<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1998.
REGISTRATION NO. 33-39946
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 10 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 12 [X]
FIRST PROVIDIAN LIFE & HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT B
(Exact Name of Registrant)
First Providian Life & Health Insurance Company
(Name of Depositor)
520 Columbia Drive
Johnson City, New York 13790
(Address of Depositor's Principal Executive Office)
Depositor's Telephone Number: (607) 772-8750
First Providian Life & Health Insurance Company
Kimberly A. Scouller, Esquire
Providian Center
P.O. Box 32830
400 West Market Street
Louisville, KY 40232
(Name and Address of Agent for Service)
Copy to:
Michael Berenson, Esquire
Ann B. Furman, Esq.
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):
[X] Immediately upon filing pursuant to paragraph (b) of Rule 485.
[_] On ___________ pursuant to paragraph (b)(1)(v) of Rule 485.
[_] 60 days after filing pursuant to paragraph (a)(1) of Rule 485.
[_] On ______ pursuant to paragraph (a)(1) of Rule 485.
[_] 75 days after filing pursuant to paragraph (a)(2) of Rule 485.
[_] On ______ pursuant to paragraph (a)(2) of Rule 485.
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<PAGE>
PURSUANT TO RULE 481
SHOWING LOCATION IN PART A (PROSPECTUS) AND PART B
(STATEMENT OF ADDITIONAL INFORMATION) OF REGISTRATION
STATEMENT OF INFORMATION REQUIRED BY FORM N-4
PART A
<TABLE>
<CAPTION>
ITEM OF
FORM N-4 PROSPECTUS CAPTION
<C> <S> <C>
1. Cover Page........................ Cover Page
2. Definitions....................... Glossary
3. Synopsis.......................... Highlights; Fee Table
4. Condensed Financial Information... Condensed Financial Information
5. General Description of Registrant,
Depositor, and Portfolio
Companies......................... First Providian Life & Health
Insurance Company; First
Providian Life & Health Insurance
Company Separate Account B;
Vanguard Variable Insurance Fund;
Voting Rights
6. Deductions and Expenses........... Charges and Deductions; Taxes;
Vanguard Variable Insurance Fund;
Expenses
7. General Description of Variable
Annuity Contracts................. Contract Features; Distribution
at Death Rules; Voting Rights;
Allocation of Purchase Payments;
Exchanges Among the Portfolios;
Additions, Deletions, or
Substitutions of Investments
8. Annuity Period.................... Annuity Payment Options
9. Death Benefit..................... Death of Annuitant Prior to
Annuity Date
10. Purchases and Contract Value...... Contract Application and Purchase
Payments; Accumulated Value
11. Redemptions....................... Full and Partial Withdrawals;
Annuity Payment Options; Free
Look Period
12. Taxes............................. Federal Tax Considerations
13. Legal Proceedings................. Part B: Legal Proceedings
14. Table of Contents for the
Statement of Additional
Information....................... Table of Contents for the
Vanguard Variable Annuity Plan
Contract Statement of Additional
Information
PART B
<CAPTION>
ITEM OF STATEMENT OF ADDITIONAL
FORM N-4 INFORMATION CAPTION
<C> <S> <C>
15. Cover Page........................ Cover Page
16. Table of Contents................. Table of Contents
17. General Information and History... The Company
18. Services.......................... Part A: Auditors; Safekeeping of
Account Assets; Distribution of
the Contract
19. Purchase of Securities Being
Offered........................... Distribution of the Contract
20. Underwriters...................... Distribution of the Contract
21. Calculation of Performance Data... Performance Information;
Additional Performance Measures
22. Annuity Payments.................. Computations of Variable Annuity
Income Payments
23. Financial Statements.............. Financial Statements
</TABLE>
<PAGE>
FIRST PROVIDIAN LIFE & HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT B
PROSPECTUS
FOR THE
VANGUARD VARIABLE ANNUITY PLAN CONTRACT
OFFERED BY
FIRST PROVIDIAN LIFE & HEALTH INSURANCE COMPANY
(A NEW YORK STOCK COMPANY)
APRIL 30, 1998
The Vanguard Variable Annuity Plan Contract (the "Contract"), offered through
First Providian Life & Health Insurance Company (the "Company"), provides a
vehicle for investing on a tax-deferred basis in nine Portfolios offered by
The Vanguard Group, Inc. The Contract is intended for retirement savings or
other long-term investment purposes.
The minimum Initial Purchase Payment for the Contract is $5,000; there are no
sales loads. The Contract is a flexible-premium deferred variable annuity that
provides a Free Look Period for a minimum of 10 days (20 days for replace-
ment), during which you may cancel your investment in the Contract.
Your Purchase Payments for the Contract may be allocated among nine
Subaccounts of First Providian Life & Health Insurance Company Separate Ac-
count B (the "Separate Account"). Assets of each Subaccount are invested in
corresponding Portfolios of Vanguard Variable Insurance Fund (the "Fund"), an
open-end, diversified investment company offered by The Vanguard Group, Inc.
The Fund currently offers nine Portfolios: the Money Market Portfolio, the
High-Grade Bond Portfolio, the High Yield Bond Portfolio, the Balanced Portfo-
lio, the Equity Income Portfolio, the Equity Index Portfolio, the Growth Port-
folio, the International Portfolio, and the Small Company Growth Portfolio.
Net Purchase Payments are automatically allocated to the Money Market Portfo-
lio until the end of your Free Look Period, and are subsequently allocated ac-
cording to your instructions.
The Contract's Accumulated Value varies with the investment performance of
the Portfolios you select. You bear all investment risk and investment results
for the Portfolios are not guaranteed.
The Contract offers a number of ways of withdrawing monies at a future date,
including a lump-sum payment and several Annuity Payment Options. Full or par-
tial withdrawals from the Contract may be made at any time before the Annuity
Date, although in many instances withdrawals made prior to age 59 1/2 are sub-
ject to a 10% penalty tax (and a portion may be subject to ordinary income
taxes). If you elect an Annuity Payment Option, Annuity Payments may be re-
ceived on a fixed or variable basis. You also have significant flexibility in
choosing the Annuity Date on which Annuity Payments begin.
This Prospectus sets forth the information you should know before investing
in the Contract; it must be accompanied by the current Prospectus for the Van-
guard Variable Insurance Fund. Please read both Prospectuses carefully and re-
tain them for future reference. A Statement of Additional Information for the
Contract Prospectus, which has the same date as this Prospectus, has also been
filed with the Securities and Exchange Commission, is incorporated herein by
reference and is available free by writing to Vanguard Variable Annuity Cen-
ter, P.O. Box 1103, Valley Forge, PA 19482-1103. The Table of Contents of the
Statement of Additional Information is included at the end of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMIS-
SION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
1
<PAGE>
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
HIGHLIGHTS........... 3
Fee Table............ 6
Glossary............. 9
Condensed Financial
Information......... 12
Financial Statements. 12
Yield and Total Re-
turn................ 12
The Company and the
Separate Account.... 13
Vanguard Variable
Insurance Fund...... 14
CONTRACT FEATURES.... 16
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Free Look Period.... 16
Contract Application
and Purchase
Payments........... 16
Allocation of
Purchase Payments.. 18
Charges and Deduc-
tions.............. 18
Accumulated Value... 20
Dividends and Capi-
tal Gains Treat-
ment............... 20
Annuity Express(TM). 20
Exchanges Among the
Portfolios......... 20
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Full and Partial
Withdrawals........ 21
Minimum Balance
Requirements....... 22
Designation of a
Beneficiary........ 23
Death of Annuitant
Prior to Annuity
Date............... 23
Annuity Date........ 24
Annuity Payment Op-
tions.............. 24
FEDERAL TAX
CONSIDERATIONS..... 27
General Information. 31
</TABLE>
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The Contract is only available in the State of New York.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESMAN, OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN
CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON.
2
<PAGE>
HIGHLIGHTS
REFER TO THE GLOSSARY (PAGE 9) FOR A DEFINITION OF ALL CAPITALIZED TERMS.
VANGUARD VARIABLE The Contract provides a vehicle for investing on a tax-
ANNUITY PLAN deferred basis in nine Portfolios offered by The Van-
CONTRACT guard Group, Inc. Monies may be subsequently withdrawn
from the Contract either as a lump sum or as an annuity
income. Because Accumulated Values and, to the extent
Variable Annuity Payments are selected, Annuity Payments
depend on the investment performance of the selected
Portfolios, you bear all investment risk for monies in-
vested under the Contract. The investment performance of
the Portfolios is not guaranteed.
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WHO SHOULD INVEST The Contract is designed for investors seeking long-
term, tax-deferred accumulation of funds, generally for
retirement but also for other long-term investment pur-
poses. The tax-deferred feature of the Contract is most
attractive to investors in high federal and state mar-
ginal tax brackets who have exhausted other avenues of
tax deferral, such as "pre-tax" contributions to employ-
er-sponsored retirement or savings plans. The Contract
is intended for long-term investors.
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INVESTMENT CHOICES Your investment in the Contract may be allocated among
several Subaccounts of the Separate Account. The
Subaccounts in turn invest exclusively in the nine Port-
folios of Vanguard Variable Insurance Fund. The Fund, a
member of The Vanguard Group of Investment Companies,
offers nine Portfolios: the Money Market Portfolio, the
High-Grade Bond Portfolio, the High Yield Bond Portfo-
lio, the Balanced Portfolio, the Equity Income Portfo-
lio, the Equity Index Portfolio, the Growth Portfolio,
the International Portfolio, and the Small Company
Growth Portfolio. The assets of each Portfolio are sepa-
rate, and each Portfolio has distinct investment objec-
tives and policies as described in the accompanying Fund
Prospectus. PAGE 14
- -------------------------------------------------------------------------------
FREE LOOK PERIOD The Contract provides a Free Look Period for a minimum
of 10 days during which you may cancel your investment
in the Contract. To cancel your investment, please re-
turn your Contract to us. When we receive the Contract,
you will be reimbursed for all Purchase Payments and any
corresponding appreciation credited to your account. PAGE
16
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HOW TO INVEST To invest in the Contract, please complete the accompa-
nying application form. The minimum Initial Purchase
Payment is $5,000; the minimum Portfolio balance is
$1,000; and subsequent Purchase Payments must be at
least $250. You may make subsequent Purchase Payments at
any time before the Con- tract's Annuity Date, as long
as the Annuitant or Joint Annuitant specified in the
Contract is living. Please note that when purchasing a
Contract, the Annuitant you name, and the Joint Annui-
tant if applicable, must be 75 years of age or less. PAGE
16
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3
<PAGE>
ALLOCATION OF Your Net Purchase Payments are initially allocated to
PURCHASE PAYMENTS the Money Market Portfolio when your Contract is issued.
Subsequently, at the end of the Free Look Period, and a
5-day grace period, the then-current Accumulated Value
of your Contract is allocated among the Portfolios of
the Fund in accordance with your application instruc-
tions. Requests to change the allocation of subsequent
Net Purchase Payments may be made in writing. PAGE 18
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CHARGES AND The Contract imposes no sales charges. The costs of the
DEDUCTIONS UNDER Contract include mortality and expense risk charges,
THE CONTRACT maintenance and administrative charges which cover the
cost of administering the Contract, and management, ad-
visory and other fees, which reflect the costs of Van-
guard Variable Insurance Fund. There are no charges un-
der the Contract for withdrawals, although withdrawals
made prior to age 59 1/2 may be subject to a 10% penalty
tax. PAGE 18
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EXCHANGES You may make exchanges among the Fund's Portfolios sub-
ject to certain restrictions on excess exchange activi-
ty. These restrictions do not apply, however, to non-
substantive exchanges or to the Money Market Portfolio.
No fee is imposed for exchanges. Exchanges must be for
at least $250, or, if less, for the entire value of the
Portfolio from which the exchange is made. PAGE 20
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FULL AND PARTIAL You may withdraw all or part of the Accumulated Value of
WITHDRAWALS the Contract before the earlier of the Annuity Date or
the Annuitant's death (or the Joint Annuitant's death,
if later). You may establish systematic withdrawals from
your Contract, and receive distributions at regular in-
tervals. Withdrawals made prior to age 59 1/2 may be
subject to a 10% penalty tax. PAGE 21
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DEATH BENEFIT If the Annuitant specified in your Contract dies prior
to the Annuity Date, the Annuitant's named Beneficiary
will receive the Death Benefit under the Contract. The
Death Benefit is the greater of the then-current Accumu-
lated Value of the Contract or the sum of all Purchase
Payments (less any partial withdrawals). Your Benefi-
ciary may elect to receive these proceeds as a lump sum
or as Annuity Payments. PAGE 23
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ANNUITY PAYMENT Beginning on the Annuity Date, you may withdraw monies
OPTIONS from the Contract in the form of an annuity income. As
the Contract Owner you may elect one of several Annuity
Payment Options. The Options provide a wide range of
flexibility in choosing an annuity payment schedule that
meets your par- ticular needs. Annuity Payments may be
received for a designated period or for life (for either
a single or joint life), with or without a guaranteed
number of payments. Annuity Payments can be fixed, or
can vary with the invest- ment performance of a Portfo-
lio of the Fund. You may elect a lump-sum payment prior
to the Annuity Date in lieu of Annuity Payments. PAGE 24
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4
<PAGE>
CONTRACT AND If you have questions about your Contract, please tele-
POLICYHOLDER phone the Vanguard Variable Annuity Center (1-800-258-
INFORMATION 4271). Please have ready the Contract number and the
Contract Owner's name when you call. As Contract Owner,
you will receive periodic statements confirming any
transactions that take place, as well as quarterly
statements and an Annual Report.
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5
<PAGE>
FEE TABLE The following table illustrates all expenses that you
would incur as a Contract Owner. The expenses and fees
shown are for the Fund's 1997 fiscal year. The purpose
of this table is to assist you in understanding the var-
ious costs and expenses that you would bear directly or
indirectly as a purchaser of the Contract. The fee table
reflects ALL expenses for both the Separate Account and
the Fund. For a complete discussion of contract costs
and expenses, see "Charges and Deductions."
<TABLE>
<CAPTION>
SEPARATE
OWNER TRANSACTION EXPENSES ACCOUNT
-------------------------------------------------------------------
<S> <C>
Sales Load Imposed on Purchases........................... None
Redemption Fees........................................... None
Exchange Fees............................................. None
-------------------------------------------------------------------
Annual Contract Maintenance Fee*.......................... $25
</TABLE>
* Applies to Contracts valued at less than $25,000 at
the time of initial purchase and on the last Business
Day of each year.
<TABLE>
<CAPTION>
SEPARATE
ANNUAL SEPARATE ACCOUNT EXPENSES ACCOUNT
---------------------------------------------------------------------
<S> <C>
Mortality and Expense Risk Charge**......................... .28%
Administrative Expense Charge............................... .10%
---
TOTAL ANNUAL SEPARATE ACCOUNT EXPENSES.................... .38%
===
</TABLE>
** This charge is currently reduced to 0.28% of all as-
sets when net assets attributable to the Separate Ac-
count (and Separate Account IV of Providian Life &
Health Insurance Company) exceed $2.5 billion. This
charge is further reduced to 0.27% of all assets when
net assets attributable to the Separate Account (and
Separate Account IV of Providian Life & Health
Insurance Company) exceed $5 billion. See "Mortality
and Expense--Risk Charge."
<TABLE>
<CAPTION>
HIGH SMALL
MONEY HIGH-GRADE YIELD EQUITY EQUITY COMPANY
ANNUAL FUND MARKET BOND BOND BALANCED INCOME INDEX GROWTH INTERNATIONAL GROWTH
OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management &
Administrative
Expenses............... .15% .21% .21% .19% .23% .20% .20% .22% .23%
Investment Advisory
Fees................... .02 .02 .06 .10 .10 .00 .15 .16 .12
12b-1 Distribution Fees. None None None None None None None None None
Other Expenses
Distribution Costs..... .03 .02 .02 .02 .02 .02 .02 .02 .01
Miscellaneous Expenses. .01 .04 .02 .01 .02 .01 .01 .06 .03
---- ---- ---- ---- ---- ---- ---- ---- ----
Total Other Expenses.... .04 .06 .04 .03 .04 .03 .03 .08 .04
---- ---- ---- ---- ---- ---- ---- ---- ----
TOTAL FUND OPERATING
EXPENSES............. .21% .29% .31% .32% .37% .23% .38% .46% .39%
==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
HIGH- HIGH SMALL
MONEY GRADE YIELD EQUITY EQUITY COMPANY
MARKET BOND BOND BALANCED INCOME INDEX GROWTH INTERNATIONAL GROWTH
TOTAL EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Separate Account
Expenses............... .38% .38% .38% .38% .38% .38% .38% .38% .38%
Total Fund Operating
Expenses............... .21 .29 .31 .32 .37 .23 .38 .46 .39
--- --- --- --- --- --- --- --- ---
GRAND TOTAL,
SEPARATE ACCOUNT AND
FUND
OPERATING
EXPENSES............. .59% .67% .69% .70% .75% .61% .76% .84% .77%
=== === === === === === === === ===
</TABLE>
The following example illustrates the expenses that you
would incur on a $1,000 purchase payment over various
periods, assuming (1) a 5% annual rate of return and (2)
redemption at the end of each period. As noted in the
table above, the Contract imposes no redemption fees of
any kind. Your expenses are identical whether you
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.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Portfolio............. $6 $19 $33 $ 75
High-Grade Bond Portfolio.......... 7 22 38 85
High Yield Bond Portfolio.......... 7 22 38 86
Balanced Portfolio................. 7 23 40 89
Equity Income Portfolio............ 8 24 42 94
Equity Index Portfolio............. 6 20 35 78
Growth Portfolio................... 8 25 43 96
International Portfolio............ 9 27 47 105
Small Company Growth Portfolio..... 8 25 43 97
</TABLE>
The Annual Contract Maintenance Fee is reflected in this
example as a percentage equal to the total amount of
fees collected during a year divided by the total
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 "Charges and Deductions."
THIS EXAMPLE SHOULD NOT BE CONSIDERED 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.
---------------------------------------------------------
AUTOMATED QUOTES The Vanguard Tele-Account Service provides access to Ac-
cumulation Unit Values (to two decimal places) and total
returns for all Portfolios, and yield information for
the Money Market, High-Grade Bond, and High Yield Bond
Portfolios of the Plan. Contract Owners may utilize this
service for 24-hour access to Plan Portfolio informa-
tion. To access the service you may call Tele-Account at
1-800-662-6273 (ON-BOARD) and follow the step-by-step
instructions, or
7
<PAGE>
speak with a Vanguard associate at 1-800-522-5555 to re-
quest 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 utilized from www.vanguard.com by double-clicking on
fund prices.
- -------------------------------------------------------------------------------
8
<PAGE>
GLOSSARY
ACCUMULATION UNIT--A measure of your ownership interest
in the Contract prior to the Annuity Date. Analogous,
though not identical, to a share owned in a mutual fund
account.
ACCUMULATION UNIT VALUE--The value of each Accumulation
Unit which is calculated each Valuation Period. Analo-
gous, though not identical, to the share price (net as-
set value) of a mutual fund.
ACCUMULATED VALUE--The value of all amounts accumulated
under the Contract prior to the Annuity Date, equivalent
to the Accumulation Units multiplied by the Accumulation
Unit Value. Analogous to the current market value of a
mutual fund account.
ANNUITANT--The person or persons whose life is used to
determine the duration of any Annuity Payments and, sub-
ject to the provision dealing with Joint Annuitants,
upon whose death, prior to the Annuity Date, benefits
under the Contract are paid.
ANNUITY DATE--The date on which Annuity Payments begin.
The Annuity Date is always the first day of the month
you specify.
ANNUITY PAYMENT--One of a series of payments made under
an Annuity Payment Option. Annuity Payments are based on
the lifetime or life expectancy of the Annuitant unless,
after the Contract Date, an Annuity Income Option which
pays for a certain period only is elected.
ANNUITY PAYMENT OPTION--One of several ways in which a
series of payments are made after the Annuity Date. Un-
der a FIXED ANNUITY OPTION, the dollar amount of each
Annuity Payment does not change over time. Annuity Pay-
ments are based on the Contract's Accumulated Value as
of the Annuity Date. Under a VARIABLE ANNUITY OPTION,
the dollar amount of each Annuity Payment may change
over time, depending upon the investment experience of
the Portfolio or Portfolios you choose.
ANNUITY UNIT--Unit of measure used to calculate Variable
Annuity Payments.
BENEFICIARY--The person to whom any benefits are due
upon the Annuitant's death.
BUSINESS DAY--A day when the New York Stock Exchange is
open for trading.
COMPANY ("WE", "US", "OUR")--First Providian Life &
Health Insurance Company, a New York stock company.
CONTRACT ANNIVERSARY--Any anniversary of the Contract
Date.
CONTRACT DATE--The date of issue of this Contract.
CONTRACT OWNER ("YOU", "YOUR")--The person or persons
designated as the Contract Owner in the Contract appli-
cation. The term shall also include any person named as
Joint Owner. A Joint Owner shares ownership in all re-
spects with the Owner. The Owner has the right to assign
ownership to a person or party other than himself.
9
<PAGE>
CONTRACT YEAR--A period of 12 months starting with the
Contract Date or any Contract Anniversary.
