.................... 599,254 -- 599,254
---------- ---------- ----------
Total........................... $2,746,754 $1,557,952 $4,304,706
========== ========== ==========
</TABLE>
F-17
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
There may be certain restrictions placed upon the amount of funds that can be
withdrawn without penalty. The amount of separate account liabilities on these
products, by withdrawal characteristics, are summarized as follows:
<TABLE>
<CAPTION>
NON-
GUARANTEED GUARANTEED
SEPARATE SEPARATE
ACCOUNT ACCOUNT TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
DECEMBER 31, 1997
Subject to discretionary withdrawal
with market value adjustment........ $ 358,061 $ -- $ 358,061
Subject to discretionary withdrawal
at book value less surrender
charge.............................. 264,642 -- 264,642
Subject to discretionary withdrawal
at market value..................... 180,802 2,767,245 2,948,047
Not subject to discretionary
withdrawal.......................... 2,024,129 -- 2,024,129
---------- ---------- ----------
$2,827,634 $2,767,245 $5,594,879
========== ========== ==========
DECEMBER 31, 1996
Subject to discretionary withdrawal
with market value adjustment........ $ 269,991 $ -- $ 269,991
Subject to discretionary withdrawal
at book value less surrender
charge.............................. 279,399 -- 279,399
Subject to discretionary withdrawal
at market value..................... 181,158 2,178,445 2,359,603
Not subject to discretionary
withdrawal.......................... 1,905,860 -- 1,905,860
---------- ---------- ----------
$2,636,408 $2,178,445 $4,814,853
========== ========== ==========
</TABLE>
A reconciliation of the amounts transferred to and from the separate accounts
is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Transfers as reported in the summary of
operations of the separate accounts
statement:
Transfers to separate accounts............. $795,663 $747,677 $553,110
Transfers from separate accounts........... 767,049 505,592 406,978
-------- -------- --------
Net transfers to (from) separate accounts.... 28,614 242,085 146,132
Reconciling adjustments--HUB level fees not
paid to AUSA general account................ 13,756 13,520 7,904
Fees paid to external fund manager......... 120 67 44
-------- -------- --------
Net adjustments.............................. 13,876 13,587 7,948
-------- -------- --------
Transfers as reported in the summary of
operations of the life, accident and health
annual statement............................ $ 42,490 $255,672 $154,080
======== ======== ========
</TABLE>
F-18
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next
anniversary date. At December 31, 1997 and 1996, these assets (which are
reported as premiums deferred and uncollected) and the amounts of the related
gross premiums and loadings, are as follows:
<TABLE>
<CAPTION>
GROSS LOADING NET
------ ------- ------
<S> <C> <C> <C>
DECEMBER 31, 1997
Ordinary direct first year business............. $ 460 $ 336 $ 124
Ordinary direct renewal business................ 6,138 1,081 5,057
Group life direct business...................... 1,267 433 834
Credit life..................................... 41 -- 41
Reinsurance ceded............................... (14) -- (14)
------ ------ ------
7,892 1,850 6,042
Accident and health:
Direct........................................ 325 -- 325
Reinsurance ceded............................. (51) -- (51)
------ ------ ------
Total accident and health................... 274 -- 274
------ ------ ------
$8,166 $1,850 $6,316
====== ====== ======
DECEMBER 31, 1996
Ordinary direct first year business............. $ 409 $ 226 $ 183
Ordinary direct renewal business................ 6,277 1,037 5,240
Group life direct business...................... 1,414 499 915
Credit life..................................... 5 -- 5
Reinsurance ceded............................... (163) -- (163)
------ ------ ------
7,942 1,762 6,180
Accident and health:
Direct........................................ 270 -- 270
Reinsurance ceded............................. -- -- --
------ ------ ------
Total accident and health................... 270 -- 270
------ ------ ------
$8,212 $1,762 $6,450
====== ====== ======
</TABLE>
At December 31, 1997 and 1996, the Company had insurance in force aggregating
$597,855 and $615,025, respectively, in which the gross premiums are less than
the net premiums required by the valuation standards established by the
Department of Insurance of the State of New York. The Company established
policy reserves of $1,476 and $1,520 to cover these deficiencies at December
31, 1997 and 1996, respectively.
7. DIVIDEND RESTRICTIONS
Generally, an insurance company's ability to pay dividends is limited to the
amount that their net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements. However,
payment of such amounts as dividends may be subject to approval by regulatory
authorities. The Company is not entitled to pay out any dividends in 1998
without prior approval.
8. RETIREMENT AND COMPENSATION PLANS
The Company's employees participate in a qualified benefit pension plan
sponsored by AEGON. The Company has no legal obligation for the plan. The
Company recognizes pension expense equal to its allocation from AEGON. The
F-19
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONTINUED)
(DOLLARS IN THOUSANDS)
pension expense is allocated among the participating companies based on the
FASB 87 expense as a percent of salaries. The benefits are based on years of
service and the employee's compensation during the highest five consecutive
years of employment. The Company was allocated $0, $13 and $14 of pension
expense for the years ended December 31, 1997, 1996 and 1995, respectively.
The plan is subject to the reporting and disclosure requirements of the
Employee Retirement Income Security Act of 1974.
The Company's employees also participate in a contributory defined
contribution plan sponsored by AEGON which is qualified under Section 401(k)
of the Internal Revenue Service Code. Employees of the Company who customarily
work at least 1,000 hours during each calendar year and meet the other
eligibility requirements, are participants of the plan. Participants may elect
to contribute up to fifteen percent of their salary to the plan. The Company
will match an amount up to three percent of the participant's salary.
Participants may direct all of their contributions and plan balances to be
invested in a variety of investment options. The plan is subject to the
reporting and disclosure requirements of the Employee Retirement Income
Security Act of 1974. The Company was allocated $12, $21 and $8 of expense for
the years ended December 31, 1997, 1996 and 1995, respectively.
AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Service Code. In addition, AEGON has established incentive deferred
compensation plans for certain key employees of the Company. AEGON also
sponsors an employee stock option plan for individuals employed at least three
years and a stock purchase plan for its producers, with the participating
affiliated companies establishing their own eligibility criteria, producer
contribution limits and company matching formula. These plans have been
accrued or funded as deemed appropriate by management of AEGON and the
Company.
In addition to pension benefits, the Company participates in plans sponsored
by AEGON that provide postretirement medical, dental and life insurance
benefits to employees meeting certain eligibility requirements. Portions of
the medical and dental plans are contributory. The expenses of the
postretirement plans calculated on the pay-as-you-go basis are charged to
affiliates in accordance with an intercompany cost sharing arrangement. The
Company expensed $2 for each of the years ended December 31, 1996 and 1995. No
expense related to these plans was recorded for 1997.
9. RELATED PARTY TRANSACTIONS
In accordance with an agreement between AEGON and the Company, AEGON will
ensure the maintenance of certain minimum tangible net worth, operating
leverage and liquidity levels of the Company, as defined in the agreement,
through the contribution of additional capital by the Company's parent as
needed.
The Company shares certain officers, employees and general expenses with
affiliated companies.
The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1997,
1996 and 1995, the Company paid $7,330, $5,739 and $6,761, respectively, for
these services, which approximates their costs to the affiliates.
Payable to affiliates and intercompany borrowings bear interest at the thirty-
day commercial paper rate of 5.60% at December 31, 1997. During 1997, 1996 and
1995, the Company paid net interest of $142, $29 and $289, respectively, to
affiliates.
10. COMMITMENTS AND CONTINGENCIES
The Company is a party to legal proceedings incidental to its business.
Although such litigation sometimes includes substantial demands for
compensatory and punitive damages, in addition to contract liability, it is
management's opinion, after consultation with counsel and a review of
available facts, that damages arising from such demands will not be material
to the Company's financial position.
F-20
<PAGE>
AUSA LIFE INSURANCE COMPANY, INC.
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS--STATUTORY BASIS--(CONCLUDED)
(DOLLARS IN THOUSANDS)
The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance
companies for the benefit of policyholders and claimants in the event of
insolvency of other insurance companies. In accordance with the purchase
agreement, assessments related to periods prior to the purchase of the Company
will be paid by Dreyfus. Assessments attributable to business reinsured from
MONY for premiums received prior to the date of the transaction will be paid
by MONY. The Company will be responsible for assessments, if any, attributable
to premium income after the date of purchase. Assessments are charged to
operations when received by the Company except where right of offset against
other taxes paid is allowed by law; amounts available for future offsets are
recorded as an asset on the Company's balance sheet. Potential future
obligations for unknown insolvencies are not determinable by the Company. The
future obligation has been based on the most recent information available from
the National Organization of Life and Health Insurance Guaranty Association.
The guaranty fund expense was $586, $246 and $(204) for the years ended
December 31, 1997, 1996 and 1995, respectively.
11. YEAR 2000 (UNAUDITED)
AEGON has adopted and has in place a Year 2000 Assessment and Planning Project
(the "Project") to review and analyze its information technology and systems
to determine if they are Year 2000 compatible. The Company has begun to
convert or modify, where necessary, critical data processing systems. It is
contemplated that the plan will be substantially completed by early 1999. The
Company does not expect this project to have a significant effect on
operations. However, to mitigate the effect of outside influences upon the
success of the project, the Company has undertaken communications with its
significant customers, suppliers and other third parties to determine their
Year 2000 compatibility and readiness. Management believes that the issues
associated with the Year 2000 will be resolved with no material financial
impact on the Company.
Since the Year 2000 computer problem, and its resolution, is complex and
multifaceted, the success of a response plan cannot be conclusively known
until the Year 2000 is reached (or an earlier date to the extent that systems
or equipment addresses Year 2000 date data prior to the Year 2000). Even with
appropriate and diligent pursuit of a well-conceived project, including
testing procedures, there is no certainty that any company will achieve
complete success. Notwithstanding the efforts or results of the Company, its
ability to function unaffected to and through the Year 2000 may be adversely
affected by actions (or failure to act) of third parties beyond its knowledge
or control.
F-21
<PAGE>
FINANCIAL STATEMENTS
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT B
Years ended December 31, 1997 and 1996
with Report of Independent Auditors
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT B
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors............................................. F-3
Audited Financial Statements
Statements of Assets and Liabilities....................................... F-4
Statements of Operations................................................... F-5
Statements of Changes in Net Assets........................................ F-9
Notes to Financial Statements.............................................. F-13
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Contract Owners
First Providian Life and Health Insurance Company Separate Account B
We have audited the accompanying statements of assets and liabilities of
First Providian Life and Health Insurance Company Separate Account B (compris-
ing the Money Market, High-Grade Bond, Balanced, Equity Index, Growth, Equity
Income, International, High Yield Bond and Small Company Growth Subaccounts)
as of December 31, 1997 and 1996, and the related statements of operations and
changes in net assets for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to ex-
press an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. Our proce-
dures included confirmation of securities owned as of December 31, 1997 and
1996, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of each of the respective
subaccounts constituting the First Providian Life and Health Insurance Company
Separate Account B at December 31, 1997 and 1996, and the results of their op-
erations and changes in their net assets for the years then ended in confor-
mity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 24, 1998
F-3
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Investments:
Money Market Portfolio (cost: $20,448,432 and
$16,979,591 in 1997 and 1996, respectively)........ $ 20,448,432 $ 16,979,591
High-Grade Bond Portfolio (cost: $14,291,681 and
$10,052,147 in 1997 and 1996, respectively)........ 14,793,669 10,253,364
Balanced Portfolio (cost: $20,127,638 and
$13,721,750 in 1997 and 1996, respectively)........ 24,783,934 16,657,085
Equity Index Portfolio (cost: $29,563,753 and
$17,674,415 in 1997 and 1996, respectively)........ 40,805,099 22,875,329
Growth Portfolio (cost: $22,102,380 and $13,823,615
in 1997 and 1996, respectively).................... 28,539,663 17,276,890
Equity Income Portfolio (cost: $14,059,358 and
$7,174,320 in 1997 and 1996, respectively)......... 18,442,399 8,840,883
International Portfolio (cost: $12,399,847 and
$8,405,989 in 1997 and 1996, respectively)......... 11,421,875 9,295,395
High Yield Bond Portfolio (cost: $7,696,607 and
$2,701,505 in 1997 and 1996, respectively)......... 7,830,602 2,745,802
Small Company Growth Portfolio (cost: $7,976,350 and
$2,417,280 in 1997 and 1996, respectively)......... 8,152,760 2,391,705
------------ ------------
Total investments.................................... 175,218,433 107,316,044
Amounts due from Fund Manager........................ 2,073 1,753
------------ ------------
TOTAL ASSETS......................................... 175,220,506 107,317,797
LIABILITIES
Amounts due to First Providian Life and Health
Insurance Company.................................. 43,424 33,164
------------ ------------
NET ASSETS........................................... $175,177,082 $107,284,633
============ ============
NET ASSETS ATTRIBUTABLE TO VARIABLE ANNUITY CONTRACT
OWNERS
Money Market Subaccount............................. $ 20,457,884 $ 16,986,272
High-Grade Bond Subaccount.......................... 14,791,141 10,248,835
Balanced Subaccount................................. 24,775,673 16,645,306
Equity Index Subaccount............................. 40,795,168 22,871,121
Growth Subaccount................................... 28,525,331 17,268,173
Equity Income Subaccount............................ 18,435,239 8,837,503
International Subaccount............................ 11,417,041 9,291,127
High Yield Bond Subaccount.......................... 7,829,900 2,745,296
Small Company Growth Subaccount..................... 8,149,705 2,391,000
------------ ------------
Net assets attributable to variable annuity contract
owners.............................................. $175,177,082 $107,284,633
============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HIGH-GRADE
MONEY MARKET BOND BALANCED EQUITY INDEX GROWTH
------------ ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends.............. $ 1,089,090 $ 769,546 $1,843,845 $ 890,735 $ 944,982
Expenses:
Mortality and expense
risk and administrative
charges................ 81,133 58,126 92,353 108,854 106,904
----------- ---------- ---------- ----------- ----------
Net investment income... 1,007,957 711,420 1,751,492 781,881 838,078
Realized and unrealized
gain on investments:
Net realized gain from
investment
transactions:
Proceeds from sales... 31,197,423 2,169,456 3,342,976 7,191,384 5,978,798
Cost of investments
sold................. 31,197,423 2,132,105 2,673,312 5,239,158 4,572,591
----------- ---------- ---------- ----------- ----------
-- 37,351 669,664 1,952,226 1,406,207
Net unrealized
appreciation
(depreciation) of
investments:
At end of year........ -- 501,988 4,656,296 11,241,346 6,437,283
At beginning of year.. -- 201,217 2,935,335 5,200,914 3,453,275
----------- ---------- ---------- ----------- ----------
-- 300,771 1,720,961 6,040,432 2,984,008
----------- ---------- ---------- ----------- ----------
Net gain (loss) on in-
vestments.............. -- 338,122 2,390,625 7,992,658 4,390,215
----------- ---------- ---------- ----------- ----------
Net increase in net
assets resulting from
operations............. $ 1,007,957 $1,049,542 $4,142,117 $ 8,774,539 $5,228,293
=========== ========== ========== =========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENT OF OPERATIONS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SMALL
EQUITY HIGH YIELD COMPANY
INCOME INTERNATIONAL BOND GROWTH TOTAL
---------- ------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends.............. $ 685,609 $ 294,038 $ 445,874 $ 30,364 $ 6,994,083
Expenses:
Mortality and expense
risk and administrative
charges................ 62,508 55,141 17,899 22,515 605,433
---------- ----------- ---------- ---------- -----------
Net investment income... 623,101 238,897 427,975 7,849 6,388,650
Realized and unrealized
gain on investments:
Net realized gain from
investment
transactions:
Proceeds from sales... 2,431,683 7,434,769 4,397,959 4,538,459 68,682,907
Cost of investments
sold................. 1,873,506 5,669,815 4,392,502 4,292,039 62,042,451
---------- ----------- ---------- ---------- -----------
558,177 1,764,954 5,457 246,420 6,640,456
Net unrealized
appreciation
(depreciation) of
investments:
At end of year........ 4,383,041 (977,972) 133,995 176,410 26,552,387
At beginning of year.. 1,666,563 889,406 44,297 (25,575) 14,365,432
---------- ----------- ---------- ---------- -----------
2,716,478 (1,867,378) 89,698 201,985 12,186,955
---------- ----------- ---------- ---------- -----------
Net gain (loss) on in-
vestments.............. 3,274,655 (102,424) 95,155 448,405 18,827,411
---------- ----------- ---------- ---------- -----------
Net increase in net
assets resulting from
operations............. $3,897,756 $ 136,473 $ 523,130 $ 456,254 $25,216,061
========== =========== ========== ========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
HIGH-GRADE
MONEY MARKET BOND BALANCED EQUITY INDEX GROWTH
------------ ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends.............. $ 700,008 $ 614,949 $1,118,903 $ 466,230 $ 786,684
Expenses:
Mortality and expense
risk and
administrative
charges............... 61,227 45,105 49,446 88,387 65,020
----------- ---------- ---------- ---------- ----------
Net investment income... 638,781 569,844 1,069,457 377,843 721,664
Realized and unrealized
gain (loss) on
investments:
Net realized gain
(loss) from investment
transactions:
Proceeds from sales... 13,240,998 1,801,202 2,323,702 4,613,638 4,258,500
Cost of investments
sold................. 13,240,998 1,808,041 1,922,381 3,745,134 3,324,278
----------- ---------- ---------- ---------- ----------
-- (6,839) 401,321 868,504 934,222
Net unrealized
appreciation
(depreciation) of
investments:
At end of year........ -- 201,217 2,935,335 5,200,914 3,453,275
At beginning of year.. -- 457,473 2,243,733 2,661,479 2,004,154
----------- ---------- ---------- ---------- ----------
-- (256,256) 691,602 2,539,435 1,449,121
----------- ---------- ---------- ---------- ----------
Net gain (loss) on
investments............ -- (263,095) 1,092,923 3,407,939 2,383,343
----------- ---------- ---------- ---------- ----------
Net increase in net
assets resulting from
operations............. $ 638,781 $ 306,749 $2,162,380 $3,785,782 $3,105,007
=========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-7
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENT OF OPERATIONS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
EQUITY HIGH YIELD SMALL COMPANY
INCOME INTERNATIONAL BOND GROWTH TOTAL
---------- ------------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Investment income:
Dividends.............. $ 349,987 $ 323,226 $ 61,355 $ 5,016 $ 4,426,358
Expenses:
Mortality and expense
risk and
administrative
charges............... 33,328 38,473 2,732 2,347 386,065
---------- ---------- -------- -------- -----------
Net investment income... 316,659 284,753 58,623 2,669 4,040,293
Realized and unrealized
gain (loss) on
investments:
Net realized gain
(loss) from investment
transactions:
Proceeds from sales... 1,256,081 2,597,230 768,131 686,636 31,546,118
Cost of investments
sold................. 1,005,412 2,340,779 757,465 622,015 28,766,503
---------- ---------- -------- -------- -----------
250,669 256,451 10,666 64,621 2,779,615
Net unrealized
appreciation
(depreciation) of
investments:
At end of year........ 1,666,563 889,406 44,297 (25,575) 14,365,432
At beginning of year.. 982,236 468,578 -- -- 8,817,653
---------- ---------- -------- -------- -----------
684,327 420,828 44,297 (25,575) 5,547,779
---------- ---------- -------- -------- -----------
Net gain (loss) on
investments............ 934,996 677,279 54,963 39,046 8,327,394
---------- ---------- -------- -------- -----------
Net increase in net
assets resulting from
operations............. $1,251,655 $ 962,032 $113,586 $ 41,715 $12,367,687
========== ========== ======== ======== ===========
</TABLE>
See accompanying notes.
