<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 29, 1998.
REGISTRATION NO. 333-65151
& 811-6298
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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.1 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 15 [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.
[X] On March 1, 1999 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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.......................... Summary; 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........... Expenses; Taxes;
Vanguard Variable Insurance Fund
7. General Description of Variable
Annuity Contracts................. The Annuity Contract
8. Annuity Period.................... Annuity Payments
9. Death Benefit..................... Death Benefit
10. Purchases and Contract Value...... Enrollment Form and Purchase
Payments; Accumulated Value
11. Redemptions....................... Access to Your Money
12. Taxes............................. Taxes
13. Legal Proceedings................. Legal Matters
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>
The Vanguard
Variable Annuity
Plan Contract
Issued Through
AUSA Life Insurance Company, Inc.
Separate Account B
By
AUSA Life Insurance Company, Inc.
Prospectus
April 30, 1999
The Vanguard Variable Annuity Plan Contract (the "Contract") provides a means of
investing on a tax-deferred basis in thirteen portfolios of Vanguard Variable
Insurance Fund -
Money Market Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
Short-Term Corporate Portfolio
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
Mid-Cap Index Portfolio
REIT Index Portfolio
Small Company Growth
Portfolio International Portfolio
The Contract is a group variable annuity contract and is intended for retirement
savings or other long-term investment purposes. You bear all investment risk
(including the possible loss of principal), and investment results are not
guaranteed. The Contract provides a Free Look Period of at least 20 days during
which the Contract may be cancelled.
Why Reading This Prospectus Is Important
This prospectus explains the Vanguard Variable Annuity Plan Contract. Reading
the Contract prospectus will help you decide whether the Contract is the right
investment for you. The Contract prospectus must be accompanied by a current
prospectus for Vanguard Variable Insurance Fund, which discusses in greater
depth the objectives, risks, and strategies of each portfolio of Vanguard
Variable Insurance Fund. Please read them both carefully before you invest and
keep them for future reference. A Statement of Additional Information for the
Contract prospectus has been filed with the Securities and Exchange Commission,
is incorporated by reference, and is available free by writing to the Vanguard
Variable Annuity Center, P.O. Box 1103, Valley Forge, PA 19482-1103 or by
calling 800-522-5555 on business days between 8 a.m. and 8 p.m. Eastern time.
The Table of Contents for the Statement of Additional Information is included at
the end of the Contract prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The Contract is available only in the state of New York.
<PAGE>
This prospectus does not constitute an offering in any jurisdiction where it
would be unlawful to make an offering like this. No one has been authorized to
give any information or make any representations about this offering other than
those contained in this prospectus. You should not rely on any other information
or representations.
[This text is intended for cover.]
<PAGE>
Contents [page numbers are place holders]
1 Cross Reference to Definitions 9 Expenses
2 Summary 10 Taxes
3 Fee Table 11 Access to Your Money
4 Example 12 Performance
5 The Annuity Contract 13 Death Benefit
6 Annuity Payments 14 Other Information
7 Purchase 15 Table of Contents of Statement of
Additional Information
8 Investment Options
16 Appendix (Condensed Financial
Information)
CROSS REFERENCE TO DEFINITIONS
We have generally defined the technical terms associated with the Contract where
they are used in the prospectus. The following list shows where certain of the
more technical and more frequently used terms are defined in the prospectus. In
the text you can easily locate the defined word because it will appear in bold
type or its definition will be covered in a space on the page set aside
specifically for discussion of the term.
[Note: Actual page numbers not yet available. Current references are to the
sections where the terms are defined.]
Accumulation Phase ["The Annuity Contract"]
Annuitant ["Death Benefit"]
Annuity Date ["Annuity Payments"]
Annuity Payment Options ["Annuity Payments"]
Beneficiary ["Death Benefit"]
Business Day ["Purchase"]
Contract ["Other Information"]
Contract Date ["Purchase"]
Contract Owner ["Other Information"]
1
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Free Look Period ["Other Information"]
Income Phase ["Annuity Payments"]
Initial Purchase Payment ["Purchase Payment"]
Joint Annuitant ["Death Benefit"]
Net Purchase Payment ["Purchase"]
Non-Qualified Contract ["Purchase"]
Qualified Contract ["Purchase"]
Portfolios ["Investment Options"]
Purchase Payment ["Purchase Payment"]
Tax Deferral ["Taxes"]
2
<PAGE>
SUMMARY
The sections in this Summary provide you with a concise discussion of the major
topics covered in this prospectus. Each section of the Summary is discussed in
greater detail in the main body of the prospectus at corresponding section
headings. Please read the full prospectus carefully.
THE ANNUITY CONTRACT
The Vanguard Variable Annuity Plan Contract is a flexible-premium variable
annuity offered by AUSA Life Insurance Company, Inc. (the "Company"). The
Contract provides a means of investing on a tax-deferred basis in thirteen
portfolios of Vanguard Variable Insurance Fund.
Who Should Invest
The Contract is intended for long-term investors who want tax-deferred
accumulations of funds, generally for retirement but also for other long-term
purposes.
The Contract provides benefits in two distinct phases: accumulation and income.
The Accumulation Phase
During the Accumulation Phase, you choose to allocate your investment in the
Contract among the thirteen Vanguard Portfolios available under the Contract.
You can contribute additional dollars to the Contract and you can take
withdrawals from the Contract during the Accumulation Phase. The value of your
investment depends on the investment performance of the Portfolios you choose.
Your earnings are generally not taxed during this phase unless you withdraw
them.
The Income Phase
During the Income Phase, you can receive regular annuity payments on a fixed or
variable basis and for various periods of time depending on your need for income
and the choices available under the Contract. See ANNUITY PAYMENTS, page x, for
more information about Annuity Payment Options.
Vanguard Variable Insurance Fund
The Portfolios available for investment under the Contract are portfolios of
Vanguard Variable Insurance Fund (the "Fund"), an open-end diversified
investment company. The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies with more than 100
distinct investment portfolios holding assets worth more than $400 billion.
ANNUITY PAYMENTS
During the Income Phase, you receive regular annuity payments under a wide range
of Annuity Payment Options. The Contract allows you to receive an income
guaranteed for as long as you live or until the second of two people dies. You
may also choose to
3
<PAGE>
receive a guaranteed number of payments over a number of years. Most Annuity
Payment Options are available on either a variable basis (where the amount of
the payment rises or falls depending on the investment performance of the
Portfolios you have chosen) or a fixed basis (where the payment is guaranteed).
PURCHASE
You can buy the Contract with a minimum investment of $5,000 under most
circumstances. You can add $250 or more at any time during the Accumulation
Phase. Your Contract may not exceed $1,000,000 without prior approval.
INVESTMENT OPTIONS
You can allocate your Purchase Payments to one or more of the following
Portfolios described in the Fund prospectus:
MANAGED BY VANGUARD'S FIXED INCOME GROUP
Money Market Portfolio
High-Grade Bond Portfolio
Short-Term Corporate Portfolio
MANAGED BY VANGUARD'S CORE MANAGEMENT GROUP
Equity Index Portfolio
Mid-Cap Index Portfolio
REIT Index Portfolio
MANAGED BY WELLINGTON MANAGEMENT COMPANY, LLP
High Yield Bond Portfolio
Balanced Portfolio
MANAGED BY NEWELL ASSOCIATES
Equity Income Portfolio
MANAGED BY Barrow, Hanley, Mewhinney & Strauss, Inc.
Diversified Value Portfolio
MANAGED BY Lincoln Capital Management Company
Growth Portfolio
MANAGED BY Granahan Investment Management
Small Company Growth Portfolio
MANAGED BY Schroder Capital Management International, Inc.
International Portfolio
4
<PAGE>
You can make or lose money in any of these Portfolios depending on their
investment performance.
EXPENSES
There are no sales charges associated with the Contract.
The Company will deduct a daily charge corresponding to an annual charge of .10%
of the net asset value of the Separate Account as an Administrative Expense
Charge and a .28% charge for the mortality and expense risks it assumes. For
Contracts valued at less than $25,000, there is also a $25 annual administrative
charge.
You will also pay Fund Operating Expenses, which currently range from .21% to
.46% annually of the average daily value of the Portfolios.
TAXES
In general, you are not taxed on earnings on your investment in the Contract
until you withdraw them or receive Annuity Payments. Earnings are taxed as
ordinary income. During the Accumulation Phase, for tax purposes withdrawals are
taken from earnings first, then from your investment in the Contract. For
Annuity Payments, payments come partially from earnings, partially from your
investment. You are taxed only on the investment portion of each Annuity
Payment. If you receive money from the Contract before age 59 1/2, you may have
to pay a 10% penalty tax on the earnings portion received.
ACCESS TO YOUR MONEY
You can take money out of your Contract at any time during the Accumulation
Phase without incurring a withdrawal charge. Each withdrawal you make must be at
least $250.
You may have to pay income tax and a tax penalty on any money you take out.
PERFORMANCE
The investment performance of the Portfolios you choose directly affects the
value of your Contract. You bear all investment risk (including the possible
loss of principal), and investment results are not guaranteed.
From time to time, the Company may advertise the investment performance of the
Portfolios. In doing so, it will use standardized methods prescribed by the
Securities and Exchange Commission, as well as certain non-standardized methods.
Past performance does not indicate or predict future performance.
DEATH BENEFIT
5
<PAGE>
If the Annuitant dies during the Accumulation Phase, the Beneficiary will
receive the Death Benefit. The Death Benefit is the greater of the then-current
Accumulated Value of the Contract or the sum of all Purchase Payments (less any
partial withdrawals). The Beneficiary may elect to receive these amounts as a
lump sum or as Annuity Payments.
Federal tax law requires that if a Contract Owner is a natural person and dies
before the Annuity Date, then the entire value of the Contract must be
distributed within five years of the date of death of the Contract Owner. If the
Contract Owner is not a natural person, the death of the Primary Annuitant
triggers the same distribution requirement. Special rules may apply to a
surviving spouse.
OTHER INFORMATION
Free Look Periods
There are two different Free Look Periods. If the Contract is not a replacement
of an existing annuity contract or life insurance or endowment policy, the
Contract provides for a Free Look Period of 20 days after the Contract Owner
receives the Contract plus 5 days for mailing. If the Contract is a replacement
of an existing annuity contract or life insurance or endowment policy, a Free
Look Period exists for 60 days after the Contract Owner receives the Contract
plus 5 days for mailing. If you cancel your Contract during the applicable Free
Look Period, the Company will return at least the amount of your Purchase
Payments under the Contract to date.
Reinstatements
If you ask the Company to reinstate a Contract exchanged under Internal Revenue
Code Section 1035 or a Contract whose funds were transferred via a
trustee-to-trustee under the Internal Revenue Code, the Company will require the
Contract Owner to replace the same total amount of money in the applicable
Subaccounts as was taken from them to effect the transfer.
AUSA Life Insurance Company, Inc.
AUSA Life Insurance Company, Inc. is a life insurance company incorporated under
New York law. It is principally engaged in offering life insurance and annuity
contracts. First Providian Life & Health Insurance Company ("First Providian")
merged into the Company in October 1998.
AUSA Life Insurance Company, Inc. Separate Account B
First Providian established the Separate Account under New York law. As part of
First Providian's merger with the Company, the Separate Account was also merged
into the Company and survived the merger intact. The Separate Account is a unit
investment trust registered with the Securities and Exchange Commission. The
Separate Account has thirteen Subaccounts, each of which invests solely in a
corresponding Portfolio of the Fund.
6
<PAGE>
Other topics
Additional information on the topics summarized above and on other topics not
summarized here can be found at OTHER INFORMATION, page x.