DEATH BENEFIT--The greater of the then-current Accumu-
lated Value or the sum of all Purchase Payments (less
any partial withdrawals and premium taxes).
FREE LOOK PERIOD--The period during which the Contract
can be cancelled and treated as void from the Contract
Date.
FUND--Vanguard Variable Insurance Fund, Inc., an open-
end, diversified investment company, offered by The Van-
guard Group, Inc., in which the Separate Account in-
vests.
JOINT ANNUITANT--The person other than the Annuitant who
may be designated by the Contract Owner and on whose
life Annuity Payments may also be based.
NET PURCHASE PAYMENT--Any Purchase Payment less the ap-
plicable Premium Tax, if any.
NON-QUALIFIED CONTRACT--A Contract other than a Quali-
fied Contract. Contributions to such a Contract are made
with after-tax dollars.
OWNER'S DESIGNATED BENEFICIARY--The person designated to
receive the Contract Owner's interest in the Contract if
the Contract Owner dies before the entire interest in
the Contract is distributed, as explained in the "IRS-
Required Distribution" section.
PAYEE--The Contract Owner, Annuitant, Beneficiary, or
any other person, estate, or legal entity to whom bene-
fits are to be paid.
PORTFOLIO--The separate investment Portfolios of the
Fund. The Fund currently offers nine Portfolios: the
Money Market Portfolio, the High-Grade Bond Portfolio,
the High Yield Bond Portfolio, the Balanced Portfolio,
the Equity Income Portfolio, the Equity Index Portfolio,
the Growth Portfolio, the International Portfolio, and
the Small Company Growth Portfolio. In this Prospectus,
Portfolio will also be used to refer to the Subaccount
that invests in the corresponding Portfolio.
PREMIUM TAX--A regulatory tax that may be assessed by
your state on the Purchase Payments made into your Con-
tract. The amount which we must pay as Premium Tax will
be deducted from each Purchase Payment or from your Ac-
cumulated Value as it is incurred by us.
PROOF OF DEATH--(a) A certified death certificate; (b) a
certified decree of a court of competent jurisdiction as
to the finding of death; (c) a written statement by a
medical doctor who attended the deceased; or (d) any
other proof satisfactory to the Company.
PURCHASE PAYMENT--Any premium payment--any amount you
invest in the Contract. The minimum Initial Purchase
Payment is $5,000; each Additional Purchase Payment must
be at least $250. Purchase Payments may be made at any
time prior to the Annuity Date as long as the Annuitant
is living.
10
<PAGE>
QUALIFIED CONTRACT--A Contract that qualifies as an in-
dividual retirement annuity under Section 408(b) of the
Internal Revenue Code of 1986, as amended.
SEPARATE ACCOUNT--First Providian Life & Health Insur-
ance Company Separate Account B. The Separate Account
consists of assets that are segregated by First
Providian Life & Health Insurance Company and invested
in the Fund. The Separate Account is independent of the
general assets of the Company.
SUBACCOUNT--That portion of the Separate Account that
invests in shares of the Fund's Portfolios. Each
Subaccount will only invest in a single Portfolio. The
investment performance of each Subaccount is linked di-
rectly to the in- vestment performance of one of the
nine underlying Portfolios of the Fund.
VALUATION PERIOD--A period between two successive Busi-
ness Days commencing at the close of business of the
first Business Day and ending at the close of business
of the following Business Day.
- -------------------------------------------------------------------------------
11
<PAGE>
CONDENSED The Accumulation Unit Values and the number of Accumula-
FINANCIAL tion Units outstanding for each Subaccount in 1992
INFORMATION through 1997 are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD DECEMBER 1, 1992 THROUGH DECEMBER 31, 1997*
----------------------------------------------------------------
HIGH- HIGH SMALL
MONEY GRADE YIELD EQUITY EQUITY COMPANY
MARKET BOND BOND BALANCED INCOME INDEX GROWTH INTERNATIONAL GROWTH
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accumulation unit value
as of:
Start Date*............ 1.061 11.489 10.000 11.098 10.000 11.596 10.000 10.000 10.000
12/31/92............... 1.064 11.656 * 11.514 * 12.039 * * *
12/31/93............... 1.091 12.514 * 12.961 10.488 13.144 10.569 * *
12/31/94............... 1.130 12.290 * 12.815 10.304 13.224 10.964 10.128 *
12/31/95............... 1.191 14.437 * 16.885 14.239 18.073 15.089 11.678 *
12/31/96............... 1.250 14.882 10.871 19.532 16.820 22.098 19.057 13.319 9.725
12/31/97............... 1.314 16.219 12.135 23.946 22.503 29.301 24.034 13.708 10.970
Number of units
outstanding as of:
12/31/92............... 1,660 11 * 9 * 33 * * *
12/31/93............... 4,079 271 * 636 290 440 220 * *
12/31/94............... 5,365 526 * 745 306 534 457 322 *
12/31/95............... 9,080 622 * 766 380 784 620 433 *
12/31/96............... 13,590 689 253 852 525 1,035 906 698 246
12/31/97............... 15,573 912 645 1,035 819 1,392 1,187 833 743
(UNITS ARE SHOWN IN
THOUSANDS)
</TABLE>
* Date of commencement of operations for the Money Market Subaccount was
12/1/92, for the High-Grade Bond, Balanced, and Equity Index Subaccounts was
12/16/92, for the Equity Income and Growth Subaccounts was 6/7/93, for the
International Subaccount was 6/3/94, and for the High Yield Bond and Small
Company Growth Subaccounts was 6/3/96.
- -------------------------------------------------------------------------------
FINANCIAL The audited statutory-basis financial statements of the
STATEMENTS Company and the financial statements of the Separate Ac-
count (as well as the Independent Auditors' Reports
thereon) are contained in the Statement of Additional
Information.
- -------------------------------------------------------------------------------
YIELD AND TOTAL From time to time a Portfolio of the Fund may advertise
RETURN its yield and total return investment performance for
various periods, including quarter-to-date, year-to-
date, one year, three year, five year and since incep-
tion. Advertised yields and total returns will be calcu-
lated according to standardized methods prescribed by
the Securities and Exchange Commission ("SEC"), so all
charges and expenses attributable to the Contract will
be included. Including these fees has the effect of de-
creasing the advertised performance of a Portfolio, so
that a Portfolio's investment performance will not be
directly comparable to that of an ordinary mutual fund.
The Company may also advertise total return or other
performance data in non-standard formats which do not
reflect the Annual Contract Maintenance Fee.
12
<PAGE>
Please refer to the Statement of Additional Information
for a description of the method used to calculate a
Portfolio's yield and total return, and a list of the
indexes and other benchmarks used in evaluating a Port-
folio's performance.
The performance measures discussed above are not in-
tended to indicate or predict future performance.
- -------------------------------------------------------------------------------
THE COMPANY AND The Company is a stock life insurance company incorpo-
THE SEPARATE rated under the laws of the State of New York on March
ACCOUNT 23, 1970, with administrative offices at 520 Columbia
Drive, Johnson City, New York 13790. The Company is
FIRST PROVIDIAN principally engaged in offering life insurance, annuity
LIFE & HEALTH contracts, and accident and health insurance and is ad-
INSURANCE COMPANY mitted to do business in 10 states and the District of
Columbia.
As of December 31, 1997, the Company had statutory as-
sets of approximately $397 million. The Company 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 servic-
es. All of the stock of AEGON USA, Inc. is indirectly
owned by AEGON n.v. of the Netherlands. AEGON n.v., a
holding company, conducts its business through subsidi-
ary companies engaged primarily in the insurance busi-
ness.
---------------------------------------------------------
FIRST PROVIDIAN The Separate Account was established by the Company as a
LIFE & HEALTH separate account under the laws of the State of New York
INSURANCE COMPANY on November 2, 1987, pursuant to a resolution of the
SEPARATE ACCOUNT B Company's Board of Directors. 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.
The assets of the Separate Account are owned by the Com-
pany and the obligations under the Contract are obliga-
tions of the Company. These assets are held separately
from the other assets of the Company and are not charge-
able with liabilities incurred in any other business op-
eration of the Company (except to the extent that assets
in the Separate Account exceed the reserves and other
liabilities of the Separate Account). The Company will
always keep assets in the Separate Account with a value
at least equal to the total Accumulated Value under the
Contracts. Income, gains and losses incurred on the as-
sets in the Separate Account, whether or not realized,
are credited to or charged against the Separate Account
without regard to other income, gains or losses of the
Company. Therefore, the investment performance of the
Separate Account is entirely independent of the invest-
ment performance of the Company's general account assets
or any other separate account maintained by the Company.
The Separate Account has nine Subaccounts, each of which
invests solely in a corresponding Portfolio of the Fund.
Additional Subaccounts may be estab-
13
<PAGE>
lished at the discretion of the Company. The Separate
Account meets the definition of a "separate account" un-
der Rule O-1(e)(1) of the 1940 Act.
- -------------------------------------------------------------------------------
VANGUARD VARIABLE Vanguard Variable Insurance Fund is an open-end diversi-
INSURANCE FUND fied investment company intended exclusively as an in-
vestment vehicle for variable annuity or variable life
insurance contracts offered by insurance companies.
The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies
with more than 94 distinct portfolios and assets in ex-
cess of $360 billion. Through their jointly owned sub-
sidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund
and the other Funds in the Group obtain at cost virtu-
ally all of their corporate management, administrative,
shareholder accounting and distribution services.
The Fund offers nine Portfolios--a money market portfo-
lio, a high-grade bond portfolio, a high yield bond
portfolio, a balanced portfolio, an equity income port-
folio, an equity index portfolio, a growth portfolio, an
international portfolio, and a small company growth
portfolio--each with distinct investment objectives
and policies.
THE MONEY MARKET PORTFOLIO seeks to provide current in-
come consistent with the preservation of capital and li-
quidity. The Portfolio also seeks to maintain a stable
net asset value of $1.00 per share. The Portfolio in-
vests primarily in high-quality money market instruments
issued by financial institutions, non-financial corpora-
tions, the U.S. Government, state and municipal govern-
ments and their agencies or instrumentalities as well as
repurchase agreements collateralized by such securities.
The Portfolio also invests in Eurodollar obligations
(dollar-denominated obligations issued outside the U.S.
by foreign banks or foreign branches of domestic banks)
and Yankee obligations (dollar- denominated obligations
issued in the U.S. by foreign banks). Vanguard's Fixed
Income Group serves as this Portfolio's investment ad-
viser.
THE HIGH-GRADE BOND PORTFOLIO seeks to parallel the in-
vestment results of the Lehman Brothers Aggregate Bond
Index. The Portfolio invests primarily in a diversified
portfolio of U.S. Government and corporate bonds, and
mortgage-backed securities. Vanguard's Fixed Income
Group serves as this Portfolio's investment adviser.
THE HIGH YIELD BOND PORTFOLIO seeks to provide a high
level of current income by investing in lower-rated debt
securities, which may be regarded as having speculative
characteristics and are commonly referred to as "junk
bonds." Under normal circumstances, at least 80% of the
Portfolio's assets will be invested in high-yield corpo-
rate debt obligations rated at least B by Moody's In-
vestors Service, Inc. or Standard & Poor's Corporation
or, if unrated, of comparable quality as determined by
the Portfolio's adviser, Wellington Management Company.
THE BALANCED PORTFOLIO seeks the conservation of princi-
pal, a reasonable income return and profits without un-
due risk. The Portfolio invests in a diversified portfo-
lio of common stocks and bonds, with common stocks
expected to represent 60% to 70% of the Portfolio's to-
tal assets and bonds to represent
14
<PAGE>
30% to 40%. Wellington Management Company serves as this
Portfolio's investment adviser.
THE EQUITY INCOME PORTFOLIO seeks to provide a high
level of current income by investing principally in div-
idend-paying equity securities. Newell Associates serves
as this Portfolio's investment adviser.
THE EQUITY INDEX PORTFOLIO seeks to parallel the invest-
ment results of the Standard & Poor's 500 Composite
Stock Price Index (S&P 500). The Portfolio invests in
common stocks included in the S&P 500. Vanguard's Core
Management Group serves as this Portfolio's investment
adviser.
THE GROWTH PORTFOLIO seeks to provide long-term capital
appreciation. The Portfolio invests primarily in equity
securities of seasoned U.S. companies with above average
prospects for growth. Lincoln Capital Management Company
serves as this Portfolio's investment adviser.
THE INTERNATIONAL PORTFOLIO seeks to provide long-term
capital appreciation. The Portfolio invests primarily in
equity securities of companies based outside the United
States. Schroder Capital Management International, Inc.
serves as this Portfolio's investment adviser.
THE SMALL COMPANY GROWTH PORTFOLIO seeks to provide long
term growth in capital by investing primarily in equity
securities of small companies deemed to have favorable
prospects for growth. These securities are primarily
common stocks but may also include securities convert-
ible into common stock. Granahan Investment Management
serves as this Portfolio's investment adviser.
There is no assurance that a Portfolio will achieve its
stated objective.
ADDITIONAL INFORMATION CONCERNING THE INVESTMENT OBJEC-
TIVES AND POLICIES OF THE PORTFOLIOS AND THE INVESTMENT
ADVISORY SERVICES, TOTAL EXPENSES AND CHARGES CAN BE
FOUND IN THE CURRENT PROSPECTUS FOR THE FUND, WHICH AC-
COMPANIES THIS PROSPECTUS. THE FUND PROSPECTUS SHOULD BE
READ CAREFULLY BEFORE ANY DECISION IS MADE CONCERNING
ALLOCATION OF PURCHASE PAYMENTS TO A PORTFOLIO.
The Portfolios may be made available to registered sepa-
rate accounts offering variable annuity and variable
life products of the Company as well as other insurance
companies. Although we believe it is unlikely, a mate-
rial conflict could arise between the interests of the
Separate Account and one or more of the other partici-
pating separate accounts. In the event of a material
conflict, the affected insurance companies agree to take
any necessary steps, including removing their separate
account from the Fund if required by law, to resolve the
matter. See the Fund's Prospectus for more information.
Administrative services are provided by The Vanguard
Group, Inc., The Vanguard Variable Annuity Center, 100
Vanguard Boulevard, Malvern, PA 19355. In addition, The
Continuum Company, Inc., 301 West 11th Street, Kansas
City, MO 64105, provides some subadministrative servic-
es.
- -------------------------------------------------------------------------------
15
<PAGE>
CONTRACT FEATURES
The rights and benefits under the Contract are described
below and in the Contract. The Company reserves the
right to make any modification to conform the Contract
to, or give the Contract Owner the benefit of, any fed-
eral or state statute or any rule or regulation of the
United States Treasury Department.
---------------------------------------------------------
FREE LOOK PERIOD A Free Look Period exists for a minimum of 10 days after
the Contract Owner receives the Contract plus 5 days for
mailing. The Contract permits the Contract Owner to can-
cel the Contract during the Free Look Period by re-
turning the Contract to the agent, person or entity from
whom it was purchased. The contract should be returned
to Vanguard Variable Annuity Center, P.O. Box 1103, Val-
ley Forge, PA 19482-1103. Withdrawals are not permitted
during the Free Look Period. Upon cancellation, the Con-
tract is treated as void from the Contract Date and the
Contract Owner will receive the greater of the Purchase
Payments made under the Contract or the Accumulated
Value of the Contract as of the day the Contract is re-
ceived by the Company.
- -------------------------------------------------------------------------------
CONTRACT Individuals wishing to purchase a Non-Qualified Contract
APPLICATION AND should send a completed application and your Initial
PURCHASE PAYMENTS Purchase Payment to the Variable Annuity Center. Your
Initial Purchase Payment must be equal to or greater
than the $5,000 minimum investment requirement. Further-
more, the named Annuitant and Joint Annuitant must be 75
years of age or less.
The Contract will be issued and the Initial Net Purchase
Payment will be credited within two Business Days after
acceptance of the application and the Initial Purchase
Payment. Acceptance is subject to the application being
received in good order, and the Company reserves the
right to reject any application or Initial Purchase Pay-
ment.
If the Initial Purchase Payment cannot be credited be-
cause the application is incomplete, the Company will
contact the applicant in writing, explain the reason for
the delay and will refund the Initial Purchase Payment
within five Business Days. As soon as the necessary re-
quirements are fulfilled the Purchase Payment will be
credited.
Additional Purchase Payments may be made at any time
prior to the Annuity Date, as long as the Annuitant or
Joint Annuitant, if applicable, is living. Additional
Purchase Payments must be for at least $250. Additional
Purchase Payments received prior to the close of the New
York Stock Exchange (generally 4:00 p.m. Eastern time)
are credited to the Accumulated Value of the Contract as
of the close of business that same day.
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, we will only accept a
foreign check which has been drawn in U.S. dollars and
has been issued by a foreign bank with a U.S. correspon-
dent bank.
The Contracts are available on a non-qualified basis and
as individual retirement annuities (IRAs) that qualify
for special federal income tax treatment.
16
<PAGE>
Generally, Qualified Contracts may be purchased only in
connection with a "rollover" of funds from another qual-
ified plan or IRA and contain certain other restrictive
provisions limiting the timing and amount of payments to
and distributions from the Qualified Contract.
Total Purchase Payments may not exceed $1,000,000 with-
out prior approval of the Company.
PURCHASING BY WIRE CORESTATES BANK N.A., ABA 031000011
MONEY SHOULD BE DEPOSIT ACCOUNT NUMBER 1412652296
WIRED TO: FIRST PROVIDIAN LIFE & HEALTH
PLEASE CALL: 1- INSURANCE COMPANY
800-258-4271 CONTRACT NUMBER CONTRACT REGISTRATION
BEFORE WIRING
To assure proper receipt, please be sure your bank in-
cludes the contract number Vanguard has assigned you.
For an Initial Purchase Payment, please complete the
Vanguard Variable Annuity Plan Application and mail it
to the Vanguard Variable Annuity Center, P.O. Box 1103,
Valley Forge, PA 19482-1103, prior to completing wire
arrangements. Note: Federal funds wire purchase orders
will be accepted only when the New York Stock Exchange
and Custodian Bank are open for business.
---------------------------------------------------------
SECTION 1035 You may exchange your Accumulated Value under an exist-
EXCHANGES ing annuity contract to the Vanguard Variable Annuity
Plan. Section 1035 of the Internal Revenue Code of 1986,
as amended (the "Code"), provides, in general, that no
gain or loss shall be recognized on the exchange of one
annuity contract for another. To complete a "1035 Ex-
change" simply provide all the requested information on
the 1035 Exchange Form and mail it, along with your ap-
plication and current contract, to the Vanguard Variable
Annuity Center. As an accommodation to owners of Van-
guard Variable Annuity Plan contracts, and in accordance
with the Code, we will accept, under certain conditions,
the consolidation of two or more Vanguard Variable Annu-
ity Plan contracts into one. Such exchanges will be ac-
cepted on a case by case basis in order to provide con-
tract owners with consolidated account reporting. In
addition, if applicable, contract owners will be respon-
sible for only one Annual Contract Maintenance Fee. Un-
der no circumstances will an exchange of an existing
Vanguard Variable Annuity Plan contract for an identical
new Vanguard Variable Annuity Plan contract be allowed.
Special rules and procedures apply to Code Section 1035
transactions, particularly if the Contract being ex-
changed was issued prior to August 14, 1982. Prospective
Contract Owners wishing to take advantage of Code Sec-
tion 1035 should consult their tax advisers.
Please note, that an outstanding loan on the contract
that you wish to transfer may create a tax consequence.
Therefore, you are encouraged to settle any outstanding
loans with your current insurance company prior to ini-
tiating a 1035 exchange into the Plan.
- -------------------------------------------------------------------------------
17
<PAGE>
ALLOCATION OF The Contract Owner specifies on the Contract Application
PURCHASE PAYMENTS how Purchase Payments will be allocated. The Contract
Owner may allocate each Purchase Payment to one or more
of the Portfolios as long as such portions are whole
number percentages and any allocation made is at least
10% and at least $1,000.
Allocation instructions for future Purchase Payments may
be changed by the Contract Owner by sending a written
notice to the Vanguard Variable Annuity Center. You may
change your investment by eliminating a Contract Portfo-
lio from your allocations or by adding a new Contract
Portfolio to your list. Please note that you must main-
tain a minimum of $1,000 in each Portfolio to which you
have allocated assets.
During the Free Look Period (which is assumed for this
purpose to be 10 days after the issuance of the Con-
tract), the Initial Net Purchase Payment and additional
Purchase Payments received during the Free Look Period
will be allocated to the Money Market Portfolio. Upon
expiration of the Free Look Period, the Accumulated
Value will remain in the Money Market Portfolio for an
additional 5-day grace period to allow for mail deliv-
ery. Upon the expiration of the Free Look Period and the
5-day grace period (15 days), the Accumulated Value will
then be allocated among the Portfolios in accordance
with the Contract Owner's instructions.
- -------------------------------------------------------------------------------
CHARGES AND The projected expenses for the Contract are substan-
DEDUCTIONS tially below the costs of other variable annuity con-
tracts. For example, based on a $25,000 contract the av-
erage expense ratio of other variable annuity contracts
was 2.09% as of December 31, 1997, compared to .71% for
the Vanguard Variable Annuity Contract (source for com-
petitors' data: Morningstar Performance Report January
1998).