F-8
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HIGH-GRADE
MONEY MARKET BOND BALANCED EQUITY INDEX GROWTH
------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balances at January 1,
1997................... $16,986,272 $10,248,835 $16,645,306 $22,871,121 $17,268,173
Increase in net assets
resulting from opera-
tions:
Net investment income.. 1,007,957 711,420 1,751,492 781,881 838,078
Net realized gain on
investments........... -- 37,351 669,664 1,952,226 1,406,207
Net unrealized
appreciation
(depreciation) of
investments........... -- 300,771 1,720,961 6,040,432 2,984,008
----------- ----------- ----------- ----------- -----------
Net increase in net
assets resulting from
operations............. 1,007,957 1,049,542 4,142,117 8,774,539 5,228,293
Changes from variable
annuity contract
transactions:
Transfers of net
premiums.............. 14,421,833 1,377,598 4,587,067 8,423,168 6,911,182
Transfers for
terminations.......... (2,115,310) (434,184) (500,566) (896,111) (535,567)
Transfers for annuity
benefits.............. -- -- (2,347) -- (1,307)
Net transfers within
Separate Account B.... (9,842,868) 2,549,350 (95,904) 1,622,451 (345,443)
----------- ----------- ----------- ----------- -----------
Net increase in net
assets derived from
variable annuity
contract transactions.. 2,463,655 3,492,764 3,988,250 9,149,508 6,028,865
----------- ----------- ----------- ----------- -----------
Net increase in net
assets................. 3,471,612 4,542,306 8,130,367 17,924,047 11,257,158
----------- ----------- ----------- ----------- -----------
Balances at December 31,
1997................... $20,457,884 $14,791,141 $24,775,673 $40,795,168 $28,525,331
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-9
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENT OF CHANGES IN NET ASSETS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SMALL
EQUITY HIGH YIELD COMPANY
INCOME INTERNATIONAL BOND GROWTH TOTAL
----------- ------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balances at January 1,
1997................... $ 8,837,503 $ 9,291,127 $2,745,296 $2,391,000 $107,284,633
Increase in net assets
resulting from
operations:
Net investment income.. 623,101 238,897 427,975 7,849 6,388,650
Net realized gain on
investments........... 558,177 1,764,954 5,457 246,420 6,640,456
Net unrealized
appreciation
(depreciation) of
investments........... 2,716,478 (1,867,378) 89,698 201,985 12,186,955
----------- ----------- ---------- ---------- ------------
Net increase in net
assets resulting from
operations............. 3,897,756 136,473 523,130 456,254 25,216,061
Changes from variable
annuity contract
transactions:
Transfers of net
premiums.............. 4,104,689 3,093,905 3,211,308 2,724,977 48,855,727
Transfers for
terminations.......... (485,849) (578,487) (561,540) (68,071) (6,175,685)
Transfers for annuity
benefits.............. -- -- -- -- (3,654)
Net transfers within
Separate Account B.... 2,081,140 (525,977) 1,911,706 2,645,545 --
----------- ----------- ---------- ---------- ------------
Net increase in net
assets derived from
variable annuity
contract transactions.. 5,699,980 1,989,441 4,561,474 5,302,451 42,676,388
----------- ----------- ---------- ---------- ------------
Net increase in net
assets................. 9,597,736 2,125,914 5,084,604 5,758,705 67,892,449
----------- ----------- ---------- ---------- ------------
Balances at December 31,
1997................... $18,435,239 $11,417,041 $7,829,900 $8,149,705 $175,177,082
=========== =========== ========== ========== ============
</TABLE>
See accompanying notes.
F-10
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
HIGH-GRADE
MONEY MARKET BOND BALANCED EQUITY INDEX GROWTH
------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balances at January 1,
1996................... $10,812,397 $ 8,977,751 $12,941,393 $14,162,330 $ 9,362,795
Increase in net assets
resulting from
operations:
Net investment income.. 638,781 569,844 1,069,457 377,843 721,664
Net realized gain
(loss) on investments. -- (6,839) 401,321 868,504 934,222
Net unrealized
appreciation
(depreciation) of
investments........... -- (256,256) 691,602 2,539,435 1,449,121
----------- ----------- ----------- ----------- -----------
Net increase in net
assets resulting from
operations............. 638,781 306,749 2,162,380 3,785,782 3,105,007
Changes from variable
annuity contract
transactions:
Transfers of net
premiums.............. 10,511,308 1,774,783 2,843,338 5,374,799 4,096,267
Transfers for
terminations.......... (1,010,844) (85,829) (617,555) (452,158) (547,857)
Transfers for annuity
benefits.............. -- -- (3,326) -- --
Net transfers within
Separate Account B.... (3,965,370) (724,619) (680,924) 368 1,251,961
----------- ----------- ----------- ----------- -----------
Net increase in net
assets derived from
variable annuity
contract transactions.. 5,535,094 964,335 1,541,533 4,923,009 4,800,371
----------- ----------- ----------- ----------- -----------
Net increase in net
assets................. 6,173,875 1,271,084 3,703,913 8,708,791 7,905,378
----------- ----------- ----------- ----------- -----------
Balances at December 31,
1996................... $16,986,272 $10,248,835 $16,645,306 $22,871,121 $17,268,173
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-11
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENT OF CHANGES IN NET ASSETS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SMALL
EQUITY HIGH YIELD COMPANY
INCOME INTERNATIONAL BOND GROWTH TOTAL
---------- ------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balances at January 1,
1996................... $5,417,621 $5,053,032 $ -- $ -- $ 66,727,319
Increase in net assets
resulting from
operations:
Net investment income.. 316,659 284,753 58,623 2,669 4,040,293
Net realized gain
(loss) on investments. 250,669 256,451 10,666 64,621 2,779,615
Net unrealized
appreciation
(depreciation) of
investments........... 684,327 420,828 44,297 (25,575) 5,547,779
---------- ---------- ---------- ---------- ------------
Net increase in net
assets resulting from
operations............. 1,251,655 962,032 113,586 41,715 12,367,687
Changes from variable
annuity contract
transactions:
Transfers of net
premiums.............. 2,218,053 2,218,577 1,371,311 743,223 31,151,659
Transfers for
terminations.......... (89,349) (154,927) (64) (123) (2,958,706)
Transfers for annuity
benefits.............. -- -- -- -- (3,326)
Net transfers within
Separate Account B.... 39,523 1,212,413 1,260,463 1,606,185 --
---------- ---------- ---------- ---------- ------------
Net increase in net
assets derived from
variable annuity
contract transactions.. 2,168,227 3,276,063 2,631,710 2,349,285 28,189,627
---------- ---------- ---------- ---------- ------------
Net increase in net
assets................. 3,419,882 4,238,095 2,745,296 2,391,000 40,557,314
---------- ---------- ---------- ---------- ------------
Balances at December 31,
1996................... $8,837,503 $9,291,127 $2,745,296 $2,391,000 $107,284,633
========== ========== ========== ========== ============
</TABLE>
See accompanying notes.
F-12
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT B
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ACCOUNTING POLICIES
ORGANIZATION OF THE ACCOUNT
First Providian Life and Health Insurance Company Separate Account B (the
"Separate Account") is a separate account of First Providian Life and Health
Insurance Company ("FPLH"), and is registered as a unit investment trust under
the Investment Company Act of 1940, as amended. The Separate Account was es-
tablished for the purpose of funding variable annuity contracts issued by
FPLH.
Prior to June 10, 1997, FPLH was an indirect, wholly owned subsidiary of
Providian Corporation ("Providian"). On June 10, 1997, Providian's insurance
operations, including the operations of FPLH, were merged with an indirect,
wholly owned subsidiary of AEGON N.V., an international insurance organization
headquartered in The Hague, The Netherlands. Providian was the surviving cor-
poration in the merger. Effective October 15, 1997, Providian's name was
changed to Commonwealth General Corporation ("CGC"). Effective December 31,
1997, ownership of CGC was transferred to AEGON USA, Inc., an indirect, wholly
owned subsidiary of AEGON N.V.
FPLH expects to merge with AUSA Life Insurance Company, an affiliate, in
1998. Upon approval and completion of the merger, AUSA Life Insurance Company
will be the surviving company.
As of December 31, 1997, the Separate Account has nine subaccounts which in-
vest exclusively in shares of a corresponding portfolio of the Vanguard Vari-
able Insurance Fund (the "Fund"), an open-end diversified investment company
offered by The Vanguard Group, Inc. ("Vanguard").
The portfolios available in the Fund as of December 31, 1997 are as follows:
VANGUARD VARIABLE INSURANCE FUND
Money Market Portfolio
High-Grade Bond Portfolio
Balanced Portfolio
Equity Index Portfolio
Growth Portfolio
Equity Income Portfolio
International Portfolio
High Yield Bond Portfolio
Small Company Growth Portfolio
Each portfolio has different investment objectives and policies as outlined
in the prospectus of the Separate Account. There is no assurance that a port-
folio will achieve its stated investment objective.
The contract owner's initial premium is automatically allocated to the Money
Market Subaccount until the end of the free look period (typically a minimum
of ten days or, for replacement, 20 days). Subsequent to the free look period
and a five day grace period, a contract owner may allocate all or a portion of
the initial premium and additional premiums, if any, to one or more
subaccounts of the Separate Account.
INVESTMENTS
The Separate Account purchases shares of the portfolios at net asset value
in connection with premium payments allocated to the subaccounts in accordance
with contract owners' directions and redeems shares of the port-
F-13
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT B
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
folios to process transfers and to meet policy contract obligations. Gains and
losses resulting from the redemption of shares are computed on the basis of
average cost. Investment transactions are recorded on the trade dates.
All dividends and capital gains earned on the portfolios are reinvested in
the portfolios and are reflected in the unit values of the subaccounts of the
Separate Account.
Investments in the portfolios are valued at market which is calculated daily
on each day the New York Stock Exchange is open for trading. Income and both
realized and unrealized gains or losses from assets of each subaccount will be
credited to, or charged against, that subaccount without regard to income,
gains or losses from any other subaccount of the Separate Account or arising
out of any other business FPLH may conduct.
The contract's accumulated value varies with the investment performance of
the corresponding portfolios. Investment results are not guaranteed by the
Separate Account or FPLH.
Although the assets in the Separate Account are the property of FPLH, the
assets in the Separate Account attributable to the contracts cannot be used to
discharge the liabilities arising out of any other business which FPLH may
conduct. The assets of the Separate Account are available to cover the general
liabilities of FPLH only to the extent that the Separate Account's assets ex-
ceed its liabilities under the contracts.