INQUIRIES AND CONTRACT AND POLICYHOLDER INFORMATION
For more information about the Vanguard Variable Annuity Plan Contract, call or
write:
Vanguard Variable Annuity Center
P.O. Box 1103
Valley Forge, PA 19482-1103.
800-522-5555
If you have questions about your Contract, please telephone the Vanguard
Variable Annuity Center at 800-258-4271. 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.
7
<PAGE>
FEE TABLE The following Fee 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 expenses and fees for the Short-Term
Corporate Portfolio, the Diversified Value Portfolio, Mid-Cap
Index Portfolio, and the REIT Index Portfolio are estimates
because the Portfolios had not commenced operations as of December
29, 1998. The purpose of this Fee Table is to assist you in
understanding the various costs and expenses that you would pay
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 EXPENSES.
- --------------------------------------------------------------------------------
Separate
Owner Transaction Expenses Account
------------------------------------------------------------------
Sales Load Imposed on Purchases........................ None
Surrender Fees......................................... None
Exchange Fees.......................................... None
------------------------------------------------------------------
Annual Contract Maintenance Fee*....................... $25
* 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.
Separate
Annual Separate Account Expenses Account
------------------------------------------------------------------
Mortality and Expense Risk Charge**.................... .28%
Administrative Expense Charge.......................... .10%
---------
Total Annual Separate Account Expenses............... .38%
========
** This charge is currently.28% of all assets when net assets
attributable to the Separate Account (and Separate Account IV of
Peoples Benefit Life Insurance Company) exceed $2.5 billion.
This charge will be reduced to .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 EXPENSES.
8
<PAGE>
<TABLE>
<CAPTION>
High- High
Annual Fund Operating Money Grade Yield Short-Term Diversified Equity
Expenses during the fiscal Market Bond Bond Corporate Balanced Value Income
year ended September 30, 1997 Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Management & Administrative
Expenses ............................. .15% .21% .21% .25% .19% .25% .23%
Investment Advisory Fees ................ .02 .02 .06 .02 .10 .12 .10
12b-1 Distribution Fees ................. None None None None None None None
Other Expenses
Distribution Costs ................... .03 .02 .02 .02 .02 .02 .02
Miscellaneous Expenses ............... .01 .04 .02 .02 .01 .01 .02
--- --- --- --- --- --- ---
Total Other Expenses .................... .04 .06 .04 .04 .03 .03 .04
--- --- --- --- --- --- ---
Total Fund Operating
Expenses .......................... .21% .29% .31% .31% .32% .40% .37%
=== === === === === === ===
</TABLE>
<TABLE>
<CAPTION>
High- High
Money Grade Yield Short-Term Diversified Equity
Market Bond Bond Corporate Balanced Value Income
TOTAL EXPENSES Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Separate Account Expenses ......... .38% .38% .38% .38% .38% .38% .38%
Total Fund Operating Expenses ........... .21 .29 .31 .31 .32 .40 .37
--- --- --- --- --- --- ---
Grand Total, Separate
Account and Fund
Operating Expenses ............... .59% .67% .69% .69% .70% .78% .75%
=== === === === === === ===
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Small
Annual Fund Operating Equity Mid-Cap REIT Company
Expenses during the fiscal Index Growth Index Index Growth International
year ended September 30, 1997 Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management & Administrative
Expenses ............................. .20% .20% .22% .26% .23% .22%
Investment Advisory Fees ................ .00 .15 .00 .01 .12 .16
12b-1 Distribution Fees ................. None None None None None None
Other Expenses
Distribution Costs ................... .02 .02 .02 .02 .01 .02
Miscellaneous Expenses ............... .01 .01 .01 .02 .03 .06
--- --- --- --- --- ---
Total Other Expenses .................... .03 .03 .03 .04 .04 .08
--- --- --- --- --- ---
Total Fund Operating
Expenses ......................... .23% .38% .25% .31% .39% .46%
=== === === === === ===
</TABLE>
<TABLE>
<CAPTION> Small
Equity Mid-Cap REIT Company
Index Growth Index Index Growth International
TOTAL EXPENSES Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Separate Account Expenses ........... .38% .38% .38% .38% .38% .38%
Total Fund Operating Expenses ............. .23 .38 .25 .31 .39 .46
--- --- --- --- --- ---
Grand Total, Separate
Account and Fund
Operating Expenses .............. .61% .76% .63% .69% .77% .84%
=== === === === === ===
</TABLE>
Automated Quotes
The Vanguard Tele-Account Service provides access to Accumulation Unit Values
(to two decimal places) and total returns for all Portfolios, and yield
information for the Money Market, High-Grade Bond, High Yield Bond, and the
Short-Term Corporate Portfolios of the Fund. Contract Owners may use this
service for 24-hour access to
9
<PAGE>
Portfolio information. To access the service you may call Tele-Account at
1-800-662-6273 (ON-BOARD) and follow the step-by-step instructions, or speak
with a Vanguard associate at 1-800-522-5555 to request a brochure that explains
how to use the service.
Vanguard's website also has Accumulation Unit Values (to two decimal places) for
all Portfolios. This service can be accessed from www.vanguard.com by
double-clicking on fund prices.
10
<PAGE>
EXAMPLE
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) full surrender at the end
of each period. The Contract imposes no surrender fees of any
kind. Your expenses are identical whether you continue 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 Options.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- ------
Money Market Portfolio........... $6 $19 $33 $75
High-Grade Bond Portfolio........ 7 22 38 85
High Yield Bond Portfolio........ 7 22 38 86
Short-Term Corporate Portfolio... 7 22 38 86
Balanced Portfolio............... 7 23 40 89
Diversified Value Portfolio...... 8 25 44 98
Equity Income Portfolio.......... 8 24 42 94
Equity Index Portfolio........... 6 20 35 78
Growth Portfolio................. 8 25 43 96
Mid-Cap Index Portfolio.......... 7 21 36 80
REIT Index Portfolio............. 7 22 38 86
Small Company Growth Portfolio... 8 25 43 97
International Portfolio.......... 9 27 47 105
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 average 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 complete discussion of Contract
costs and expenses, see EXPENSES.
You should not consider this example to be a representation of
past or future expenses or performance. Actual expenses may be
higher or lower than those shown, subject to the guarantees in the
Contract.
CONDENSED FINANCIAL INFORMATION
Please note that the Appendix contains a history of accumulation unit values in
a table labeled "Condensed Financial Information."
11
<PAGE>
THE ANNUITY CONTRACT
The Vanguard Variable Annuity Plan Contract is a flexible-premium variable
annuity offered by AUSA Life Insurance Company, Inc. (the "Company"). The
Contract provides a means of investing on a tax-deferred basis in various
portfolios (the "Portfolios") offered by Vanguard Variable Insurance Fund. You
may purchase a Contract using after-tax dollars (a Non-Qualified Contract), or
you may purchase a Qualified Contract by "rolling over" funds from another
individual retirement annuity or from a qualified plan.
Who Should Invest
The Contract is intended for long-term investors who want tax-deferred
accumulation of funds, generally for retirement but also for other long-term
investment purposes. The tax-deferred feature of the Contract is most attractive
to investors in high federal and state marginal tax brackets who have exhausted
other avenues of tax deferral, such as pre-tax contributions to
employer-sponsored retirement or savings plans.
About the Contract
The Vanguard Variable Annuity Plan Contract is a contract between you, the
Contract Owner, and the Company, the issuer of the Contract.
The Contract provides benefits in two distinct phases: accumulation and income.
Accumulation Phase
The Accumulation Phase starts when you purchase your Contract and ends
immediately before the Annuity Date, when the Income Phase starts. During the
Accumulation Phase, you choose to allocate your investment in the Contract among
the thirteen available Portfolios. The Contract is a variable annuity because
the value of your investment in the Portfolios can go up or down depending on
the investment performance of the Portfolios you choose. The Contract is a
flexible-premium annuity because you can make additional investments of at least
$250 until the Income Phase begins. During this phase, you are generally not
taxed on earnings from amounts invested unless you withdraw them.
Other benefits available during the Accumulation Phase include the ability to:
. Make exchanges among your Portfolio choices at no charge and without
current tax consequences (page x)
. Withdraw all or part of your money with no surrender penalty charged by the
Company, although you may incur income taxes and a 10% penalty tax (page x)
Income Phase
During the Income Phase, you receive regular annuity payments. The amount of
these payments is based in part on the amount of money accumulated under your
Contract (its Accumulated Value) and the Annuity Payment Option you select. The
Annuity Payment Options are explained at ANNUITY PAYMENTS, page x.
12
<PAGE>
At your election, payments can be either variable or fixed. If variable, the
payments rise or fall depending on the investment performance of the Portfolios
you choose. If fixed, the payment amounts are guaranteed.
Annuity payments are available in a wide variety of options, including payments
over a specified period or for life (for either a single life or joint lives),
with or without a guaranteed number of payments.
The Separate Account
When you purchase a Contract, your money is deposited into the Company's
Separate Account B. The Separate Account contains a number of Subaccounts that
invest exclusively in shares of the corresponding Portfolios. The investment
performance of each Subaccount is linked directly to the investment performance
of one of the Portfolios. Assets in the Separate Account belong to the Company
but are accounted for separately from the Company's other assets and can be used
only to satisfy its obligations to Contract Owners.
Vanguard Variable Insurance Fund
The Portfolios available for investment under the Contract are portfolios of
Vanguard Variable Insurance Fund (the "Fund"), an open-end diversified
investment company intended exclusively as an investment vehicle for variable
annuity and 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 100 distinct investment
portfolios holding assets worth more than $400 billion. Through their jointly
owned subsidiary, The Vanguard Group, Inc., Vanguard Variable Insurance Fund and
the other funds in the group obtain at cost virtually all of their corporate
management, administrative, shareholder accounting, and distribution services.
13
<PAGE>
ANNUITY PAYMENTS
During the Income Phase, you receive regular annuity payments under a wide range
of Annuity Payment Options.
Starting the Income Phase
As Contract Owner, you exercise control over when the Income Phase begins by
specifying an Annuity Date on the Enrollment Form when you purchase the
Contract. The Annuity Date is the date on which annuity payments begin and is
always the first day of the month you specify. You may also change the Annuity
Date at any time in writing, as long as the Annuitant or Joint Annuitant is
living and the Company receives the request at least 30 days before the
then-scheduled Annuity Date. Any Annuity Date you request must be at least 30
days from the day the Company receives written notice of it. The latest possible
Annuity Date the Company will accept without prior approval is the first day of
the month after the Annuitant's 90th birthday.
If you do not specify an Annuity Date, either on the Enrollment Form or by
written request, Annuity Payments will begin on the first day of the month after
ten full years from the date of your Contract or the first day of the month
after the Annuitant's 65th birthday, whichever is later.
The Annuity Date for Qualified Contracts may also be controlled by endorsements,
the plan, or applicable law.
Annuity Payment Options
The income you take from the Contract during the Income Phase can take several
different forms, depending on your particular needs. Except for the Designated
Period Annuity Option listed below, the Annuity Payment Options listed below are
available on either a variable basis or a fixed basis.
If available on a variable basis, the Annuity Payment Options provide payments
that, after the initial payment, will go up or down depending on the investment
performance of the Portfolios you choose.
If available on a fixed basis, the Annuity Payment Options provide payments in
an amount that does not change. If you choose a fixed Annuity Payment Option,
the Company will move your investment out of the Portfolios and into the general
account of the Company.
. Life Annuity - Monthly Annuity Payments are paid for the life of an
Annuitant, ending with the last payment before the Annuitant dies.