No sales load is deducted from the Initial Purchase Pay-
ment or any Additional Purchase Payments. In addition,
there are no sales charges imposed upon withdrawals.
---------------------------------------------------------
MORTALITY AND The Company imposes a charge as compensation for bearing
EXPENSE RISK certain mortality and expense risks under the Contracts.
CHARGE The annual charge is assessed daily based on the com-
bined net assets of the Separate Account and Separate
Account IV of Providian Life & Health Insurance Company
in the Fund according to the following schedule:
<TABLE>
<CAPTION>
RATE FOR
NET ASSETS ALL ASSETS
-------------------------------------- ----------
<S> <C>
Up to $2.5 Billion 0.30%
Over $2.5 Billion and Up To $5 Billion 0.28%
Over $5 Billion 0.27%
</TABLE>
The Company guarantees that these mortality and expense
risk breakpoints will never increase. If this charge is
insufficient to cover actual costs and assumed risks,
the loss will fall on the Company. Conversely, if the
charge proves more than sufficient, any excess will be
added to the Company surplus.
18
<PAGE>
The mortality risk borne by the Company under the Con-
tracts, where one of the life Annuity Payment Options
was selected, is to make monthly annuity payments (de-
termined in accordance with the annuity tables and other
provisions contained in the Contract) regardless of how
long all Annuitants may live. We also assume mortality
risk as a result of our guarantee of a minimum Death
Benefit in the event the Annuitant dies prior to the An-
nuity Date.
The expense risk borne by the Company under the Con-
tracts is that the charges for administrative expenses
which are guaranteed for the life of the Contract may be
insufficient to cover the actual costs of issuing and
administering the Contract.
---------------------------------------------------------
ADMINISTRATIVE An annual administrative charge of .10% of the net asset
CHARGE & value of the Separate Account is assessed daily along
MAINTENANCE FEE with an annual maintenance fee of $25 for Contracts val-
ued at less than $25,000 at the time of initial purchase
and on the last Business Day of each year. It is impor-
tant to note that fluctuation in Accumulation Unit Val-
ues due to changes in the market values of securities
may cause an investor's Contract's value to fall below
$25,000. The annual maintenance fee is deducted propor-
tionately from each Contract's Accumulated Value; there-
fore, the $25 fee is assessed per Contract, not per
Portfolio chosen. Your Initial Purchase Payment of less
than $25,000 is reduced by an initial maintenance fee
which is pro rated to reflect only the remaining portion
of the calendar year of purchase. Thereafter, the fee is
deducted on the last Business Day of the year for the
following year, on a pro rata basis from each of the
Portfolios you have chosen. These deductions represent
reimbursement to the Company for the costs expected to
be incurred over the life of the Contract for issuing
and maintaining each Contract and the Separate Account.
Please note that Contracts valued at $25,000 or more as
of the last Business Day of the year will not be as-
sessed the $25 maintenance fee for the following year.
---------------------------------------------------------
TAXES Under present laws, the Company will not incur New York
state or local taxes. If there is a change in state or
local tax laws, charges for such taxes may be made. The
Company does not expect to incur any federal income tax
liability attributable to investment income or capital
gains retained as part of the reserves under the Con-
tracts. (See "Federal Tax Considerations," page 27.)
Based upon these expectations, no charge is currently
being made to the Separate Account for corporate federal
income taxes that may be attributable to the Separate
Account.
The Company will periodically review the question of a
charge to the Separate Account for corporate federal in-
come taxes related to the Separate Account. Such a
charge may be made in future years for any federal in-
come taxes incurred by the Company. This might become
necessary if the tax treatment of the Company is ulti-
mately determined to be other than what the Company cur-
rently believes it to be, if there are changes made in
the federal income tax treatment of annuities at the
corporate level, or if there is a change in the
Company's tax status. In the event that the Company
should incur federal income taxes attributable to in-
vestment income or capital gains retained as part
19
<PAGE>
of the reserves under the Contracts, the Accumulated
Value of the Contract would be correspondingly adjusted
by any provision or charge for such taxes.
---------------------------------------------------------
VANGUARD VARIABLE The value of the assets in the Separate Account will re-
INSURANCE FUND flect the fees and expenses paid by the Fund. A complete
EXPENSES description of these expenses is found in the "Fee Ta-
ble" section of this Prospectus and in the "Management
of the Fund" section of the Fund's Statement of Addi-
tional Information.
- -------------------------------------------------------------------------------
ACCUMULATED VALUE At the commencement of the Contract, the Accumulated
Value equals the Initial Net Purchase Payment. Thereaf-
ter, on any Business Day the Accumulated Value equals
the Accumulated Value from the previous Business Day in-
creased by: i) any Additional Net Purchase Payments re-
ceived by the Company and ii) any increase in the Accu-
mulated Value due to investment results of the selected
Portfolio(s) that occur during the Valuation Period; and
reduced by: i) any decrease in the Accumulated Value due
to investment results of the selected Portfolio(s), ii)
a daily charge to cover the mortality and expense risks
assumed by the Company, iii) any charge to cover the
cost of administering the Contract, iv) any partial
withdrawals, and v) Premium Taxes, if any, that occur
during the Valuation Period.
The Accumulated Value is expected to change from Valua-
tion Period to Valuation Period, reflecting the invest-
ment experience of the selected Portfolios of the Fund
as well as the daily deduction of charges. When your Net
Purchase Payments are allocated to a selected Portfolio,
they result in a particular number of Accumulation Units
being credited to your Contract. The number of Accumula-
tion Units credited is determined by dividing the dollar
amount allocated to each Portfolio by the Accumulation
Unit Value for that Portfolio as of the end of the Valu-
ation Period in which the payment is received. The Accu-
mulation Unit Value varies each Valuation Period (i.e.,
each day that there is trading on the New York Stock Ex-
change) with the net rate of return of the Portfolio.
The net rate of return reflects the investment perfor-
mance of the Portfolio for the Valuation Period and is
net of asset charges to the Portfolio.
- -------------------------------------------------------------------------------
DIVIDENDS AND All dividends and capital gains earned will be rein-
CAPITAL GAINS vested and reflected in the Accumulation Unit Value.
TREATMENT Only in this way can these earnings remain tax deferred.
- -------------------------------------------------------------------------------
ANNUITY The Annuity Express service allows you to transfer funds
EXPRESS(TM) automatically from your checking or statement savings
account to one or more Portfolios in your Contract. You
may purchase into existing Portfolios (if the $1,000
minimum balance requirement has been met) monthly, quar-
terly, semiannually, or annually. The minimum automatic
purchase is $50 and the maximum is $100,000.
- -------------------------------------------------------------------------------
EXCHANGES AMONG Should your investment goals change, you may exchange
THE PORTFOLIOS the Accumulated Value among the Portfolios of the Fund.
Requests for exchanges may be made
20
<PAGE>
in writing and, if received prior to the close of the
New York Stock Exchange (generally 4:00 p.m. Eastern
time) are processed at the close of business that same
day. Requests received after the close of the Exchange
are processed the next Business Day.
The Contract's exchange privilege is not intended to af-
ford Contract Owners a way to speculate on short-term
movements in the market. Accordingly, in order to pre-
vent excessive use of the exchange privilege that may
potentially disrupt the management of the Fund and in-
crease transaction costs, the Separate Account has es-
tablished a policy of limiting excessive exchange activ-
ity.
Because excessive exchanges can potentially disrupt the
management of the Portfolios and increase transaction
costs, exchange activity is limited to two substantive
exchanges (at least 30 days apart) from each Portfolio
(except the Money Market Portfolio) during any 12 month
period. "Substantive" means either a dollar amount large
enough to have a negative impact on a Portfolio or a se-
ries of movements between Portfolios. This restriction
does not limit non-substantive exchanges and does not
apply to exchanges from the Money Market Portfolio. All
exchanges must be for at least $250 or, if less, the Ac-
cumulated Value in the Portfolio. However, the Company
and the Fund reserve the right to revise or terminate
the exchange privilege, limit the amount of or reject
any exchange, as deemed necessary, at any time.
---------------------------------------------------------
AUTOMATIC The Automatic Exchange Service allows you to move money
EXCHANGES automatically among the Portfolios of the Fund. You may
exchange fixed amounts or percentages of your Portfolio
balance either monthly, quarterly, semiannually or annu-
ally into existing (the $1,000 minimum balance require-
ment has been met) Portfolios. Exchanges at regular in-
tervals or "dollar-cost averaging" can be used, for
example, to move money from a money market portfolio
into a stock or bond portfolio. The minimum exchange
amount is $250. The Automatic Exchange Service may be
established by completing a Vanguard Variable Annuity
Plan Automatic Exchange Service Application Form or
writing a letter of instruction. You may change the
transfer amount or cancel this service in writing.
Please note that the Automatic Exchange Service cannot
be used to establish a new Portfolio, and will not be
activated until the Free Look Period has expired.
- -------------------------------------------------------------------------------
FULL AND PARTIAL At any time before the Annuity Date and while the Annui-
WITHDRAWALS tant or Joint Annuitant is living, the Contract Owner
may make a partial or full withdrawal of the Contract to
receive all or part of the Accumulated Value by sending
a written request to the Variable Annuity Center. Full
or partial withdrawals may only be made before the Annu-
ity Date and all partial withdrawal requests must be for
at least $250. (See "Federal Tax Considerations," page
27.)
You can make a withdrawal by writing to the Variable An-
nuity Center. Your written request should include your
Contract number, social security number, withdrawal
amount, the signature of all owners, and federal tax
withholding election (IF NO WITHHOLDING ELECTION IS CHO-
SEN, WE WILL BE REQUIRED TO WITHHOLD 10%). Your proceeds
will normally be distributed within two Business
21
<PAGE>
Days after the receipt of the request but in no event
will it be later than seven calendar days, subject to
postponement in certain circumstances (see "Deferment of
Payment" page 26).
---------------------------------------------------------
SYSTEMATIC You may establish an automatic withdrawal of a specific
WITHDRAWALS amount, a percentage of the balance, or accumulated
earnings from your Contract, and receive distributions
on a monthly, quarterly, semiannual, or annual schedule.
Once established, a check will be sent to your Contract
address, bank account or as you direct. Please note that
each systematic withdrawal, like any other partial with-
drawal, is subject to federal income taxes on the earn-
ings, and may be subject to a 10% tax imposed by the IRS
on withdrawals made prior to age 59 1/2.
A minimum Contract balance of $10,000, and Portfolio
balance of $1,000 are required to establish a systematic
withdrawal program for your Contract. The minimum auto-
matic withdrawal amount is $250. Changes to the with-
drawal amount, percentage, or the frequency of distribu-
tions may be made by telephone. Any other changes,
including a change in the destination of the check, must
be requested in writing, and should include signatures
of all Contract owners. To cancel the systematic with-
drawal program, the Contract owner(s) needs to submit a
letter of instruction with the appropriate signatures.
To establish a systematic withdrawal program for your
Contract, simply complete the Vanguard Variable Annuity
Plan Systematic Withdrawal Program Application Form.
Please note that the completed form must be signed by
all Contract owners, and must be signature guaranteed if
you are directing the withdrawal checks to an address
other than the Contract address.
Payments under the Contract of any amounts derived from
premiums paid by check may be delayed until such time as
the check has cleared your bank. If, at the time the
Contract Owner requests a full or partial withdrawal, he
or she has not provided the Company with a written elec-
tion not to have federal income taxes withheld, the Com-
pany must by law withhold such taxes from the taxable
portion of any full or partial withdrawal and remit that
amount to the federal government. Moreover, the Internal
Revenue Code provides that a 10% penalty tax will be im-
posed on certain early withdrawals. (See "Federal Tax
Considerations," page 27.)
Since the Contract Owner assumes the investment risk
with respect to amounts allocated to the Separate Ac-
count, the total amount paid upon withdrawal of the Con-
tract (taking into account any prior withdrawals) may be
more or less than the total Purchase Payments made.
- -------------------------------------------------------------------------------
MINIMUM BALANCE Due to the relatively high cost of maintaining smaller
REQUIREMENTS accounts, the Company reserves the right to transfer the
balance in any Portfolio account that falls below
$1,000, due to a partial withdrawal or exchange, to the
remaining Portfolios held under that Contract, on a pro
rata basis. In the event that the entire value of the
Contract falls below $1,000, you may be notified that
the Accumulated Value of your account is below the Con-
tract's minimum requirement. You would then be allowed
60 days to make an additional investment before
22
<PAGE>
the account is liquidated. Proceeds would be promptly
paid to the Contract Owner. The full proceeds would be
taxable as a withdrawal. A full withdrawal will result
in an automatic termination of the Contract.
- -------------------------------------------------------------------------------
DESIGNATION OF A The Contract Owner may select one or more Beneficiaries,
BENEFICIARY who would receive benefits upon the death of the Annui-
tant, and name them in the application. The
beneficiary(ies), as named on the application, will
serve as the beneficiary designation. Thereafter, while
the Annuitant or Joint Annuitant is living, the Contract
Owner may change the Beneficiary by written notice. Such
change will take effect on the date the notice is signed
by the Contract Owner but will not affect any payment
made or other action taken before the Company acknowl-
edges the notice. The Contract Owner may also make the
designation of Beneficiary irrevocable by sending writ-
ten notice to, and obtaining approval from, the Company.
Changes in the Beneficiary may then be made only with
the consent of the designated irrevocable Beneficiary.
If the Annuitant dies prior to the Annuity Date, the
following will apply unless the Contract Owner has made
other provisions:
(a) If there is more than one Beneficiary, each will
share in the Death Benefits equally;
(b) If one or two or more Beneficiaries has already
died, that share of the Death Benefit will be paid
equally to the survivor(s);
(c) If no Beneficiary is living, the proceeds will be
paid to the Contract Owner;
(d) If a Beneficiary dies at the same time as the Annui-
tant, the proceeds will be paid as though the Bene-
ficiary had died first. If a Beneficiary dies within
15 days after the Annuitant's death and before the
Company receives due proof of the Annuitant's death,
proceeds will be paid as though the Beneficiary had
died first.
If a Beneficiary who is receiving Annuity Payments dies,
any remaining Payments Certain will be paid to that
Beneficiary's named Beneficiary(ies) when due. If no
Beneficiary survives the Annuitant, the right to any
amount payable will pass to the Contract Owner. If the
Contract Owner is the Annuitant, this right will pass to
his or her estate.
If a Life Annuity with Period Certain Option was elect-
ed, and if the Annuitant dies on or after the Annuity
Date, any unpaid Payments Certain will be paid to the
Beneficiary.
- -------------------------------------------------------------------------------
DEATH OF ANNUITANT Subject to the provisions dealing with Joint Annuitants,
PRIOR TO ANNUITY if the Annuitant dies prior to the Annuity Date, an
DATE amount will be paid as proceeds to the Beneficiary. If
the Annuitant or Joint Annuitant dies prior to the Annu-
ity Date, the survivor shall become the sole Annuitant.
The Death Benefit is calculated and is payable upon re-
ceipt of due Proof of Death of the Annuitant as well as
proof that the Annuitant died prior to the Annuity Date.
Upon receipt of this proof, the Death Benefit will be
paid within seven days, or as soon thereafter as the
Company has sufficient information about the Beneficiary
to make the pay-
23
<PAGE>
ment. The Beneficiary may receive the amount payable in
a lump sum cash benefit or under one of the Annuity Pay-
ment Options.
A lump sum cash benefit will equal the greater of: (a)
the Accumulated Value as of the date of due Proof of
Death and proof that the Annuitant died prior to the An-
nuity Date or (b) the sum of Purchase Payments less the
sum of all partial withdrawals and premium taxes. An An-
nuity Payment will be based on the greater of: (a) the
Accumulated Value on the Annuity Date elected by the
Beneficiary and approved by the Company or (b) the sum
of Purchase Payments less the sum of all partial with-
drawals and premium taxes. The Contract Owner may elect
an Annuity Payment Option for the Beneficiary or, if no
such election was made by the Contract Owner and a cash
benefit has not been paid, the Beneficiary may make this
election after the Annuitant's death.
For a discussion of the consequences of the death of the
Contract Owner, if different from the Annuitant, see
"Distribution-at-Death Rules," page 29.
- -------------------------------------------------------------------------------
ANNUITY DATE The Contract Owner may specify an Annuity Date in the
application, which can be no later than the first day of
the month after the Annuitant's 85th birthday, without
the Company's prior approval. If no Annuity Date is
specified in the application, the Annuity will begin re-
ceiving Annuity Payments on the first day of the month
after ten full years from the date of this Contract, or
the first day of the month which follows the Annuitant's
65th birthday, whichever is later. The Annuity Date is
the date that Annuity Payments are scheduled to commence
under the Contract, unless the Contract has been surren-
dered or an amount has been paid as proceeds to the des-
ignated Beneficiary prior to that date.
The Contract Owner may advance or defer the Annuity
Date. However, the Annuity Date may not be advanced to a
date prior to 30 days after the date of receipt of a
written request or, without the Company's prior approv-
al, deferred to a date beyond the Annuitant's 85th
birthday. An Annuity Date may only be changed by written
request during the Annuitant's or Joint Annuitant's
lifetime and must be made at least 30 days before the
then-scheduled Annuity Date. The Annuity Date and Annu-
ity Payment Options available for Qualified Contracts
may also be controlled by endorsements, the plan or ap-
plicable law.
- -------------------------------------------------------------------------------
ANNUITY PAYMENT All Annuity Payment Options (except the Designated Pe-
OPTIONS riod Annuity Option) are offered as "Variable Annuity
Options." This means that Annuity Payments, after the
initial payment, will reflect the investment experience
of the Portfolio or Portfolios chosen by the Contract
Owner. All Annuity Payment Options are offered as "Fixed
Annuity Options." This means that the amount of each
payment will be set on the Annuity Date and will not
change. If you choose a Fixed Option, your investment
will be moved out of the underlying Vanguard Portfolios
and into the general account of First Providian Life &
Health Insurance Company. If you do not wish to receive
your payments on an annuity basis, you may take a lump
sum payment at anytime before the annuity date. The lump
sum value is equal to the Accumulation Value. The fol-
lowing Annuity Payment Options are available under the
Contract:
24
<PAGE>
LIFE ANNUITY--Available as either a Fixed or Variable
Option. Monthly Annuity Payments are paid for the life
of an Annuitant, ceasing with the last Annuity Payment
due prior to the Annuitant's death.
JOINT AND LAST SURVIVOR ANNUITY--Available as either a
Fixed or Variable Option. Monthly Annuity Payments are
paid for the life of two Annuitants and thereafter for
the life of the survivor, ceasing with the last Annuity
Payment due prior to the survivor's death.
LIFE ANNUITY WITH PERIOD CERTAIN--Available as either a
Fixed or Variable Option. Monthly Annuity Payments are
paid for the life of an Annuitant, with a Period Certain
of not less than 120, 180, or 240 months, as elected.
INSTALLMENT OR UNIT REFUND LIFE ANNUITY--Available as
either a Fixed (Installment Refund) or Variable (Unit
Refund) Option. Monthly Annuity Payments are paid for
the life of an Annuitant, with a Period Certain deter-
mined by dividing the Accumulated Value by the First An-
nuity Payment.
DESIGNATED PERIOD ANNUITY--Only available as a Fixed Op-
tion. Monthly Annuity Payments are paid for a Period
Certain as elected, which may be from 10 to 30 years.
In the event that an Annuity Payment Option is not se-
lected, the Company will make monthly Annuity Payments
that will go on for as long as the Annuitant lives (120
payments guaranteed) in accordance with the Life Annuity
with Period Certain Option and the annuity benefit sec-
tions of the Contract. That portion of the Accumulated
Value that has been held in a Portfolio prior to the An-
nuity Date will be applied under a Variable Annuity Op-
tion based on the performance of that Portfolio. Subject
to approval by the Company, the Contract Owner may se-
lect any other Annuity Payment Option then being offered
by the Company. Annuity Payments are guaranteed to be
not less than as provided by the Annuity Tables for the
first payment under a Variable Option and each payment
under a Fixed Option, and the Annuity Payment Option
elected by the Contract Owner. The minimum payment, how-
ever, is $100. If the Accumulated Value is less than
$5,000, the Company has the right to pay that amount in
a lump sum. From time to time, the Company may require
proof that the Annuitant, Joint Annuitant, or Contract
Owner is living. Annuity Payment Options are not avail-
able to: (1) an assignee; or (2) any other than a natu-
ral person, except with the consent of the Company.
The Company may, at the time of election of an Annuity
Payment Option, offer more favorable rates in lieu of
the guaranteed rates specified in the Annuity Tables
found in the Contract.
The value of Variable Annuity Payments will reflect the
investment experience of the chosen Portfolio. On or af-
ter the Annuity Date, the Annuity Payment Option is ir-
revocable. Only one Variable Annuity Option may be cho-
sen from among those made available by the Company per
each Portfolio. The annuity tables, which are contained
in the Contract and are used to calculate the value of
Variable Annuity Payments, are based on an assumed in-
terest rate of 4%. If the actual net investment experi-
ence exactly equals the assumed interest rate, then the
Variable Annuity Payments will remain the same (equal to
the
25
<PAGE>
first Annuity Payment). However, if actual investment
experience exceeds the assumed interest rate, the Vari-
able Annuity Payments will increase; conversely, they
will decrease if the actual experience is lower.