2. INVESTMENTS
The following is a summary of shares and amounts outstanding for each of the
respective portfolios as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------
NET ASSET FAIR
PORTFOLIO SHARES VALUE VALUE
- --------- -------------- --------- ------------
<S> <C> <C> <C>
Money Market.............................. 20,448,431.510 $ 1.00 $ 20,448,432
High-Grade Bond........................... 1,382,585.888 10.70 14,793,669
Balanced.................................. 1,457,878.471 17.00 24,783,934
Equity Index.............................. 1,605,235.995 25.42 40,805,099
Growth.................................... 1,321,280.694 21.60 28,539,663
Equity Income............................. 982,023.376 18.78 18,442,399
International............................. 888,861.868 12.85 11,421,875
High Yield Bond........................... 739,433.617 10.59 7,830,602
Small Company Growth...................... 743,864.964 10.96 8,152,760
------------
$175,218,433
============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------
NET ASSET FAIR
PORTFOLIO SHARES VALUE VALUE
- --------- -------------- --------- ------------
<S> <C> <C> <C>
Money Market.............................. 16,979,591.191 $ 1.00 $ 16,979,591
High-Grade Bond........................... 983,064.587 10.43 10,253,364
Balanced.................................. 1,109,732.540 15.01 16,657,085
Equity Index.............................. 1,170,093.530 19.55 22,875,329
Growth.................................... 976,647.283 17.69 17,276,890
Equity Income............................. 605,539.909 14.60 8,840,883
International............................. 729,622.842 12.74 9,295,395
High Yield Bond........................... 265,808.560 10.33 2,745,802
Small Company Growth...................... 246,313.599 9.71 2,391,705
------------
$107,316,044
============
</TABLE>
F-14
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT B
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The aggregate cost of shares purchased during the years ended December 31,
1997 and 1996 for each of the respective portfolios is as follows:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Money Market........................................... $ 34,666,264 $19,420,627
High-Grade Bond........................................ 6,371,639 3,335,200
Balanced............................................... 9,079,200 4,914,940
Equity Index........................................... 17,128,496 9,918,289
Growth................................................. 12,851,356 9,785,079
Equity Income.......................................... 8,758,544 3,743,104
International.......................................... 9,663,673 6,160,156
High Yield Bond........................................ 9,387,604 3,458,971
Small Company Growth................................... 9,851,109 3,039,296
------------ -----------
$117,757,885 $63,775,662
============ ===========
</TABLE>
3. FEDERAL INCOME TAXES
Operations of the Separate Account are included in the federal income tax
return of FPLH, which is taxed as a life insurance company under the Internal
Revenue Code. The Separate Account will not be taxed as a regulated investment
company under Subchapter M of the Internal Revenue Code. Under current federal
income tax law, no federal income taxes are payable with respect to the Sepa-
rate Account.
4. ADVISORY AND SERVICE FEES
Vanguard furnishes corporate management, administrative, marketing and dis-
tribution services. Additionally, Vanguard furnishes investment advisory serv-
ices to certain Funds' portfolios. The net asset value of the portfolios is
net of the advisory and service fees.
5. EXPENSES
An annual charge is deducted from the unit values of the subaccounts of the
Separate Account for FPLH's assumption of certain mortality and expense risks
incurred in connection with the contract and for the cost of administering the
contract. It is assessed daily based on the Fund's combined net assets attrib-
utable to the Separate Account and Separate Account IV of Providian Life and
Health Insurance Company ("PLH"), an affiliate of FPLH. For the year ended De-
cember 31, 1995 and through April 29, 1996, the annual rate on the first $500
million of combined net assets in the Fund was .45% and was .40% on the next
$250 million of combined net assets in the Fund. This charge was reduced in
various increments to .30% on combined net assets in the Fund in excess of
$1.5 billion. Effective April 30, 1996 and through November 30, 1997, the an-
nual rate changed to .375% on the first $1.5 billion of combined net assets in
the Fund and is reduced to .30% of combined net assets in the Fund in excess
of $1.5 billion. Effective December 1, 1997, the annual rate changed to .30%
on the first $2.5 billion of combined net assets in the Fund, is reduced to
.28% of combined net assets in the Fund over $2.5 billion and up to $5 bil-
lion, and is further reduced to .27% of combined net assets in the Fund in ex-
cess of $5 billion.
For the years ended December 31, 1997 and 1996, the effective annual rate
for this mortality and expense charge was .33% and .37%, respectively, and the
total charge was $485,197 and $319,868, respectively.
In addition, an annual administrative charge of .10% is deducted from the
unit value of the subaccounts of the Separate Account. This charge is assessed
daily by Vanguard based on the Fund's net assets attributable to the Separate
Account and Separate Account IV of PLH. Additionally, an annual maintenance
fee of $25 per contract
F-15
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT B
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
is charged for contracts valued at less than $25,000 at the time of initial
purchase and on the last business day of each year. The maintenance fee is de-
ducted proportionately from the contract's accumulated value. These deductions
represent reimbursement to Vanguard for the costs expected to be incurred for
issuing and maintaining each contract and the Separate Account. The total of
these costs for the years ended December 31, 1997 and 1996 was $120,237 and
$66,197, respectively.
6. CONTRACT OWNER TRANSACTIONS
Transactions with contract owners during 1997 and 1996 and end of period
values for each of the respective subaccounts were as follows:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
MONEY MARKET
Outstanding units at beginning of period.... 13,589,800.233 9,080,164.861
Issuance of units........................... 26,256,533.646 15,271,388.654
Redemption of units......................... (24,273,458.794) (10,761,753.282)
---------------- ----------------
Outstanding units at end of period.......... 15,572,875.085 13,589,800.233
================ ================
End of period:
Unit value................................. $ 1.313687 $ 1.249928
================ ================
Subaccount value........................... $ 20,457,884 $ 16,986,272
================ ================
HIGH-GRADE BOND
Outstanding units at beginning of period.... 688,685.283 621,861.498
Issuance of units........................... 361,675.682 189,611.380
Redemption of units......................... (138,380.457) (122,787.595)
---------------- ----------------
Outstanding units at end of period.......... 911,980.508 688,685.283
================ ================
End of period:
Unit value................................. $ 16.218703 $ 14.881740
================ ================
Subaccount value........................... $ 14,791,141 $ 10,248,835
================ ================
BALANCED
Outstanding units at beginning of period.... 852,209.437 766,458.776
Issuance of units........................... 332,091.843 211,350.350
Redemption of units......................... (149,646.867) (125,599.689)
---------------- ----------------
Outstanding units at end of period.......... 1,034,654.413 852,209.437
================ ================
End of period:
Unit value................................. $ 23.945844 $ 19.531943
================ ================
Subaccount value........................... $ 24,775,673 $ 16,645,306
================ ================
EQUITY INDEX
Outstanding units at beginning of period.... 1,034,963.491 783,606.794
Issuance of units........................... 624,661.863 474,338.097
Redemption of units......................... (267,342.618) (222,981.400)
---------------- ----------------
Outstanding units at end of period.......... 1,392,282.736 1,034,963.491
================ ================
End of period:
Unit value................................. $ 29.300922 $ 22.098481
================ ================
Subaccount value........................... $ 40,795,168 $ 22,871,121
================ ================
</TABLE>
F-16
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT B
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1997 1996
-------------- -------------
<S> <C> <C>
GROWTH
Outstanding units at beginning of period......... 906,140.118 620,485.748
Issuance of units................................ 558,643.385 526,957.808
Redemption of units.............................. (277,928.123) (241,303.438)
-------------- -------------
Outstanding units at end of period............... 1,186,855.380 906,140.118
============== =============
End of period:
Unit value...................................... $ 24.034378 $ 19.056846
============== =============
Subaccount value................................ $ 28,525,331 $ 17,268,173
============== =============
EQUITY INCOME
Outstanding units at beginning of period......... 525,405.637 380,466.275
Issuance of units................................ 412,755.767 225,146.289
Redemption of units.............................. (118,921.677) (80,206.927)
-------------- -------------
Outstanding units at end of period............... 819,239.727 525,405.637
============== =============
End of period:
Unit value...................................... $ 22.502863 $ 16.820343
============== =============
Subaccount value................................ $ 18,435,239 $ 8,837,503
============== =============
INTERNATIONAL
Outstanding units at beginning of period......... 697,571.102 432,692.144
Issuance of units................................ 658,115.586 467,326.158
Redemption of units.............................. (522,836.330) (202,447.200)
-------------- -------------
Outstanding units at end of period............... 832,850.358 697,571.102
============== =============
End of period:
Unit value...................................... $ 13.708394 $ 13.319255
============== =============
Subaccount value................................ $ 11,417,041 $ 9,291,127
============== =============
HIGH YIELD BOND
Outstanding units at beginning of period......... 252,538.898 --
Issuance of units................................ 779,271.325 324,832.566
Redemption of units.............................. (386,577.523) (72,293.668)
-------------- -------------
Outstanding units at end of period............... 645,232.700 252,538.898
============== =============
End of period:
Unit value...................................... $ 12.135002 $ 10.870783
============== =============
Subaccount value................................ $ 7,829,900 $ 2,745,296
============== =============
SMALL COMPANY GROWTH
Outstanding units at beginning of period......... 245,862.203 --
Issuance of units................................ 921,518.831 317,488.323
Redemption of units.............................. (424,466.620) (71,626.120)
-------------- -------------
Outstanding units at end of period............... 742,914.414 245,862.203
============== =============
End of period:
Unit value...................................... $ 10.969911 $ 9.724958
============== =============
Subaccount value................................ $ 8,149,705 $ 2,391,000
============== =============
</TABLE>
F-17
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT B
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. NET ASSETS
Net assets at December 31, 1997 for each of the respective subaccounts are
summarized in the following tables:
<TABLE>
<CAPTION>
HIGH-GRADE
MONEY MARKET BOND BALANCED EQUITY INDEX GROWTH
------------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Contract owner
transactions........... $18,080,284 $12,213,143 $15,133,347 $24,796,887 $ 17,856,388
Accumulated net
investment income...... 2,377,600 2,141,006 3,821,988 1,704,258 1,753,786
Accumulated net realized
gain (loss) on
investments............ -- (64,996) 1,164,041 3,052,678 2,477,874
Net unrealized
appreciation on
investments............ -- 501,988 4,656,297 11,241,345 6,437,283
----------- ----------- ----------- ----------- ------------
$20,457,884 $14,791,141 $24,775,673 $40,795,168 $ 28,525,331
=========== =========== =========== =========== ============
<CAPTION>
HIGH YIELD COMPANY
EQUITY INCOME INTERNATIONAL BOND GROWTH TOTAL
------------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Contract owner
transactions........... $11,992,251 $ 9,767,242 $ 7,193,184 $ 7,651,736 $124,684,462
Accumulated net
investment income...... 1,261,010 573,485 486,598 10,518 14,130,249
Accumulated net realized
gain on investments.... 798,937 2,054,286 16,123 311,041 9,809,984
Net unrealized
appreciation
(depreciation) on
investments............ 4,383,041 (977,972) 133,995 176,410 26,552,387
----------- ----------- ----------- ----------- ------------
$18,435,239 $11,417,041 $ 7,829,900 $ 8,149,705 $175,177,082
=========== =========== =========== =========== ============
</TABLE>
8. YEAR 2000 (UNAUDITED)
CGC's parent has adopted and has in place a Year 2000 Assessment and Plan-
ning Project (the "Project") to review and analyze its information technology
and systems to determine if they are Year 2000 compatible. CGC and FPLH have
begun to convert or modify, where necessary, critical data processing systems.
It is contemplated that the Project will be substantially completed by early
1999. CGC and FPLH do not expect this Project to have a significant effect on
operations. However, to mitigate the effect of outside influences upon the
success of the Project, CGC and FPLH have undertaken communications with their
significant customers, suppliers and other third parties to determine their
Year 2000 compatibility and readiness. Management believes that the issues as-
sociated with the Year 2000 will be resolved with no material financial impact
on CGC and FPLH.
Since the Year 2000 computer problem, and its resolution, is complex and
multifaceted, the success of a response plan cannot be conclusively known un-
til the Year 2000 is reached (or an earlier date to the extent that systems or
equipment addresses Year 2000 date data prior to the Year 2000). Even with ap-
propriate and diligent pursuit of a well-conceived project, including testing
procedures, there is no certainty that any company will achieve complete suc-
cess. Notwithstanding the efforts or results of CGC and FPLH, their ability to
function unaffected to and through the Year 2000 may be adversely affected by
actions (or failure to act) of third parties beyond their knowledge or con-
trol.
F-18
<PAGE>
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
Part A None
Part B Audited Financial Statements of AUSA Life Insurance Company, Inc.
Separate Account B (formerly First Providian Life and Health
Insurance Company Separate Account B), for the Period Since
Inception Through Years ended December 31, 1997 and 1996, with
Report of Independent Auditors/6/
Supplemental Financial Statements--Statutory Basis of AUSA Life
Insurance Company, Inc. for the Years ended December 31, 1997, 1996
and 1995, with Report of Independent Auditors/6/
Part C None
(B) EXHIBITS
(1) Resolution of the Board of Directors of First Providian Life and Health
Insurance Company ("First Providian") authorizing establishment of the
Separate Account./3/
(2) Not Applicable.
(3) Not Applicable.
(4) Form of variable annuity contract/1/
(5) Form of application/1/
(6) (a) Articles of Incorporation of AUSA Life Insurance Company, Inc./4/
(b) By-Laws of AUSA Life Insurance Company, Inc./4/
(7) Not applicable.
(8) (a) Participation Agreement for the Vanguard Variable Insurance Fund/6/
(b) Administration Services Agreement/5/
(9) (a) Opinion and Consent of Counsel/6/
(b) Consent of Counsel/6/
(10) Consent of Independent Auditors/6/
(11) No financial statements are omitted from item 23.
(12) Not applicable.
(13) Performance computation/2/
(14) (a) None.
(b) Not applicable.
- --------
/1/ Incorporated by reference from Pre-Effective Amendment No. 1 to the Regis-
tration Statement of National Home Life Assurance Company Separate Account
IV, File No. 33-36073.
/2/ Incorporated by reference from Post-Effective Amendment No. 5 to the Regis-
tration Statement of First Providian Life & Health Insurance Company Sepa-
rate Account B, File No. 33-39946.
/3/ Incorporated by reference from Pre-Effective Amendment No. 1 to the Regis-
tration Statement of First Providian Life & Health Insurance Company Sepa-
rate Account C, File No. 33-94204.
/4/ Incorporated by reference from Initial Registration Statement on Form N-4 of
AUSA Life Insurance Company, Inc.-- AUSA Endeavor Variable Annuity Account,
File No. 33-83560 (as filed on September 1, 1994).
/5/ Incorporated by reference from Post-Effective Amendment No. 10 to the Regis-
tration Statement on Form N-4 of First Providian Life & Health Insurance
Company, File No. 33-39946, filed on April 30, 1998.
/6/ Filed herewith.
C-1
<PAGE>
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
OFFICERS:
<TABLE>
<S> <C>
Director and President.......................... Tom A. Schlossberg
4 Manhattanville Road
Purchase, NY 10577
Director and Chairman of the Board.............. Larry G. Brown
201 Highland Avenue
Largo, FL 33770
Director and Vice President..................... William L. Busler
4333 Edgewood Road NE
Cedar Rapids, IA 52499
Vice President and Chief Financial Officer...... Patrick S. Baird
4333 Edgewood Road NE
Cedar Rapids, IA 52499
Secretary....................................... Craig D. Vermie
4333 Edgewood Road NE
Cedar Rapids, IA 52499
Director and Chief Actuary...................... Colette B. Vargas
4 Manhattanville Road
Purchase, NY 10577
Treasurer....................................... Brenda K. Clancy
4333 Edgewood Road NE
Cedar Rapids, IA 52499
Director........................................ Jack R. Dykhouse
Brown Trail, Suite 302
Bedford, TX 76021
Director........................................ Steven E. Frushtick
500 Fifth Avenue
New York, NY 10110
Director........................................ Carl Thor Hanson
900 Birdseye Road
P.O. Box 112
Orient, NY 11957-0112
Director and Vice President..................... B. Larry Jenkins
2 East Chase Street
Baltimore, MD 21202
Director and Vice President..................... Vera F. Mihaic
666 Fifth Avenue
New York, NY 10103-0001
Director........................................ Peter P. Post
415 Madison Avenue
New York, NY 10017
Director........................................ Cor H. Verhagen
51 JFK Parkway
Short Hills, NJ 07078
Director........................................ E. Kirby Warren
725 Uris Hall
116th Street & Broadway
New York, NY 10027
</TABLE>
C-2
<PAGE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT.
The Depositor, AUSA Life Insurance Company, Inc. ("AUSA Life"), is indirectly
wholly owned by AEGON USA, Inc. The Registrant is a segregated asset account
of AUSA Life.
The following chart indicates the persons controlled by or under common con-
trol with AUSA Life.