. Joint and Last Survivor Annuity - Monthly Annuity Payments are paid for as
long as at least one of two named Annuitants is living, ending with the
last payment before the surviving Annuitant dies.
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. Life Annuity With Period Certain - Monthly Annuity Payments are paid for as
long as the Annuitant lives, with payments guaranteed to be made for a
period of at least 10 years, 15 years, or 20 years, as elected. If the
Annuitant dies before the period certain ends, the Company will make any
remaining payments to the Beneficiary.
. Installment or Unit Refund Life Annuity - Available as either a fixed
(Installment Refund) or variable (Unit Refund) Annuity Payment Option.
Monthly Annuity Payments are paid for the life of an Annuitant, with a
period certain determined by dividing the Accumulated Value by the first
Annuity Payment. If the Annuitant dies before the period certain ends, the
Company will make any remaining payments to the Beneficiary.
. Designated Period Annuity - Available only on a fixed basis. Monthly
Annuity Payments are paid for a specified period, which may be from 10 to
30 years.
Calculating Annuity Payments
Fixed Annuity Payments. Each fixed Annuity Payment is guaranteed to be at least
the amount shown in the Contract's Annuity Tables corresponding to the Annuity
Payment Option selected.
Variable Annuity Payments. To calculate variable Annuity Payments, the Company
determines the amount of the first variable Annuity Payment. The first variable
Annuity Payment will equal the amount shown in the applicable Annuity Table in
the Contract. This amount depends on the Accumulated Value of your Contract on
the Annuity Date, the sex and age of the Annuitant (and Joint Annuitant where
there is one), the Annuity Payment Option selected, and any applicable Premium
Taxes. Subsequent variable Annuity Payments depend on the investment experience
of the Portfolios chosen. If the actual net investment experience of the
Portfolios chosen exactly equals the Assumed Interest Rate of 4%, then the
variable Annuity Payments will not change in amount. If the actual net
investment experience of the Portfolios chosen is greater than the Assumed
Interest Rate of 4%, then the variable Annuity Payments will increase. On the
other hand, they will decrease if the actual experience is lower. The Statement
of Additional Information contains a more detailed description of the method of
calculating variable Annuity Payments.
Impact of Annuitant's Age on Annuity Payments. For either fixed or variable
Annuity Payments involving life income, the actual ages of the Annuitant and
Joint Annuitant will affect the amount of each payment. Since payments based on
the lives of older Annuitants and Joint Annuitants are expected to be fewer in
number, the amount of each Annuity Payment will be greater.
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Impact of Length of Payment Periods on Annuity Payments. The value of all
payments, both fixed and variable, will be greater for shorter guaranteed
periods than for longer guaranteed periods, and greater for single-life
annuities than for joint and survivor annuities, because they are expected to be
made for a shorter period.
A Few Things to Keep in Mind Regarding Annuity Payments
. If an Annuity Payment Option is not selected, the Company will assume that
you chose the Life Annuity With Period Certain option (with 10 years of
payments guaranteed) on a variable basis.
. The minimum payment is $100. If during the Accumulation Phase your
Accumulated Value falls below $2,000, the Company reserves the right to pay
that amount to you in a lump sum.
. From time to time, the Company may require proof that the Annuitant, Joint
Annuitant, or Contract Owner is living.
. If someone has assigned ownership of a Contract to you, or if a non-natural
person (e.g., a corporation) owns a Contract, you may not start the Income
Phase of the Contract without the Company's consent.
. At the time the Company calculates your fixed Annuity Payments, the Company
may offer more favorable rates than those guaranteed in the Annuity Tables
found in the Contract.
. Once Annuity Payments begin, you may not select a different Annuity Payment
Option. Nor may you cancel an Annuity Payment Option after Annuity Payments
have begun.
. If you have selected a variable Annuity Payment Option, you may change the
Portfolios funding the variable Annuity Payments by written request.
However, because excessive exchanges can potentially disrupt the management
of the Portfolios and increase transaction costs, exchange activity is
limited to two substantive "round trips" (at least 30 days apart) through
the Portfolios (except the Money Market Portfolio) during any 12-month
period. A "round trip" is a redemption from a Portfolio followed by a
purchase back into the Portfolio. Also, "round trip" covers transactions
accomplished by any combination of methods, including transactions
conducted by check, wire, or exchange to or from another Vanguard fund.
"Substantive" means either a dollar amount large enough to have a negative
impact on the Portfolios or a series of movements between Portfolios.
. You may select an Annuity Payment Option and allocate a portion of the
value of your Contract to a fixed version of that Annuity Payment Option
and a portion to a variable version of that Annuity Payment Option
(assuming the Annuity Payment Option is available on both a fixed and
variable basis). You may not select more than one Annuity Payment Option.
. 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 most current address of record.
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PURCHASE
Enrollment and Issuance of Contracts
Contract Issuance. To invest in the Vanguard Variable Annuity Plan Contract, you
should send a completed Enrollment Form, a signed and completed Definition of
Replacement form, and your Initial Purchase Payment to the Vanguard Variable
Annuity Center. The Company will issue a Contract only if the Annuitant and
Joint Annuitant are 75 years of age or less.
If the Enrollment Form and the Definition of Replacement Form are received in
good order, the Company will issue the Contract and will credit the Initial
Purchase Payment within two Business Days after receipt. A Business Day is any
day that the New York Stock Exchange is open for trading.
If the Company cannot credit the Initial Purchase Payment because the Enrollment
Form or the Definition of Replacement Form is incomplete, the Company will
contact the applicant in writing, explain the reason for the delay, and refund
the Initial Purchase Payment within five Business Days unless the applicant
consents to the Company's retaining the Initial Purchase Payment and crediting
it as soon as the necessary requirements are fulfilled.
In order to prevent lengthy processing delays caused by the clearing of foreign
checks, the Company will accept only those foreign checks that are drawn in U.S.
dollars and are issued by a foreign bank with a U.S. correspondent bank.
You may purchase a Qualified Contract only in connection with a "rollover" of
funds from another qualified plan or individual retirement annuity. Qualified
Contracts contain certain other restrictive provisions limiting the timing of
payments to and distributions from the Qualified Contract. (See QUALIFIED
INDIVIDUAL RETIREMENT ANNUITIES, page x.)
D E F I N I T I O N
Qualified Contract
When the term "Qualified Contract" is used in this prospectus we mean a Contract
that qualifies as an individual retirement annuity under Section 408(b) of the
Internal Revenue Code. There are other types of qualified annuity contracts
defined under different Internal Revenue Code sections, but we are not referring
to those in this prospectus.
Purchase Payments
A Purchase Payment is any amount you use to buy or add to the Contract. A
Purchase Payment may be reduced by any applicable Premium Tax or an initial
Annual Contract Maintenance Fee. In that case, the resulting amount is called a
Net Purchase Payment.
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A Few Things to Keep in Mind Regarding Purchase Payments
. The minimum Initial Purchase Payment for a Contract is $5,000.
. The Company will not accept third-party checks for Purchase Payments.
. You may make additional Purchase Payments at any time during the
Accumulation Phase and while the Annuitant or Joint Annuitant, if
applicable, is living. Additional Purchase Payments must be at least $250.
. Additional Purchase Payments received before the close of the New York
Stock Exchange (usually 4:00 p.m. Eastern time) are credited to the
Contract's Accumulated Value as of the close of business that same day.
. The minimum amount that you can allocate to any one Portfolio is $1,000.
. The total of all Purchase Payments may not exceed $1,000,000 without prior
approval from the Company.
The date on which the Initial Purchase Payment is credited to the Contract value
is called the Contract Date.
D E F I N I T I O N
Premium Tax
A Premium Tax is a regulatory tax some states assess on the Purchase Payments
made into a Contract. If the Company should have to pay any Premium Tax, it will
be deducted from each Purchase Payment or from the Accumulated Value as the
Company incurs the tax. Currently, New York does not impose a Premium Tax.
Purchasing by Wire
Money should be wired to: FIRST UNION NATIONAL BANK
ABA 031201467
DEPOSIT ACCOUNT NUMBER 2014126522964
AUSA LIFE INSURANCE COMPANY, INC. and
THE VANGUARD GROUP, INC.
[YOUR CONTRACT NUMBER]
[YOUR CONTRACT REGISTRATION]
Please call: 1-800-258-4271
before wiring
Please be sure your bank includes your Contract number to assure proper receipt.
If you would like to wire your Initial Purchase Payment, you should complete the
Vanguard Variable Annuity Plan Enrollment Form and mail it along with your
signed and completed Definition of Replacement form to the Vanguard Variable
Annuity Center, P.O. Box 1103, Valley Forge, PA 19482-1103, prior to completing
wire arrangements.
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Note that the Company will accept Federal Funds wire purchase orders only when
the New York Stock Exchange and Custodian Bank are open for business.
Annuity ExpressTM
The Annuity Express service allows you to make additional Purchase Payments by
transferring funds automatically from your checking or statement savings account
(not passbook savings account) to one or more Portfolios on a monthly,
quarterly, semi-annual, or annual basis. You may add to existing Portfolios
provided you have a minimum balance of $1,000. The minimum automatic purchase is
$50; the maximum is $100,000.
Section 1035 Exchanges
Under Section 1035 of the Internal Revenue Code, you may exchange the assets of
an existing annuity contract or life insurance or endowment policy to the
Vanguard Variable Annuity Plan Contract without any current tax consequences. To
make a "1035 Exchange" complete a 1035 Exchange form and mail it along with your
signed and completed Enrollment Form, Definition of Replacement form, Important
Notice Regarding Replacement or Change of Life Insurance Policies or Annuity
Contracts and your current contract, to the Vanguard Variable Annuity Center.
To accommodate owners of Vanguard Variable Annuity Plan Contracts, under certain
conditions the Company will allow for the consolidation of two or more Vanguard
Variable Annuity Plan Contracts into one Contract. In order to provide Contract
Owners with consolidated account reporting the Company will accept these
exchanges on a case-by-case basis. If applicable, you will be responsible for
only one Annual Contract Maintenance Fee. Under no circumstances will the
Company allow the exchange of an existing Vanguard Variable Annuity Plan
Contract for an identical new Vanguard Variable Annuity Plan Contract.
Because special rules and procedures apply to 1035 Exchanges, particularly if
the Contract being exchanged was issued prior to August 14, 1982, you should
consult a tax adviser before making a 1035 Exchange.
Please note that any outstanding loans you may have on a contract you wish to
exchange may create a current tax consequence. For this reason we encourage you
to settle any outstanding loans with your current insurance company before
initiating a 1035 Exchange into a Vanguard Variable Annuity Plan Contract.
Allocation of Purchase Payments
You specify on the Enrollment Form what portion of your Purchase Payments you
want to be allocated among which Portfolios. You may allocate your Purchase
Payments to one or more Portfolios. All allocations you make must be in
whole-number percentages and must be at least 10% of your Contract's Accumulated
Value and $1,000. Your initial Net Purchase Payment will be immediately
allocated among the Portfolios in the percentages you specified on your
Enrollment Form without waiting for the Free Look Period to pass.
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Should your investment goals change, you may change the allocation percentages
for additional Net Purchase Payments by sending written notice to the Vanguard
Variable Annuity Center. The change will take effect on the date the Company
receives your written notice.
WHAT'S MY CONTRACT WORTH TODAY?