If an Annuity Payment Option is chosen that depends on
the continuation of the life of the Annuitant or of a
Joint Annuitant, proof of birth date may be required be-
fore Annuity Payments begin. For Annuity Payment Options
involving life income, the actual age of the Annuitant
or of a Joint Annuitant will affect the amount of each
payment. Since payments to older Annuitants are expected
to be fewer in number, the amount of each Annuity Pay-
ment shall be greater.
If at the time of any Annuity Payment the Contract Owner
has not provided the Company with a written election not
to have federal income taxes withheld, the Company must
by law withhold such taxes from the taxable portion of
such Annuity Payment and remit that amount to the fed-
eral government.
The value of all payments, both fixed and variable, will
be greater for shorter guaranteed periods than for
longer guaranteed periods, and greater for life annui-
ties than for joint and survivor annuities, because they
are expected to be made for a shorter period.
After the Annuity Date, the Contract Owner may change
the Portfolio funding the Variable Annuity Payments, ei-
ther by written request or by calling the Variable Annu-
ity Center (1-800-258-4271). Because excessive exchanges
can potentially disrupt the management of the Portfolios
and increase transaction costs, exchange activity is
limited to two substantive exchanges (at least 30 days
apart) from the Portfolios (except the Money Market
Portfolio) during any 12-month period. "Substantive"
means either a dollar amount large enough to have a neg-
ative impact on a Portfolio or a series of movements be-
tween Portfolios. The method of computation of Variable
Annuity Payments is described in more detail in the
Statement of Additional Information.
If you choose an Annuity Payment Option and the postal
or other delivery service is unable to deliver checks to
the Payee's address of record, no interest will accrue
on amounts represented by uncashed Annuity Payment
checks. It is the Payee's responsibility to keep the
Company informed of the Payee's current address of rec-
ord.
---------------------------------------------------------
DEFERMENT OF Payment of any cash withdrawal or lump-sum death benefit
PAYMENT due from the Separate Account will occur within seven
days from the date the election becomes effective, ex-
cept that the Company may be permitted to defer such
payment if: (1) the New York Stock Exchange is closed
for other than usual weekends or holidays, or trading on
the Exchange is otherwise restricted; or (2) an emer-
gency exists as defined by the SEC, or the SEC requires
that trading be restricted; or (3) the SEC permits a de-
lay for the protection of Contract Owners.
- -------------------------------------------------------------------------------
26
<PAGE>
FEDERAL TAX CONSIDERATIONS
INTRODUCTION The ultimate effect of federal income taxes on the
amounts paid for the Contract, on the investment returns
on assets held under a Contract, on Annuity Payments,
and on the economic benefits to the Contract Owner, An-
nuitant or Beneficiary, depends on the terms of the Con-
tract, the Company's tax status and upon the tax status
of the individuals concerned. The following discussion
is general in nature and is not intended as tax advice.
You should consult a tax adviser regarding the tax con-
sequences of purchasing a Contract. No attempt is made
to consider any applicable state or other tax laws.
Moreover, the discussion is based upon the Company's un-
derstanding of the federal income tax laws as they are
currently interpreted. No representation is made regard-
ing the likelihood of continuation of the federal income
tax laws, the Treasury Regulations, or the current in-
terpretations by the Internal Revenue Service. We re-
serve the right to make uniform changes on the Contract
to the extent necessary to continue to qualify the Con-
tract as an annuity. For a discussion of federal income
taxes as they relate to the Fund, please see the accom-
panying Prospectus for the Fund.
---------------------------------------------------------
TAXATION OF Section 72 of the Code governs taxation of annuities. In
ANNUITIES IN general, a Contract Owner is not taxed on increases in
GENERAL value under a Contract until some form of withdrawal or
distribution is made under it. However, under certain
circumstances, the increase in value may be subject to
current federal income tax. (See "Contracts Owned by
Non-Natural Persons" and "Diversification Standards",
page 30.)
Section 72 provides that the proceeds of a full or par-
tial withdrawal from a Contract prior to the Annuity
Date will be treated as taxable income to the extent the
amounts held under the Contract exceed the "investment
in the Contract", as that term is defined in the Code.
The "investment in the Contract" can generally be de-
scribed as the cost of the Contract, and generally con-
stitutes all purchase payments paid for the Contract
less any amounts received under the Contract that are
excluded from the individual's gross income. The taxable
portion is taxed at ordinary income tax rates. For pur-
poses of this rule, a pledge or assignment of a Contract
is treated as a payment received on account of a partial
withdrawal of a Contract.
Upon receipt of a full or partial withdrawal or an Annu-
ity Payment under the Contract, you will be taxed if the
value of the Contract exceeds the investment in the Con-
tract. Ordinarily, the taxable portion of such payments
will be taxed at ordinary income tax rates. Partial
withdrawals are generally taken out of earnings first
and then your purchase payments in the Contract.
For Fixed Annuity Payments, in general, the taxable por-
tion of each payment is determined by using a formula
known as the "exclusion ratio", which establishes the
ratio that the investment in the Contract bears to the
total expected amount of Annuity Payments for the term
of the Contract. That ratio is then applied to each pay-
ment to determine the non-taxable portion of the pay-
ment. The remaining portion of each payment is taxed at
ordinary income tax rates. For Variable Annuity Pay-
ments, in general, the taxable portion is deter-
27
<PAGE>
mined by a formula that establishes a specific dollar
amount of each payment that is not taxed. The dollar
amount is determined by dividing the investment in the
Contract by the total number of expected periodic pay-
ments. The remaining portion of each payment is taxed at
ordinary income tax rates. Once the excludible portion
of Annuity Payments to date equals the investment in the
Contracts, the balance of the Annuity Payments will be
fully taxable.
Generally, the entire amount distributed from a Quali-
fied Contract is taxable to the Owner. In the case of
Qualified Contracts with after tax contributions, the
Owner is entitled to exclude the portion of each with-
drawal or annuity payment constituting a return of after
tax contributions. Once all of your after tax contribu-
tions have been returned to you on a non-taxable basis,
subsequent withdrawals or annuity payments are fully
taxable as ordinary income. Since the Company has no
knowledge of the amount of after tax contributions you
have made, you will need to make this computation in the
preparation of your federal income tax return.
Withholding of federal income taxes on all distributions
is required unless the recipient elects not to have any
amounts withheld and properly notifies the Company of
that election. In certain situations, taxes will be
withheld on distributions to non-resident aliens at a
30% flat rate unless an exemption from withholding ap-
plies under the applicable tax treaty.
With respect to amounts withdrawn or distributed before
the taxpayer reaches age 59 1/2, a penalty tax is im-
posed equal to 10% of the taxable portion of amounts
withdrawn or distributed. However, the penalty tax will
not apply to withdrawals: (i) made on or after the death
of the Contract Owner (or where the Contract Owner is
not an individual, the death of the primary Annuitant,
who is defined as the individual the events in whose
life are of primary importance in affecting the timing
and payment under the Contract); (ii) attributable to
the taxpayer's becoming disabled within the meaning of
Code Section 72(m)(7); (iii) that are part of a series
of substantially equal periodic payments made at least
annually for the life (or life expectancy) of the tax-
payer, or joint lives (or joint life expectancies) of
the taxpayer and his Beneficiary; (iv) from a qualified
plan; (v) allocable to investment in the Contract before
August 14, 1982; (vi) under a qualified funding asset
(as defined in Code Section 130(d)); (vii) under an im-
mediate annuity contract as defined in Section 72(u)(4);
or (viii) that are purchased by an employer on termina-
tion of certain types of qualified plans and that are
held by the employer until the employee separates from
service. Other tax penalties may apply to certain dis-
tributions as well as to certain contributions and other
transactions under a qualified contract.
If the penalty tax does not apply to a withdrawal as a
result of the application of item (iii) above, and the
series of payments are subsequently modified (other than
by reason of death or disability), the tax for the year
in which the modification occurs will be increased by an
amount (as determined under Treasury Regulations) equal
to the penalty tax that would have been imposed but for
item (iii) above, plus interest for the deferral period.
The foregoing rule applies if the modification takes
place (a) before the close of the period that is
28
<PAGE>
five years from the date of the first payment and after
the taxpayer attains age 59 1/2, or (b) before the tax-
payer reaches age 59 1/2. The tax penalty may also not
apply to distributions from Qualified Contracts issued
under Section 408(b) of the Code used to pay qualified
higher education expenses or the acquisition costs (up
to $10,000) involved in the purchase of a principal res-
idence by a first-time homebuyer.
---------------------------------------------------------
THE COMPANY'S TAX The Company is taxed as a life insurance company under
STATUS Part I of Subchapter L of the Code. Since the Separate
Account is not a separate entity from the Company and
its operations form a part of the Company, it will not
be taxed separately as a "regulated investment company"
under Subchapter M of the Code. Investment income and
realized capital gains on the assets of the Separate Ac-
count are reinvested and taken into account in determin-
ing the Accumulation Value. Under existing federal in-
come tax law, the Separate Account's investment income,
including realized net capital gains, is not taxed to
the Company. The Company reserves the right to make a
deduction for taxes should they be imposed with respect
to such items in the future.
---------------------------------------------------------
DISTRIBUTION-AT- In order to be treated as an annuity contract, a con-
DEATH RULES tract must, generally, provide the following two distri-
bution rules: (a) if any Contract Owner dies on or after
the Annuity Date and before the entire interest in the
Contract has been distributed, the remaining portion of
such interest must be distributed at least as rapidly as
the method in effect on the Contract Owner's death; and
(b) if any Contract Owner dies before the Annuity Date,
the entire interest in the Contract must generally be
distributed within five years after the date of death.
To the extent such interest is payable to a Designated
Beneficiary, however, such interest may be annuitized
over the life of that Designated Beneficiary or over a
period not extending beyond the life expectancy of that
Beneficiary, so long as distributions commence within
one year after the Contract Owner's death. If the Desig-
nated Beneficiary is the spouse of the Contract Owner,
the Contract (together with the deferred tax on the ac-
crued and future income thereunder) may be continued un-
changed in the name of the spouse as Contract Owner. The
term Designated Beneficiary means the natural person
named by the Contract Owner as a beneficiary and to whom
ownership of the Contract passes by reason of the Con-
tract Owner's death.
If the Contract Owner is not an individual, death of the
"primary Annuitant" (as defined under the Code) is
treated as the death of the Contract Owner. The primary
Annuitant is the individual who is of primary importance
in affecting the timing or the amount of payout under a
Contract. In addition, when the Contract Owner is not an
individual, a change in the primary Annuitant is treated
as the death of the Contract Owner. Finally, in the case
of Joint Contract Owners, the distribution will be re-
quired at the death of the first of the Contract Owners.
---------------------------------------------------------
TRANSFERS OF Any transfer of a Non-Qualified Contract prior to the
ANNUITY CONTRACTS Annuity Date for less than full and adequate considera-
tion will generally trigger tax on the gain in the Con-
tract to the Contract Owner at the time of such trans-
fer. The invest -
29
<PAGE>
ment in the Contract of the transferee will be increased
by any amount included in the Contract Owner's income.
This provision, however, does not apply to those trans-
fers between spouses or incident to a divorce which are
governed by Code Section 1041(a).
---------------------------------------------------------
CONTRACTS OWNED BY Where the Contract is held by a non-natural person (for
NON-NATURAL example, a corporation), the Contract is generally not
PERSONS treated as an annuity contract for federal income tax
purposes, and the income on that Contract (generally the
increase in the net Accumulated Value less the payments)
is includible in taxable income each year. The rule does
not apply where the non-natural person is only a nominal
owner such as a trust or other entity acting as an agent
for a natural person. The rule also does not apply where
the Contract is acquired by the estate of a decedent,
where the Contract is a qualified funding asset for
structured settlements, where the Contract is purchased
by an employer on behalf of an employee upon termination
of a qualified plan, and in the case of an immediate an-
nuity as defined under the Code.
---------------------------------------------------------
ASSIGNMENTS A transfer of ownership of a Contract or the designation
of an Annuitant or other Beneficiary who is not also the
Contract Owner may result in tax consequences to the
Contract Owner, Annuitant or Beneficiary that are not
discussed herein. A Contract Owner contemplating such a
transfer or assignment of a Contract should contact a
tax adviser with respect to the potential tax effects of
such a transaction.
---------------------------------------------------------
MULTIPLE CONTRACTS All non-qualified annuity contracts issued by the same
RULE company (or affiliate) to the same Contract Owner during
any calendar year are to be aggregated and treated as
one contract for purposes of determining the amount in-
cludible in the taxpayer's gross income. Thus, any
amount received under any Contract prior to the Con-
tract's Annuity Date, such as a partial withdrawal, will
be taxable (and possibly subject to the 10% penalty tax)
to the extent of the combined income in all such con-
tracts. The Treasury Department has specific authority
to issue regulations that prevent the avoidance of Code
Section 72(e) through the serial purchase of annuity
Contracts or otherwise. In addition, there may be other
situations in which the Treasury may conclude that it
would be appropriate to aggregate two or more Contracts
purchased by the same Contract Owner. The aggregation
rules do not apply to immediate annuities as defined un-
der Section 72(u)(4) of the Code. Accordingly, a Con-
tract Owner should consult a tax adviser before purchas-
ing more than one Contract or other annuity contracts.
---------------------------------------------------------
DIVERSIFICATION To comply with certain diversification regulations (the
STANDARDS "Regulations"), which were issued in final form on March
2, 1989, under Code Section 817(h), after a start up pe-
riod, each Subaccount of the Separate Account will be
required to diversify its investments. The Regulations
generally require that on the last day of each quarter
of a calendar year, no more than 55% of the value of
each Subaccount of the Separate Account is represented
by any one investment, no more than 70% is represented
by any two investments, no more than 80% is represented
by any three investments, and no more than 90% is repre-
sented
30
<PAGE>
by any four investments. A "look-through" rule applies
that suggests that each Subaccount of the Separate Ac-
count will be tested for compliance with the percentage
limitations by looking through to the assets of the
Portfolio of the Fund in which each such division in-
vests. All securities of the same issuer are treated as
a single investment. As a result of the 1988 Act, each
government agency or instrumentality will be treated as
a separate issuer for purposes of those limitations.
In connection with the issuance of temporary diversifi-
cation regulations in 1986, the Treasury announced that
such regulations did not provide guidance concerning the
extent to which Contract Owners may direct their invest-
ments to particular divisions of a separate account. It
is possible that regulations or revenue rulings may be
issued in this area at some time in the future. It is
not clear, at this time, what these regulations or rul-
ings would provide. It is possible that when the regula-
tions or rulings are issued, the Contracts may need to
be modified in order to remain in compliance. For these
reasons, the Company reserves the right to modify the
Contracts, as necessary, to prevent the Contract Owner
from being considered the owner of assets of the Sepa-
rate Account.
We intend to comply with the Regulations to assure that
the Contracts continue to be treated as annuity con-
tracts for federal income tax purposes.
---------------------------------------------------------
QUALIFIED Qualified Contracts to provide for retirement may gener-
INDIVIDUAL ally be purchased only in connection with a "rollover"
RETIREMENT of funds from another individual retirement annuity
ANNUITIES (IRA) or qualified plan. IRA Contracts must contain spe-
cial provisions and are subject to limitations on con-
tributions and the timing of when distributions can be
made. Tax penalties may apply to contributions in excess
of specified limits, loans or reassignments, distribu-
tions that do not meet specified requirements, or in
other circumstances. Anyone desiring to purchase a Qual-
ified Contract should consult a personal tax adviser.
- -------------------------------------------------------------------------------
GENERAL The Company retains the right, subject to any applicable
INFORMATION law, to make certain changes. The Company reserves the
right to eliminate the shares of any of the Portfolios
ADDITIONS, and to substitute shares of another Portfolio of the
DELETIONS, OR Fund, or of another registered open-end management in-
SUBSTITUTIONS OF vestment company, if the shares of the Portfolios are no
INVESTMENTS longer available for investment, or, if in the Company's
judgment, investment in any Portfolio would be inappro-
priate in view of the purposes of the Separate Account.
To the extent required by the 1940 Act, substitutions of
shares attributable to a Contract Owner's interest in a
Portfolio will not be made until SEC approval has been
obtained and the Contract Owner has been notified of the
change.
New Portfolios may be established when marketing, tax,
investment, or other conditions so warrant. Any new
Portfolios will be made available to existing Contract
Owners on a basis to be determined by the Company. The
Company may also eliminate one or more Portfolios if
marketing, tax, investment or other conditions so war-
rant.
In the event of any such substitution or change, the
Company may, by appropriate endorsement, make such
changes in the Contracts as may be necessary
31
<PAGE>
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
Separate Account may be operated as a management company
under the 1940 Act or any other form permitted by law,
may be deregistered under such Act in the event such
registration is no longer required, or may be combined
with one or more other separate accounts.
---------------------------------------------------------
DISTRIBUTOR OF THE The Vanguard Group, Inc., through its wholly-owned sub-
CONTRACTS sidiary, Vanguard Marketing Corp., is the principal dis-
tributor of the Contract. For these services, the Fund
paid a fee of less than .02% of the Fund's average net
assets for the 1997 fiscal year. This fee is guaranteed
not to exceed .20% of the Fund's average month-end net
assets. A complete description of these services is
found in the "Management of the Fund" section of the
Fund's Prospectus and in the Fund's Statement of Addi-
tional Information. The principal business address for
The Vanguard Group, Inc. is The Vanguard Variable Annu-
ity Center, 100 Vanguard Boulevard, Malvern, PA 19355.
---------------------------------------------------------
VOTING RIGHTS The Fund does not hold regular meetings of shareholders.
The Directors of the Fund may call special meetings of
shareholders as may be required by the 1940 Act or other
applicable law. To the extent required by law, the Port-
folio shares held in the Separate Account will be voted
by the Company at shareholder meetings of the Fund in
accordance with instructions received from persons hav-
ing voting interests in the corresponding Portfolio.
Fund shares as to which no timely instructions are re-
ceived or shares held by the Company as to which Con-
tract Owners have no beneficial interest will be voted
in proportion to the voting instructions that are re-
ceived with respect to all Contracts participating in
that Portfolio. Voting instructions to abstain on any
item to be voted upon will be applied on a pro rata ba-
sis to reduce the votes eligible to be cast.
The number of votes that are available to a Contract
Owner will be calculated separately for each Portfolio
of the Separate Account. That number will be determined
by applying his or her percentage interest, if any, in a
particular Portfolio to the total number of votes at-
tributable to the Portfolio.
Prior to the Annuity Date, the Contract Owner holds a
voting interest in each Portfolio to which the Accumu-
lated Value is allocated. The number of votes which are
available to a Contract Owner will be determined by di-
viding the Accumulated Value attributable to a Portfolio
by the net asset value per share of the applicable Port-
folio. After the Annuity Date, the person receiving An-
nuity Payments under any variable annuity option has the
voting interest. The number of votes after the Annuity
Date will be determined by dividing the reserve for such
Contract allocated to the Portfolio by the net asset
value per share of the corresponding Portfolio. After
the Annuity Date, the votes attributable to a Contract
decrease as the reserves allocated to the Portfolio de-
crease. In determining the number of votes, fractional
shares will be recognized.
The number of votes of the Portfolio that are available
will be determined as of the date coincident with the
date established by that Portfolio for determining
shareholders eligible to vote at the meeting of the
Fund. Voting instruc-
32
<PAGE>
tions will be solicited by written communication prior
to such meeting in accordance with procedures estab-
lished by the Fund.
---------------------------------------------------------
YEAR 200 MATTERS In March 1997, the Company adopted and currently has in
place a Year 2000 Assessment and Planning Project (the
"Plan") to review and analyze existing hardware and
software systems, as well as voice and data communica-
tions systems, to determine if they are Year 2000 com-
patible. The Plan provides for a management process that
ensures that when a particular system, or software ap-
plication, is determined to be "non-compliant" the
proper steps are in place to either remedy the "non-com-
pliance" or cease using the particular system or soft-
ware. The Plan also provides that the Chief Information
Officer report to the Board of Directors as to the sta-
tus of the efforts under the Plan on a regular and rou-
tine basis. The Company has engaged the services of a
third-party provider that is specialized in Year 2000
issues to work on the project.
The Plan has four specific objectives: (1) to develop an
inventory of all applications; (2) to evaluate all ap-
plications in the inventory to determine the most pru-
dent manner to move them to Year 2000 compliance, if re-
quired; (3) to estimate budgets, resources and schedules
for the migration of the "affected" applications to Year
2000 compliance; and (4) to define testing and deploy-
ment requirements to successfully manage validation and
re-deployment of any changed code. It is anticipated
that all compliance issues will be resolved by December
1998.
As of the date of this Prospectus, the Company has iden-
tified and made available what it believes are the ap-
propriate resources of hardware, people, and dollars,
including the engagement of outside third parties, to
assure that the Plan will be completed.