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
AEGON N.V. Netherlands Corporation 53.63% of Vereniging Holding company
AEGON Netherlands
Membership Association
Groninger Financieringen Netherlands Corporation 100% of AEGON N.V. Holding company
B.V. Netherlands Corporation
AEGON Netherland N.V. Netherlands Corporation 100% of AEGON N.V. Holding company
Netherlands Corporation
AEGON Nevak Holding B.V. Netherlands Corporation 100% of AEGON N.V. Holding company
Netherlands Corporation
AEGON International N.V. Netherlands Corporation 100% of AEGON N.V. Holding company
Netherlands Corporation
Voting Trust Trustees: Delaware Voting Trust
K.J. Storm
Donald J. Shepard H.B.
Van Wijk Dennis Hersch
AEGON U.S. Holding Delaware 100% of Voting Trust Holding company
Corporation
Short Hills Management New Jersey 100% of AEGON U.S. Holding company
Company Holding Corporation
CORPA Reinsurance New York 100% of AEGON U.S. Holding company
Company Holding Corporation
AEGON Management Company Indiana 100% of AEGON U.S. Holding company
Holding Corporation
RCC North America Inc. Delaware 100% of AEGON U.S. Holding company
Holding Corporation
AEGON USA, Inc. Iowa 100% AEGON U.S. Holding Holding company
Corporation
AUSA Holding Company Maryland 100% AEGON USA, Inc. Holding company
Monumental General Maryland 100% AUSA Holding Co. Holding company
Insurance Group, Inc.
Trip Mate Insurance Kansas 100% Monumental General Sale/admin. of travel
Agency, Inc. Insurance Group, Inc. insurance
Monumental General Maryland 100% Monumental General Provides management
Administrators, Inc. Insurance Group, Inc. srvcs. to unaffiliated
third party
administrator
Executive Management and Maryland 100% Monumental General Provides actuarial
Consultant Services, Administrators, Inc. consulting services
Inc.
Monumental General Mass Maryland 100% Monumental General Marketing arm for sale
Marketing, Inc. Insurance Group, Inc. of mass marketed
insurance coverages
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
Diversified Investment Delaware 100% AUSA Holding Co. Registered investment
Advisors, Inc. advisor
Diversified Investors Delaware 100% Diversified Broker-Dealer
Securities Corp. Investment Advisors,
Inc.
AEGON USA Securities, Iowa 100% AUSA Holding Co. Broker-Dealer
Inc.
Supplemental Ins. Tennessee 100% AUSA Holding Co. Insurance
Division, Inc.
Creditor Resources, Inc. Michigan 100% AUSA Holding Co. Credit insurance
CRC Creditor Resources Canada 100% Creditor Resources, Insurance agency
Canadian Dealer Network Inc.
Inc.
AEGON USA Investment Iowa 100% AUSA Holding Co. Investment advisor
Management, Inc.
AEGON USA Realty Iowa 100% AUSA Holding Co. Provides real estate
Advisors, Inc. administrative and real
estate investment
services
Quantra Corporation Delaware 100% AEGON USA Realty Real estate and
Advisors, Inc. financial software
production and sales
Quantra Software Delaware 100% Quantra Corporation Manufacture and sell
Corporation mortgage loan and
security management
software
Landauer Realty Iowa 100% AEGON USA Realty Real estate counseling
Advisors, Inc. Advisors, Inc.
Landauer Associates, Delaware 100% AEGON USA Realty Real estate counseling
Inc. Advisors, Inc.
Realty Information Iowa 100% AEGON USA Realty Information Systems for
Systems, Inc. Advisors, Inc. real estate investment
management
AEGON USA Realty Iowa 100% AEGON USA Realty Real estate management
Management, Inc Advisors, Inc.
USP Real Estate Iowa 21.89% First AUSA Life Real estate investment
Investment Trust Ins. Co. trust
13.11% PFL Life Ins. Co.
4.86% Bankers United
Life Assurance Co.
RCC Properties Limited Iowa AEGON USA Realty Limited Partnership
Partnership Advisors, Inc. is
General Partner and 5%
owner.
AUSA Financial Markets, Iowa 100% AUSA Holding Co. Marketing
Inc.
Endeavor Investment California 49.9% AUSA Financial General Partnership
Advisors Markets, Inc.
Universal Benefits Iowa 100% AUSA Holding Co. Third party
Corporation administrator
Investors Warranty of Iowa 100% AUSA Holding Co. Provider of automobile
America, Inc. extended maintenance
contracts
Massachusetts Fidelity Iowa 100% AUSA Holding Co. Trust company
Trust Co.
Money Services, Inc. Delaware 100% AUSA Holding Co. Provides financial
counseling for
employees and agents of
affiliated companies
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
Zahorik Company, Inc. California 100% AUSA Holding Co. Broker-Dealer
ZCI, Inc. Alabama 100% Zahorik Company, Insurance agency
Inc.
AEGON Asset Management Delaware 100% AUSA Holding Co. Registered investment
Services, Inc. advisor
Intersecurities, Inc. Delaware 100% AUSA Holding Co. Broker-Dealer
ISI Insurance Agency, California 100% Western Reserve Insurance agency
Inc. Life Assurance Co.
of Ohio
ISI Insurance Agency of Ohio 100% ISI Insurance Insurance agency
Ohio, Inc. Agency, Inc.
ISI Insurance Agency of Texas 100% ISI Insurance Insurance agency
Texas, Inc. Agency, Inc.
ISI Insurance Agency of Massachusetts 100% ISI Insurance Insurance Agency
Massachusetts, Inc. Agency Inc.
Associated Mariner Michigan 100% Intersecurities, Holding co./management
Financial Group, Inc. Inc. services
Mariner Financial Michigan 100% Associated Broker/Dealer
Services, Inc. Mariner Financial
Group, Inc.
Mariner Planning Michigan 100% Mariner Financial planning
Corporation Financial Services,
Inc.
Associated Mariner Michigan 100% Associated Insurance agency
Agency, Inc. Mariner Financial
Group, Inc.
Associated Mariner Hawaii 100% Associated Insurance agency
Agency of Hawaii, Inc. Mariner Agency, Inc.
Associated Mariner Ins. Massachusetts 100% Associated Insurance agency
Agency of Mariner Agency, Inc.
Massachusetts, Inc.
Associated Mariner Ohio 100% Associated Insurance agency
Agency Ohio, Inc. Mariner Agency, Inc.
Associated Mariner Texas 100% Associated Insurance agency
Agency Texas, Inc. Mariner Agency, Inc.
Associated Mariner New Mexico 100% Associated Insurance agency
Agency New Mexico, Inc. Mariner Agency, Inc.
Mariner Mortgage Corp. Michigan 100% Associated Mortgage origination
Mariner Financial
Group, Inc.
Idex Investor Services, Florida 100% AUSA Holding Co. Shareholder services
Inc.
Idex Management, Inc. Delaware 50% AUSA Holding Co. Investment advisor
50% Janus Capital
Corp.
IDEX Series Fund Massachusetts Various Mutual fund
First AUSA Life Maryland 100% AEGON USA, Inc. Insurance holding
Insurance Company company
AUSA Life Insurance New York 100% First AUSA Life Insurance
Company, Inc. Insurance Company
Life Investors Insurance Iowa 100% First AUSA Life Insurance
Company of America Ins. Co.
Life Investors Alliance, Delaware 100% LIICA Purchase, own, and hold
LLC the equity interest of
other entities
Bankers United Life Iowa 100% Life Investors Insurance
Assurance Company Ins. Company of
America
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
Life Investors Agency Iowa 100% Life Investors Marketing
Group, Inc. Ins. Company of
America
PFL Life Insurance Iowa 100% First AUSA Life Insurance
Company Ins. Co.
AEGON Financial Services Minnesota 100% PFL Life Marketing
Group, Inc. Insurance Co.
AEGON Assignment Kentucky 100% AEGON Financial Administrator of
Corporation of Kentucky Services Group, Inc. structured settlements
AEGON Assignment Illinois 100% AEGON Financial Administrator of
Corporation Services Group, Inc. structured settlements
Southwest Equity Life Arizona 100% of Common Voting Insurance
Ins. Co. Stock First AUSA Life
Ins. Co.
Iowa Fidelity Life Arizona 100% of Common Voting Insurance
Insurance Co. Stock First AUSA Life
Ins. Co.
Western Reserve Life Ohio 100% First AUSA Life Insurance
Assurance Co. of Ohio Ins. Co.
AEGON Equity Group, Inc. Florida 100% Western Reserve Insurance Agency
Life Assurance Co. of
Ohio
WRL Series Fund, Inc. Maryland Various Mutual fund
WRL Investment Services, Florida 100% Western Reserve Provides administration
Inc. Life Assurance Co. of for affiliated mutual
Ohio fund
WRL Investment Florida 100% Western Reserve Registered investment
Management, Inc. Life Assurance Co. of advisor
Ohio
Monumental Life Maryland 100% First AUSA Life Insurance
Insurance Co. Ins. Co.
AEGON Special Markets Maryland 100% Monumental Life Marketing
Group, Inc. Ins. Co.
Monumental General Maryland 100% First AUSA Life Insurance
Casualty Co. Ins. Co.
United Financial Maryland 100% First AUSA Life General agency
Services, Inc. Ins. Co.
Bankers Financial Life Arizona 100% First AUSA Life Insurance
Ins. Co. Ins. Co.
The Whitestone Maryland 100% First AUSA Life Insurance agency
Corporation Ins. Co.
Cadet Holding Corp. Iowa 100% First AUSA Life Holding company
Insurance Company
Commonwealth General Delaware 100% AEGON USA, Inc. Holding company
Corporation ("CGC")
PB Series Trust Massachusetts N/A Mutual fund
Monumental Agency Group, Kentucky 100% CGC Provider of srvcs. to
Inc. ins. cos.
Benefit Plans, Inc. Delaware 100% CGC TPA for Peoples Security
Life Insurance Company
Durco Agency, Inc. Virginia 100% Benefit Plans, General agent
Inc.
Commonwealth General. Kentucky 100% CGC Administrator of
Assignment Corporation structured settlements
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
AFSG Securities Pennsylvania 100% CGC Broker-Dealer
Corporation
PB Investment Advisors, Delaware 100% CGC Registered investment
Inc. advisor
Diversified Financial Delaware 100% CGC Provider of investment,
Products Inc. marketing and admin.
services to ins. cos.
AEGON USA Real Estate Delaware 100% Diversified Real estate and mortgage
Services, Inc. Financial Products Inc holding company
Capital Real Estate Delaware 100% CGC Furniture and equipment
Development Corporation lessor
Capital General Delaware 100% CGC Holding company
Development Corporation
Commonwealth Life Kentucky 100% Capital General Insurance company
Insurance Company Development Corporation
Peoples Security Life North Carolina 100% Capital General Insurance company
Insurance Company Development Corporation
JMH Operating Company, Mississippi 100% Peoples Security Real estate holdings
Inc. Life Insurance Company
Capital Security Life North Carolina 100% Capital General Insurance company
Ins. Co. Development Corporation
Independence Automobile Florida 100% Capital Security Automobile Club
Association, Inc. Life Insurance Company
Independence Automobile Georgia 100% Capital Security Automobile Club
Club, Inc. Life Insurance Company
Capital 200 Block Delaware 100% CGC Real estate holdings
Corporation
Capital Broadway Kentucky 100% CGC Real estate holdings
Corporation
Southlife, Inc. Tennessee 100% CGC Investment subsidiary
Ampac Insurance Agency, Pennsylvania 100% CGC Provider of management
Inc. (EIN 23-1720755) support services
National Home Life Pennsylvania 100% Ampac Insurance Special-purpose
Corporation Agency, Inc. subsidiary
Compass Rose Development Pennsylvania 100% Ampac Insurance Special-purpose
Corporation Agency, Inc. subsidiary
Frazer Association Illinois 100% Ampac Insurance TPA license-holder
Consultants, Inc. Agency, Inc.
Valley Forge Associates, Pennsylvania 100% Ampac Insurance Furniture & equipment
Inc. Agency, Inc. lessor
Veterans Benefits Plans, Pennsylvania 100% Ampac Insurance Administrator of group
Inc. Agency, Inc. insurance programs
Veterans Insurance Delaware 100% Ampac Insurance Special-purpose
Services, Inc. Agency, Inc. subsidiary
Financial Planning Dist. Columbia 100% Ampac Insurance Special-purpose
Services, Inc. Agency, Inc. subsidiary
Providian Auto and Home Missouri 100% CGC Insurance company
Insurance Company
Academy Insurance Group, Delaware 100% CGC Holding company
Inc.
Academy Life Missouri 100% Academy Insurance Insurance company
Insurance Co. Group, Inc.
Pension Life Insurance New Jersey 100% Academy Insurance Insurance company
Company of America Group, Inc.
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
Academy Services, Inc. Delaware 100% Academy Insurance Special-purpose
Group, Inc. subsidiary
Ammest Development Corp. Kansas 100% Academy Insurance Special-purpose
Inc. Group, Inc. subsidiary
Ammest Insurance Agency, California 100% Academy Insurance General agent
Inc. Group, Inc.
Ammest Massachusetts Massachusetts 100% Academy Insurance Special-purpose
Insurance Agency, Inc. Group, Inc. subsidiary
Ammest Realty, Inc. Pennsylvania 100% Academy Insurance Special-purpose
Group, Inc. subsidiary
Ampac, Inc. Texas 100% Academy Insurance Managing general
Group, Inc. agent
Ampac Insurance Agency, Pennsylvania 100% Academy Insurance Special-purpose
Inc. Group, Inc. subsidiary
(EIN 23-2364438)
Data/Mark Services, Inc. Delaware 100% Academy Insurance Provider of mgmt.
Group, Inc. services
Force Financial Group, Delaware 100% Academy Insurance Special-purpose
Inc. Group, Inc. subsidiary
Force Financial Massachusetts 100% Force Fin. Group, Special-purpose
Services, Inc. Inc. subsidiary
Military Associates, Pennsylvania 100% Academy Insurance Special-purpose
Inc. Group, Inc. subsidiary
NCOA Motor Club, Inc. Georgia 100% Academy Insurance Automobile club
Group, Inc.
NCOAA Management Company Texas 100% Academy Insurance Special-purpose
Group, Inc. subsidiary
Unicom Administrative Pennsylvania 100% Academy Insurance Provider of admin.
Services, Inc. Group, Inc. services
Unicom Administrative Germany 100% Unicom Provider of admin.
Services, GmbH Administrative services
Services, Inc.
Providian Property and Kentucky 100% Providian Auto and Insurance company
Casualty Insurance Home Insurance Company
Company
Providian Fire Insurance Kentucky 100% Providian Property Insurance company
Co. and Casualty Insurance
Co.
Capital Liberty, L.P. Delaware 79.2% Commonwealth Life Holding Company
Insurance Company
19.8% Peoples Security
Life Insurance Company
1% CGC
Commonwealth General LLC Turks & 100% CGC Special-purpose
Caicos Islands subsidiary
Peoples Benefit Life Missouri 3.7% CGC Insurance company
Insurance Company 15.3% Peoples Security
Life Insurance Company
20% Capital Liberty,
L.P.
61% Commonwealth Life
Insurance Company
Veterans Life Insurance Illinois 100% Peoples Benefit Insurance company
Co. Life Insurance Company
Peoples Benefit Pennsylvania 100% Veterans Life Ins. Special-purpose
Services, Inc. Co. subsidiary
</TABLE>
C-8
<PAGE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of August 31, 1998 there were 3,285 owners of Contracts.