Accumulated Value
The Accumulated Value of your Contract is the value of all amounts accumulated
under the Contract during the Accumulation Phase (similar to the current market
value of a mutual fund account). When the Contract is opened, the Accumulated
Value is equal to your initial Net Purchase Payment. On any Business Day
thereafter, the Accumulated Value equals the Accumulated Value from the previous
Business Day,
plus -
. any additional Net Purchase Payments credited
. any increase in the Accumulated Value due to investment results of the
Portfolio(s) you selected
minus -
. any decrease in the Accumulated Value due to investment results of the
Portfolio(s) you selected
. the daily Mortality and Expense Risk Charge
. the daily Administrative Expense Charge
. the Annual Contract Maintenance Fee, if applicable
. any withdrawals
. any Premium Taxes that occur during the Valuation Period.
The Valuation Period is any period between two successive Business Days
beginning at the close of business of the first Business Day and ending at the
close of business of the next Business Day.
You should expect the Accumulated Value of your Contract to change from
Valuation Period to Valuation Period, reflecting the investment experience of
the Portfolios you have selected as well as the daily deduction of charges.
An Accumulation Unit is a measure of your ownership interest in the Contract
during the Accumulation Phase. When you allocate your Net Purchase Payments to a
selected Portfolio, the Company will credit a certain number of Accumulation
Units to your Contract. The Company determines the number of Accumulation Units
it credits by dividing the dollar amount you have allocated to a Portfolio by
the Accumulation Unit Value for that Portfolio as of the end of the Valuation
Period in which the payment is received. Each Portfolio has its own Accumulation
Unit Value (similar to the share price (net asset value) of a mutual fund). The
Accumulation Unit Value varies each Valuation Period with the net rate of return
of the Portfolio. The net rate of return reflects the performance of the
Portfolio for the Valuation Period and is net of asset charges to the Portfolio.
Per Portfolio, the Accumulated Value equals the number of Accumulation Units
multiplied by the Accumulation Unit Value for that Portfolio.
All dividends and capital gains earned will be reinvested and reflected in the
Accumulation Unit Value. Only in this way can these earnings remain
tax-deferred.
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INVESTMENT OPTIONS
Vanguard Variable Insurance Fund
The Vanguard Variable Annuity Plan Contract offers you a means of investing in
thirteen Portfolios of Vanguard Variable Insurance Fund. A brief description of
each Portfolio is given below. For more detailed information regarding the
Portfolios, you should read the prospectus for Vanguard Variable Insurance Fund
that accompanies the Contract prospectus.
The Fund offers the following types of portfolios - a money market portfolio, a
high-grade bond portfolio, a high yield bond portfolio, a short-term corporate
portfolio, a balanced portfolio, a diversified value portfolio, an equity income
portfolio, an equity index portfolio, a growth portfolio, a mid-cap index
portfolio, a REIT index portfolio, a small company growth portfolio, and an
international portfolio - each with distinct investment objectives and policies.
. The Money Market Portfolio seeks to provide current income consistent with
the preservation of capital and liquidity. The Portfolio also seeks to
maintain a stable net asset value of $1.00 per share. The Portfolio invests
primarily in high-quality money market instruments issued by financial
institutions, non-financial corporations, the U.S. government, state and
municipal governments and their agencies or instrumentalities, as well as
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). An investment in the Portfolio is not insured or
guaranteed by the FDIC or any other government agency. Although the
Portfolio seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Portfolio.
Vanguard's Fixed Income Group serves as this Portfolio's investment
adviser.
. The High-Grade Bond Portfolio seeks to parallel the investment 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 corporate debt obligations rated at least B
by Moody's Investors Service, Inc. or Standard & Poor's Corporation or, if
unrated, of comparable quality as determined by the Portfolio's adviser,
Wellington Management Company.
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. The Short-Term Corporate Portfolio seeks to provide a high level of income
by investing primarily in high-quality, short-term bonds issued by
corporations. Vanguard's Fixed Income Group serves as this Portfolio's
investment adviser.
. The Balanced Portfolio seeks the conservation of principal, a reasonable
income return, and profits without undue risk. The Portfolio invests in a
diversified portfolio of common stocks and bonds, with common stocks
expected to represent 60% to 70% of the Portfolio's total assets and bonds
to represent 30% to 40%. Wellington Management Company serves as this
Portfolio's investment adviser.
. The Diversified Value Portfolio seeks to provide long-term growth of
capital and a moderate level of dividend income by investing primarily in
common stocks of large and medium-sized companies whose stocks the adviser
considers to be undervalued and out of favor with investors. Such "value"
stocks typically have above-average dividend yields and/or below-average
prices in relation to such financial measures as earnings, book value, and
cash flow. Barrow, Hanley, Mewhinney & Strauss, Inc. serves as this
Portfolio's investment adviser.
. The Equity Income Portfolio seeks to provide a high level of current income
by investing principally in dividend-paying equity securities. Newell
Associates serves as this Portfolio's investment adviser.
. The Equity Index Portfolio seeks to provide long-term growth of capital by
matching the performance of the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"), which contains the stocks of 500 of the largest domestic
companies. 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 Mid-Cap Index Portfolio seeks to provide long-term growth of capital by
matching the performance of the Standard & Poor's MidCap 400 Index ("S&P
MidCap 400"), which is made up of stocks of medium-sized companies.
Vanguard's Core Management Group serves as this Portfolio's investment
adviser.
. The REIT Index Portfolio seeks to provide a high level of income and
moderate long-term growth of capital by investing in stocks of real estate
investment trusts ("REITs"), which own office buildings, hotels, shopping
centers, and other properties. The Portfolio seeks to match the performance
of the Morgan Stanley REIT Index, a benchmark of U.S. property trusts.
Vanguard's Core Management Group 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
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favorable prospects for growth. These securities are primarily common
stocks but may also include securities convertible into common stock.
Granahan Investment Management 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.
There is no assurance that a Portfolio will achieve its stated objective.
Additional information regarding the investment objectives and policies of the
Portfolios and the investment advisory services can be found in the current Fund
prospectus accompanying this prospectus.
Exchanges Among the Portfolios
Should your investment goals change, you may exchange money among the Portfolios
of the Fund at no cost, subject to the following conditions:
. You may make requests for exchanges in writing. The Company will process
requests it receives prior to the close of the New York Stock Exchange
(generally 4:00 p.m. Eastern time) at the close of business that same day.
Requests received after the close of the New York Stock Exchange are
processed the next Business Day.
. The minimum amount you may exchange from a Portfolio is $250 (unless the
Accumulated Value in a Portfolio is less than $250).
. The $1,000 minimum balance requirement per Portfolio must be satisfied at
all times.
. The Company does not charge a fee for exchanges among the Portfolios.
L I M I T A T I O N S O N E X C H A N G E S
Because excessive exchanges can disrupt management of the Fund and increase the
Fund's costs for all Contract Owners, the Fund limits exchanges as follows:
. You may make no more than two substantive "round trips" through a Portfolio
(not including the Money Market Portfolio) during any 12-month period.
. Your round trips through a Portfolio must be at least 30 days apart.
. The Fund and the Company may refuse an exchange at any time, for any
reason.
. The Company may revoke a Contract Owner's telephone exchange privilege at
any time, for any reason.
A "round trip" is a redemption from a Portfolio followed by a purchase back into
the Portfolio. Also, "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to or from another Vanguard fund.
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"Substantive" means a dollar amount that The Vanguard Group, Inc. determines, in
its sole discretion, could adversely affect management of the Fund.
Automatic Exchange Service
With the Automatic Exchange Service you can move money automatically among the
Portfolios of the Fund. You can exchange fixed dollar amounts or percentages of
your Portfolio balance into the other Portfolios offered under the Contract on
either a monthly, quarterly, semiannual, or annual basis (provided the $1,000
minimum balance requirement has been met in the Portfolios to which you are
moving money).
The minimum amount you may exchange is $250.
A C L O S E R L O O K A T
Dollar-Cost Averaging
Using the Automatic Exchange Service, you can establish exchanges at regular
intervals in a plan of investing often referred to as "dollar-cost averaging,"
moving money, for example, from the Money Market Portfolio into a stock or bond
Portfolio. The main objective of Dollar-Cost Averaging is to shield your
investment from short-term price fluctuations. Since the same dollar amount is
transferred to other Portfolios each month, more Accumulation Units are credited
to a Portfolio if the value per Accumulation Unit is low, while fewer
Accumulation Units are credited if the value per Accumulation Unit is high.
Therefore, it is possible to achieve a lower average cost per Accumulation Unit
over the long term if the Accumulation Unit Value declines over that period.
This plan of investing allows investors to take advantage of market fluctuations
but does not assure a profit or protect against a loss in declining markets.
To take advantage of the Automatic Exchange Service, complete a Vanguard
Variable Annuity Plan Automatic Exchange Service Application Form or send a
letter of instruction to the Vanguard Variable Annuity Center.
You may change the amount to be transferred or cancel this service in writing at
any time. This service cannot be used to establish a new Portfolio, and will not
go into effect until the Free Look period has expired.
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EXPENSES
A C L O S E R L O O K A T
The Costs of Investing in a Variable Annuity
Costs are an important consideration in choosing a variable annuity. That's
because you, as a contract owner, pay the costs of operating underlying mutual
funds, plus any transaction costs associated with the fund's buying and selling
of securities, as well as the costs associated with the annuity contract itself.
These combined costs can have a significant effect on the investment performance
of the annuity contract. Even seemingly small differences in mutual fund and
annuity contract expenses can, over time, have a dramatic effect on performance.
The projected expenses for the Vanguard Variable Annuity Plan Contract are
substantially below the costs of other variable annuity contracts. For example,
on a $25,000 Contract the average expense ratio of other variable annuity
contracts was 2.09% as of December 31, 1997, compared to .71% for the Vanguard
Variable Annuity Plan Contract. (Source for competitors' data: Morningstar
Performance Report, January 1998.)
S U M M A R Y O F C O S T S O F I N V E S T I N G
I N T H E V A N G U A R D V A R I A B L E A N N U I T Y
P L A N C O N T R A C T
. No sales load
. No charge to make full or partial withdrawals
. No fee to exchange money among the Portfolios
. $25 Annual Contract Maintenance Fee on Contracts valued at less than
$25,000
. Annual Mortality and Expense Risk Charge: .28%
. Annual Administrative Expense Charge: .10%
. Fees and expenses paid by the Portfolios which ranged from .21% to .46% in
the fiscal year ending September 30, 1997
A fuller explanation of the expenses you would pay under the Contract follows.
Mortality and Expense Risk Charge
The Company charges a fee as compensation for bearing certain mortality and
expense risks under the Contract. The annual charge is assessed daily based on
the combined net assets of the Separate Account and Separate Account IV of
Peoples Benefit Life Insurance Company in the Fund, according to the following
schedule:
Rate For
Net Assets All Assets
--------------------------------------------- ----------
Up to $2.5 billion .30%
Over $2.5 billion and up to $5 billion .28%
Over $5 billion .27%
The charge is currently .28%.
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The mortality and expense risk rates described above cannot be increased. If the
charge is more than sufficient to cover actual costs or assumed risks, any
excess will be added to the Company's surplus. If the charges collected under
the Contract are not enough to cover actual costs or assumed risks, then the
Company will bear the loss.
A C L O S E R L O O K A T
The Mortality and Expense Risk Charge
The Company assumes mortality risk in two ways. First, where Contract Owners
elect an Annuity Payment Option under which the Company guarantees a number of
payments over a life or joint lives, the Company assumes the risk of making
monthly annuity payments regardless of how long all Annuitants may live. Second,
the Company assumes mortality risk in guaranteeing a minimum Death Benefit in
the event the Annuitant dies during the Accumulation Phase.
The expense risk the Company assumes is that the charge for administrative
expenses, which are guaranteed not to increase beyond the rates shown for the
life of the Contract, may not be great enough to cover the actual costs of
issuing and administering the Contract.