The Year 2000 computer problem, and its resolution, is
complex and multifaceted, and the success of a response
plan cannot be conclusively known until the Year 2000 is
reached (or an earlier date to the extent that the sys-
tems or equipment addresses Year 2000 data prior to the
Year 2000). Even with appropriate and diligent pursuit
of a well conceived response plan, including testing
procedures, there is no certainty that any company will
achieve complete success. Further, notwithstanding its
efforts or results, the Company's ability to function
unaffected to and through the year 2000 may be adversely
affected by actions (or failures to act) of third par-
ties beyond its knowledge or control.
---------------------------------------------------------
AUDITORS Ernst & Young LLP serves as independent auditors for the
Separate Account and the Company and will audit their
financial statements annually.
---------------------------------------------------------
LEGAL MATTERS Jorden Burt Boros Cicchetti Berenson & Johnson LLP, of
Washington, DC, has provided legal advice relating to
the federal securities laws applicable to the issue and
sale of the Contracts. All matters of New York law per-
taining to the validity of the Contract and the
Company's right to issue such Contracts have been passed
upon by Kimberly A. Scouller, Esquire, on behalf of the
Company.
- -------------------------------------------------------------------------------
33
<PAGE>
TABLE OF CONTENTS FOR THE VANGUARD VARIABLE ANNUITY PLAN CONTRACT
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE CONTRACT............................................................ B-2
Computation of Variable Annuity Income Payments........................ B-2
Exchanges.............................................................. B-3
Joint Annuitant........................................................ B-3
GENERAL MATTERS......................................................... B-3
Non-Participating...................................................... B-3
Misstatement of Age or Sex............................................. B-3
Assignment............................................................. B-3
Annuity Data........................................................... B-4
Annual Report.......................................................... B-4
Incontestability....................................................... B-4
Ownership.............................................................. B-4
DISTRIBUTION OF THE CONTRACT............................................ B-4
PERFORMANCE INFORMATION................................................. B-4
Money Market Subaccount Yields......................................... B-4
30-Day Yield for Non-Money Market Subaccounts.......................... B-5
Standardized Average Annual Total Return for Non-Money Market
Subaccounts........................................................... B-5
ADDITIONAL PERFORMANCE MEASURES......................................... B-7
Non-Standardized Total Return and Non-Standardized Average Annual Total
Return................................................................ B-7
Non-Standardized Total Return Year-to-Date............................. B-8
Non-Standardized One Year Return....................................... B-8
SAFEKEEPING OF ACCOUNT ASSETS........................................... B-9
THE COMPANY............................................................. B-9
STATE REGULATION........................................................ B-9
RECORDS AND REPORTS..................................................... B-9
LEGAL PROCEEDINGS....................................................... B-9
OTHER INFORMATION....................................................... B-10
FINANCIAL STATEMENTS.................................................... B-10
Audited Financial Statements........................................... B-10
</TABLE>
34
<PAGE>
FIRST PROVIDIAN LIFE & HEALTH INSURANCE COMPANY
SEPARATE ACCOUNT B
STATEMENT OF ADDITIONAL INFORMATION
FOR THE
VANGUARD VARIABLE ANNUITY PLAN CONTRACT
OFFERED BY
FIRST PROVIDIAN LIFE & HEALTH INSURANCE COMPANY
(A NEW YORK STOCK COMPANY)
ADMINISTRATIVE OFFICES
520 COLUMBIA DRIVE
JOHNSON CITY, NEW YORK 13790
----------------
This Statement of Additional Information expands upon subjects discussed in
the current Prospectus for the Vanguard Variable Annuity Plan Contract (the
"Contract") offered by First Providian Life & Health Insurance Company (the
"Company"). You may obtain a copy of the Prospectus dated April 30, 1998 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, 1998
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
----------------- ----
<S> <C>
THE CONTRACT............................................................ B-2
Computation of Variable Annuity Income Payments........................ B-2
Exchanges.............................................................. B-3
Joint Annuitant........................................................ B-3
GENERAL MATTERS......................................................... B-3
Non-Participating...................................................... B-3
Misstatement of Age or Sex............................................. B-3
Assignment............................................................. B-3
Annuity Data........................................................... B-4
Annual Report.......................................................... B-4
Incontestability....................................................... B-4
Ownership.............................................................. B-4
DISTRIBUTION OF THE CONTRACT............................................ B-4
PERFORMANCE INFORMATION................................................. B-4
Money Market Subaccount Yields......................................... B-4
30-Day Yield for Non-Money Market Subaccounts.......................... B-5
Standardized Average Annual Total Return for Non-Money Market
Subaccounts........................................................... B-5
ADDITIONAL PERFORMANCE MEASURES......................................... B-7
Non-Standardized Total Return and Non-Standardized Average Annual Total
Return................................................................ B-7
Non-Standardized Total Return Year-to-Date............................. B-8
Non-Standardized One Year Return....................................... B-8
SAFEKEEPING OF ACCOUNT ASSETS........................................... B-9
THE COMPANY............................................................. B-9
STATE REGULATION........................................................ B-9
RECORDS AND REPORTS..................................................... B-9
LEGAL PROCEEDINGS....................................................... B-9
OTHER INFORMATION....................................................... B-10
FINANCIAL STATEMENTS.................................................... B-10
Audited Financial Statements........................................... B-10
</TABLE>
B-1
<PAGE>
THE CONTRACT
In order to supplement the description in the Prospectus, the following pro-
vides additional information about the Contract which may be of interest to
Contract Owners.
COMPUTATION OF VARIABLE ANNUITY INCOME PAYMENTS
Variable Annuity Income Payments are computed as follows. First, the Accumu-
lated Value (or the portion of the Accumulated Value used to provide variable
payments) is applied under the Annuity Table contained in the Contract corre-
sponding to the Annuity Option elected by the Contract Owner and based on an
assumed interest rate of 4%. This will produce a dollar amount which is the
first monthly payment. The Company may, at the time Annuity Income Payments
are computed, offer more favorable rates in lieu of the guaranteed rates spec-
ified in the Annuity Table.
The amount of each Annuity Payment after the first is determined by means of
Annuity Units. The number of Annuity Units is determined by dividing the first
Annuity Payment by the Annuity Unit value for the selected Subaccount on the
Annuity Date. The number of Annuity Units for the Subaccount then remains
fixed, unless an exchange of Annuity Units (as set forth below) is made. After
the first Annuity Payment, the dollar amount of each subsequent Annuity Pay-
ment is equal to the number of Annuity Units multiplied by the Annuity Unit
value for the Subaccount on the due date of the Annuity Payment.
The Annuity Unit value for each Subaccount was initially established at
$10.00 on the day money was first deposited in that Subaccount. The Annuity
Unit value for any subsequent Business Day is equal to (a) times (b) times
(c), where:
(a) the Annuity Unit value for the immediately preceding Business Day;
(b) the Net Investment Factor for the day;
(c) the investment result adjustment factor (.99989255 per day), which recog-
nizes an assumed interest rate of 4% per year used in determining the An-
nuity Payment amounts.
The Net Investment Factor is a factor applied to a Subaccount that reflects
daily changes in the value of the Subaccount due to:
(a) any increase or decrease in the value of the Subaccount due to investment
results;
(b) a daily charge for the mortality and expense risks assumed by the Company
corresponding to an annual rate according to the following schedule:
<TABLE>
<CAPTION>
RATE FOR
NET ASSETS* ALL ASSETS
----------- ----------
<S> <C>
Up to $2.5 Billion............................................... 0.30%
Over $2.5 Billion and Up To $5 Billion........................... 0.28%
Over $5 Billion.................................................. 0.27%
</TABLE>
* Based on combined net assets of the Separate Account and Separate Account
IV of Providian Life & Health Insurance Company.
(c) a daily charge for the cost of administering the Contract corresponding
to an annual charge of .10%.
(d) an annual charge of $25 for maintenance of Contracts valued at less than
$25,000 at time of initial purchase and on the last business day of each
year.
The Annuity Tables contained in the Contract are based on the 1983 Table "A"
Mortality Table projected for mortality improvement to the year 2000 using
Projection Scale G and an interest rate of 4% a year.
B-2
<PAGE>
EXCHANGES
After the Annuity Date, if a Variable Annuity Option has been chosen, the
Contract Owner may, by written request, exchange the current value of the ex-
isting Subaccount to Annuity Units of any other Subaccount then available. The
request for the exchange must be received, however, at least 10 Business Days
prior to the first payment date on which the exchange is to take effect. This
exchange shall result in the same dollar amount of Annuity Payment on the date
of exchange. The Contract Owner is limited to two substantive exchanges (at
least 30 days apart) from a Portfolio (except the Money Market Portfolio) in
any Contract Year, and the value of the Annuity Units exchanged must provide a
monthly Annuity Payment of at least $100 at the time of the exchange. "Sub-
stantive" means either a dollar amount large enough to have a negative impact
on a Portfolio or a series of movements between Portfolios.
Exchanges will be made using the Annuity Unit value for the Subaccounts on
the date the request for exchange is received by the Company. On the exchange
date, the Company will establish a value for the current Subaccount by multi-
plying the Annuity Unit value by the number of Annuity Units in the existing
Subaccount, and compute the number of Annuity Units for the new Subaccount by
dividing the Annuity Unit value of the new Subaccount into the value previ-
ously calculated for the existing Subaccount.
JOINT ANNUITANT
The Contract Owner may, in the Contract Application or by written request at
least 30 days prior to the Annuity Date, name a Joint Annuitant. Such Joint
Annuitant must meet the Company's underwriting requirements. If approved by
the Company, the Joint Annuitant shall be named on the Contract Schedule or
added by endorsement. An Annuitant or Joint Annuitant may not be replaced.
The Annuity Date shall be determined based on the date of birth of the Annui-
tant. If the Annuitant or Joint Annuitant dies prior to the Annuity Date, the
survivor shall be the sole Annuitant. Another Joint Annuitant may not be des-
ignated. Payment to a Beneficiary shall not be made until the death of the
surviving Annuitant.
GENERAL MATTERS
NON-PARTICIPATING
The Contracts are non-participating. No dividends are payable and the Con-
tracts will not share in the profits or surplus earnings of the Company.
MISSTATEMENT OF AGE OR SEX
The Company may require proof of age and sex before making Annuity Payments.
If the Annuitant's stated age, sex or both in the Contract are incorrect, the
Company will change the Annuity Benefits payable to those which the Purchase
Payments would have purchased for the correct age and sex. In the case of cor-
rection of the stated age or sex after payments have commenced, the Company
will: (1) in the case of underpayment, pay the full amount due with the next
payment; or (2) in the case of overpayment, deduct the amount due from one or
more future payments.
ASSIGNMENT
Any Nonqualified Contract may be assigned by the Contract Owner prior to the
Annuity Date and during the Annuitant's lifetime. The Company is not responsi-
ble for the validity of any assignment. No assignment will be recognized until
the Company receives written notice thereof. The interest of any Beneficiary
which the assignor has the right to change shall be subordinate to the inter-
est of an assignee. Any amount paid to the assignee shall be paid in one sum,
notwithstanding any settlement agreement in effect at the time assignment was
executed. The Company shall not be liable as to any payment or other settle-
ment made by the Company before receipt of written notice.
B-3
<PAGE>
ANNUITY DATA
The Company will not be liable for obligations which depend on receiving in-
formation from a Payee until such information is received in a form satisfac-
tory to the Company.
ANNUAL REPORT
Once each Contract Year, the Company will send the Contract Owner an annual
report of the current Accumulated Value allocated to each Subaccount; and any
Purchase Payments, charges, exchanges or withdrawals during the year. This re-
port will also give the Contract Owner any other information required by law
or regulation. The Contract Owner may ask for a report like this at any time.
INCONTESTABILITY
This Contract is incontestable from the Contract Date, subject to the "Mis-
statement of Age or Sex" provision.
OWNERSHIP
The Owner of the Contract on the Contract Date is the Annuitant, unless oth-
erwise specified in the application. The Owner may specify a new Owner by
written notice at any time thereafter. The term Owner also includes any person
named as a Joint Owner. A Joint Owner shares ownership in all respects with
the Owner. During the Annuitant's lifetime all rights and privileges under
this Contract may be exercised solely by the Owner. Upon the death of the Own-
er(s), Ownership is retained by the surviving Joint Owner or passes to the
Owner's Designated Beneficiary, if one has been designated by the Owner. If no
Owner's Designated Beneficiary is designated or if no Owner's Designated Bene-
ficiary is living, the Owner's Designated Beneficiary is the Owner's estate.
From time to time the Company may require proof that the Owner is still liv-
ing.
DISTRIBUTION OF THE CONTRACT
The Vanguard Group, Inc. through its wholly-owned subsidiary, Vanguard Mar-
keting Corporation, is the principal distributor of the Contracts. For these
services, the Fund paid a fee of .02% of the Funds' average net assets for its
1997 fiscal year. This fee is guaranteed not to exceed .20% of the Fund's av-
erage month-end net assets. A complete description of these services is found
in the "Management of the Fund" section of the Fund's Prospectus and in the
Fund's Statement of Additional Information.
PERFORMANCE INFORMATION
Performance information for the Subaccounts including the yield and effective
yield of the Money Market Subaccount, the yield of the remaining Subaccounts,
and the total return of all Subaccounts, may appear in reports or promotional
literature to current or prospective Contract Owners.
MONEY MARKET SUBACCOUNT YIELDS
Current yield for the Money Market Subaccount will be based on the change in
the value of a hypothetical investment (exclusive of capital changes) over a
particular 7-day period, less a pro-rata share of Subaccount expenses accrued
over that period (the "base-period"), and stated as a percentage of the in-
vestment at the start of the base period (the "base period return"). The base
period return is then annualized by multiplying by 365/7, with the resulting
yield figure carried to at least the nearest hundredth of one percent.
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%.
B-4
<PAGE>
30-DAY YIELD FOR NON-MONEY MARKET SUBACCOUNTS
Quotations of yield for the remaining Subaccounts will be based on all in-
vestment income per Unit earned during a particular 30-day period, less ex-
penses accrued during the period ("net investment income"), and will be com-
puted by dividing net investment income by the value of a Unit on the last day
of the period, according to the following formula:
YIELD = 2[(a-b + 1)/6/ - 1]
---
cXd
Where:
[a] equals the net investment income earned during the period by the Series
attributable to shares owned by a Subaccount
[b] equals the expenses accrued for the period (net of reimbursements)
[c] equals the average daily number of Units outstanding during the period
[d] equals the maximum offering price per Accumulation Unit on the last day
of the period
Yield on the Subaccount is earned from the increase in net asset value of
shares of the Series in which the Subaccount invests and from dividends de-
clared and paid by the Series, which are automatically reinvested in shares of
the Series.
The yield of each Subaccount for the 30-day period ended December 31, 1997,
is set forth below. Yields are calculated daily for each Subaccount. Premiums
and discounts on asset-backed securities are not amortized.
<TABLE>
<S> <C>
High-Grade Bond Subaccount............................................. 5.73%
High Yield Bond Subaccount............................................. 8.14%
Balanced Subaccount.................................................... 3.26%
Equity Income Subaccount............................................... 2.33%
Equity Index Subaccount................................................ 1.15%
Growth Subaccount...................................................... 0.41%
International Subaccount............................................... --
Small Company Growth Subaccount........................................ 0.15%
</TABLE>
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN FOR NON-MONEY MARKET SUBACCOUNTS
When advertising performance of the Subaccounts, the Company will show the
"Standardized Average Annual Total Return," calculated as prescribed by the
rules of the SEC, for each Subaccount. The Standardized Average Annual Total
Return is the effective annual compounded rate of return that would have pro-
duced the cash redemption value over the stated period had the performance re-
mained constant throughout. The calculation assumes a single $1,000 payment
made at the beginning of the period and full redemption at the end of the pe-
riod. It reflects the deduction of all applicable sales loads, the Annual Con-
tract Maintenance Fee and all other Portfolio, Separate Account and Contract
level charges except Premium Taxes, if any. In calculating performance infor-
mation, the Annual Contract Maintenance Fee is reflected as a percentage equal
to the total amount of fees collected during a year divided by the total aver-
age net assets of the Portfolios during the same year. The fee is assumed to
remain the same in each year of the applicable period. The fee is prorated to
reflect only the remaining portion of the calendar year of purchase. Thereaf-
ter, the fee is deducted on the last business day of the year for the follow-
ing 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
B-5
<PAGE>
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%
Balanced Subaccount....... 22.58% 23.14% 15.73% 22.58% 22.58% 14.08%
Equity Income Subaccount.. 33.77% 29.71% -- 33.77% 33.77% 19.39%
Equity Index Subaccount... 32.58% 30.34% 19.43% 32.58% 32.58% 17.43%
Growth Subaccount......... 26.10% 29.88% -- 26.10% 26.10% 21.13%
International Subaccount.. 2.91% 10.59% -- 2.91% 2.91% 9.18%
Small Company Growth
Subaccount............... 12.79% -- -- 12.79% 12.79% 6.03%
</TABLE>
- --------
* Since Inception:
Equity Index Subaccount and High-Grade Bond Subaccount--April 29, 1991
Balanced Subaccount--May 23, 1991
Equity Income Subaccount and Growth Subaccount--June 7, 1993
International Subaccount--June 3, 1994
High Yield Bond Subaccount and Small Company Growth Subaccount--June 3,
1996
<TABLE>
<CAPTION>
MONTH-
TO- QUARTER 6 MONTHS-
DATE TO-DATE TO-DATE
------ ------- ---------
<S> <C> <C> <C>
High-Grade Bond Subaccount............................ 1.03% 2.74% 6.05%
High Yield Bond Subaccount............................ 1.29% 2.27% 6.04%
Balanced Subaccount................................... 1.61% 2.77% 9.06%
Equity Income Subaccount.............................. 2.62% 5.93% 14.22%
Equity Index Subaccount............................... 1.07% 2.72% 10.27%
Growth Subaccount..................................... 1.53% 4.05% 7.28%
International Subaccount.............................. 0.50% -9.61% -11.42%
Small Company Growth Subaccount....................... -1.00% -8.22% 9.59%
</TABLE>
All total return figures reflect the deduction of the administrative charge,
and the mortality and expense risk charge. The SEC requires that an assumption
be made that the Contract Owner surrenders the entire Contract at the end of
the 1-, 5- and 10-year periods (or, if less, up to the life of the Subaccount)
for which performance is required to be calculated.
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
B-6
<PAGE>
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 perfor-
mance, investment objectives, and assets, or tracked by other services, compa-
nies, 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 Con-
tract. Unmanaged indices may assume the reinvestment of dividends but gener-
ally do not reflect deductions for administrative and management costs and ex-
penses.
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 First Providian Life & Health Insurance Company as
determined by A.M. Best, Moody's, Standard & Poor's or other recognized rating
services. Reports and promotional literature may also contain other informa-
tion 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, publica-
tions, or other persons who rank separate accounts or other investment prod-
ucts on overall performance or other criteria, and (ii) the effect of tax de-
ferred compounding on a Subaccount's investment returns, or returns in gener-
al, which may be illustrated by graphs, charts, or otherwise, and which may
include a comparison, at various points in time, of the return from an invest-
ment in a Contract (or returns 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 TOTAL RETURN AND NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURN
The Company may show Non-Standardized Total Return (i.e., the percentage
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 Av-
erage 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 Total Return and the Non-Standardized Av-
erage 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 stat-
ed. Because the value of an Accumulation Unit reflects the Separate Account
and Portfolio expenses (See Fee Table in the Prospectus), the Non-Standardized
Total Return and Non-Standardized Average Annual Total Return also reflect
these expenses. However, these percentages do not reflect the Annual Contract
Maintenance Fee or Premium Taxes (if any), which if included would reduce the
percentages reported by the Company.
NON-STANDARDIZED TOTAL RETURN
FOR PERIOD ENDING 12/31/97
<TABLE>
<CAPTION>
MONTH-
TO- QUARTER- 6 MONTHS- ONE SINCE
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% 7.51%
High Yield Bond Subaccount........... 1.29% 2.27% 6.05% 11.63% 13.06%
Balanced Subaccount.................. 1.61% 2.77% 9.07% 22.60% 14.13%
Equity Income Subaccount............. 2.62% 5.94% 14.23% 33.78% 19.43%
Equity Index Subaccount.............. 1.67% 2.73% 10.27% 32.59% 17.48%
Growth Subaccount.................... 1.53% 4.05% 7.29% 26.12% 21.17%
International Subaccount............. 0.50% -9.60% -11.47% 2.92% 9.22%
Small Company Growth Subaccount...... -0.99% -8.22% 9.60% 12.80% 6.05%
</TABLE>
B-7
<PAGE>
NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURNS
FOR PERIOD ENDING 12/31/97
<TABLE>
<CAPTION>
SINCE
ONE YEAR THREE YEAR FIVE YEAR INCEPTION
-------- ---------- --------- ---------
<S> <C> <C> <C> <C>
High-Grade Bond Subaccount.............. 8.98% 9.69% 6.83% 7.51%
High Yield Bond Subaccount.............. 11.63% -- -- 13.06%
Balanced Subaccount..................... 22.60% 23.17% 15.77% 14.13%
Equity Income Subaccount................ 33.78% 29.74% -- 19.43%
Equity Index Subaccount................. 32.59% 30.37% 19.47% 17.48%
Growth Subaccount....................... 26.12% 29.90% -- 21.17%
International Subaccount................ 2.92% 10.62% -- 9.22%
Small Company Growth Subaccount......... 12.80% -- -- 6.05%
</TABLE>
NON-STANDARDIZED TOTAL RETURN YEAR-TO-DATE
The Company may show Non-Standardized Total Return Year-to-Date as of a par-
ticular date, or simply Total Return YTD, for one or more Subaccounts with re-
spect to one or more non-standardized base periods commencing at the beginning
of a calendar year. Total Return YTD figures reflect the percentage change in
actual Accumulation Unit Values during the relevant period. These percentages
reflect a deduction for the Separate Account and Portfolio expenses, but do
not include the Annual Contract Maintenance Fee or Premium Taxes (if any),
which if included would reduce the percentages reported by the Company.