ITEM 28. INDEMNIFICATION
The New York Code (Section 721 et seq.) provides for permissive indemnifica-
tion in certain situations, mandatory indemnification in other situations, and
prohibits indemnification in certain situations. The Code also specifies pro-
cedures for determining when indemnification payments can be made.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended ( the "1933 Act"), may be permitted to directors, offi-
cers, and controlling persons of the Depositor pursuant to the foregoing pro-
visions, or otherwise, the Depositor has been advised that, in the opinion of
the securities and Exchange Commission, such indemnification is against public
policy as expressed in the 1933 Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Depositor of expenses incurred or paid by a director, offi-
cer, or controlling person in connection with the securities being regis-
tered), the Depositor will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final adjudi-
cation of such issue.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None.
(b) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of The Continuum Company, Inc., Kansas City, Mis-
souri, The Vanguard Group, Inc., Valley Forge, Pennsylvania and AUSA Life In-
surance Company, Inc., New York, New York.
ITEM 31. MANAGEMENT SERVICES
All management contracts are discussed in Part A or Part B.
ITEM 32. UNDERTAKINGS
(a) Registrant undertakes that it will file a post-effective amendment to
this registration statement as frequently as necessary to ensure that the au-
dited financial statements in the registration statement are never more than
16 months old for so long as Premiums under the Policy may be accepted.
(b) Registrant undertakes that it will include either (i) a postcard or simi-
lar written communication affixed to or included in the Prospectus that the
applicant can remove to send for a Statement of Additional Information or (ii)
a space in the Policy application that an applicant can check to request a
Statement of Additional Information.
(c) Registrant undertakes to deliver any Statement of Additional Information
and any financial statements required to be made available under this Form
promptly upon written or oral request to AUSA Life Insurance Company, Inc., at
the address or phone number listed in the Prospectus.
(d) AUSA Life Insurance Company, Inc. hereby represents that the fees and
charges deducted under the policies described in this registration statement,
in the aggregate, are reasonable in relation to the services rendered, the ex-
penses expected to be incurred, and the risks assumed by AUSA Life Insurance
Company, Inc.
C-9
<PAGE>
SECTION 403(B) REPRESENTATIONS
AUSA Life represents that it is relying on a no-action letter dated November
28, 1988, to the American Council of Life Insurance (Ref. No. IP-6-88), re-
garding Sections 22(e), 27(c)(1), and 27(d) of the Investment Company Act of
1940, as amended, in connection with redeemability restrictions on Section
403(b) Policies, and that paragraphs numbered (1) through (4) of that letter
will be complied with.
C-10
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant hereby certifies that this Amendment to the Registration
Statement meets the requirements for effectiveness pursuant to paragraph (b) of
Rule 485 and has caused this Registration Statement to be signed on its behalf,
in the City of Purchase and State of New York, on this 28th day of September,
1998.
AUSA LIFE INSURANCE COMPANY, INC.
SEPARATE ACCOUNT C
Registrant
AUSA LIFE INSURANCE COMPANY, INC.
Depositor
/s/ Tom A. Schlossberg
-------------------------
Tom A. Schlossberg
President
<PAGE>
As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities and on the duties indicated.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/s/ William Brown, Jr. Director September 28, 1998
- -----------------------------------
William Brown, Jr.
/s/ Larry G. Brown Director September 28, 1998
- -----------------------------------
Larry G. Brown
/s/ William L. Busler Director September 28, 1998
- -----------------------------------
William L. Busler
/s/ Jack R. Dykhouse Director September 28, 1998
- -----------------------------------
Jack R. Dykhouse
/s/ Steven E. Frushtick Director September 28, 1998
- -----------------------------------
Steven E. Frushtick
/s/ Carl T. Hanson Director September 28, 1998
- -----------------------------------
Carl T. Hanson
/s/ B. Larry Jenkins Director September 28, 1998
- -----------------------------------
B. Larry Jenkins
/s/ Colette Vargas Director September 28, 1998
- -----------------------------------
Colette Vargas
/s/ Vera F. Mihaic Director September 28, 1998
- -----------------------------------
Vera F. Mihaic
/s/ Peter P. Post Director September 28, 1998
- -----------------------------------
Peter P. Post
/s/ Tom A. Schlossberg Director (Principal September 28, 1998
- ----------------------------------- Executive Officer)
Tom A. Schlossberg
/s/ Cor H. Verhagen Director September 28, 1998
- -----------------------------------
Cor H. Verhagen
/s/ E. Kirby Warren Director September 28, 1998
- -----------------------------------
E. Kirby Warren
/s/ Brenda K. Clancy Treasurer (Chief September 28, 1998
- ----------------------------------- Accounting Officer
Brenda K. Clancy
</TABLE>
<PAGE>
SEPARATE ACCOUNT B
VANGUARD VARIABLE ANNUITY PLAN CONTRACT
INDEX TO EXHIBITS
EXHIBIT 8(a) PARTICIPATION AGREEMENT FOR THE VANGUARD VARIABLE INSURANCE
FUND
EXHIBIT 9(a) OPINION AND CONSENT OF COUNSEL
EXHIBIT 9(b) CONSENT OF COUNSEL
EXHIBIT 10 CONSENT OF INDEPENDENT AUDITORS
<PAGE>
Participation, Market Consulting and Administration Agreement
AMONG
VANGUARD VARIABLE INSURANCE FUND, INC.
AND
THE VANGUARD GROUP, INC.
AND
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
AND
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
<PAGE>
THIS AGREEMENT, made and entered into this 22nd day of June 1998, by and
among Providian Life and Health Insurance Company ("Providian"), on its own
behalf and on behalf of Providian Life and Health Insurance Company Separate
Account IV ("Separate Account IV"), First Providian Life and Health Insurance
Company ("First Providian"), on its own behalf and on behalf of First Providian
Life and Health Insurance Company Separate Account B, ("Separate Account B" and,
collectively with Separate Account IV, the "Accounts") (Providian, First
Providian and the Accounts collectively, the "Company") and The Vanguard Group,
Inc. ("Sponsor") and Vanguard Variable Insurance Fund, Inc. ("Fund")
(collectively, "Parties").
WHEREAS, the Company and Sponsor are also parties to one certain
Administrative Services Agreement dated September, 1997, which is incorporated
by reference.
Company, Sponsor and Fund, intending to be legally bound, hereby agree as
follows:
1. Sales of the Contracts
----------------------
1.1 Company, Sponsor, and Fund hereby agree to perform the duties and
assume the responsibilities set forth herein in connection with the offering of
certain mutually agreed upon variable annuity contracts ("Contracts"), to be
called the Vanguard Variable Annuity Plan, which are to be offered by the
Company and use the Fund as its underlying investment vehicle. Company shall
establish and maintain subdivisions of the Accounts as required by law to
perform Company's obligations under the Contracts, including the obligation to
establish a subdivision for each portfolio lawfully offered by Sponsor and Fund,
and accepted by Company for the Contracts, acceptance of which will not be
unreasonably withheld.
1.2 Company hereby appoints Sponsor, acting through its wholly-owned
subsidiary, Vanguard Marketing Corporation ("Consultant"), as its exclusive
representative to design and implement a marketing program, consisting
principally of direct mail marketing, whereby the Contracts shall be marketed
directly to certain of Sponsor's customers, selected by Sponsor, and to the
general public to the fullest extent permitted by all applicable federal and
state laws and regulations. Sponsor agrees to use reasonable diligence and to
cooperate fully with
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Company to successfully market the Contracts, and to communicate openly with
Company prior to any decisions by Sponsor to cease or slow Sponsor's or
Consultant's assistance or participation in such marketing efforts; provided,
however, that neither Sponsor nor Consultant has any obligation to sell any
minimum number or amount of Contracts.
1.3 Company agrees to use reasonable diligence to maintain fixed
annuitization rates for the Contracts which are no less than the median rates of
insurance carriers which have the same or better credit ratings as the Company;
provided, however, that Company has no obligation to offer any minimum level of
payout rates except as required by state or federal law. Company further agrees
to a competitive analysis by the Sponsor of the fixed annuitization rates
offered by Company. The Company will provide Sponsor with the same information
that the Company uses to perform its own competitive analysis for rate setting
purposes. Such competitive analysis shall occur on a semi-annual basis, in May
and October. Should this analysis demonstrate that the fixed annuitization rates
offered by the Company have fallen below the median, then the Company and
Sponsor will engage in discussions to set an appropriate rate.
1.4 Company and Sponsor agree that, during the term of this Agreement,
applications to purchase the Contracts will not be accepted or rejected, and
Contracts will not be issued unless approved or rejected by Sponsor or its
designee pursuant to underwriting standards initially agreed upon by Company and
Sponsor and set forth in the procedures manual prepared for the third party
administrator and which will be reviewed and approved by the Company prior to
commencement of Contract sales. Furthermore, the procedures manual will be made
available to Company for review on a quarterly basis for as long as Sponsor is
acting as third party administrator for existing business.
1.5 (a) Company agrees that, during the term of this Agreement, neither
it nor any of its United States domiciled affiliates will offer, or participate
directly or indirectly in the offering of proprietary variable annuity contracts
(which are not intended to include single premium immediate variable annuity
contracts),sponsored by investment companies by direct
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marketing. Except as expressly limited by this section, Company and its
affiliates may offer any product to the public. The Company and its affiliates
may offer any proprietary variable annuity by direct marketing that was offered
on or before the date of this Agreement. A "proprietary" variable annuity
contract shall mean a variable annuity offering the funds of a single investment
company and which bears an annual mortality and expense risk fee less than 0.75%
of the daily net assets of the account. "Direct Marketing" shall mean the
marketing of variable annuity contracts primarily by mail or telephone or
Internet and shall not include the marketing of products:
(i) through a commissioned force of distributors, primarily
engaged in face-to-face solicitations;
(ii) to legitimate affinity groups(e.g., to members of the
Professional Golfers Association, auto clubs, etc.);
(iii) primarily through individuals with a professional relationship
with the person being solicited(e.g., investment advisers, certified public
accountants and financial planners, etc. );
(iv) as part of a conservation effort or to existing policyowners
of the Company or its affiliates as to products with no relationship to Fund or
Sponsor;
(v) primarily through investment companies that are owned by or
affiliated with a bank or other federally insured depository financial
institution, or a registered national or regional broker/dealer firm (e.g.,
Merrill Lynch, Smith Barney, Raymond James, etc.);
(vi) directly or indirectly to pension funds, employer-employee
plans, deferred compensation plans or employer-employee trusts;
(b) Sponsor agrees that during the term of this Agreement, it will not
by Direct Marketing offer, or participate directly or indirectly in the offering
of, variable annuity contracts (which are not intended to include single premium
immediate variable annuity contracts), other than the Contract; provided that
Sponsor may participate directly or indirectly
3
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in the offering and issuance of variable annuity contracts to pension funds,
employer-employee plans, deferred compensation plans or employer-employee trusts
and, provided further, that Sponsor may offer any financial products by Direct
Marketing except as limited by this section. Fund agrees that it will offer
shares in connection with variable annuity contracts only to separate accounts
of Company during the term of this Agreement. Fund will continue to offer
shares for contracts in force at the termination of this Agreement for so long
as any Fund shares are held by the Accounts. Nothing in this Agreement shall be
construed to apply to variable life insurance policies or single premium
immediate variable annuity contracts.
(c) The exclusive arrangement set forth in Section 1.5(a) of this
Agreement shall be effective as long as the Company reasonably determines that
the Sponsor is "actively promoting" the annuity. Without requiring Sponsor to
commit to a minimum level of sales, Sponsor would be considered to be "actively
promoting" the annuity if it engages in activities including but not limited to
the following: (1) continuing to maintain a marketing staff at or above
substantially the same levels in place as of the date of this Agreement; (2)
maintaining its in-bound 800 telephone line and the staff to support continued
offers and sales of the annuity; (3) continuing to market and advertise the
product at or above substantially the same annual advertising expense levels as
of the date of this Agreement, and (4) maintaining inventories of marketing
materials and prospectuses and related materials to enable Sponsor to process
inquiries regarding the annuity.
(d) (1) If the Company or any of its affiliated U.S. companies (i)
offers a proprietary variable annuity contract by Direct Marketing, or (ii)
acquires a company that offers a proprietary variable annuity contract by Direct
Marketing and such contract constitutes more than 10% of the acquired company's
annual net income or has been sold for less than two years prior to the date of
the acquisition; or (2) Sponsor breaches Section 1.5(b) of this Agreement, then
the Parties will meet within ninety (90) days after the offering or completion
of the acquisition in order to renegotiate in good faith the pricing structure
and terms and conditions of this Agreement. If the parties are unable to reach
a mutual agreement within
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ninety (90) days after the commencement of such negotiations, then the
nonbreaching party may terminate this Agreement as of the end of such second
ninety (90) day period. If the Agreement is not terminated as provided herein it
shall continue until otherwise terminated according to its provisions. If
termination of this Agreement occurs because of a breach of section 1.5(d)(1)(i)
by the Company, Company shall pay Sponsor, as liquidated damages for such breach
and termination, the sum of Two hundred fifty thousand Dollars ($250,000) as
full and complete satisfaction of any and all losses, damages or claims due to
such breach and termination. Liquidated damages as provided in this section
shall not apply to any other breach or reason for termination under this
Agreement.
1.6 (a) Sponsor and Company agree that the Contracts shall be sold
principally through Direct Marketing methods and that no employee, agent or
representative of Sponsor or Consultant (collectively, "Representatives") shall
engage in any solicitation activities regarding the Contracts, unless duly
licensed and appointed as an insurance agent of the Company pursuant to
procedures formulated by Company and agreed to by Sponsor. Neither Sponsor nor
any such Representatives will be paid any commission or other compensation based
upon the volumes of sales of the Contracts. Company will be responsible for
promptly processing any applicable licensing and appointment forms. Company
agrees to provide licensing advice and assistance to Sponsor and the
Representatives, including ongoing advice as to licensing requirements and
access to Company personnel knowledgeable in licensing procedures. Company
further agrees to provide ongoing training to Sponsor regarding its efforts to
market the Contracts and to provide such ongoing assistance as Sponsor may
reasonably require. The Parties will be responsible for licensing and
appointment fees as set forth in the August 12, 1997 letter agreement between
the Parties, which agreement should be read to include First Providian as a
party and is hereby incorporated by reference.
(b) Recognizing Company's obligation to provide for proper
administration of the Contracts and consistent with obligations of the parties
set forth in the September 1997 Administrative Services Agreement among
Providian, First Providian and Sponsor, Sponsor is
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hereby additionally authorized and responsible, at its own expense, to deliver
to each Contract purchaser ("Owner") current prospectuses for the Contract and
the Fund as required by law and, at initial purchase, the appropriate form of
the Contract.
(c) Sponsor may not delegate to any third party all or part of the
services to be performed by it hereunder except with Company's written consent
which shall not be unreasonably withheld.
1.7 The Company and Sponsor agree to add a stable value fund, or similar
fund, at Sponsor's discretion should Sponsor deem such a fund necessary. The
terms and conditions of such offering shall be mutually beneficial to the
Company, Sponsor and the contract purchasers. The Parties shall negotiate in
good faith to reach agreement as to the required terms and conditions.
1.8 Sponsor has no authority as the Company's agent to, and shall not (a)
make any promise or incur any debt on behalf of Company; (b) hold itself out as
an employee of Company; (c) misrepresent, add, alter, waive, discharge, or omit
any material provision(s) of the Contracts or the then current prospectuses for
the Contracts or the Fund or confirmation statements or any other Company
materials; (d) recommend an exchange of any Contract for another deferred
annuity Contract except as permitted under Section 9 (pertaining to
termination); (e) pay or allow to be paid to any Owner or potential purchaser
any rebate or other inducement not specified in the Contracts; (f) give or offer
to give, on Company's behalf, any specific advice or opinion regarding any
specific tax result for any individual or entity in connection with the purchase
of any Contract (although Sponsor may appropriately explain general principles
of taxation and the Company's obligations to report certain transactions to
taxing authorities); or (g) take any other action beyond the scope of the
authority granted under this Agreement.