Administrative Expense Charge
The Company assesses each Contract an annual Administrative Expense Charge to
cover the cost of issuing and administering each Contract and of maintaining the
Separate Account. The Administrative Expense Charge is assessed daily at a rate
equal to .10% annually of the net asset value of the Separate.
Annual Contract Maintenance Fee
In certain situations, the Company charges an Annual Contract Maintenance Fee of
$25. The fee is to reimburse the Company for the costs it expects over the life
of the Contract for maintaining each Contract and the Separate Account.
The Company charges the fee if -
. Your Initial Purchase Payment is less than $25,000. In that case, your
Initial Purchase Payment is reduced by a pro rated amount of the $25 fee to
reflect the remaining portion of the calendar year of purchase.
. The Accumulated Value of your Contract is less than $25,000 on the last
Business Day of any year. In that case, the fee will be deducted on the
last Business Day of the year for the following year.
The fee is deducted proportionately from each of the Portfolios you have
selected.
Fund Operating Expenses
The value of the assets in the Separate Account will reflect the fees and
expenses paid by Vanguard Variable Insurance Fund. A complete description of
these expenses is found in the "Fee Table" section of this prospectus and in the
"Management of the Fund" section of the Fund's Statement of Additional
Information.
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TAXES
INTRODUCTION
The following discussion of annuity taxation is general in nature and is based
on the Company's understanding of the treatment of annuity contracts under
current federal income tax law, particularly Section 72 of the Internal Revenue
Code and various Treasury Regulations and Internal Revenue Service
interpretations dealing with Section 72. The discussion does not touch upon
state or local taxes. It is not tax advice. You should consult with a qualified
tax adviser about your particular situation to ensure that your purchase of a
Contract results in the tax treatment you desire. Additional discussion of tax
matters is included in the Statement of Additional Information.
TAXATION OF ANNUITIES IN GENERAL
Tax Deferral
Special rules in the Internal Revenue Code for annuity taxation exist today. In
general, those rules provide that you are not currently taxed on increases in
value under a Contract until you take some form of withdrawal or distribution
from it. However, it is important to note that, under certain circumstances, you
might not get the advantage of tax deferral, meaning that the increase in value
would be subject to current federal income tax. (See "Annuity Contracts Owned by
Non-Natural Persons," page x, and "Diversification Standards," page x.)
A C L O S E R L O O K A T
Tax Deferral
Tax deferral means no current tax on earnings in your Contract. The amount you
would have paid in income taxes can be left in the Contract and earn money for
you.
One tradeoff of tax deferral is that there are certain restrictions on your
ability to access your money, including penalty taxes for early withdrawals.
This is one reason why a variable annuity is intended as a long-term investment.
Another tradeoff is that, when funds are withdrawn, they are taxed at ordinary
income rates instead of capital gains rates, which apply to certain other sorts
of investments.
Taxation of Full and Partial Withdrawals
If you make a full or partial withdrawal (including a Systematic Withdrawal)
from a Non-Qualified Contract during the Accumulation Phase, you as Contract
Owner will be taxed at ordinary income rates on earnings you withdraw at that
time. For purposes of this rule, withdrawals are taken first from earnings on
the Contract and then from the money you invested in the Contract. This
"investment in the contract" can generally be described as the cost of the
Contract, and it generally includes all Purchase Payments minus any amounts you
have already received under the Contract that represented the return of invested
money. Also for purposes of this rule, a pledge or assignment of a Contract is
treated as a partial withdrawal from a Contract. (If you are contemplating using
your Contract as collateral for a loan, you may be asked to pledge or assign
it.)
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Taxation of Annuity Payments
When you take Annuity Payments in the Income Phase of a Non-Qualified Contract,
for tax purposes each payment is deemed to return to you a portion of your
investment in the Contract. Since with a Non-Qualified Contract you have already
paid taxes on those amounts (the Contract was funded with after-tax dollars),
you will not be taxed again on your investment - only on your earnings.
For fixed Annuity Payments from a Non-Qualified Contract, in general, the
Company calculates the taxable portion of each payment using a formula known as
the "exclusion ratio." This formula establishes the ratio that the investment in
the Contract bears to the total expected amount of Annuity Payments for the term
of the Contract. The Company then applies that ratio to each payment to
determine the non-taxable portion of the payment. The remaining portion of each
payment is taxable at ordinary income tax rates.
For variable Annuity Payments from a Non-Qualified Contract, in general, the
Company calculates the taxable portion of each payment using a formula that
establishes a specific dollar amount of each payment that is not taxed. To find
the dollar amount, the Company divides the investment in the Contract by the
total number of expected periodic payments. The remaining portion of each
payment is taxable at ordinary income tax rates.
Once your investment in the Contract has been returned, the balance of the
Annuity Payments represent earnings only and therefore are fully taxable.
Taxation of Withdrawals and Distributions From Qualified Contracts
Generally, the entire amount distributed from a Qualified Contract is taxable to
the Contract Owner. In the case of Qualified Contracts with after-tax
contributions, you may exclude the portion of each withdrawal or Annuity Payment
constituting a return of after-tax contributions. Once all of your after-tax
contributions 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.
Tax Withholding
Federal tax law requires that the Company withhold federal income taxes on all
distributions unless the recipient elects not to have any amounts withheld and
properly notifies the Company of that election. In certain situations, the
Company will withhold taxes on distributions to non-resident aliens at a flat
30% rate unless an exemption from withholding applies under an applicable tax
treaty.
Penalty Taxes on Certain Early Withdrawals
The Internal Revenue Code provides for a penalty tax in connection with certain
withdrawals or distributions that are includible in income. The penalty amount
is 10% of the amount includible in income that is received under an annuity.
However, there are exceptions to the penalty tax. For instance, it does not
apply to withdrawals: (i) made after the taxpayer reaches age 59 1/2; (ii) made
on or after the death of the Contract Owner
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or, where the Contract Owner is not an individual, on or after 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 Contracts);
(iii) attributable to the disability of the taxpayer which occurred after the
purchase of the Contract (as defined in the Internal Revenue Code); (iv) that
are part of a series of substantially equal periodic payments made at least
annually for the life (or life expectancy) of the taxpayer, or joint lives (or
joint life expectancies) of the taxpayer and his or her beneficiary; (v) from a
Qualified Contract (note, however, that other penalties may apply); (vi) under
an immediate annuity contract (as defined in the Internal Revenue Code); (vii)
that can be traced to an investment in the Contract prior to August 14, 1982; or
(viii) under a Contract that an employer purchases on termination of certain
types of qualified plans and that the employer holds until the employee
separates from service.
If the penalty tax does not apply to a withdrawal as a result of the application
of item (iv) above, and the series of payments is subsequently modified (for
some reason other than 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
(iv) 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
591/2, or (b) before the taxpayer reaches age 591/2.
For Qualified Contracts, other tax penalties may apply to certain distributions
as well as to certain contributions and other transactions.
The penalty tax may not apply to distributions from Qualified Contracts issued
under Section 408(b) of the Internal Revenue Code that you use to pay qualified
higher education expenses or the acquisition costs (up to $10,000) involved in
the purchase of a principal residence by a first-time homebuyer.
ANNUITY CONTRACTS OWNED BY NON-NATURAL PERSONS
Where a non-natural person (for example, a corporation) holds a Contract, that
Contract is generally not 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 considered taxable income each year.
This 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 estate of a decedent acquires a Contract,
where an employer purchases a Contract on behalf of an employee upon termination
of a qualified plan, or to an immediate annuity (as defined in the Internal
Revenue Code).
MULTIPLE-CONTRACTS RULE
All non-qualified annuity contracts issued by the same 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 includible in the
taxpayer's gross income. Thus, any amount received under any Contract prior to
the Contract's Annuity Date, such as a
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partial withdrawal, will be taxable (and possibly subject to the 10% federal
penalty tax) to the extent of the combined income in all such contracts. The
Treasury Department has specific authority to issue regulations that prevent the
avoidance of the multiple-contracts rules through the serial purchase of annuity
contracts or otherwise. In addition, there may be other situations in which the
Treasury Department may conclude that it would be appropriate to aggregate two
or more Contracts purchased by the same Contract Owner. Accordingly, a Contract
Owner should consult a tax adviser before purchasing more than one Contract or
other annuity contracts. (The aggregation rules do not apply to immediate
annuities (as defined in the Internal Revenue Code).)
TRANSFERS OF ANNUITY CONTRACTS
Any transfer of a Non-Qualified Contract during the Accumulation Phase for less
than full and adequate consideration will generally trigger income tax (and
possibly the 10% federal penalty tax) on the gain in the Contract to the
Contract Owner at the time of such transfer. The transferee's investment in the
Contract will be increased by any amount included in the Contract Owner's
income. This provision, however, does not apply to transfers between spouses or
former spouses incident to a divorce that are governed by Internal Revenue Code
Section 1041(a).
ASSIGNMENTS OF ANNUITY CONTRACTS
A transfer of ownership in a Contract, a collateral assignment, 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 this prospectus does not discuss. A Contract Owner considering
such a transfer or assignment of a Contract should contact a tax adviser about
the potential tax effects of such a transaction.
DIVERSIFICATION STANDARDS
To comply with certain regulations under Internal Revenue Code Section 817(h),
after a start-up period, each Subaccount of the Separate Account will be
required to diversify its investments in accordance with certain diversification
standards. A "look-through" rule applies that suggests that each Subaccount of
the Separate Account will be tested for compliance with the diversification
standards by looking through to the assets of the Portfolios in which each
Subaccount invests.
In connection with the issuance of temporary diversification regulations in
1986, the Treasury Department announced that such regulations did not provide
guidance on the extent to which Contract Owners may direct their investments to
particular subaccounts 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 rulings would provide. It is
possible that when the regulations or rulings are issued, the Contract may need
to be modified in order to remain in compliance. For these reasons, the Company
reserves the right to modify the Contract, as necessary, to maintain the
tax-deferred status of the Contract.
We intend to comply with the diversification regulations to assure that the
Contract continues to be treated as an annuity contract for federal income tax
purposes.
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QUALIFIED INDIVIDUAL RETIREMENT ANNUITIES
Generally, you may purchase Qualified Contracts only in connection with a
"rollover" of funds from another individual retirement annuity (IRA) or
qualified plan. Qualified Contracts must contain special provisions and are
subject to limitations on contributions and the timing of when distributions can
and must be made. Tax penalties may apply to contributions greater than
specified limits, loans, reassignments, distributions that do not meet specified
requirements, or in other circumstances. Anyone desiring to purchase a Qualified
Contract should consult a personal tax adviser.
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ACCESS TO YOUR MONEY
The value of your Contract can be accessed during the Accumulation Phase -
. by making a full or partial withdrawal
. by electing an Annuity Payment Option
. by your Beneficiary in the form of a Death Benefit
Full and Partial Withdrawals. You may withdraw all or part of your money at any
time during the Accumulation Phase of your Contract without a Company charge,
provided the Annuitant or Joint Annuitant is still living. All partial
withdrawals must be for at least $250.
On the date the Company receives your request for a full withdrawal, the amount
payable is the Accumulated Value.
- --------------------------------------------------------------------------------
Because you assume the investment risk under the Contract, the total amount paid
upon a full withdrawal of the Contract may be more or less than the total
Purchase Payments made (taking prior withdrawals into account).
- --------------------------------------------------------------------------------
To make a withdrawal, send your written request to the Vanguard Variable Annuity
Center. Your written request should include your Contract number, Social
Security number, the amount you wish to withdraw, how you want that amount
allocated among the various Portfolios, the signature of all Contract Owners,
and your federal tax withholding election.