<TABLE>
<CAPTION>
TOTAL RETURN YTD
AS OF 12/31/97
----------------
<S> <C>
High-Grade Bond Subaccount..................................... 8.98%
High Yield Bond Subaccount..................................... 11.63%
Balanced Subaccount............................................ 22.60%
Equity Income Subaccount....................................... 33.78%
Equity Index Subaccount........................................ 32.59%
Growth Subaccount.............................................. 26.12%
International Subaccount....................................... 2.92%
Small Company Growth Subaccount................................ 12.80%
</TABLE>
NON-STANDARDIZED ONE YEAR RETURN
The Company may show Non-Standardized One Year Return, for one or more
Subaccounts with respect to one or more non-standardized base periods commenc-
ing at the beginning of a calendar year (or date of inception, 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 dur-
ing the relevant period. These percentages reflect a deduction for the Sepa-
rate Account and Portfolio expenses, but do not include the Annual Contract
Maintenance Fee or Premium Taxes (if any), which if included would reduce the
percentages reported by the Company.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992
----- ----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C>
High-Grade Bond Subaccount............. 8.98% 3.08% 17.47% -3.19% 8.92% 5.70%
High Yield Bond Subaccount............. 11.63% -- -- -- -- --
Balanced Subaccount.................... 22.60% 15.68% 31.76% -1.13% 12.56% 6.59%
Equity Income Subaccount............... 33.78% 18.13% 38.19% -1.76% -- --
Equity Index Subaccount................ 32.59% 22.27% 36.67% 0.61% 9.18% 6.77%
Growth Subaccount...................... 26.12% 26.29% 37.62% 3.74% -- --
International Subaccount............... 2.92% 14.05% 15.31% -- -- --
Small Company Growth Subaccount........ 12.80% -- -- -- -- --
</TABLE>
B-8
<PAGE>
SAFEKEEPING OF ACCOUNT ASSETS
Title to assets of the Separate Account is held by the Company. The assets
are kept physically segregated and held separate and apart from the Company's
general account assets. Records are maintained of all purchases and redemp-
tions of eligible Portfolio shares held by each of the Subaccounts.
THE COMPANY
All of the stock of the Company is owned by Veterans Life Insurance Company,
which is a wholly owned subsidiary of Providian Life and Health Insurance Com-
pany ("PLH"). Commonwealth General Corporation owns a 3.7% interest in PLH and
61%, 15.3%, and 20% interests, respectively, are held by Commonwealth Life In-
surance Company, Peoples Security Life Insurance Company, and Capital Liberty,
L.P. Commonwealth Life Insurance Company and Peoples Security Life Insurance
Company are each wholly owned by Capital General Development Corporation,
which in turn is wholly owned by Commonwealth General Corporation. A 1% inter-
est in Capital Liberty, L.P. is owned by Commonwealth General Corporation,
which is the general partner, and 79.2% and 19.8% interests, respectively, are
held by two limited partners, Commonwealth Life Insurance Company and Peoples
Security Life Insurance Company.
Commonwealth General Corporation is wholly owned by AEGON USA, Inc., which in
turn is wholly owned by AEGON U.S. Holding Corporation, a wholly owned subsid-
iary of AEGON International n.v. AEGON International n.v. is a wholly owned
subsidiary of AEGON n.v. Vereniging AEGON (a Netherlands membership associa-
tion) has a 53.63% interest in AEGON n.v.
STATE REGULATION
The Company is a stock life insurance company organized under the laws of the
State of New York, and is subject to regulation by the New York State Depart-
ment of Insurance. An annual statement is filed with the New York Superinten-
dent of Insurance on or before March 1 of each year covering the operations
and reporting on the financial condition of the Company as of December 31 of
the preceding calendar year. Periodically, the New York Superintendent of In-
surance examines the financial condition of the Company, including the liabil-
ities and reserves of the Separate Account.
The availability of certain contract rights and provisions depends on state
approval and/or filing and review processes. Where required by state law or
regulation, the Contracts will be modified accordingly.
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.
B-9
<PAGE>
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 statutory-basis financial statements of the Company for the years
ended December 31, 1997 and December 31, 1996, including the Report of Inde-
pendent Auditors thereon, which are also included in this Statement of Addi-
tional 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 performance of the assets held in the
Separate Account.
B-10
<PAGE>
STATUTORY-BASIS FINANCIAL STATEMENTS
FIRST PROVIDIAN LIFE AND HEALTH
INSURANCE COMPANY
YEARS ENDED DECEMBER 31, 1997 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
STATUTORY-BASIS FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. 1
Audited Financial Statements
Balance Sheets (Statutory-Basis)............................................ 2
Statements of Operations (Statutory-Basis).................................. 3
Statements of Changes in Capital and Surplus (Statutory-Basis).............. 4
Statements of Cash Flows (Statutory-Basis).................................. 5
Notes to Financial Statements............................................... 6
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
First Providian Life and Health Insurance Company
We have audited the accompanying statutory-basis balance sheets of First
Providian Life and Health Insurance Company as of December 31, 1997 and 1996,
and the related statutory-basis statements of operations, changes in capital
and surplus, and cash flows for the years then ended. These financial state-
ments are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing 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. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the New York Department of Insurance, which practices differ from
generally accepted accounting principles. The variances between such practices
and generally accepted accounting principles are also described in Note 1. The
effects on the financial statements of these variances are not reasonably de-
terminable but are presumed to be material.
In our opinion, because of the effects of the matter described in the pre-
ceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the fi-
nancial position of First Providian Life and Health Insurance Company at De-
cember 31, 1997 and 1996, or the results of its operations or its cash flows
for the years then ended.
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of First Providian
Life and Health Insurance Company at December 31, 1997 and 1996, and the re-
sults of its operations and its cash flows for the years then ended, in con-
formity with accounting practices prescribed or permitted by the New York De-
partment of Insurance.
/s/ Ernst & Young LLP
- -------------------------------
Louisville, Kentucky
April 24, 1998
1
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
BALANCE SHEETS (STATUTORY-BASIS)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1997 1996
------------ ------------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Bonds............................................... $193,126,619 $202,816,142
Preferred stocks.................................... 1,791,722 1,820,130
Policy loans........................................ 2,306,676 2,161,098
Cash and short-term investments..................... 14,623,166 2,722,574
Other invested assets............................... 104,681 61,009
------------ ------------
Total cash and invested assets................... 211,952,864 209,580,953
Deferred and uncollected premiums.................... 2,973,976 3,088,869
Accrued investment income............................ 3,011,366 3,548,020
Amounts due from affiliates.......................... 794,077 360,620
Other admitted assets................................ 224,524 158,590
Separate account assets.............................. 177,885,176 107,317,797
------------ ------------
Total admitted assets................................ $396,841,983 $324,054,849
============ ============
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate policy reserves........................... $107,256,124 $115,759,093
Policy and contract claims.......................... 3,343,556 2,666,897
Premiums received in advance........................ 313,916 295,034
Accrued commissions, general expenses, and taxes.... 484,969 378,021
Amounts due to affiliates........................... 62,246 35,309
Asset valuation reserve............................. 2,266,096 2,029,494
Interest maintenance reserve........................ 9,766,842 8,822,157
Other liabilities................................... 1,276,064 1,824,673
Separate account liabilities........................ 177,885,176 107,317,797
------------ ------------
Total liabilities................................ 302,654,989 239,128,475
Capital and surplus:
Capital stock, $2 par value; 1,000,000 shares
authorized, issued and outstanding................. 2,000,000 2,000,000
Paid-in surplus..................................... 10,485,844 10,485,844
Special surplus fund................................ 1,607,352 1,473,034
Unassigned surplus.................................. 80,093,798 70,967,496
------------ ------------
Total capital and surplus........................ 94,186,994 84,926,374
------------ ------------
Total liabilities and capital and surplus............ $396,841,983 $324,054,849
============ ============
</TABLE>
See accompanying notes.
2
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
STATEMENTS OF OPERATIONS (STATUTORY-BASIS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Premiums earned:
Life and annuity................................ $12,155,417 $12,170,934
Accident and health............................. 5,152,989 5,135,923
Annuity deposit funds............................. 52,147,732 30,982,346
Net investment income............................. 16,359,415 15,632,095
Commissions and expense allowances on reinsurance
ceded............................................ 185,461 394,923
Amortization of interest maintenance reserve...... 450,566 423,319
Reinsurance recapture gain........................ 2,202,882 --
Other income...................................... -- 21
----------- -----------
88,654,462 64,739,561
Benefits and expenses:
Accident and health, life and other benefits...... 31,707,697 24,544,627
Decrease in aggregate policy reserves............. (8,502,969) (5,411,122)
Interest on reinsurance reserves.................. 93,070 191,948
Commissions....................................... 128,037 77,336
General insurance expenses........................ 4,875,881 4,546,942
Insurance taxes, licenses, and fees............... 844,767 692,100
Net transfers to separate accounts................ 44,794,451 27,869,760
----------- -----------
73,940,934 52,511,591
----------- -----------
Net gain from operations before federal income
taxes.............................................. 14,713,528 12,227,970
Federal income tax expense.......................... 5,219,000 4,414,000
----------- -----------
Net gain from operations............................ 9,494,528 7,813,970
Net realized capital gains (losses), net of income
taxes (benefits) (1997--$747,000; 1996--($174,000))
and excluding gains (losses) transferred to the
interest maintenance reserve (1997--$1,395,248;
1996--($341,664)).................................. 4,286 (9,975)
----------- -----------
Net income.......................................... $ 9,498,814 $ 7,803,995
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS (STATUTORY-BASIS)
<TABLE>
<CAPTION>
CAPITAL PAID-IN SPECIAL UNASSIGNED
STOCK STOCK SURPLUS FUND SURPLUS
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balances, January 1, 1996..... $2,000,000 $10,485,844 $1,357,319 $63,100,573
Net income.................... -- -- -- 7,803,995
Change in net unrealized gains
on investments............... -- -- -- 26,057
Prior year federal income tax
adjustment................... -- -- -- 446,132
(Increase) decrease in
nonadmitted assets and
related items................ -- -- 115,715 (82,809)
Increase in asset valuation
reserve...................... -- -- -- (326,452)
---------- ----------- ---------- -----------
Balances, December 31, 1996... 2,000,000 10,485,844 1,473,034 70,967,496
Net income.................... -- -- -- 9,498,814
Change in net unrealized
losses on investments........ -- -- -- (80,708)
Prior year federal income tax
adjustment................... -- -- -- 58,000
(Increase) decrease in
nonadmitted assets and
related items................ -- -- 134,318 (113,202)
Increase in asset valuation
reserve...................... -- -- -- (236,602)
---------- ----------- ---------- -----------
Balances, December 31, 1997... $2,000,000 $10,485,844 $1,607,352 $80,093,798
========== =========== ========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
STATEMENTS OF CASH FLOWS (STATUTORY-BASIS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1997 1996
------------ -----------
<S> <C> <C>
Cash and short-term investments provided:
Operations:
Premiums and annuity fund deposits................ $ 69,554,536 $48,426,473
Net investment income received.................... 16,880,518 15,205,072
Allowances on reinsurance ceded and other income
received......................................... 185,461 394,944
------------ -----------
86,620,515 64,026,489
Benefits paid..................................... 31,036,565 24,265,630
Commissions, expenses, and taxes paid............. 10,900,700 9,106,408
Net increase in policy loans...................... 145,578 153,466
Net transfers to separate accounts................ 44,775,696 27,910,962
------------ -----------
86,858,539 61,436,466
------------ -----------
Total cash provided (applied) by operations..... (238,024) 2,590,023
Investments sold, matured or repaid................ 159,445,896 73,171,482
Other cash provided:
Net cash received on reinsurance recaptured....... 2,202,882 --
Investment payables............................... -- 402,490
Other items....................................... 134,062 829,867
------------ -----------
Total other cash provided....................... 2,336,944 1,232,357
------------ -----------
Total cash and short-term investments provided.. 161,544,816 76,993,862
Cash and short-term investments applied:
Investments acquired............................... 147,684,481 85,301,194
Other cash applied:
Payable to affiliates............................. 406,521 548,108
Investment payables............................... 402,491 --
Other items....................................... 1,150,731 295,431
------------ -----------
Total other cash applied........................... 1,959,743 843,539
------------ -----------
Total cash and short-term investments applied... 149,644,224 86,144,733
------------ -----------
Increase (decrease) in cash and short-term
investments.................................... 11,900,592 (9,150,871)
Cash and short-term investments:
Beginning of year.................................. 2,722,574 11,873,445
------------ -----------
End of year........................................ $ 14,623,166 $ 2,722,574
============ ===========
</TABLE>
See accompanying notes.
5
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION, NATURE OF OPERATIONS AND ACCOUNTING POLICIES
Organization
First Providian Life and Health Insurance Company (FPLH) is domiciled in New
York. Prior to June 10, 1997, FPLH was an indirect, wholly owned subsidiary of
Providian Corporation (Providian). On June 10, 1997, Providian's insurance op-
erations, 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 corpo-
ration in the merger. Effective October 15, 1997, Providian's name was changed
to Commonwealth General Corporation (Commonwealth). Effective December 31,
1997, ownership of Commonwealth was transferred to AEGON USA, Inc., an indi-
rect, wholly owned subsidiary of AEGON N.V.
FPLH is a wholly owned subsidiary of Veterans Life Insurance Company (VLIC),
a wholly owned subsidiary of Providian Life and Health Insurance Company (PLH).
PLH is owned by Commonwealth Life Insurance Company (CLICO) 61%, Capital Liber-
ty, L.P. (CLLP) 20%, Peoples Security Life Insurance Company (PSI) 15%, and
Commonwealth 4%. Commonwealth is the ultimate parent of CLICO, CLLP, and PSI.
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.
Nature of Operations
FPLH sells and services life and accident and health insurance products, pri-
marily utilizing direct response methods, such as television, telephone and
mail to reach low to middle-income households nationwide. FPLH also sells and
services individual accumulation products, primarily utilizing financial plan-
ners, stock brokerage firms and a mutual fund.
Management's Estimates
The preparation of financial statements of insurance companies requires man-
agement to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known, which could im-
pact the amounts reported and disclosed herein.
Basis of Presentation
The accompanying financial statements of FPLH have been prepared in accor-
dance with the accounting practices prescribed or permitted by the New York De-
partment of Insurance. Such practices vary from generally accepted accounting
principles (GAAP). The more significant variances from GAAP are as follows:
Investments
Investments in bonds are reported at amortized cost or fair value based
on their National Association of Insurance Commissioners (NAIC) rating; for
GAAP, such fixed maturity investments are designated at purchase as held-
to-maturity, trading or available-for-sale. Held-to-maturity fixed invest-
ments are reported at amortized cost, and the remaining fixed maturity in-
vestments are reported at fair value with unrealized holding gains and
losses reported in operations for those designated as trading and as a sep-
arate component of shareholders' equity for those designated as available-
for-sale.
6
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION, NATURE OF OPERATIONS AND ACCOUNTING POLICIES (CONTINUED)
Fair values of investments in bonds and preferred stocks are generally
based on values specified by the Securities Valuation Office (SVO) of the
NAIC, rather than on values provided by outside broker confirmations or in-
ternally calculated estimates. However, for certain investments, the NAIC
does not provide a value and FPLH uses either admitted asset investment
amounts (i.e., statement values) as allowed by the NAIC, quoted fair values
provided by outside broker confirmations or internally calculated esti-
mates. Changes between cost and admitted asset investment amounts are cred-
ited or charged directly to unassigned surplus rather than to a separate
surplus account.
Under a formula prescribed by the NAIC, FPLH defers the portion of real-
ized capital gains and losses attributable to changes in the general level
of interest rates on sales of certain liabilities and fixed income invest-
ments, principally bonds, and amortizes such deferrals into income on a
straight-line basis over the remaining period to maturity based on group-
ings of individual liabilities or investments sold. The net accumulated un-
amortized balance of such deferrals is reported as an "interest maintenance
reserve" (IMR) in the accompanying balance sheets. Realized capital gains
and losses are reported in income net of federal income tax and transfers
to the IMR. The "asset valuation reserve" (AVR) is also determined by a
NAIC prescribed formula and is reported as a liability rather than a valua-
tion allowance. The AVR represents a provision for possible fluctuations in
the value of bonds and other invested assets.
Changes to the AVR are charged or credited directly to unassigned sur-
plus. Under GAAP, realized capital gains and losses are reported in the in-
come statement on a pretax basis in the period that the asset giving rise
to the gain or loss is sold and direct write-downs are recorded (or valua-
tion allowances are provided, where appropriate under GAAP) when there has
been a decline in value deemed to be other than temporary, in which case,
write-downs (or provisions) for such declines are charged to income.
Policy Acquisition Costs
Costs of acquiring and renewing business are expensed when incurred. Un-
der GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For uni-
versal life insurance and investment-type contracts, to the extent recover-
able from future gross profits, deferred policy acquisition costs are amor-
tized generally in proportion to the present value of expected gross prof-
its from surrender charges and investment, mortality and expense margins.
Nonadmitted Assets
Certain assets designated as "nonadmitted," principally agents' debit
balances and furniture and equipment, are excluded from the accompanying
balance sheets and are charged directly to unassigned surplus.
Premiums
Revenues for universal life policies and investment-type contracts con-
sist of the entire premium received and benefits incurred represent the to-
tal of death benefits paid, surrenders and the change in policy reserves.
Under GAAP, premiums received in excess of policy charges are not recog-
nized as premium revenue and benefits represent the excess of benefits paid
over the policy account value and interest credited to the account values.
7
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION, NATURE OF OPERATIONS AND ACCOUNTING POLICIES (CONTINUED)
Benefit Reserves
Certain policy reserves are calculated using prescribed interest and mor-
tality assumptions rather than on estimated expected experience and actual
account balances as would be required under GAAP.
Reinsurance
Policy and contract liabilities ceded to reinsurers have been reported as
reductions of the related reserves rather than as assets as would be re-
quired under GAAP.
Commissions allowed by reinsurers on business ceded are reported as in-
come when received rather than being deferred and amortized with deferred
policy acquisition costs.
Federal Income Taxes
Deferred federal income taxes are not provided for differences between
the financial statement amounts and the tax bases of assets and liabili-
ties.
Statements of Cash Flow
Cash and short-term investments in the statements of cash flow represent
cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding captions of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
The effects of the foregoing variances from GAAP on the accompanying statuto-
ry-basis financial statements have not been determined, but are presumed to be
material.
Other significant accounting policies followed in preparing the accompanying
statutory-basis financial statements are as follows:
Investments
Bonds, preferred stocks, policy loans and short-term investments are
stated at values prescribed by the NAIC, as follows:
Bonds not backed by other loans are stated at amortized cost using the
constant effective yield method.
Loan-backed bonds and structured securities are valued at amortized
cost using the constant effective yield method. Anticipated prepayments
are considered when determining the amortization of related discounts or
premiums. Prepayment assumptions are obtained from dealer survey values
or internal estimates and are consistent with the current interest rate
and economic environment. The retrospective adjustment method is used to
value such securities.
Preferred stocks are carried at cost. In the prior year, such stocks
were reported at fair value as determined by the SVO of the NAIC.
Policy loans are carried at the aggregate unpaid principal balance.
Short-term investments include investments with maturities of less
than one year at the date of acquisition. Short-term investments are
carried at amortized cost.
8
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION, NATURE OF OPERATIONS AND ACCOUNTING POLICIES (CONTINUED)
Bond and other loan interest is credited to income as it accrues. For se-
curities, FPLH follows the guidelines of the NAIC for each security on an
individual basis in determining the admitted or nonadmitted status of ac-
crued income amounts. There was no interest on securities excluded from in-
vestment income at December 31, 1997 and 1996.
Net income includes realized gains and losses on investments sold, net of
tax and transfers to the IMR. The cost of investments sold is determined on
a first-in, first-out basis.
Separate Accounts
Separate account assets and liabilities reported in the accompanying
statutory-basis financial statements represent funds that are separately
administered, principally for annuity contracts, and for which the contract
holder, rather than FPLH, bears the investment risk. Separate account con-
tract holders have no claim against the assets of the general account of
FPLH. Separate account assets and liabilities are reported at estimated
fair value. The operations of the separate accounts are not included in the
accompanying statutory-basis financial statements. Fees charged on separate
account policyholder deposits are included in net transfers to separate ac-
counts in the accompanying statements of operations.