1.9 Except as required by law, Sponsor and Company each agree that all
information communicated to it by the other, including, without limitation, the
names and addresses of Owners (which are acknowledged to be a valuable trade
asset developed and owned by
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Sponsor), shall be received in strict confidence, shall be used by the recipient
Party only for the purposes of this Agreement and that no such information shall
be disclosed by the recipient Party, its agent or employees without the prior
written consent of the other Party.
1.10 Except with the written permission of Sponsor, Company shall not
engage in any sales or solicitation activity to customers of Sponsor except as
part of a solicitation to the general public; provided that, after the
termination hereof, Company shall engage in such communications with Owners only
as may be required by law as determined in Company's reasonable discretion or
otherwise as mutually agreed to in writing by Company and Sponsor. Use by the
Company of a list of Sponsor's customers or Owners to make a solicitation to the
general public shall constitute a violation of this Section 1.10.
1.11 To the extent required by law, including the administrative
requirements of regulatory authorities, Company reserves the right to modify any
of the Contracts in any respect whatsoever, or to suspend the sale of any of the
Contracts, in whole or in part. Company agrees to notify Sponsor promptly in
writing upon the occurrence of any event Company believes might necessitate a
material modification or suspension. During the term of this Agreement, Company
agrees not to modify materially the Contracts without Sponsor's written consent,
which shall not be unreasonably withheld.
1.12 The Company shall not assign or transfer by any method, including,
without limitation, reinsurance and assumption or otherwise, any of its rights
and duties arising under this Agreement or with respect to any of the Contracts
without the prior written consent of Sponsor. Reinsurance ceded by the Company
to its affiliated insurance companies in respect of the Contracts (excluding
assumption reinsurance) shall not require the consent of Sponsor.
1.13 Company agrees that if the ratings of any outside reinsurer, if any,
decrease below Standard & Poor's AA or its equivalent, then Company shall reshop
such reinsurance to obtain reinsurance with a company with ratings at least
equal to the ratings before the decrease. Company also agrees to provide Sponsor
with copies of any and all reinsurance treaties which affect the Contracts.
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1.14 Company and Sponsor agree that, except to the extent prohibited by
contract or policy provisions, existing and new Owners shall be treated
substantially similarly.
1.15 Sponsor agrees that Sponsor and its Representatives will be bound by
the Ethics Code (attached as Exhibit A), as amended from time to time. Company
is responsible for providing Sponsor any such amendments.
1.16 The Company or its designee have the right under this Agreement to
conduct at least annually a market conduct review of all of Vanguard's
activities with respect to the Contracts
2. Sales of Fund Shares
--------------------
2.1 Fund shares shall be sold by the respective portfolios of Fund and
purchased by Company for the appropriate sub-account at the net asset value next
computed after receipt by Fund or its designee of each order of the Accounts or
its designee, in accordance with the provisions of this Agreement and of the
then current prospectuses of the Fund and the Contracts. Company may purchase
Fund shares for its own account subject to (a) receipt of prior written approval
by Sponsor; and (b) such purchases being in accordance with the then current
prospectuses of the Fund and the Contracts. For purposes of this Section and
Section 1.6, each Owner shall be a designee of the Accounts for placing such
orders, to the extent that such Owner's orders are consistent with the
provisions of the applicable Contract, and Sponsor shall be designee of Fund for
receipt of such orders. Orders or payments for shares purchased will be sent
promptly to Fund and will be made payable in the manner established from time to
time by Fund for the receipt of such payments. Fund reserves the right to delay
transfer of its shares until the payment check has cleared the depository
account.
2.2 Fund will redeem the shares when requested on behalf of the
corresponding subdivision of the Accounts at the net asset value next computed
after receipt of each request for redemption, as established in accordance with
the provisions of the then current prospectuses of the Fund and the Contracts.
Fund will make payment in the manner established from time to time by Fund for
the receipt of such redemption requests, but in no
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event shall payment be delayed for a greater period than permitted by the
Investment Company Act of 1940 (the "1940 Act"). The Board of Trustees of Fund
("Trustees") may refuse to sell shares of any particular portfolio of Fund
("Portfolio") to any person, or suspend or terminate the offering of shares of
any particular Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is determined by the Trustees, in their
reasonable business judgment exercised in compliance with all applicable laws or
regulations, to be in the best interests of the Owners.
2.3 Company agrees to purchase and redeem the shares of each Portfolio in
accordance with the provisions of this Agreement, of the Contracts and of the
then current prospectuses for the Contracts and Fund. Except as necessary to
implement Owner initiated transactions, or as required by state and/or federal
laws or regulations, Company shall not redeem Fund shares attributable to the
Contracts. Company agrees that all net amounts available under the Contracts
shall be invested exclusively in Fund shares during the term of this Agreement.
2.4 Issuance and transfer of Fund shares will be by book entry only.
Stock certificates will not be issued to the Company or the Accounts. Shares
ordered from Fund will be recorded in appropriate book entry titles for the
Accounts.
2.5 Fund shall furnish prompt notice followed by written confirmation to
Company or its delegates of any income, dividends or capital gains distributions
payable on the Fund's shares. Company hereby elects to receive all such
dividends and distributions as are payable on shares of a Portfolio in
additional shares of that Portfolio, provided that Company continues to receive
in cash any mortality and expense charges which are due to Company. Fund shall
notify Company or its delegate of the number of shares so issued as payment of
such dividends and distributions.
2.6 With respect to the "free look" period, Company agrees to direct
investment into all subaccounts during that period as provided for in the policy
form approved by each state. With respect to contracts redeemed during this
period in states whose regulations require return of premium, Sponsor shall
refund to Contract holders the premium paid unless otherwise
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<PAGE>
required by state law or the policy approved in that state and any resulting
gain or loss on such premiums during this free look period shall be borne by
Company. For states which allow return of accumulated value, Sponsor shall
refund to Contract holders the accumulated value, unless otherwise required by
the policy. Accumulated Value shall mean the value of all amounts accumulated
under the Contract prior to the Annuity Date, equivalent to the Accumulation
Units multiplied by the Accumulation Unit Value. This is analogous to the
current market value of a mutual fund account.
3. Proxy Solicitations and Voting
------------------------------
3.1 Sponsor shall solicit proxies relative to each Portfolio and tabulate
voting instructions from Owners, in compliance with all applicable laws and
regulations.
3.2 Company shall vote: (a) Fund shares owned by Company; and (b) Fund
shares for which no instructions have been received from Owners as certified in
writing by Sponsor, in the same proportion as Fund shares of the Portfolio for
which instructions have been received.
4. Representations and Warranties
------------------------------
4.1 Company represents and warrants that it is an insurance company duly
organized and in good standing under applicable law and that it has legally and
validly established the Accounts prior to any issuance or sale thereof as
segregated asset accounts under applicable state law and that it has and will
maintain the capacity to issue all Contracts that may be sold; and that it is
properly licensed, qualified and in good standing to sell the Contracts in all
50 states and the District of Columbia.
4.2 Company represents and warrants that the Contracts are registered
under the Securities Act of 1933 (the "1933 Act").
4.3 Company represents and warrants that it has registered the Accounts
as unit investment trusts in accordance with the provisions of the 1940 Act to
serve as segregated investment accounts for the Contracts.
4.4 Company represents that the Contracts are currently treated as
annuity contracts under applicable provisions of the Internal Revenue Code of
1986, as amended ("Code"), and
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<PAGE>
under the Insurance Laws of the fifty states and the District of Columbia, and
that it will maintain such treatment and that it will notify Sponsor and Fund
promptly upon having reasonable basis for believing that the Contracts have
ceased to be so treated or that they might not be so treated in the future.
4.5 Sponsor and Fund represent and warrant that the Fund is lawfully
established and validly existing under the laws of the state of Pennsylvania and
that Fund complies and will continue to comply in all material respects with the
1940 Act.
4.6 Sponsor and Fund represent and warrant that Fund shares sold pursuant
to this Agreement are registered under the 1933 Act and duly authorized for
issuance; that Fund will sell such shares in compliance with all applicable
federal and state laws; and that Fund is and will remain registered under the
1940 Act. Fund shall register and qualify the shares for sale in accordance with
the securities laws of the various states only if and to the extent deemed
advisable by Fund.
4.7 Sponsor and Fund represent and warrant that Fund will invest money
from the Contracts in such a manner as to ensure that the Contracts will be
treated as variable annuity contracts under the Code and the regulations issued
thereunder, and that Fund will comply with Section 817(h) of the Code as amended
from time to time and with all applicable regulations promulgated thereunder.
Fund agrees to provide Company a statement of each Portfolio's assets within 14
days after the end of each calendar quarter and to provide to Company a copy of
Fund's procedures for complying with such diversification requirements upon
reasonable request.
4.8 Sponsor and Fund represent and warrant that each Portfolio of the
Fund will qualify as a Regulated Investment Company under Subchapter M of the
Code, and that such Portfolio will maintain such qualification (under Subchapter
M or any successor or similar provision) and that it will promptly notify
Company upon having any reasonable basis for believing that it has ceased to so
qualify or that it might not so qualify in the future.
11
<PAGE>
4.9 Sponsor and Fund represent that Fund's investment policies, fees and
expenses are in compliance with the investment restrictions of applicable state
law for separate accounts of domestic insurers and with any other applicable
state insurance laws of which Company has made it aware in writing at the date
hereof. Company shall promptly notify Sponsor and Fund in writing of subsequent
changes in such investment restrictions, including any communications received
by the Company from the insurance department of the state of domicile, and upon
receipt of such notice, Sponsor and Fund shall bring the Fund into compliance
therewith at the earliest time practicable under the circumstances.
4.10 Sponsor represents and warrants that Consultant is and will remain a
member in good standing of the National Association of Securities Dealers, Inc.
("NASD") and is and will be registered as a broker-dealer with the SEC. Subject
to the Parties' mutual agreement under Section 1.6(a), to the extent applicable,
Sponsor further represents that it will advertise, sell and distribute Fund
shares and the Contracts in accordance with all applicable state and federal
laws, including without limitation, the 1933 Act, the Securities Exchange Act of
1934 (the "1934 Act") and the 1940 Act.
4.11 Sponsor represents and warrants that it and Consultant are and will
remain duly registered in all material respects under all applicable federal and
state securities laws and shall perform their obligations hereunder in
compliance in all material respects with any applicable state and federal laws.
4.12 Sponsor and Fund represent and warrant that all of their directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of Fund are and shall continue to be at all
times covered by a blanket fidelity bond or similar coverage for the benefit of
Fund in an amount not less than the amount required by the applicable rules of
the NASD and the federal securities laws. The aforesaid bond shall include
coverage for larceny and embezzlement and shall be issued by a reputable bonding
company.
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4.13 Company represents and warrants that all of its directors, officers,
employees, investment advisers, and other individuals/entities dealing with the
money and/or securities of Fund are and shall continue to be at all times
covered by a blanket fidelity bond or similar coverage for the benefit of Fund,
in an amount not less than the amount required by the applicable rules of the
NASD and the federal securities laws. The aforesaid bond shall include coverage
for larceny and embezzlement and shall be issued by a reputable bonding company.
4.14 Company represents and warrants that its reserve calculation will be
based on records established and maintained by Sponsor and will comply with
relevant actuarial guidelines and standards of practice in the industry.
4.15 Company and Sponsor represent and warrant that they currently are
engaged in projects to ensure that operations and performance shall continue
without interruption before, during and after January 1, 2000. The Parties shall
provide to each other more specific information concerning these plans at a
mutually agreed upon schedule, but no later than June 30, 1998.
5. Sales Material and Information
------------------------------
5.1 Company shall file the Contracts in all jurisdictions in which it is
licensed (the "States") and use its best efforts to secure approval for sale of
the Contracts in the States, and Company further agrees to maintain such
approvals.
5.2 All sales material prepared by Sponsor will be filed by Company with
the appropriate state regulatory authorities as required in the States and
Company will use its best efforts to effect prompt review of such material in
the States and to provide Sponsor with such assistance as Sponsor may reasonably
require in order to develop sales literature in compliance with the laws and
regulations of the States. Sponsor shall be responsible for filing all such
material in compliance with the Federal securities laws and the rules of the
NASD.
5.3 Company shall promptly inform Sponsor as to the status of all such
sales literature filings and shall promptly notify Sponsor of all approvals or
disapprovals of sales literature filings in the States. Company will promptly
provide Sponsor with copies of all
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correspondence relating to the Contracts with Owners, regulatory authorities or
any other person and will promptly advise Sponsor of the substance of any
telephone conversations or meetings with such persons relating to the Contracts.
Sponsor shall promptly provide Company with copies of correspondence and reports
of inquiries, meetings and discussions concerning regulation of the Contracts
and Owner complaints respecting the Contracts.
5.4 Sponsor shall furnish to Company each piece of sales literature or
other promotional material in which Company is named at the earliest practical
stage of its development. Company commits to comment, approve or disapprove of
all proposed advertising within four (4) business days of being requested to do
so by Sponsor. All Parties agree to cooperate with the others to facilitate each
other's ongoing efforts to comply with all applicable laws and regulations.
5.5 Except with Company's consent, Fund and Sponsor shall not give any
information or make any representations on behalf of Company or concerning
Company, the Accounts, or the Contracts other than the information or
representations contained in: (a) a registration statement or prospectus for the
Contracts, as amended or supplemented from time to time; (b) published reports
for the Accounts which are in the public domain or approved by Company for
distribution to Contract Owners; or (c ) sales literature or other promotional
material approved by Company.
5.6 No Party shall use any other Party's names, logos, trademarks or
service marks, whether registered or unregistered, without the prior consent of
such Party. Sponsor owns and possesses all right, title and interest in and to
the name "Vanguard Variable Annuity Plan" and any trademarks or tradenames
associated therewith.
5.7 Fund or Sponsor will provide to Company at least one complete copy of
all registration statements, prospectuses, Statements of Additional Information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no-action
letters, and all amendments to the above, that relate to Fund or its shares, (a)
in draft form prior to the filing of such document with the
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SEC or other regulatory authorities with reasonable time allowed for Company to
provide Fund with its comments and (b) in final form as filed.
5.8 Company will provide to Sponsor and Fund at least one complete copy
of all registration statements, prospectuses, Statements of Additional
Information, reports, solicitations for voting instructions, sales literature,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no-action
letters and all amendments to any of the above, that relate to the Contracts or
the Accounts, (a) in draft form prior to the filing of such document with the
SEC with reasonable time allowed for Sponsor to provide Company with its
comments and (b) in final form as filed. If requested by Sponsor in lieu
thereof, Company shall provide such documentation (including a final copy of the
new prospectus as set in type at Sponsor's expense) and other assistance as is
reasonably necessary in order for Sponsor once each year (or more frequently if
the prospectus for Company is amended) to have the prospectus for the Contracts
and Fund's prospectus printed together in one document (such printing to be at
Sponsor's expense). In the event of an SEC, NASD or state insurance department
audit, both Sponsor and Company agree to cooperate in responding to requests for
information and agree to provide such reasonable support as may be necessary
without charge.
5.9 For purposes of this Section 5, the phrase "sales literature or other
promotional material" includes, but is not limited to, advertisements, sales
literature, scripts, educational or training materials or other communications.
5.10 Company will calculate appropriate reserves for the Contracts. That
reserve calculation will be at least as great as required by the state of
domicile.
5.11 The Parties agree to review the Contracts during the last calendar
quarter of each year for possible changes and will make their personnel
reasonably available for this purpose.