Systematic Withdrawals. You may elect to have a specified dollar amount or a
percentage of the balance withdrawn from your Contract's Accumulated Value on a
monthly, quarterly, semiannual, or annual basis. The Company requires that you
maintain a minimum Contract balance of $10,000, and a minimum Portfolio balance
of $1,000 in order to establish the systematic withdrawal program for your
Contract. The minimum amount for each Systematic Withdrawal is $250.
You may elect this option by completing the Vanguard Variable Annuity Plan
Systematic Withdrawal Program Application Form. The Form must be signed by all
Contract Owners and must be signature-guaranteed if you are directing the
withdrawal payments to an address other than the Contract address.
The Company must receive your Form at least 30 days before the date you want
systematic withdrawals to begin. The Company will process each Systematic
Withdrawal on the date and at the frequency you specified in your Systematic
Withdrawal Program Application Form.
You may change the amount to be withdrawn and the percentage or the frequency of
distributions by telephone. Any other changes you make, including a change in
the destination of the check or your election to cancel this option, must be
made in writing, and should include signatures of all Contract Owners.
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Minimum Balance Requirements
The minimum required balance in any Portfolio is $1,000. If an exchange or
withdrawal would reduce the balance in a Portfolio to less than $1,000, the
Company will transfer the remaining balance to the other Portfolios under the
Contract on a pro rata basis. If the entire value of the Contract falls below
$1,000, and if you have not made a Purchase Payment within three years, the
Company may notify you that the Accumulated Value of your Contract is below the
minimum balance requirement. In that case, you will be given 60 days to make an
Additional Purchase Payment before your Contract is liquidated. The Company
would then promptly pay proceeds to the Contract Owner. The proceeds would be
taxed as a withdrawal from the Contract. Full withdrawal will result in an
automatic termination of the Contract.
Payment of Full or Partial Withdrawal Proceeds
The Company will pay cash withdrawals within seven days after receipt of your
written request for withdrawal except in one of the following situations, in
which the Company may delay the payment beyond seven days:
. the New York Stock Exchange is closed on a day that is not a weekend or a
holiday, or trading on the New York Stock Exchange is otherwise restricted
. an emergency exists as defined by the Securities and Exchange Commission
(the "SEC"), or the SEC requires that trading be restricted
. the SEC permits a delay for your protection as a Contract Owner
. the payment is derived from premiums paid by check, in which case the
Company may delay payment until the check has cleared your bank
- --------------------------------------------------------------------------------
Taxation of Withdrawals
For important information on the tax consequences of withdrawals, see "Taxation
of Full and Partial Withdrawals," page x, and "Penalty Taxes on Certain Early
Withdrawals," page x.
- --------------------------------------------------------------------------------
Tax Withholding on Withdrawals
If you do not provide the Company with a written request not to have federal
income taxes withheld when you request a full or partial withdrawal, federal tax
law requires the Company to withhold federal income taxes from the taxable
portion of any withdrawal and send that amount to the federal government.
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PERFORMANCE
Standardized Performance
From time to time, the Company may advertise the yield and total return
investment performance of a Portfolio for various periods, including
quarter-to-date, year-to-date, one-year, five-year, and since inception. The
Company will calculate advertised yields and total returns according to
standardized methods prescribed by the SEC, so that all charges and expenses
attributable to the Contract will be included. Including these fees has the
effect of decreasing 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.
Non-Standardized Performance
The Company may also advertise total return or other performance data in
non-standardized formats that do not reflect the Annual Contract Maintenance
Fee.
Not Indications of Future Performance
The performance measures discussed above are not intended to indicate or predict
future performance.
Statement of Additional Information
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 Portfolio's performance.
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DEATH BENEFIT
In General
If the Annuitant dies during the Accumulation Phase, the Beneficiary will
receive the Death Benefit. The Death Benefit is either the then-current
Accumulated Value of the Contract or the sum of all Purchase Payments (minus any
partial withdrawals and any applicable Premium Taxes) - whichever is greater.
The Beneficiary may elect to receive these amounts as a lump sum or as Annuity
Payments.
Federal tax law requires that if a Contract Owner is a natural person and dies
before the Annuity Date, then the entire value of the Contract must be
distributed within five years of the date of death of the Contract Owner. If the
Contract Owner is not a natural person, the death of the Primary Annuitant
triggers the same distribution requirement. Special rules may apply to a
surviving spouse.
Death of the Annuitant During the Accumulation Phase
If the Annuitant dies during the Accumulation Phase, the Beneficiary will be
entitled to the Death Benefit. When it receives Due Proof of Death of the
Annuitant, the Company will calculate the Death Benefit. The Beneficiary can
choose to receive the amount payable in a lump-sum cash benefit or under one of
the Annuity Payment Options. The Contract Owner can choose an Annuity Payment
Option for the Beneficiary before the Annuitant's death. However, if the
Contract Owner does not make such a choice and the Company has not already paid
a cash benefit, the Beneficiary may choose a payment option after the
Annuitant's death.
Paid as a lump sum, the Death Benefit is the greater of:
(1) the Accumulated Value on the date we receive Due Proof of Death; or
(2) the amount of all Purchase Payments made to date minus the amount of
all partial withdrawals and Premium Taxes, if any.
Paid under one of the Annuity Payment Options, the Death Benefit will be based
on the greater of:
(1) the Accumulated Value on the Annuity Date elected by the Beneficiary
and approved by the Company; or
(2) the amount of all Purchase Payments minus the amount of all partial
withdrawals and Premium Taxes, if any.
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D E F I N I T I O N
Due Proof of Death
When the term "Due Proof of Death" is used in this prospectus we mean any of the
following:
. a certified death certificate
. a certified decree of a court of competent jurisdiction as to the finding
of death
. a written statement by a medical doctor who attended the deceased
. any other proof satisfactory to the Company
- --------------------------------------------------------------------------------
Death of the Annuitant During the Income Phase
The Death Benefit, if any, payable if the Annuitant dies during the Income Phase
depends on the Annuity Payment Option selected. Upon the Annuitant's death, the
Company will pay the Death Benefit, if any, to the Beneficiary under the Annuity
Payment Option in effect. For instance, if the Life Annuity With Period Certain
option has been elected, and if the Annuitant dies during the Income Phase, then
any unpaid payments certain will be paid to the Beneficiary.
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A Word About Joint Annuitants
The Contract permits you as Contract Owner to name a Joint Annuitant. This can
have different effects depending on whether the Contract is in the Accumulation
Phase or the Income Phase.
During the Accumulation Phase, the Death Benefit is payable only after the death
of both the Annuitant and the Joint Annuitant.
During the Income Phase, it will not matter that you have named a Joint
Annuitant unless you have chosen an Annuity Payment Option, such as the Joint
and Last Survivor Annuity option, that pays over the life of more than one
person. Therefore, if you have chosen an Annuity Payment Option that provides
income over the life of someone other than the person named as Joint Annuitant,
the Joint Annuitant's death during the Income Phase will have no effect on the
benefits due under the Contract.
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Designation of a Beneficiary
The Contract Owner may select one or more Beneficiaries and name them in the
Enrollment Form. Thereafter, while the Annuitant or Joint Annuitant is living,
the Contract Owner may change the Beneficiary by written notice. The change will
take effect as of the date the Contract Owner signs the notice, but it will not
affect any payment made or any other action taken before the Company
acknowledges the notice. The Contract Owner may also make the designation of
Beneficiary irrevocable by sending written notice to the Company 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 during the Accumulation Period, the following will apply
unless the Contract Owner has made other provisions.
. If there is more than one Beneficiary, each will share in the Death Benefit
equally.
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. If one or two or more Beneficiaries have already died, the Company will pay
that share of the Death Benefit equally to the survivor(s).
. If no Beneficiary is living, the Company will pay the proceeds to the
Contract Owner.
. If a Beneficiary dies at the same time as the Annuitant, the Company will
pay the proceeds as though the Beneficiary 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, the Company will pay proceeds
as though the Beneficiary had died first.
If a Beneficiary who is receiving Annuity Payments dies, the Company will pay
any remaining Payments Certain 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 not living at this
time, this right will pass to his or her estate.
Death of the Contract Owner
Death of the Contract Owner During the Accumulation Phase. With two exceptions,
federal tax law requires that when either the Contract Owner or the Joint Owner
(if any) dies during the Accumulation Phase, the Company must pay out the entire
value of the Contract within five years of the date of death. First exception:
If the entire value is to be distributed to the Owner's Designated Beneficiary,
he or she may elect to have it paid under an Annuity Payment Option over his or
her life or over a period certain no longer than his or her life expectancy as
long as the payments begin within one year of the Contract Owner's death. Second
exception: If the Owner's Designated Beneficiary is the spouse of the Contract
Owner (or Joint Owner), the spouse may elect to continue the Contract in his or
her name as Contract Owner indefinitely and to continue deferring tax on the
accrued and future income under the Contract. ("Owner's Designated Beneficiary"
means the natural person whom the Contract Owner names as a beneficiary and who
becomes the Contract Owner upon the Contract Owner's death.) If the Contract
Owner and the Annuitant are the same person, then upon that person's death the
Beneficiary is entitled to the Death Benefit. In this regard, see "Death of the
Annuitant During the Accumulation Phase," page x.
Death of the Contract Owner During the Income Phase. Federal tax law requires
that when either the Contract Owner or the Joint Owner (if any) dies during the
Income Phase, the Company must pay the remaining portions of the value of the
Contract at least as rapidly as under the method of distribution being used on
the date of death.
Non-Natural Person as Contract Owner. Where the Contract Owner is not a natural
person (for example, is a corporation), the death of the "primary Annuitant" is
treated as the death of the Contract Owner for purposes of federal tax law. (The
Internal Revenue Code defines a "primary Annuitant" as the individual who is of
primary importance in affecting the timing or the amount of payout under the
Contract.) In addition, where the Contract Owner is not a natural person, a
change in the identity of the "primary Annuitant" is also treated as the death
of the Contract Owner for purposes of federal tax law.
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Payment of Lump-Sum Death Benefits
The Company will pay lump-sum Death Benefits within seven days after the
election to take a lump sum becomes effective except in one of the following
situations, in which the Company may delay the payment beyond seven days:
. the New York Stock Exchange is closed on a day that is not a weekend or a
holiday, or trading on the New York Stock Exchange is otherwise restricted
. an emergency exists as defined by the SEC, or the SEC requires that trading
be restricted
. the SEC permits a delay for your protection as a Contract Owner
. the payment is derived from premiums paid by check, in which case the
Company may delay payment until the check has cleared your bank
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OTHER INFORMATION
AUSA Life Insurance Company, Inc. (the "Company," "We," "Us," "Our")
AUSA Life Insurance Company, Inc. is a stock life insurance company incorporated
under the laws of the state of New York on October 3, 1947, with offices at 666
Fifth Avenue, New York, New York 10103. It is principally engaged in offering
life insurance and annuity contracts, and is licensed in the District of
Columbia and all states except Hawaii.
As of December 31, 1997, the Company had statutory assets of approximately $9.9
billion. It is a 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
services. AEGON N.V. of the Netherlands indirectly owns all of the stock of
AEGON USA, Inc. AEGON N.V., a holding company, conducts its business through
subsidiary companies engaged primarily in the insurance business.
The First Providian Merger. 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 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 approving the merger on May 26, 1998, and
May 29, 1998, respectively, the boards of directors of the Company and First
Providian determined that the merger of two financially strong stock life
insurance companies would result in an overall enhanced capital position and
reduced expenses, which, together, 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.