Policy Reserves
Unearned premiums represent the portion of premiums written which are ap-
plicable to the unexpired terms of accident and health policies in force,
calculated principally by the application of monthly pro rata fractions.
Liabilities for unearned premiums are included in aggregate policy re-
serves.
FPLH waives deduction of deferred fractional premiums upon death of
insureds. FPLH's policy is to return any portion of the final premium be-
yond the date of death. Surrender values are not promised in excess of the
legally computed reserves. Additional premiums are charged for policies is-
sued on substandard lives according to underwriting classification. Mean
reserves are determined by computing the regular mean reserve for the plan
at the issued age and holding, in addition, one-half of the extra premium
charged for the year.
The tabular interest has been determined from the basic data for the cal-
culation of policy reserves. The tabular less actual reserve released and
the tabular cost have been determined by formula as described in the NAIC
instructions.
Liabilities for Policy and Contract Claims
Liabilities for policy and contract claims, principally related to acci-
dent and health policies, include amounts determined in accordance with
standard actuarial practice and statutory regulation. These estimates are
subject to the effects of trends in claim severity and frequency. Although
considerable variability is inherent in such estimates, management believes
that the liabilities for policy and contract claims are adequate. The meth-
ods of making such estimates and establishing the resulting liabilities are
continually reviewed and updated, and any adjustments resulting therefrom
are reflected in current earnings.
Premiums, Benefits and Expenses
For individual and most group life policies, premiums are reported as
earned on the policy/certificate anniversary. For individual and group an-
nuities, premiums and annuity fund deposits are recorded as earned when
collected. For individual and group accident and health policies, premiums
are recorded as earned on
9
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION, NATURE OF OPERATIONS AND ACCOUNTING POLICIES (CONTINUED)
a pro rata basis over the coverage period for which the premiums were col-
lected or due. Benefit claims (including an estimated provision for claims
incurred but not reported), policy reserve changes and expenses are charged
to income as incurred.
Reinsurance
Reinsurance premiums, benefits and expenses are accounted for in a manner
consistent with that used in accounting for original policies issued and
the terms of reinsurance contracts. Premiums, benefits, expenses and aggre-
gate policy reserves are recorded net of reinsured amounts.
Permitted Statutory Accounting Practices
FPLH's statutory-basis financial statements are prepared in accordance
with accounting practices prescribed or permitted by the New York Depart-
ment of Insurance. Currently, "prescribed" statutory accounting practices
include state insurance laws, regulations, and general administrative
rules, as well as a variety of publications of the NAIC, including the
NAIC's Accounting Practices and Procedures Manual. "Permitted" statutory
accounting practices encompass all accounting practices that are not pre-
scribed; such practices may differ from state to state, may differ from
company to company within a state, and may change in the future.
The NAIC is in the process of codifying statutory accounting practices
(Codification). Codification will likely change, to some extent, prescribed
statutory accounting practices and may result in changes to the accounting
practices that FPLH uses to prepare its statutory-basis financial state-
ments. Codification, which is expected to be approved by the NAIC in 1998,
will require adoption by the various states before it becomes the pre-
scribed statutory basis of accounting for insurance companies domesticated
within those states. Accordingly, before Codification becomes effective for
FPLH, New York must adopt Codification as the prescribed basis of account-
ing on which domestic insurers must report their statutory-basis results to
the Department of Insurance. At this time it is unclear whether New York
will adopt Codification. However, based on current draft guidance, manage-
ment believes that the impact of codification will not be material to
FPLH's statutory-basis financial statements.
Reclassifications
Certain reclassifications have been made to the prior year financial state-
ments to conform with the current year presentation.
2. INVESTMENTS
The tables below contain amortized cost (carrying value or statement value)
and fair value information on bonds.
<TABLE>
<CAPTION>
AMORTIZED GROSS GROSS FAIR
COST UNREALIZED GAINS UNREALIZED LOSSES VALUE
--------- ---------------- ----------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
U.S. government
obligations............. $ 8,979 $ 444 $ 3 $ 9,420
States and political
subdivisions............ 5,091 -- -- 5,091
Corporate and other...... 121,094 8,626 523 129,197
Foreign corporate*....... 22,363 474 557 22,280
Asset-backed............. 11,495 29 -- 11,524
Mortgage-backed.......... 24,105 1,565 -- 25,670
-------- ------- ------ --------
$193,127 $11,138 $1,083 $203,182
======== ======= ====== ========
</TABLE>
10
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
AMORTIZED GROSS GROSS FAIR
COST UNREALIZED GAINS UNREALIZED LOSSES VALUE
--------- ---------------- ----------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
U.S. government
obligations............. $ 30,055 $ 66 $ 26 $ 30,095
States and political
subdivisions............ 5,094 406 -- 5,500
Corporate and other...... 125,377 4,446 959 128,864
Foreign corporate*....... 5,556 -- -- 5,556
Asset-backed............. 2,825 -- -- 2,825
Mortgage-backed.......... 33,909 -- -- 33,909
-------- ------ ---- --------
$202,816 $4,918 $985 $206,749
======== ====== ==== ========
</TABLE>
- --------
*Substantially all are U.S. dollar denominated.
The amortized cost and fair value of bonds at December 31, 1997, by contrac-
tual maturity, are shown below. Actual maturities may differ from contractual
maturities because certain borrowers may have the right to call or prepay ob-
ligations, sometimes without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less............................... $ 2,003 $ 2,003
Due after one year through five years................. 16,799 16,906
Due after five years through ten years................ 49,120 49,742
Due after ten years................................... 89,605 97,337
-------- --------
157,527 165,988
Asset-backed securities............................... 11,495 11,524
Mortgage-backed securities............................ 24,105 25,670
-------- --------
$193,127 $203,182
======== ========
</TABLE>
Proceeds during 1997 and 1996 from sales, maturities and calls of bonds were
$159,446,000 and $73,171,000, respectively. Gross gains of $2,651,000 and
$170,000 and gross losses of $505,000 and $696,000 in 1997 and 1996, respec-
tively, were realized on those sales.
The cost of preferred stocks of unaffiliated companies was $1,792,000 and
$1,739,000 at December 31, 1997 and 1996, respectively, and the related fair
value was $1,891,000 and $1,820,000 at December 31, 1997 and 1996, respective-
ly. There was no difference between cost and statement value of preferred
stocks at December 31, 1997. The difference between cost and statement value
of $81,000 at December 31, 1996 was credited directly to unassigned surplus as
of that date and did not affect net income.
Included in investments are securities having statement values of $1,620,000
at December 31, 1997 which were on deposit with various state insurance de-
partments to satisfy regulatory requirements.
Concentrations of Credit Risk
FPLH limits credit risk by diversifying its investment portfolio among pub-
lic and private placement bonds and preferred stocks. It further diversifies
these portfolios between and within industry sectors, by geography and by
property type. Credit risk is also limited by maintaining stringent underwrit-
ing standards and purchasing
11
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. INVESTMENTS (CONTINUED)
insurance protection in certain cases. In addition, FPLH establishes credit ap-
proval processes, credit limits and monitoring procedures on an individual
counterparty basis. As a result, management believes that significant concen-
trations of credit risk do not exist.
3. FEDERAL INCOME TAXES
FPLH is included in the life-nonlife consolidated federal income tax return
filed by PLH. Under a written agreement, PLH and its affiliates (including
FPLH) allocate the federal income tax liability among the members of the con-
solidated return group in the ratio that each member's separate return tax lia-
bility, or benefit from a net operating loss, for the year bears to the consol-
idated tax liability. The final settlement under this agreement is made after
the annual filing of the consolidated U.S. Corporate Income Tax Return.
Reported income tax expense differs from income tax expense that would result
from applying statutory rates to pretax income primarily due to differences in
the statutory and tax treatment of certain investments and deferred policy ac-
quisition costs.
Included in the statements of changes in capital and surplus are certain ad-
justments increasing surplus by $58,000 and $446,000 at December 31, 1997 and
1996, respectively, relating to tax accrual adjustments applicable to the prior
tax years.
At December 31, 1997, accumulated earnings of FPLH for federal income tax
purposes included a "Policyholders' Surplus" account balance of $1,631,000; a
special memorandum tax account. This is a special memorandum account balance
which has not been currently taxed, but income taxes computed at current rates
will become payable if this surplus is distributed. Provisions of the Deficit
Reduction Act of 1984 (the Act) do not permit further additions to the Policy-
holders' Surplus account. The "Shareholders' Surplus" account is also a special
memorandum tax account, and generally represents an accumulation of taxable in-
come (net of tax thereon) plus the dividends-received deduction, tax-exempt in-
terest, and certain other special deductions as provided by the Act. At Decem-
ber 31, 1997, the balance in the Shareholders' Surplus account amounted to ap-
proximately $92,131,000. There is no present intention to make distributions in
excess of the Shareholders' Surplus account.
4. RELATED PARTY TRANSACTIONS
Reinsurance Ceded to Affiliates
FPLH is a party to a reinsurance agreement with VLIC whereby FPLH cedes a pro
rata portion of accident and health policies according to issue dates. Reinsur-
ance ceded to VLIC has reduced net gain from operations before federal income
taxes by $285,000 and $600,000 in 1997 and 1996, respectively. On July 1, 1997,
the reinsurance agreement was amended whereby FPLH recaptured the accident and
health policies from VLIC. The recapture resulted in FPLH receiving cash from
VLIC in the amount of $2,202,882, which has been recorded as a net gain as of
December 31, 1997.
Other Agreements and Transactions with Related Parties
FPLH entered into an agreement, effective January 1, 1992, with PLH for the
performance of administrative services, management support services and market-
ing services for FPLH. PLH, as compensation, receives an amount equal to the
actual cost of providing these services. Amounts paid to PLH for these services
were $3,700,000 in 1997 and $2,200,000 in 1996.
FPLH entered into a revolving credit note with Commonwealth on September 3,
1996, whereby FPLH can borrow from Commonwealth up to $1,000,000. Interest is
computed monthly at a rate designated in the note. At
12
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
December 31, 1997 and 1996, there was no outstanding balance. During 1997,
FPLH paid $1,500 in interest expense. No interest expense was incurred or paid
during 1996.
FPLH participates in various benefit plans sponsored by Commonwealth and the
related costs allocated to FPLH are not significant.
Commonwealth provides general management, advisory, legal and other general
services to FPLH. Diversified Financial Products, Inc., (DFP), formerly
Providian Capital Management, Inc., an affiliate, provides investment manage-
ment services to FPLH along with marketing and administrative services for
FPLH's accumulation business.
5. REINSURANCE
Certain premiums and benefits are ceded to nonaffiliated insurance companies
under various reinsurance agreements. The ceded reinsurance agreements provide
FPLH with increased capacity to write larger risks and maintain its exposure
to loss within its capital resources.
FPLH's ceded reinsurance agreements with affiliated and nonaffiliated insur-
ance companies reduced (increased) certain items in the accompanying financial
statements by the following amounts:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Benefits paid or
provided............... $ 364 $ 804
Commission and expense
allowances on
reinsurance ceded...... (185) (395)
Interest on reinsurance
reserves............... (93) (192)
Policy and contract
claims*................ 44 44
Unearned premium
reserves*.............. 1 1
Aggregate policy
reserves*.............. 13 13
Premiums received in
advance*............... 1 1
</TABLE>
- --------
*At year end
For long-duration contracts, the effect of reinsurance on life and annuity
premiums earned in 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1997 1996
PREMIUMS PREMIUMS
EARNED EARNED
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Direct................................................. $12,179 $12,194
Ceded.................................................. (24) (23)
------- -------
Net.................................................... $12,155 $12,171
======= =======
</TABLE>
For short-duration contracts, the effect of reinsurance on accident and
health premiums written and earned in 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1997 PREMIUMS 1996 PREMIUMS
--------------- ----------------
WRITTEN EARNED WRITTEN EARNED
------- ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Direct.................................. $5,851 $5,851 $ 6,671 $ 6,671
Ceded................................... (698) (698) (1,535) (1,535)
------ ------ ------- -------
Net..................................... $5,153 $5,153 $ 5,136 $ 5,136
====== ====== ======= =======
</TABLE>
13
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. REINSURANCE (CONTINUED)
Amounts payable or recoverable for reinsurance on paid or unpaid life and
health claims are not subject to periodic or maximum limits. At December 31,
1997, FPLH reinsurance recoverables are not material and no individual rein-
surer owed FPLH an amount equal to or greater than 3% of FPLH's surplus.
FPLH remains obligated for amounts ceded in the event that the reinsurers do
not meet their obligations.
6. ANNUITY RESERVES
The withdrawal provisions of FPLH's annuity reserves at December 31, 1997 are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Subject to discretionary withdrawal at market value........ $177,844 72.4%
Subject to discretionary withdrawal at book value less
surrender charge.......................................... 13,347 5.4%
Subject to discretionary withdrawal (without adjustment) at
book value with minimal or no charge or adjustment........ 51,306 20.9%
Not subject to discretionary withdrawal.................... 3,281 1.3%
-------- ------
Total annuity reserves before reinsurance.................. 245,778 100.0%
======
Less reinsurance........................................... --
--------
Net annuity reserves*...................................... $245,778
========
</TABLE>
- --------
* Includes $177,844,000 of annuities reported in FPLH's separate account li-
abilities. See first caption above. The remaining balance, $67,934,000, is
included in aggregate policy reserves in the accompanying balance sheet.
7. SEPARATE ACCOUNTS
Separate accounts held by FPLH represent funds held for individual policy-
holders. The separate accounts do not have any minimum guarantees and the in-
vestment risks associated with market value changes are borne entirely by the
policyholder. The assets in the separate accounts, carried at estimated fair
value, consist solely of common stocks. Information regarding the separate ac-
counts of FPLH as of and for the year ended December 31, 1997 is as follows (in
thousands):
<TABLE>
<S> <C>
Premiums, deposits and other considerations..................... $ 51,475
========
Separate account liabilities*................................... $177,844
========
</TABLE>
- --------
* Separate account liabilities are exclusive of $41,000 which represents
amounts due to the general account as of December 31, 1997.
A reconciliation of the amounts transferred to and from FPLH's separate ac-
counts for the year ended December 31, 1997 is presented below (in thousands):
<TABLE>
<S> <C>
Transfers as reported in the Summary of Operations of FPLH's
Separate Accounts Annual Statements:
Transfers to separate accounts................................... $51,475
Transfers from separate accounts................................. (6,801)
-------
Net transfers to separate accounts................................. 44,674
Reconciling adjustments:
Fees paid to external fund manager............................... 120
-------
Transfers as reported in the Summary of Operations of FPLH's Life,
Accident & Health Annual Statement................................ $44,794
=======
</TABLE>
14
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. DEFERRED AND UNCOLLECTED PREMIUMS
Deferred and uncollected life insurance premiums and annuity considerations
as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
TYPE GROSS LOADING NET OF LOADING
---- ------ ------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Ordinary new................................... $ 431 $ 315 $ 116
Ordinary renewal............................... 3,162 1,032 2,130
------ ------ ------
Total ordinary................................. 3,593 1,347 2,246
Group new...................................... 6 6 --
Group renewal.................................. 1,136 408 728
------ ------ ------
Total group.................................... 1,142 414 728
------ ------ ------
Total.......................................... $4,735 $1,761 $2,974
====== ====== ======
</TABLE>
9. CAPITAL AND SURPLUS AND STATUTORY RESTRICTIONS ON DIVIDENDS
Life/Health insurance companies are subject to certain Risk-Based Capital
(RBC) requirements as specified by the NAIC. Under those requirements, the
amount of capital and surplus maintained by a life/health insurance company is
to be determined based on the various risk factors related to it. At December
31, 1997, FPLH meets the RBC requirements.
FPLH is restricted from distributing any dividends to shareholders without
prior approval from the New York Department of Insurance.
Included in FPLH's capital and surplus is a special surplus fund which con-
sists of a group life contingency reserve and annuitant mortality fluctuation
reserve at December 31, 1997 of $1,480,387 and $126,965, respectively
($1,422,181 and $50,853, respectively, at December 31, 1996).
10. CONTINGENCIES
In the ordinary course of business, FPLH is a defendant in litigation prin-
cipally involving insurance policy claims for damages, including compensatory
and punitive damages. In the opinion of management, the outcome of such liti-
gation will not result in a loss which would be material to FPLH's financial
position or results of operations.
11. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by FPLH in estimating fair
value disclosures for financial instruments in the accompanying financial
statements and notes thereto:
Bonds and Preferred Stocks
The fair values of bonds and preferred stocks are generally based on pub-
lished quotations of the SVO of the NAIC. However, for certain investments,
the SVO does not provide a value and FPLH uses either admitted asset in-
vestment amounts (i.e., statement values) as allowed by the NAIC, values
provided by outside broker confirmations or internally calculated esti-
mates. The fair values of FPLH's investment in bonds and preferred stocks
are disclosed in Note 2.
Policy Loans
The carrying values of policy loans reported in the accompanying balance
sheets approximate their fair values.
15
<PAGE>
FIRST PROVIDIAN LIFE AND HEALTH INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Cash, Short-Term Investments and Deferred and Uncollected Premiums
The carrying values of cash, short-term investments, and deferred and
uncollected premiums reported in the accompanying balance sheets approxi-
mate their fair values.
Investment Contracts
The fair values of investment-type fixed annuity contracts are estimated
using discounted cash flow calculations, based on current interest rates
for similar contracts. The fair values of variable annuity contracts are
equal to their carrying values.
The carrying values and fair values of FPLH's liabilities for investment-
type contracts at December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
FAIR
CARRYING VALUE VALUE
-------------- --------
(IN THOUSANDS)
<S> <C> <C>
DECEMBER 31, 1997
Fixed annuity contracts.......................... $ 67,934 $ 64,416
Variable annuity contracts*...................... 177,844 177,844
-------- --------
$245,778 $242,260
======== ========
DECEMBER 31, 1996
Fixed annuity contracts.......................... $ 76,881 $ 72,900
Variable annuity contracts*...................... 107,285 107,285
-------- --------
$184,166 $180,185
======== ========
</TABLE>
- --------
*Included in FPLH's separate account liabilities.
The fair values for FPLH's insurance contracts other than investment con-
tracts are not required to be disclosed. However, the fair values of liabili-
ties under all insurance contracts are taken into consideration in FPLH's over-
all management of interest rate risk, such that FPLH's exposure to changing in-
terest rates is minimized through the matching of investment maturities with
amounts due under insurance contracts.
12. YEAR 2000 (UNAUDITED)
Commonwealth's parent 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. Commonwealth 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. Commonwealth and FPLH do not expect this Project to have a signifi-
cant effect on operations. However, to mitigate the effect of outside influ-
ences upon the success of the Project, Commonwealth and FPLH have undertaken
communications with their significant customers, suppliers and other third par-
ties to determine their Year 2000 compatibility and readiness. Management be-
lieves that the issues associated with the Year 2000 will be resolved with no
material financial impact on Commonwealth 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 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 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 Commonwealth 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 control.
16
<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
First Providian Life & Health Insurance Company Separate Account B
Years ended December 31, 1997 and 1996 with Report of Independent Au-
ditors/4/
Audited Financial Statements--Statutory-Basis
First Providian Life & Health Insurance Company
Years ended December 31, 1997 and 1996 with Report of Independent Au-
ditors/4/
Part C None
(B) EXHIBITS
(1) Resolution of the Board of Directors of First Providian Life and Health
Insurance Company ("First Providian") authorizing establishment of the
Separate Account./3/
(2) Not Applicable.
(3) Not Applicable.
(4) Form of variable annuity contract/1/
(5) Form of application/1/
(6) (a) Amended and Restated Charter of First Providian/3/
(b) By-Laws of First Providian as amended February 28, 1995/3/
(7) Not applicable.
(8) (a) Form of Participation Agreement for the Vanguard Variable Insurance
Fund/1/
(b) First Amendment to Participation, Market Consulting and Administra-
tion Agreement/2/
(c) Administration Services Agreement/4/
(9) (a) Opinion and Consent of Counsel/4/
(b) Consent of Counsel/4/
(10) Consent of Independent Auditors/4/
(11) No financial statements are omitted from item 23.
(12) Not applicable.
(13) Performance computation/2/
(14) 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/Filed herewith.
C-1
<PAGE>
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
OFFICERS:
<TABLE>
<S> <C>
President....................................... David G. Rekoski
Senior Vice President........................... Edward A. Biemer
Senior Vice President........................... Thomas P. Bowie
Executive Vice President........................ William L. Busler
Treasurer....................................... Martha A. McConnell
Vice President.................................. Brian Alford
Vice President.................................. Nathan C. Anguiano
Vice President.................................. Frank A. Camp
Vice President.................................. Jane A. Coyne
Vice President.................................. Carolyn M. Johnson
Vice President, Secretary & Assoc. Gen. Susan E. Martin
Counsel.........................................
Vice President & Assistant Treasurer............ John A. Mazzuca
Vice President.................................. Daniel C. Mohwinkel
Vice President.................................. Maureen E. Nielsen
Vice President.................................. Thomas B. Nesspor
Vice President.................................. Larry N. Norman
Vice President.................................. G. Eric O'Brien
Vice President.................................. Daniel H. Odum
Vice President and Actuary...................... John C. Prestwood, Jr.