6. Fees and Expenses
-----------------
6.1 The mortality and expense risk ("M&E") charges with respect to the
Contracts shall be as set forth in the November 26, 1997, letter from Providian
and First Providian to Sponsor
15
<PAGE>
which is hereby incorporated by reference. In the event the assumptions upon
which the M&E charges were based change materially, parties agree to negotiate
in good faith to arrive at a mutually acceptable level of M&E charges with
respect to the Contracts. Any reduction in the M&E charges referred to in the
letter will be lowered at the time a new asset breakpoint is reached. In
addition, prior to the filing of each annual post-effective amendment to the
registration statements for the Contracts, the parties agree to review the asset
amounts and growth trends. If the trend indicates a new breakpoint would be
reached in the three months after the date of the post-effective amendment, the
M&E will be lowered at the time of the annual post-effective amendment filings..
The administration charges with respect to the Contracts shall be as set forth
in Schedule 6.1 attached hereto.
6.2 Fund shall pay no fee or other compensation to Consultant except as
permitted under the then current prospectus of Fund.
6.3 Fund or Sponsor shall bear the cost of registration and qualification
of Fund's shares; preparation and filing of Fund's prospectus and registration
statement, proxy materials and reports; preparation of all other statements and
notices relating to Fund, Consultant or Sponsor required by federal or state
law; and payment of all applicable fees, including, without limitation, all fees
due under Rule 24f-2 relating to Fund; all taxes on the issuance or transfer of
Funds; and the expenses for the solicitation and sale of the contracts,
including all costs of printing and distributing all copies of advertisements,
prospectuses, Statements of Additional Information, proxy materials, and reports
to Owners or potential purchasers of the Contracts as required by applicable
state and federal law.
6.4 Company shall see to it that the Contracts are registered under the
1933 Act, and that the Accounts are registered as unit investment trusts in
accordance with the 1940 Act. Company shall bear the expenses for the costs of
preparation and filing of Company's prospectus and registration statement with
respect to the Contracts; preparation of all other statements and notices
relating to the Accounts or the Contracts required by any federal or state law;
payment of all applicable fees, including, without limitation, all fees due
under Rule
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<PAGE>
24f-2 relating to the Contracts; all costs of drafting, filing, and obtaining
approvals of the Contracts in the various states under applicable insurance
laws; filing of annual reports on form N-SAR, and all other costs associated
with ongoing compliance with all such laws and its obligations hereunder.
7. Fixed Annuitization Service Charge for Administration
-----------------------------------------------------
In connection with any Owner's election under any Contract to receive
a fixed annuity payout option, Company agrees to pay to Sponsor for the life of
the Contract a fixed annuitization service charge for administration in the form
of twelve (12) basis points per year of the amount remaining in the reserves for
each such Contract. One-fourth of such payment will be made at the end of each
calendar quarter based on the reserves held on such contracts at the end of such
quarter. Such fees will not be payable with respect to any Contract for which
the payment amount was determined by use of the Contract's guaranteed factor due
to current factors being less favorable than such guaranteed factors.
8. Indemnification
---------------
8.1 Indemnification By Company
(a) Company agrees to indemnify and hold harmless Fund and each of
its directors and officers, Sponsor and each person, if any, who controls Fund
within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" for purposes of this Section 8.1) against any and all losses, claims,
damages, liabilities (including amounts paid in settlement with the written
consent of Company) or litigation (including legal fees and other expenses), to
which the Indemnified Parties may become subject under any statute, regulation,
at common law or otherwise, and which:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in the Registration
Statement or prospectus for the Contracts or contained in the Contracts (or any
amendment or supplement to any of the foregoing), or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein
17
<PAGE>
not misleading, provided that this paragraph 8.1(a) shall not apply as to any
Indemnified Party if such statement or omission or such alleged statement or
omission was made in reliance upon and conformity with information furnished to
Company by or on behalf of Fund or Sponsor for use in the Registration Statement
or prospectus for the Contracts or in the Contracts (or any amendment or
supplement) or otherwise for use in connection with the sale of the Contracts or
Fund shares; or
(ii) arise out of, or as a result of, statements or
misrepresentations or wrongful conduct of Company or persons under its control,
with respect to the sale or distribution of the Contracts or Fund shares; or
(iii) arise out of any untrue statements or alleged untrue
statement of a material fact contained in a Registration Statement, prospectus,
or sales literature covering the Fund or any amendment thereof or supplement
thereto, or the omission or alleged omission to state therein a material fact
required to be stated therein, or necessary to make the statements therein not
misleading, if such a statement or omission was made in reliance upon
information furnished to Fund by or on behalf of Company; or
(iv) arise out of , or as a result of, any failure by Company
or persons under its control to provide the services and furnish the materials
under the terms of this Agreement; or
(v) arise out of, or result from, any material breach of any
representation and/or warranty made by Company or persons under its control in
this Agreement or arise out of or result from any other material breach of this
Agreement by Company or persons under its control, as limited by and in
accordance with the provisions of sections 8.1(b) and 8.1(c ) hereof.
(b) Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason
18
<PAGE>
of such Indemnified Party's reckless disregard of obligations or duties under
this Agreement or to Fund, whichever is applicable, or to the extent of such
Indemnified Party's negligence.
(c ) Company shall not be liable under this Indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified Company in writing within a
reasonable time after the summons or after first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify Company of any such
claim shall not relieve Company from any liability which it may have to the
Indemnified Party otherwise than on account of this Indemnification provision.
In case any such action is brought against the Indemnified Parties, Company
shall be entitled to participate, at its own expense, in the defense of such
action. Company also shall be entitled to assume and to control the defense
thereof. After notice from Company to such Indemnified Party of Company's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and Company will not
be liable to such Indemnified Party under this Agreement for any legal fees or
other expenses subsequently incurred by such Indemnified Party independently in
connection with the defense thereof other than reasonable costs of
investigation.
(d) The Indemnified Parties will promptly notify Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of Fund shares or the Contracts or the operation of the
Fund.
8.2 Indemnification by Sponsor
(a) Sponsor agrees to indemnify and hold harmless Company and each of
its directors and officers and each person, if any, who controls Company within
the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" for purposes of this Section 8.2) against any and all losses, claims,
damages, liabilities (including amounts paid in settlement with the written
consent of Sponsor) or litigation (including legal fees and other
19
<PAGE>
expenses) to which the Indemnified Parties may become subject under any statute,
at common law or otherwise, and which:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or prospectus or sales literature of Fund (or any amendment or
supplement to any of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
provided that this Section 8.2(a) shall not apply as to any Indemnified Party if
such statement or omission or such alleged statement or omission was made in
reliance upon and in conformity with information furnished to Sponsor or Fund by
or on behalf of Company for use in the Registration Statement or prospectus for
Fund or in sales literature (or any amendment or supplement) or otherwise for
use in connection with the sale of the Contracts or Fund shares; or
(ii) arise out of, or as a result of, statements or
representations or wrongful conduct of Fund or Sponsor or persons under their
control, with respect to the sale or distribution of the Contracts or Fund
shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration Statement, prospectus,
or sales literature covering the Contracts, or any amendment thereof or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, if such statement or omission was made in reliance upon
information furnished to Company by or on behalf of Fund, or Sponsor; or
(iv) arise out of, or as a result of, any failure by Fund or
Sponsor or persons under their control to provide the services and furnish the
materials under the terms of this Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by Fund, Sponsor or persons under their
control in this Agreement or
20
<PAGE>
arise out of or result from any other material breach of this Agreement by Fund,
Sponsor or persons under their control;
(vi) arise out of Sponsor's performance, nonperformance or
breach of Sponsor's duties under Section 1.6(b) of this Agreement, except to the
extent that such losses, claims, damages, liabilities or litigation is caused by
Sponsor's compliance with Company's written interpretations of state insurance
laws or regulations; as limited by and in accordance with the provisions of
Sections 8.2(b) and 8.2(c) hereof.
(b) Sponsor shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
Company or the Accounts, whichever is applicable, or to the extent of such
Indemnified Party's negligence.
(c ) Sponsor shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified Sponsor in writing within a
reasonable time after the summons or other first legal process giving
information on the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify Sponsor of any such
claim shall not relieve Sponsor from any liability which it may have to the
Indemnified Party otherwise than on account of this Indemnification provision.
In case any such action is brought against the Indemnified Parties, Sponsor will
be entitled to participate, at its own expense, in the defense thereof. Sponsor
also shall be entitled to assume and to control the defense thereof. After
notice from Sponsor to such Indemnified Party of Sponsor's election to assume
the defense thereof, the Indemnified Party shall bear the fees and expenses of
any additional counsel retained by it, and Sponsor will not be liable to such
Indemnified Party under this Agreement
21
<PAGE>
for any legal fees or other expenses subsequently incurred by such Indemnified
Party independently in connection with the defense thereof other than reasonable
costs of investigation.
(d) The Indemnified Parties will promptly notify Sponsor of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Contracts or the operation of the Accounts.
9. Potential Conflicts
-------------------
9.1 The Trustees of the Fund will monitor the Fund for the existence of
any material irreconcilable conflict between the interests of the contract
owners of all separate accounts investing in the Fund. An irreconcilable
material conflict may arise for a variety of reasons, including: (a) an action
by any state insurance regulatory authority; (b) a change in applicable federal
or state insurance, tax, or securities laws or regulations, or a public ruling,
private letter ruling, no-action or interpretative letter, or any similar action
by insurance, tax, or securities regulatory authorities; (c ) an administrative
or judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by an insurer to disregard the voting
instructions of contract owners. The Trustees shall inform the Company promptly
and in writing if they determine that an irreconcilable material conflict exists
and the implications thereof.
9.2 The Company will report any potential or existing conflicts of which
it is aware to the Trustees. The Company will assist the Trustees in carrying
out their responsibilities under the mixed and shared funding exemptive order
received by the Fund (Investment Company Act Release Nos. 21526 (Notice) and
21611 (Order), November 20, 1995 and December 19, 1995, respectively), by
providing the Trustees with all information reasonably necessary for the
Trustees to consider any issues raised. This includes, but is not limited to, an
obligation by the Company to inform the Trustees whenever contract owner voting
instructions are disregarded.
22
<PAGE>
9.3 If it is determined by a majority of the Trustees, or a majority of
the disinterested trustees ("Disinterested Trustees"), that a material
irreconcilable conflict exists, the Company and other participating insurance
companies ("Participating Insurance Companies") shall, at their expense, take
whatever steps are necessary to remedy or eliminate the irreconcilable material
conflict, up to and including: (a) withdrawing the assets allocable to some or
all of the separate accounts from the Fund or any Portfolio and reinvesting such
assets in a different investment medium, including (but not limited to) another
Portfolio of the Fund, or submitting the question whether such segregation
should be implemented to a vote of all affected contract owners and, as
appropriate, segregating the assets of any appropriate group (i.e., annuity
----
contract owners, life insurance contract owners, or variable contract owners of
one or more Participating Insurance Companies) that votes in favor of such
segregation, or offering to the affected contract owners the option of making
such a change; and (b) establishing a new registered management investment
company or managed separate account.
9.4 If a material irreconcilable conflict arises because of a decision by
the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority, the Company may be
required, at the Fund's election, to withdraw an Account's investment in the
Fund and no charge or penalty will be imposed against the separate account as a
result of such a withdrawal. Any such withdrawal must take place within six (6)
months after the Fund gives notice that this provision is being implemented, and
until the end of that six-month period the Fund shall continue to accept and
implement orders by the Company for the purchase (and redemption) of shares of
the Fund.
9.5 If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
Accounts' investment in the Fund within six months after the Trustees inform the
Company that they have determined that such decision has created an
irreconcilable material conflict, and until the end of the six-month period the
23
<PAGE>
Fund shall continue to accept and implement orders by the Company for the
purchase (and redemption) of shares of the Fund.
9.6 For purposes of Section 9.3 of this Agreement, a majority of the
Disinterested Trustees shall determine whether any proposed action adequately
remedies any irreconcilable material conflict, but in no event will the Fund be
required to establish a new funding medium for the Contracts. The Company shall
not be required by Section 9.3 to establish a new funding medium for the
Contracts if an offer to do so has been declined by vote of a majority of
Contract owners materially adversely affected by the irreconcilable material
conflict.
10. Term and Termination
--------------------
10.1 The initial term of this Agreement shall be for a term of five years,
commencing on June 22, 1998. This Agreement shall thereafter automatically renew
from year to year, provided that, during such renewal periods, either Company or
Sponsor may terminate this Agreement without cause upon six months' advance
written notice to the other.
10.2 Notwithstanding any other provision of this Agreement, Sponsor or the
Fund, without payment of any amount, may terminate this Agreement for cause on
not less than thirty (30) days' prior written notice to the Company, unless
Company has cured such cause within 30 days of receiving such notice, for any
one of the following reasons:
(a) Material breach by Company of any representation, warranty,
covenant or obligation hereunder or under the Contracts.
(b) Change in control of Company or Company's ultimate controlling
person. For purposes of this Section 10.2, control and changes in control shall
be determined in accordance with applicable state insurance law (Missouri
Insurance Holding Company System Act, Title XXIV, Chap. 382, MO. Ins. Code; NY
Insurance Law Ch. 28, Sec. 1501). Company will provide Sponsor, as soon as
practicable, with notice of any proposed merger or other corporate
reorganization involving Company. Sponsor agrees that it will not object to the
assumption by AUSA Life during 1998 or 1999 of First Providian's rights and
obligations under this agreement upon merger of First Providian into AUSA Life.
24
<PAGE>
(c) A material change in, or other material revision to the
Contracts not previously accepted in writing by Sponsor.
(d) Any action taken by federal or state regulatory authorities of
competent jurisdiction which, in Sponsor or Fund's reasonable judgment, either
(i) materially and adversely alters the terms, advantages and/or benefits of the
Contracts to current or prospective purchasers; or (ii) materially and adversely
alters the terms or conditions of Sponsor's and/or Funds' participation in the
subject matter of this Agreement.
(e) Any material suspension or withdrawal, or any revision
downward of the Company's published claims paying ratings to "A+" or lower by
Standard & Poor's, or to "A" or lower by Duff & Phelps, or to "A" or lower by
- ------------------ -------------
Best's Insurance Reports, "A-" or lower by Best's Insurance Reports for First
- ------------------------
Providian and, subsequent to the merger, AUSA Life.
(f) Commencement of delinquency proceedings by or against Company
including, but not limited to, application for, or entry of, an order of
supervision, suspension, rehabilitation, receivership, liquidation or
reorganization in respect of Company. At any time after Sponsor has given notice
of termination for cause, Sponsor without prejudice to Company's rights or
remedies, may take such otherwise lawful steps as it deems necessary or
appropriate to protect the interests of Owners, including ceasing to offer
Contracts and/or additional Contract investments and advising Owners of such
notice of termination and of their rights and alternatives. Following the
effective date of such termination notice (if the cause for such has not been
cured), Sponsor may offer the Owners different variable annuity contracts in
exchange for Contracts.
10.3 Notwithstanding any other provision of this Agreement, Company may
terminate this Agreement for cause on not less than thirty (30) days' prior
written notice to Fund and Sponsor, unless Fund or Sponsor has cured such cause
within thirty (30) days of receiving such notice, for any one of the following
reasons:
25
<PAGE>
(a) Material breach by Fund or Sponsor of any representation, warranty,
covenant or obligation hereunder.
(b) Any action taken by federal or state regulatory authorities of
competent jurisdiction which, in Company's reasonable judgment, either
(i) materially and adversely alters the terms, advantages and/or
benefits of the Contracts to current or prospective purchasers; or (ii)
materially and adversely alters the terms or conditions of Company's
participation in the subject matter of this Agreement.
10.4 Notwithstanding the termination of this Agreement, each Party shall
continue for so long as any Contracts remain outstanding to perform such of its
duties hereunder as are necessary to ensure the continued tax deferred status
thereof and the payment of benefits thereunder.