AUSA Life Insurance Company, Inc. Separate Account B
The Separate Account was established by First Providian, a former affiliate of
the Company, as a separate account under the laws of the state of New York on
November 2, 1987. On October 1, 1998, First Providian, 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 registered with the SEC under
the Investment Company Act of 1940 (the "1940 Act"). Such registration does not
signify that the SEC supervises the management or the investment practices or
policies of the Separate Account.
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The Company owns the assets of the Separate Account, and the obligations under
the Contract are obligations of the Company. These assets are held separately
from the other assets of the Company and are not chargeable with liabilities
incurred in any other business operation 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 assets 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 investment performance of the Company's general
account assets or any other separate account the Company maintains.
The Separate Account has thirteen Subaccounts, each of which invests solely in a
corresponding Portfolio of the Fund. Additional Subaccounts may be established
at the Company's discretion. The Separate Account meets the definition of a
"separate account" under Rule O-1(e)(1) of the 1940 Act.
Group Contract
The Contract described here is a group contract, participation in which will be
evidenced by a certificate that the Company will issue to the Contract Owner.
When the word "Contract" appears in this prospectus, it means the certificate
issued to a Contract Owner.
Contract Owner ("You," "Your")
The Contract Owner is the person or persons designated as the Contract Owner in
the Enrollment Form to participate in the Contract. The term shall also include
any person named as Joint Owner. A Joint Owner shares ownership in all respects
with the Owner. The Owner has the right to assign ownership to a person or party
other than himself.
Payee
The Payee is the Contract Owner, Annuitant, Beneficiary, or any other person,
estate, or legal entity to whom benefits are to be paid.
Free Look Periods
There are two different Free Look Periods depending on whether the Contract is a
replacement or not.
Free Look Period for Non-Replacement Contracts. If the Contract is not a
replacement of an existing annuity contract or life insurance or endowment
policy, the Contract provides for a Free Look Period of 20 days after the
Contract Owner receives the Contract plus 5 days for mailing. The Contract Owner
may cancel the Contract during the Free Look Period by returning it to the
Vanguard Variable Annuity Center, P.O. Box 1103, Valley Forge, PA 19482-1103.
Upon cancellation, the Contract is treated as void from the Contract Date and
the Contract Owner will receive the greater of the Purchase Payments made under
the Contract and any fees or other charges or the
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Accumulated Value of the Contract as of the day the Contract is received by the
Company.
Free Look Period for Replacement Contracts. If the Contract is a replacement of
an existing annuity contract or life insurance or endowment policy, a Free Look
Period exists for 60 days after the Contract Owner receives the Contract plus 5
days for mailing. Upon cancellation of a replacement Contract, the Contract is
treated as void from the Contract Date and the Contract Owner will receive the
greater of the Purchase Payments made under the Contract and any fees or other
charges or the Accumulated Value of the Contract as of the day the Company
receives the Contract.
If the amount returned is based on Purchase Payments, the Contract Owner will
also receive the amount of any Mortality and Expense Risk Charges and
Administrative Expense Charges exacted to date.
If the amount returned is based on the Accumulated Value, the Contract Owner
will also receive the amount of any prorated Annual Contract Maintenance Fee and
the amount of any Mortality and Expense Risk Charges and Administrative Expense
Charges exacted to date. (The prorated Annual Contract Maintenance Fee is
already included when calculating the amount returned based on Purchase
Payments.)
Withdrawals are not permitted during the Free Look Period.
Reinstatements
The Company occasionally receives requests to reinstate a Contract whose funds
had been transferred to another company via an exchange under Internal Revenue
Code Section 1035 or a trustee-to-trustee transfer under the Internal Revenue
Code. In this situation, the Company will require the Contract Owner to replace
the same total amount of money in the applicable Subaccounts as was taken from
them to effect the transfer. The total dollar amount of funds reapplied to the
Separate Account will be used to purchase a number of Accumulation Units
available for each Subaccount based on the Accumulation Unit Values at the date
of Reinstatement (within two days of the date the funds were received by the
Company). It should be noted that the number of Accumulation Units available on
the Reinstatement date may be more or less than the number surrendered for the
transfer. Contract Owners should consult a qualified tax adviser concerning the
tax consequences of any Internal Revenue Code Section 1035 exchanges or
reinstatements.
Administrative Services
Administrative Services are provided by The Vanguard Group, Inc., the Vanguard
Variable Annuity Center, 100 Vanguard Boulevard, Malvern, PA 19355. In addition,
CSC Financial Services Group, 301 West 11th Street, Kansas City, MO 64105,
provides some administrative services.
Distributor of the Contracts
41
<PAGE>
The Vanguard Group, Inc., through its wholly owned subsidiary, Vanguard
Marketing Corp., is the principal distributor 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 Additional Information. The principal business address
for the Vanguard Group, Inc. is 100 Vanguard Boulevard, Malvern, PA 19355.
Voting Rights
The Fund does not hold regular meetings of shareholders. The Trustees of the
Fund may call special meetings of shareholders as the 1940 Act or other
applicable law may require. To the extent required by law, the Company will vote
the Portfolio shares held in the Separate Account at shareholder meetings of the
Fund in accordance with instructions received from persons having voting
interests in the corresponding Portfolio. The Company will vote Fund shares as
to which no timely instructions are received and those shares held by the
Company as to which Contract Owners have no beneficial interest in proportion to
the voting instructions that are received 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 basis 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 Accumulated Value is allocated. The number of votes which
are available to a Contract Owner will be determined by dividing the Accumulated
Value attributable to a Portfolio by the net asset value per share of the
applicable Portfolio. After the Annuity Date, the person receiving Annuity
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 decrease. 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 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.
Additions, deletions, or substitutions of investments
The Company retains the right, subject to any applicable law, to make certain
changes. The Company reserves the right to eliminate the shares of any of the
Portfolios and to substitute shares of another Portfolio of the Fund or of
another registered open-end management investment company, if the shares of the
Portfolios are no longer available for investment or if, in the Company's
judgment, investment in any Portfolio would be inappropriate in view of the
purposes of the Separate Account. To the extent the 1940 Act requires,
substitutions of shares attributable to a Contract Owner's interest in a
42
<PAGE>
Portfolio will not be made until SEC approval has been obtained and the Contract
Owner has been notified of the change.
The Company may establish new Portfolios when marketing, tax, investment, or
other conditions so warrant. The Company will make any new Portfolios available
to existing Contract Owners on a basis the Company will determine. The Company
may also eliminate one or more Portfolios if marketing, tax, investment, or
other conditions so warrant.
In the event of any such substitution or change, the Company may, by appropriate
endorsement, make whatever changes in the Contracts may be necessary or
appropriate to reflect such substitution or change. Furthermore, if deemed to be
in the best interests of persons having voting rights under the Contracts, the
Company may operate the Separate Account as a management company under the 1940
Act or any other form permitted by law, may deregister the Separate Account
under the 1940 Act in the event such registration is no longer required, or may
combine the Separate Account with one or more other separate accounts.
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 communications systems,
to determine if they are Year 2000 compatible. The Plan provides for a
management process that ensures that when a particular system, or software
application, is determined to be "non-compliant" the proper steps are in place
to either remedy the "non-compliance" or cease using the particular system or
software. The Plan also provides that the Chief Information Officer report to
the Board of Directors as to the status of the efforts under the Plan on a
regular and routine 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 applications in the inventory to determine the
most prudent manner to move them to Year 2000 compliance, if required; (3) to
estimate budgets, resources and schedules for the migration of any "affected"
applications to Year 2000 compliance; and (4) to define testing and deployment
requirements to successfully manage validation and re-deployment of any changed
code. It is anticipated that all mission-critical systems are Year 2000
compliant as of December 31, 1998, with validation testing to continue through
June 1999. As of the date of this Prospectus, the Company has identified and
made available what it believes are the appropriate 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 systems or equipment
addresses Year 2000 data prior to the Year 2000). Even with the appropriate and
diligent pursuit of a
43
<PAGE>
well conceived response plan, including testing procedures, there is no
certainty that the 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 parties beyond its knowledge or control.
Financial Statements
The audited supplemental statutory-basis financial statements of the Company and
the financial statements of the Separate Account (as well as the Independent
Auditors' Reports on them) are contained in the Statement of Additional
Information.
Auditors
Ernst & Young LLP serves as independent auditors for the Company and the
Separate Account and audits their financial statements annually.
Legal Matters
The law firm of Jorden Burt Boros Cicchetti Berenson & Johnson LLP, of
Washington, D.C., has provided legal advice concerning the issue and sale of the
Contract under the applicable federal securities laws. On behalf of the Company,
Gregory E. Miller-Breetz, Esquire, has passed upon all matters of New York law
pertaining to the validity of the Contract and the Company's right to issue the
Contract.
44
<PAGE>
TABLE OF CONTENTS FOR THE VANGUARD VARIABLE ANNUITY PLAN CONTRACT
STATEMENT OF ADDITIONAL INFORMATION
Page
----
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
CONFLICTS OF INTEREST WITH OTHER SEPARATE ACCOUNTS....................... B-9
THE COMPANY.............................................................. B-9
TAXES.................................................................... 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
45
<PAGE>
Appendix
CONDENSED The information presented below reflects the operations of the
FINANCIAL Subaccounts in connection with the individual variable annuity
INFORMATION contracts offered through the First Providian Life & Health
Insurance Company Separate Account B, which was acquired intact
by AUSA Life Insurance Company, Inc. on October 1, 1998. As of
October 1, 1998, a group variable annuity contract replaced the
individual variable annuity contract, and new individual variable
annuity contracts no longer are offered for sale. The Accumulation
Unit Values and the number of Accumulation Units outstanding for
each Subaccount for 1992 through 1997 are as follows:
<TABLE>
<CAPTION>
For the period December 1, 1992 through December 31, 1997
--------------------------------------------------------------------------------
High
Money High-Grade Yield Short-Term Diversified Equity
Market Bond Bond Corporate Balanced Value Income
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value as of:
Start Date* ........................... 1.061 11.489 10.000 10.000 11.098 10.000 10.000
12/31/92 .............................. 1.064 11.656 . . 11.514 . .
12/31/93 .............................. 1.091 12.514 . . 12.961 . 10.488
12/31/94 .............................. 1.130 12.290 . . 12.815 . 10.304
12/31/95 .............................. 1.191 14.437 . . 16.885 . 14.239
12/31/96 .............................. 1.250 14.882 10.871 . 19.532 . 16.820
12/31/97 .............................. 1.314 16.219 12.135 . 23.946 . 22.503
Number of units outstanding as of:
12/31/92 .............................. 1,660 11 . . 9 . .
12/31/93 .............................. 4,079 271 . . 636 . 290
12/31/94 .............................. 5,365 526 . . 745 . 306
12/31/95 .............................. 9,080 622 . . 766 . 380
12/31/96 .............................. 13,590 689 253 . 852 . 525
12/31/97 .............................. 15,573 912 645 . 1,035 . 819
</TABLE>
(Units are shown in thousands)
<TABLE>
<CAPTION>
For the period December 1, 1992 through December 31, 1997
--------------------------------------------------------------------------------
Small
Equity Mid-Cap REIT Company
Index Growth Index Index Growth International
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accumulation unit value as of:
Start Date* ........................... 11.596 10.000 10.000 10.000 10.000 10.000
12/31/92 .............................. 12.039 . . . . .
12/31/93 .............................. 13.144 10.569 . . . .
12/31/94 .............................. 13.224 10.964 . . . 10.128
12/31/95 .............................. 18.073 15.089 . . . 11.678
12/31/96 .............................. 22.098 19.057 . . 9.725 13.319
12/31/97 .............................. 29.301 24.034 . . 10.970 13.708
Number of units outstanding as of:
12/31/92 .............................. 33 . . . . .
12/31/93 .............................. 440 220 . . . .