11. Notices
-------
11.1 Any notice shall be deemed sufficiently given when sent by
registered or certified mail to the other Party at the address of such Party set
forth below or at such other address as such Party may from time to time specify
in writing to the other Party.
If to Fund or Sponsor:
Ellen Rinaldi
The Vanguard Group, Inc.
P.O. Box 2600
Valley Forge, PA 19482
with a copy to:
R. Gregory Barton
The Vanguard Group, Inc.
P.O. Box 2600
Valley Forge, PA 19482
If to Company:
Sarah J. Strange
Financial Markets Division
Providian Life & Health Insurance Company
400 West Market Street
Louisville, KY 40232
26
<PAGE>
With a copy to:
Frank A. Camp
General Counsel
Financial Markets Division
Providian Life & Health Insurance Company
4333 Edgewood Road, N.E.
Cedar Rapids, IA 52499
12. Miscellaneous
-------------
12.1 The captions in this Agreement are included for convenience of
reference only and in no way affect the construction or effect of any provisions
hereof.
12.2 If any portion of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
12.3 Each Party shall cooperate with each other Party and all appropriate
governmental authorities (including without limitation the SEC, the NASD and
state insurance regulators) and shall permit such authorities reasonable access
to its books and records in connection with any investigation or inquiry
relating to this Agreement. Company shall promptly provide Sponsor, and Sponsor
shall promptly provide Company, a copy of any substantive communications
received from all appropriate governmental authorities (including without
limitation the SEC, the NASD and state insurance regulators) relating to the
subject matter of this Agreement.
12.4 Each Party hereto grants to the other the right to audit its records
relating to the terms and conditions of this Agreement upon reasonable notice
during reasonable business hours in order to confirm compliance with this
Agreement.
12.5 The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the Parties hereto are entitled to under state and
federal laws.
12.6 The terms of this Agreement shall be construed and the provisions
hereof interpreted under and in accordance with the laws of Pennsylvania;
provided, however, that all
27
<PAGE>
performances rendered hereunder shall be subject to compliance with all
applicable state and federal laws and regulations.
12.7 During the term of this Agreement, Company shall promptly provide
Sponsor with copies of Company's annual and quarterly financial statements, as
published, to include both those prepared using statutory accounting principles
and the requisite NAIC convention blank forms, and also those prepared on the
basis of generally accepted accounting principles.
12.8 Sections 1.6(b), 1.8, 1.9, 1.11, 5.6, 7, 8, and 9.5 hereof shall
survive termination of this Agreement.
12.9 Sponsor agrees that, during the term of this Agreement and for a
period of one year following termination of this Agreement, neither it nor any
of its affiliates will, directly or indirectly, solicit for employment or hire
any employee of the Company or any of its affiliates engaged in the development,
distribution or administration of the Contracts. Company agrees that during the
term of this Agreement, and for a period of one year following termination of
this Agreement, neither it nor any of its affiliates will, directly or
indirectly, solicit for employment or hire any employee of the Sponsor or any of
its affiliates engaged in the development, distribution or administration of the
Contracts.
12.10 The "Work Product" shall be the sole and exclusive property of
Sponsor and all rights, title and interest therein shall vest in Sponsor;
provided that Company may disclose Work Product if required by law, regulation,
subpoena, court order or other lawful authority. For purpose of this Section
12.10, Work Product means all concepts, designs, files, reports, programs,
manuals, listings, databases and any other material developed or prepared,
whether in hard copy or electronic media, by Company for Sponsor which is unique
to Sponsor or Fund, and which is the subject of prior notice by Sponsor to
Company that Sponsor considers the material to be Work Product, but does not
include any such material if it applies, or may be applied, generally to
variable annuities (such as, among other things, insurance features, separate
account charges, annuitization options, software programs). Sponsor shall have
the right to obtain from Company and to hold in its own name copyrights,
trademark registrations,
28
<PAGE>
patents or whatever protection Sponsor may deem appropriate for the Work
Product. Company agrees to give Sponsor, at Sponsor's expense, all assistance
reasonably required to protect the rights set forth in this Section 12.10. The
Parties intend the Work Product to be deemed "works made for hire" as defined in
the United States Copyright Act. In the event and to the extent that they are
deemed not to constitute works made for hire, Company assigns to Sponsor the
copyright to the Work Product in perpetuity.
12.11 This Agreement, including all reference to exhibits hereto,
constitutes the entire agreement between the Parties on this subject matter and
may not be modified or amended except in a writing signed by both Parties; all
prior agreements, representations, statements, negotiations and understandings
between the Parties are superseded hereby, except for those attached as exhibits
hereto.
12.12 In the event that any dispute, controversy or claim arising out of
this Agreement cannot be resolved in the normal course of discussion between the
Parties, then within ten (10) days of request by either Party, the issue will be
submitted to a committee comprised of representatives of Sponsor's Legal and
Corporate Planning Departments and Company. If agreement cannot be reached by
such committee within ten (10) days thereafter, the dispute shall be settled by
arbitration in accordance with the rules then in effect of the American
Arbitration Association. The arbitration shall be held in the City of
Philadelphia, Commonwealth of Pennsylvania, unless Company and Sponsor agree to
hold the arbitration in a different location. Any judgment upon the award
rendered may be entered in any court having jurisdiction and shall be final and
unappealable. Without limiting the foregoing, Company consents to the
jurisdiction of the Court of Common Pleas of Philadelphia County and the United
States District Court for the Eastern District of Pennsylvania if arbitration is
unavailable for any reason. Company and Sponsor also consent to service of
process by first class mail.
12.13 Company may not sell the block of business relating hereto without
Sponsor's consent.
29
<PAGE>
12.14 In the event that Company or Sponsor come under investigation by
regulatory authorities for fraud, illegal activities or improper market conduct
which allegedly misled Owners, then the other Party may communicate with Owners
in order to advise them of their options with respect to the Contracts.
12.15 On an annual basis, the Parties agree to meet to discuss the levels
of service being provided hereunder, specifically the levels of responsiveness
and assistance. If Sponsor is not satisfied with the service provided by
Louisville, then Sponsor may, in its discretion, move the service to Cedar
Rapids.
30
<PAGE>
IN WITNESS WHEREOF, each of the Parties hereto has caused this Agreement to
be duly executed as of the date first set forth above.
COMPANY:
PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
By:/s/ Larry N. Norman
----------------------
Title: Vice President
--------------
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
By: /s/ Larry N. Norman
----------------------
Title: Vice President
--------------
Fund:
VANGUARD VARIABLE INSURANCE FUND, INC.
By: /s/ Raymond J. Klapinsky
--------------------------
Title: Secretary
---------
Sponsor:
THE VANGUARD GROUP, INC.
By: /s/ John E. Barth
-----------------
Title: Principal
---------
31
<PAGE>
Schedule 6.1
SCHEDULE OF ADMINISTRATIVE CHARGES
----------------------------------
Vanguard Variable Annuity Plan - Deferred and Annuitized Contracts
- ------------------------------------------------------------------
Administrative Charge Payable to Sponsor
An annual administrative charge shall be assessed daily equal to .10% of the net
asset value of the Company's Separate Accounts IV and B. Additionally, a $25.00
Contract charge, payable to Sponsor, shall be assessed on all Contracts under
$25,000.
32
<PAGE>
Exhibit A
ETHICS CODE
Providian Life and Health Insurance Company and First Providian Life and Health
Insurance Company (together, "Company") have committed to the Principles of
Ethical Market Conduct and Code of Life Insurance Ethical Market Conduct
developed by the American Council of Life Insurance and endorsed by its Board of
Directors. As part of the implementation of those principles and code, Company
requires that registered representatives ("RR") and registered principals ("RP")
of Vanguard Marketing Corporation, who are involved in the sale of the Vanguard
Variable Annuity Plan (the "Plan"), adopt, abide by and enforce the following
Ethics Code:
1. RR will conduct business according to high standards of
honesty and fairness and render that service to his or here
customers which, in the same circumstances, he or she would
apply to or demand for himself or herself. To conduct its
business according to high standards of honesty and fairness,
RR will:
A. Make reasonable efforts to determine the insurable needs
or financial objectives of his or her customers based
upon relevant information obtained from the customer and
enter into transactions which assist the customer in
meeting his or her insurable needs or financial
objectives.
B. Maintain compliance with applicable laws and regulations.
C. In cooperation with consumers, regulators and others,
affirmatively seek to improve the practices for sales and
marketing of the Plan.
D. Reflect this Code of Ethics in everyday practices.
2. RR will provide competent and customer-focused sales and
service. To provide for competent sales and service of the
Plan, RR will make certain that:
A. He or she is of good character and business repute, and
have appropriate qualifications and experience.
B. He or she is duly licensed or otherwise qualified under
state law.
C. He or she has adequately trained to focus on customers'
needs and objectives.
D. He or she has adequate knowledge of the Plan and its
operation.
E. He or she is trained in the need to comply with
applicable insurance laws and regulations and the
concepts in this Code of Ethics.
F. He or she participates in continuing education.
3. RR will engage in active and fair competition. To maintain and
enhance competition in the marketplace, RR will:
A. Maintain compliance with applicable state and federal
laws fostering fair competition.
B. Not replace existing life insurance policies and annuity
contracts without first communicating to the customer, in
a manner consistent with Ethics Principle 4 below,
information that he or she needs in order to ascertain
whether such replacement of existing policies or
contracts may or may not be in his or her best interest.
C. Refrain from disparaging competitors.
<PAGE>
4. RR will provide advertising and sales materials that comply
with this Agreement and that are clear as to purpose and
honest and fair as to content. To comply with this principle,
RR will make certain that:
A. Presentation of any material designed to lead to sales or
solicitation of annuity PLANS is done in a manner
consistent with the best interests of the customer. All
such sales or solicitation communications should be based
upon the principles of fair dealing and good faith, and
will have a sound basis in fact.
B. Materials presented as part of a sale are comprehensible
in light of the complexity of the Plan.
C. He or she maintains compliance with applicable laws and
regulations related to advertising, unfair trade
practices, sales illustrations and other similar
provisions.
D. Illustrations of premiums and consideration, costs,
values and benefits are accurate and fair, and contain
appropriate disclosure of amount which are not guaranteed
and those which are guaranteed in the policy or contract.
5. RR will provide a means for fair and expeditious handling
of customer complaints and disputes. To assist in the
resolution of any complaints and disputes that may arise
concerning market conduct, RR will:
A. Notify his or her RP immediately of any customer
complaints.
B. Assist in identifying, evaluating and handling complaints
in compliance with applicable state law and regulations
related to consumer complaint handling.
C. Make good faith efforts to resolve complaints and
disputes without resorting to civil litigation.
6. The RPs will maintain a system of supervision that is
reasonably designed to achieve compliance with this Ethics
Code. In so doing, they will:
A. Establish and enforce policies and procedures reasonable
designed to comply with this Ethics Code.
B. Implement an adequate system of supervision of the market
activities of RRs in order to monitor their compliance
with this Ethics Code and applicable laws and
regulations.
C. Conduct compliance training sessions.
D. Audit and monitor RRs' sales practices.
E. Provide each RR with a copy of this Ethics Code.
<PAGE>
EXHIBIT 9(a)
September 28, 1998
AUSA Life Insurance Company, Inc.
AEGON Financial Services Group, Inc.
400 West Market Street
Louisville, Kentucky 40202
RE: AUSA Life Insurance Company, Inc. Separate Account B-- Opinion and Consent
To Whom It May Concern:
This opinion and consent is furnished in connection with the filing of the
Initial Registration Statement on Form N-4 under the Securities Act of 1933, as
amended (the "1933 Act"), and Amendment No. 13 to the Registration Statement on
Form N-4 under the Investment Company Act of 1940, as amended (the "1940 Act"),
File No. 811-6298 (the "Registration Statement"), of AUSA Life Insurance
Company, Inc. Separate Account B (Vanguard) ("Separate Account B"). Separate
Account B receives and invests premiums allocated to it under a individual
flexible premium multi-funded annuity contract, the Vanguard Variable Annuity
Plan Contract (the "Annuity Contract"). The Annuity Contract is offered in the
manner described in the prospectus contained in the Registration Statement (the
"Prospectus").
In my capacity as legal adviser to AUSA Life Insurance Company, Inc. ("AUSA
Life"), I hereby confirm the establishment of Separate Account B as a separate
account for assets applicable to the Annuity Contract, pursuant to the
provisions of Section 4240 of the New York Insurance Statutes. First Providian
will be merged with and into AUSA Life on October 1, 1998. In addition, I have
made such examination of the law in addition to consultation with outside
counsel and have examined such corporate records and such other documents as I
consider appropriate as a basis for the opinion hereinafter expressed. On the
basis of such examination, it is my professional opinion that:
1. AUSA Life Insurance Company, Inc. is a corporation duly organized and
validly existing under the laws of the State of New York.
2. Effective as of October 1, 1998, Separate Account B will be an account
maintained by AUSA Life Insurance Company, Inc. pursuant to the laws of
the State of New York, under which income, capital gains, and capital
losses incurred on the assets of Separate Account B will be credited to
or charged against the assets of Separate Account B, without regard to
the income, capital gains or capital losses arising out of any other
business which AUSA Life Insurance Company, Inc. may conduct.
3. Assets allocated to Separate Account B will be owned by AUSA Life
Insurance Company, Inc. The assets in Separate Account B attributable
to the Annuity Contract generally will not be chargeable with
liabilities arising out of any other business which AUSA Life Insurance
Company, Inc. may conduct. Effective as of October 1, 1998, the assets
of Separate Account B will be available to cover the general
liabilities of AUSA Life Insurance Company, Inc. only to the extent
that the assets
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of Separate Account B exceed the liabilities arising under the Annuity
Contracts.
4. The Annuity Contracts will have been duly authorized by AUSA Life
Insurance Company, Inc. and, when sold in jurisdictions authorizing
such sales, in accordance with the Registration Statement, will
constitute validly issued and binding obligations of AUSA Life
Insurance Company, Inc. in accordance with their terms.
5. Owners of the Annuity Contracts, as such, will not be subject to any
deductions, charges, or assessments imposed by AUSA Life Insurance
Company, Inc. other than those provided in the Annuity Contract.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to my name under the heading "Legal Matters" in
the Prospectus.
Very truly yours,
/s/ Gregory E. Miller-Breetz
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Gregory E. Miller-Breetz
Attorney
2
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Exhibit 9(b)
September 28, 1998
AUSA Life Insurance Company, Inc.
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499
Ladies and Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the Prospectus contained in the Initial Registration Statement on
Form N-4 under the Securities Act of 1933, as amended (the "1933 Act"), and
Amendment No. 13 to the Registration Statement on Form N-4 under the Investment
Company Act of 1940, as amended (the "1940 Act"), File No. 811-6298 (the
"Registration Statement"), filed on or around October 1, 1998 by AUSA Life
Insurance Company, Inc. and AUSA Life Insurance Company, Inc. Separate Account B
(funding the Vanguard Variable Annuity Plan--individual contract) with the
Securities and Exchange Commission under the 1933 Act and the 1940 Act.
Very truly yours,
/s/ Jorden Burt Boros Cicchetti
Berenson & Johnson LLP
JORDEN BURT BOROS CICCHETTI
BERENSON & JOHNSON LLP
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[LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE]
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Financial
Statements" and "Auditors" and to the use of our report dated April 24, 1998,
with respect to the financial statements of First Providian Life and Health
Insurance Company Separate Account B and to the use of our report dated
October 1, 1998 with respect to the supplemental statutory-basis financial
statements of AUSA Life Insurance Company, Inc. in the Registration Statement
(Form N-4) for AUSA Life Insurance Company, Inc. Separate Account B and related
Prospectus of the Vanguard Variable Annuity Plan Contract for the registration
of individual variable annuity contracts.
/s/ Ernst & Young LLP
Des Moines, Iowa
October 1, 1998