12/31/94 .............................. 534 457 . . . 322
12/31/95 .............................. 784 620 . . . 433
12/31/96 .............................. 1,035 906 . . 246 698
12/31/97 .............................. 1,392 1,187 . . 743 833
</TABLE>
(Units are shown in thousands)
* Date of commencement of operations for the Money Market Subaccount was
December 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
Short-Term Corporate, Diversified Value, Mid-Cap Index, and REIT Index
Subaccounts had not commenced operation as of December 29, 1998.
46
<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 April 30, 1999 by calling
1-800-522-5555, or writing to Vanguard Variable Annuity Center, P.O. Box 1103,
Valley Forge, PA 19482-1103. Terms used in the current Prospectus for the
Contract 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.
April 30, 1999
<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
CONFLICTS OF INTEREST WITH OTHER SEPARATE ACCOUNTS...................... B-9
THE COMPANY............................................................. B-9
TAXES................................................................... 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>
<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 enrollment form 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 enrollment form. 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 effec-
tive 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. The yield
and total return performance information presented below reflects the opera-
tions of the Subaccounts in connection with the individual variable annuity
contracts offered through the First Providian Life & Health Insurance Company
Separate Account B, which was acquired intact by AUSA Life Insurance Company,
Inc., on October 1, 1998. As of October 1, 1998, new individual variable annu-
ity contracts no longer are offered for sale.
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 re-
sulting 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]
-----
c X d
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%
Short-Term Corporate Subaccount........................................ --
Balanced Subaccount.................................................... 3.26%
Diversified Value Subaccount........................................... --
Equity Income Subaccount............................................... 2.33%
Equity Index Subaccount................................................ 1.15%
Growth Subaccount...................................................... 0.41%
Mid-Cap Index Subaccount............................................... --
REIT Index Subaccount.................................................. --
Small Company Growth Subaccount........................................ 0.15%
International Subaccount............................................... --
</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, calculated 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%
Short-Term Corporate
Subaccount............. -- -- -- -- -- --
Balanced Subaccount..... 22.58% 23.14% 15.73% 22.58% 22.58% 14.08%
Diversified Value
Subaccount............. -- -- -- -- -- --
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%
Mid-Cap Index
Subaccount............. -- -- -- -- -- --
REIT Index
Subaccount............. -- -- -- -- -- --
Small Company Growth
Subaccount............. 12.79% -- -- 12.79% 12.79% 6.03%
International
Subaccount............. 2.91% 10.59% -- 2.91% 2.91% 9.18%
</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%
Short-Term Corporate Subaccount..................... -- -- --
Balanced Subaccount................................. 1.61% 2.77% 9.06%
Diversified Value Subaccount........................ -- -- --
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%
Mid-Cap Index Subaccount............................ -- -- --
REIT Index Subaccount............................... -- -- --
Small Company Growth Subaccount..................... -1.00% -8.22% 9.59%
International Subaccount............................ 0.50% -9.61% -11.42%
</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%
Short-Term Corporate
Subaccount............. -- -- -- -- --
Balanced Subaccount..... 1.61% 2.77% 9.07% 22.60% 115.77%
Diversified Value
Subaccount............. -- -- -- -- --
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%
Mid-Cap Index
Subaccount............. -- -- -- -- --
REIT Index
Subaccount............. -- -- -- -- --
Small Company Growth
Subaccount............. -0.99% -8.22% 9.60% 12.80% 9.70%
International
Subaccount............. 0.50% -9.60% -11.47% 2.92% 37.08%
</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%
Short-Term Corporate Subaccount..... -- -- -- --
Balanced Subaccount................. 22.60% 23.17% 15.77% 14.13%
Diversified Value Subaccount........ -- -- -- --
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%
Mid-Cap Index Subaccount............ -- -- -- --
REIT Index Subaccount............... -- -- -- --
Small Company Growth Subaccount..... 12.80% -- -- 6.05%
International Subaccount............ 2.92% 10.62% -- 9.22%
</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%
Short-Term Corporate Subaccount............................. --
Balanced Subaccount......................................... 22.60%
Diversified Value Subaccount................................ --
Equity Income Subaccount.................................... 33.78%
Equity Index Subaccount..................................... 32.59%
Growth Subaccount........................................... 26.12%
Mid-Cap Index Subaccount.................................... --
REIT Index Subaccount....................................... --
Small Company Growth Subaccount............................. 12.80%
International Subaccount.................................... 2.92%
</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% -- -- -- -- --
Short-Term Corporate Subaccount..... -- -- -- -- -- --
Balanced Subaccount................. 22.60% 15.68% 31.76% -1.13% 12.56% 6.59%
Diversified Value Subaccount........ -- -- -- -- -- --
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% -- --
Mid-Cap Index Subaccount............ -- -- -- -- -- --
REIT Index Subaccount............... -- -- -- -- -- --
Small Company Growth Subaccount..... 12.80% -- -- -- -- --
International Subaccount............ 2.92% 14.05% 15.31% -- -- --
</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.
CONFLICTS OF INTEREST WITH OTHER SEPARATE ACCOUNTS
The Portfolios may be made available to registered separate accounts offering
variable annuity and variable life products of the Company or other insurance
companies. Although the Company believes it is unlikely, a material conflict
could arise between the interests of the Separate Account and one or more of the
other participating separate accounts. In the event a material conflict does
exist, the affected insurance companies agree to take any necessary steps,
including removing their separate accounts from the Fund if required by law, to
resolve the matter. See the Fund's prospectus for more information.
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.
TAXES
The Company is taxed as a life insurance company under Part I of Subchapter L
of the Internal Revenue Code. Since the Separate Account is not a separate
entity from the Company and its operations form a part of the Company, the
Separate Account will not be taxed separately as a "regulated investment
company" under Subchapter M of the Internal Revenue Code. Investment income and
realized capital gains on the assets of the Separate Account are reinvested and
taken into account in determining the Accumulated Value. Under existing federal
income 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.
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, the Company may make charges
for such taxes. 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 Contracts. 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 income taxes related to the Separate Account. Such
a charge may be made in future years for any federal income taxes the Company
incurs. This might become necessary if the Company ultimately determines that
its tax treatment is not what it currently believes it to be, if there are
changes in the federal income tax treatment of annuities at the corporate level,
or if there is a change in the Company's tax status. If the Company should incur
federal income taxes attributable to investment 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.
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
B-9
<PAGE>
addition, the Company is subject to regulation under the insurance laws of
other jurisdictions in which it may operate.
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/6/
(5) Form of enrollment form/6/
(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/7/
(b) Consent of Counsel/7/
(10) Consent of Independent Auditors/7/
(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/ Incorporated by reference from Initial Registration Statement on Form N-4 of
AUSA Life Insureance Company Separate Account B, File No. 333-65151 (as
filed on October 1, 1998).
/7/ Filed herwith.
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 Administrator of
Corporation Financial Services Structured Settlements
Group, Inc.
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 26.77% First AUSA Insurance
Insurance Co. Life Ins. Co.
73.23% Capital General
Dev. Corp.
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
JMH Operating Company, Mississippi 100% Peoples Security Real estate holdings
Inc. Life Insurance Company
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 agent
Group, Inc.
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 99.0% Monumental Life Holding Company
Ins. Co.
1% CGC
Commonwealth General LLC Turks & 100% CGC Special-purpose
Caicos Islands subsidiary
Peoples Benefit Life Missouri 3.7% CGC Insurance company
Insurance Company 20% Capital Liberty,
L.P.
76.3% Monumental Life
Ins. Co.
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 November 30, 1998 there were 67 contract owners.
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 (a)(1)
of Rule 485 and has caused this Registration Statement to be signed on its
behalf, in the City of Louisville and Commonwealth of Kentucky, on this 28th day
of December, 1998.
AUSA LIFE INSURANCE COMPANY, INC.
SEPARATE ACCOUNT C
Registrant
AUSA LIFE INSURANCE COMPANY, INC.
Depositor
/s/ Tom A. Schlossberg
-------------------------
Tom A. Schlossberg
President
By: /s/ Gregory E. Miller-Breetz
--------------------------------
Gregory E. Miller-Breetz
Attorney-In-Fact
<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 December 28, 1998
- -----------------------------------
William Brown, Jr.
/s/ Larry G. Brown Director December 28, 1998
- -----------------------------------
Larry G. Brown
/s/ William L. Busler Director December 28, 1998
- -----------------------------------
William L. Busler
/s/ Jack R. Dykhouse Director December 28, 1998
- -----------------------------------
Jack R. Dykhouse
/s/ Steven E. Frushtick Director December 28, 1998
- -----------------------------------
Steven E. Frushtick
/s/ Carl T. Hanson Director December 28, 1998
- -----------------------------------
Carl T. Hanson
/s/ B. Larry Jenkins Director December 28, 1998
- -----------------------------------
B. Larry Jenkins
/s/ Colette Vargas Director December 28, 1998
- -----------------------------------
Colette Vargas
/s/ Vera F. Mihaic Director December 28, 1998
- -----------------------------------
Vera F. Mihaic
/s/ Peter P. Post Director December 28, 1998
- -----------------------------------
Peter P. Post
/s/ Tom A. Schlossberg Director (Principal December 28, 1998
- ----------------------------------- Executive Officer)
Tom A. Schlossberg
/s/ Cor H. Verhagen Director December 28, 1998
- -----------------------------------
Cor H. Verhagen
/s/ E. Kirby Warren Director December 28, 1998
- -----------------------------------
E. Kirby Warren
/s/ Brenda K. Clancy Treasurer (Chief December 28, 1998
- ----------------------------------- Accounting Officer
Brenda K. Clancy
</TABLE>
By: /s/ Gregory E. Miller-Breetz
- -----------------------------------
Gregory E. Miller-Breetz
Attorney-In-Fact
<PAGE>
SEPARATE ACCOUNT B
VANGUARD VARIABLE ANNUITY PLAN CONTRACT
INDEX TO EXHIBITS
EXHIBIT 9(a) OPINION AND CONSENT OF COUNSEL
EXHIBIT 9(b) CONSENT OF COUNSEL
EXHIBIT 10 CONSENT OF INDEPENDENT AUDITORS
<PAGE>
EXHIBIT 9(a)
December 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
Post-Effective Amendment No. 1 to Registration Statement on Form N-4 under the
Securities Act of 1933, as amended (the "1933 Act"), and Amendment No. 15 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 group 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. 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. Separate Account B is 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 are 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. 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
<PAGE>
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
- ----------------------------
Gregory E. Miller-Breetz
Attorney
2
<PAGE>
Exhibit 9(b)
December 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 Post-Effective Amendment No. 1 to the
Registration Statement on Form N-4 under the Securities Act of 1933, as amended
(the "1933 Act"), and Amendment No. 15 to the Registration Statement on Form N-4
under the Investment Company Act of 1940, as amended (the "1940 Act"), File Nos.
811-6298; 333-65151 (the "Registration Statement"), filed on or around December
28, 1998 by AUSA Life Insurance Company, Inc. and AUSA Life Insurance Company,
Inc. Separate Account B (funding the Vanguard Variable Annuity Plan--group
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
<PAGE>
[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" in the Prospectus and "Financial Statements" in the
Statement of Additional Information 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 (name changed to AUSA Life Insurance
Company, Inc. Separate Account B on October 1, 1998) 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. included in Post-
Effective Amendment No. 1 to the Registration Statement (Form N-4 No. 333-65151)
for AUSA Life Insurance Company, Inc. Separate Account B and related Prospectus
of the Vanguard Variable Annuity Plan Contract.
/s/ Ernst & Young LLP
Des Moines, Iowa
December 28, 1998