Vice President.................................. Gary H. Scott
Vice President.................................. Douglas A. Sarcia
Vice President.................................. Brian A. Smith
Vice President and Consumer Services Officer.... Rosalie M. Smith
Vice President.................................. Colleen M. Tobiason
Vice President.................................. William A. Waldie, Jr.
Vice President.................................. Michael A. Wapp
Vice President & Actuary........................ Ronald L. Ziegler
Assistant Vice President & Qualified Actuary.... Michael A. Cioffi
Assistant Vice President........................ Kimberly A. Cushing
Assistant Vice President........................ Mary Ellen Fahringer
Assistant Vice President........................ JoAnn Herndon
Assistant Vice President--Information Walt Kristik
Technology......................................
Assistant Vice President........................ Patricia A. Lukacs
Assistant Vice President........................ William R. Maurer
Assistant Vice President........................ Robert E. Payne
Assistant Vice President........................ Teresa Stolba
Assistant Treasurer............................. Brenda Clancy
Assistant Treasurer............................. William C. White, IV
Assistant Controller............................ Paul J. Lukacs
Assistant Controller............................ Joseph C. Noone
Second Vice President........................... Amy E. Anders
Second Vice President........................... Cindy L. Chanley
Second Vice President........................... George E. Claiborne, Jr.
Second Vice President........................... Michele M. Coan
Second Vice President........................... Karen H. Fleming
Second Vice President........................... Michael F. Lane
Second Vice President........................... Frank J. Rosa
Second Vice President/Investments............... David L. Blankenship
Second Vice President/Investments............... C. Ray Brewer
Second Vice President/Investments............... Kirk W. Buese
Second Vice President/Investments............... William S. Cook
Second Vice President/Investments............... Deborah A. Dias
Second Vice President/Investments............... Lee W. Eastland
</TABLE>
C-2
<PAGE>
<TABLE>
<S> <C>
Second Vice President/Investments............... Donald E. Flynn
Second Vice President/Investments............... Eric B. Goodman
Second Vice President/Investments............... James Grant
Second Vice President/Investments............... David R. Halfpap
Second Vice President/Investments............... Robert L. Hansen
Second Vice President/Investments............... Donna L. Heitzman
Second Vice President/Investments............... David W. Hopewell
Second Vice President/Investments............... Frederick B. Howard
Second Vice President/Investments............... Claudia E. Jackson
Second Vice President/Investments............... Jon D. Kettering
Second Vice President/Investments............... Tim Kuussalo
Second Vice President/Investments............... David J. Ludke
Second Vice President/Investments............... James D. MacKinnon
Second Vice President/Investments............... Jeffrey T. McGlaun
Second Vice President/Investments............... Paul D. Meir
Second Vice President/Investments............... Thomas L. Nordstrom
Second Vice President/Investments............... Ralph M. O'Brien
Second Vice President/Investments............... Douglas H. Owen, Jr.
Second Vice President/Investments............... Dennis Roland
Second Vice President/Investments............... James D. Ross
Second Vice President/Investments............... J. Alan Schork
Second Vice President/Investments............... Lindsay Schumacher
Second Vice President/Investments............... Michael B. Shaffer
Second Vice President/Investments............... Clifford Sheets
Second Vice President/Investments............... Michael B. Simpson
Second Vice President/Investments............... Jon L. Skaggs
Second Vice President/Investments............... Elizabeth A. Smedley
Second Vice President/Investments............... Michael S. Smith
Second Vice President/Investments............... Bradley L. Stofferahn
Second Vice President/Investments............... Randall K. Waddell
Second Vice President/Investments............... Marcia E. Weiland
Second Vice President/Investments............... Tammy C. Wetterer
Second Vice President and Assistant Secretary... Edward P. Reiter
Assistant Secretary............................. L. Jude Clark
Assistant Secretary............................. Colleen S. Lyons
Assistant Secretary............................. Mary Ann Malinyak
Assistant Secretary............................. John F. Reesor
Assistant Secretary............................. Mary L. Schaefer
Assistant Secretary............................. Kimberly A. Scouller
Assistant Secretary............................. R. Michael Slaven
Product Compliance Officer...................... James T. Bradley
</TABLE>
DIRECTORS:
I. Donald Britton John C. Prestwood, Jr.
Patricia A. Collins Rosalie M. Smith
Jeffrey H. Goldberger Thomas B. Nesspor
Susan E. Martin David G. Rekoski
Brian B. Perry Craig D. Vermie
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT.
The Depositor, First Providian Life & Health Insurance Company ("First
Providian"), is indirectly wholly owned by AEGON USA, Inc. The Registrant is a
segregated asset account of First Providian.
C-3
<PAGE>
The following chart indicates the persons controlled by or under common con-
trol with First Providian Life & Health Insurance Company.
<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
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.
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
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.
Cedar Income Fund, Ltd. Iowa 16.73% PFL Life Ins. Co. Real estate investment
trust
3.77% Bankers United
Life Assurance Company
3.38% Life Investors Co.
of America
1.97% AEGON USA Realty
Advisors, Inc.
.18% First AUSA Life
Ins. 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-5
<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% Intersecurities, Insurance agency
Inc. Inc.
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 II Series Fund Massachusetts Various Mutual fund
IDEX Fund Massachusetts Various Mutual fund
IDEX Fund 3 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.
Bankers United Life Iowa 100% Life Investors Insurance
Assurance Company Ins. Company of
America
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.
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
AEGON Financial Services Minnesota 100% PFL Life Marketing
Group, Inc. Insurance Co.
AEGON Assignment Kentucky 100% AEGON Financial Administrator of
Corporation Services Group, Inc. structured settlements
Southwest Equity Life Arizona 100% of Common Voting Insurance
Ins. Co. Stock First AUSA Life
Ins. Co.
Iowa Fidelity Life Arizona 100% of Common Voting Insurance
Insurance Co. Stock First AUSA Life
Ins. Co.
Western Reserve Life Ohio 100% First AUSA Life Insurance
Assurance Co. of Ohio Ins. Co.
WRL Series Fund, Inc. Maryland Various Mutual fund
WRL Investment Services, Florida 100% Western Reserve Provides administration
Inc. Life Assurance Co. of for affiliated mutual
Ohio fund
WRL Investment Florida 100% Western Reserve Registered investment
Management, Inc. Life Assurance Co. of advisor
Ohio
Monumental Life Maryland 100% First AUSA Life Insurance
Insurance Co. Ins. Co.
AEGON Special Markets Maryland 100% Monumental Life Marketing
Group, Inc. Ins. Co.
Monumental General Maryland 100% First AUSA Life Insurance
Casualty Co. Ins. Co.
United Financial Maryland 100% First AUSA Life General agency
Services, Inc. Ins. Co.
Bankers Financial Life Arizona 100% First AUSA Life Insurance
Ins. Co. Ins. Co.
The Whitestone Maryland 100% First AUSA Life Insurance agency
Corporation Ins. Co.
Cadet Holding Corp. Iowa 100% First AUSA Life Holding company
Insurance Company
Commonwealth General Delaware 100% AEGON USA, Inc. Holding company
Corporation ("CGC")
PB Series Trust Massachusetts N/A Mutual fund
Monumental Agency Group, Kentucky 100% CGC Provider of srvcs. to
Inc. ins. cos.
Benefit Plans, Inc. Delaware 100% CGC TPA for Peoples Security
Life Insurance Company
Durco Agency, Inc. Virginia 100% Benefit Plans, General agent
Inc.
Commonwealth General. Kentucky 100% CGC Administrator of
Assignment Corporation structured settlements
Providian Financial Pennsylvania 100% CGC Financial services
Services, Inc.
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.
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
AEGON USA Real Estate Delaware 100% Diversified Real estate and mortgage
Services, Inc. Financial Products Inc holding company
Capital Real Estate Delaware 100% CGC Furniture and equipment
Development Corporation lessor
Capital General Delaware 100% CGC Holding company
Development Corporation
Commonwealth Life Kentucky 100% Capital General Insurance company
Insurance Company Development Corporation
Agency Holding I, Inc. Delaware 100% Commonwealth Life Investment subsidiary
Insurance Company
Agency Investments I, Delaware 100% Agency Holding I, Investment subsidiary
Inc. Inc.
Peoples Security Life North Carolina 100% Capital General Insurance company
Insurance Company Development Corporation
Ammest Realty Texas 100% Peoples Security Special purpose
Corporation Life Insurance Company subsidiary
Agency Holding II, Inc. Delaware 100% Peoples Security Investment subsidiary
Life Insurance Company
Agency Investments II, Delaware 100% Agency Holding II, Investment subsidiary
Inc. Inc.
Agency Holding III, Inc. Delaware 100% Peoples Security Investment subsidiary
Life Insurance Company
Agency Investments III, Delaware 100% Agency Holding III, Investment subsidiary
Inc. Inc.
JMH Operating Company, Mississippi 100% Peoples Security Real estate holdings
Inc. Life Insurance Company
Capital Security Life North Carolina 100% Capital General Insurance company
Ins. Co. Development Corporation
Independence Automobile Florida 100% Capital Security Automobile Club
Association, Inc. Life Insurance Company
Independence Automobile Georgia 100% Capital Security Automobile Club
Club, Inc. Life Insurance Company
Capital 200 Block Delaware 100% CGC Real estate holdings
Corporation
Capital Broadway Kentucky 100% CGC Real estate holdings
Corporation
Southlife, Inc. Tennessee 100% CGC Investment subsidiary
Ampac Insurance Agency, Pennsylvania 100% CGC Provider of management
Inc. (EIN 23-1720755) support services
National Home Life Pennsylvania 100% Ampac Insurance Special-purpose
Corporation Agency, Inc. subsidiary
Compass Rose Development Pennsylvania 100% Ampac Insurance Special-purpose
Corporation Agency, Inc. subsidiary
Association Consultants, Illinois 100% Ampac Insurance TPA license-holder
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
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
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.
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 Insurance company
Casualty Insurance and Home Insurance
Company Company
Providian Fire Insurance Kentucky 100% Providian Insurance company
Co. Property and Casualty
Insurance Co.
Capital Liberty, L.P. Delaware 79.2% Commonwealth Holding Company
Life Insurance
Company
19.8% Peoples Security
Life Insurance
Company
1% CGC
Commonwealth General LLC Turks & 100% CGC Special-purpose
Caicos Islands subsidiary
</TABLE>
C-9
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION OF PERCENT OF VOTING
NAME INCORPORATION SECURITIES OWNED BUSINESS
---- --------------- ----------------- --------
<S> <C> <C> <C>
Providian Life and Missouri 3.7% CGC Insurance company
Health Insurance 15.3% Peoples Security
Company Life Insurance Company
20% Capital Liberty,
L.P.
61% Commonwealth Life
Insurance Company
Veterans Life Insurance Illinois 100% Providian Life and Insurance company
Co. Health Insurance
Company
Peoples Benefit Pennsylvania 100% Veterans Life Ins. Special-purpose
Services, Inc. Co. subsidiary
First Providian Life New York 100% Veterans Life Ins. Insurance Company
and Health Insurance Co.
Company
</TABLE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of February 28, 1998 there were 2,845 owners of Contracts.
ITEM 28. INDEMNIFICATION
Item 28 is incorporated by reference from the initial Registration Statement
of National Home Life Assurance Company of New York Separate Account B, File
No. 33-39946.
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 and The Vanguard Group, Inc., Valley Forge, Pennsylvania.
ITEM 31. MANAGEMENT SERVICES
All management contracts are discussed in Part A or Part B.
ITEM 32. UNDERTAKINGS
(a) First Providian Life and Health Insurance Company represents that the
fees and charges deducted under the contracts 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 First Providian Life
and Health Insurance Company.
C-10
<PAGE>
SIGNATURES
AS REQUIRED BY THE SECURITIES ACT OF 1933 AND THE INVESTMENT COMPANY ACT OF
1940, THE REGISTRANT, FIRST PROVIDIAN LIFE & HEALTH INSURANCE COMPANY SEPARATE
ACCOUNT B, CERTIFIES THAT IT MEETS THE REQUIREMENTS OF SECURITIES ACT RULE 485
FOR EFFECTIVENESS OF THIS AMENDED REGISTRATION STATEMENT AND HAS CAUSED THIS
AMENDED REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF IN THE COUNTY OF
JEFFERSON AND COMMONWEALTH OF KENTUCKY ON THE 30TH DAY OF APRIL, 1998.
First Providian Life & Health
Insurance Company Separate Account
B (Registrant)
By: First Providian Life & Health
Insurance Company
By: /s/ David G. Rekoski*
---------------------------------
DAVID G. REKOSKI, DIRECTOR AND
PRESIDENT
First Providian Life & Health
Insurance Company (Depositor)
By: /s/ David G. Rekoski*
---------------------------------
DAVID G. REKOSKI, DIRECTOR AND
PRESIDENT
*By: /s/ R. Michael Slaven
--------------------------------
R. MICHAEL SLAVEN, ATTORNEY-IN-
FACT
C-11
<PAGE>
AS REQUIRED BY THE SECURITIES ACT OF 1933, THIS AMENDED REGISTRATION STATEMENT
HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ David G. Rekoski Director and April 30, 1998
- -------------------------------------- President
DAVID G. REKOSKI
/s/ Martha A. McConnell* Treasurer (Chief April 30, 1998
- -------------------------------------- Accounting Officer)
MARTHA A. MCCONNELL
/s/ Susan E. Martin* Director, Vice
- -------------------------------------- President, April 30, 1998
SUSAN E. MARTIN Secretary and
Assoc. General
Counsel
/s/ I. Donald Britton* Director April 30, 1998
- --------------------------------------
I. DONALD BRITTON
/s/ Patricia A. Collins* Director April 30, 1998
- --------------------------------------
PATRICIA A. COLLINS
/s/ Jeffrey H. Goldberger* Director April 30, 1998
- --------------------------------------
JEFFREY H. GOLDBERGER
/s/ Brian H. Perry* Director April 30, 1998
- --------------------------------------
BRIAN H. PERRY
/s/ Rosalie M. Smith* Director, Vice April 30, 1998
- -------------------------------------- President and
ROSALIE M. SMITH Consumer Services
Officer
/s/ John C. Prestwood, Jr.* Director, Vice April 30, 1998
- -------------------------------------- President and
JOHN C. PRESTWOOD, JR. Actuary
/s/ Thomas B. Nesspor* Director and Vice April 30, 1998
- -------------------------------------- President
THOMAS B. NESSPOR
/s/ Craig D. Vermie Director April 30, 1998
- --------------------------------------
CRAIG D. VERMIE
*By: /s/ R. Michael Slaven
---------------------------------
R. MICHAEL SLAVEN, ATTORNEY-IN-FACT
</TABLE>
C-12
<PAGE>
SEPARATE ACCOUNT B
VANGUARD VARIABLE ANNUITY PLAN CONTRACT
INDEX TO EXHIBITS
EXHIBIT 8(c) ADMINISTRATIVE SERVICES AGREEMENT DATED SEPTEMBER, 1997
BETWEEN THE VANGUARD GROUP, INC., PROVIDIAN LIFE AND HEALTH
INSURANCE COMPANY AND FIRST PROVIDIAN LIFE AND HEALTH
INSURANCE COMPANY
EXHIBIT 9(a) OPINION AND CONSENT OF COUNSEL
EXHIBIT 9(b) CONSENT OF COUNSEL
EXHIBIT 10 CONSENT OF INDEPENDENT AUDITORS
<PAGE>
ADMINISTRATIVE SERVICES AGREEMENT
THIS ADMINISTRATIVE SERVICES AGREEMENT (this "Agreement"), dated as of
September 30, 1997, is between The Vanguard Group, Inc. ("Vanguard"), and
Providian Life and Health Insurance Company and First Providian Life and Health
Insurance Company (referred to herein as the "Company").
WHEREAS, the Company or its authorized representatives desire to ensure
that the administration of the Vanguard Variable Annuity Plan Contract, offered
by the Company which uses the Vanguard Variable Insurance Fund as its underlying
investment vehicle (the "Contracts"), is implemented in accordance with all
applicable laws and regulations; and
WHEREAS, Vanguard, a licensed third party administrator desires to
perform certain administrative functions with respect to the Contracts.
NOW, THEREFORE, in consideration of the promises herein contained and
other good and valuable consideration, the parties hereto agree as follows with
respect to the administration of the Contracts.
AGREEMENT
1.1 Administration of Contracts. The Company retains Vanguard to
---------------------------
perform the administrative services set forth in Exhibit A hereto with respect
to the Contracts.
1.2 Termination. Either party may terminate this Agreement upon
-----------
written notice to the other party in the manner described below (a) for Cause
(defined below); (b) upon the termination, for whatever reason, of that certain
Participation, Market Consulting and Administration Agreement dated April 23,
1991 among Vanguard, the Company and Vanguard Variable Insurance Fund, Inc., as
amended (the "Participation Agreement"): and/or (c) upon mutual agreement of the
parties hereto. The Company must fulfill all lawful obligations with respect to
the Contracts, regardless of any dispute between the Company and Vanguard. In
order to fulfill this obligation, Vanguard shall maintain and make available to
the Company complete Books and Records (defined below) which shall be (i)
readily accessible to the Company at Vanguard's offices during the transition
from Vanguard to the Company or another third party administrator selected by
the Company and (ii) promptly delivered to the Company at its offices or such
other location designated by the Company. Upon termination, Vanguard, subject to
any fiduciary obligations it may have, shall release its authority with respect
to the bank accounts, and funds deposited therein, described in Section 1.4
below. "Cause" shall mean the material breach of this Agreement by either party
or the material default by either party in any of its duties and obligations
hereunder, which breach or default remains uncured for thirty (30) days after
the receipt of written notice thereof by the breaching or defaulting party. The
Company shall provide thirty (30) days written notice to Vanguard of termination
or cancellation of this Agreement if the termination is required by applicable
law.
<PAGE>
1.3 Receipt of Payments. The payment to Vanguard of any premiums or
-------------------
charges for the Contracts by or on behalf of a Contract owner shall be deemed to
have been received by the Company, and the payment of return premiums or claims
by the Company to Vanguard shall not be deemed payment to a Contract owner or
claimant until such payments are received by such Contract owner or claimant.
Vanguard shall comply with all federal securities laws, regulations and rules
and NASD rules regarding the deadlines for investing premiums, redeeming
Contracts and paying claims. Nothing in this Section 1.3 limits any right of the
Company against Vanguard resulting from the failure of Vanguard to make payments
to the Company, Contract owners or claimants.
1.4 Fiduciary Account. Vanguard will hold in a fiduciary capacity all
-----------------
charges or premiums collected by it on behalf of or for the Company with respect
to Contract owners, and return premiums received from the Company. Vanguard
shall comply with all applicable fiduciary account statutes and regulations. In
accordance with applicable laws, regulations and rules, Vanguard will
immediately remit such funds to the person or persons entitled thereto, or shall
promptly deposit them in a fiduciary account established and maintained by
Vanguard in a federally or state-insured financial institution reasonably
acceptable to the Company, in the name of the Company, which fiduciary account,
with respect to funds relating to Nevada policyholders, shall be deposited in an
account located at a financial institution located in Nevada, unless the Nevada
Insurance Department grants an exemption. Vanguard shall require the bank in
which such fiduciary account is maintained to keep records clearly recording the
deposits in and withdrawals from such account on behalf of or for the Company.
Vanguard shall promptly obtain and keep copies of all such records and, upon
request of the Company, furnish the Company with copies of such records
pertaining to deposits and withdrawals on behalf of or for the Company. Vanguard
may make withdrawals from such account for:
a. remittance to the Company when entitled thereto;
b. transfer to and deposit in accounts for the underlying
portfolios described in the Contracts in accordance with
Contract owner instructions;
c. transfer to and deposit in a claims paying account, with
claims to be paid as provided in this Agreement;
d. payment to Vanguard of the amounts described in Section 1.10
below; or
e. remittance of return premiums to the person or persons
entitled thereto.
1.5 Form of Payments of Claims. All claims paid by Vanguard from funds
--------------------------
collected on behalf of the Company, including withdrawals, cancellations and
death claims, shall be paid only on checks or drafts of and as authorized by the
Company.
1.6 Notices to Policyholders. To the extent required by applicable law,
------------------------
Vanguard shall provide a written notice to the Contract owners advising them of
the identity of and relationship among Vanguard, the Contract owners and the
Company. If Vanguard collects funds from the Contract owners, Vanguard will
provide the Contract owner with a written statement specifying the amount of the
premium charged by the Company for such Contract. Any policies,
2
<PAGE>
certificates, booklets, termination notices or other written communications
delivered by the Company to Vanguard for delivery to its Contract owners shall
be delivered by Vanguard promptly after receipt of instructions from the Company
to do so.
1.7 Books and Records. Vanguard shall establish and maintain facilities and
-----------------
procedures for the safekeeping of policy forms, check forms and facsimile
signature imprinting devices, if any, and all other documents, reports, records,
books, files, and other materials (whether on paper, microfiche, computer or
other forms) relative to this Agreement and all transactions between Vanguard,
the Company, and Contract owners, which shall include the identity and addresses
of contract owners and certificate holders (collectively, "Books and Records"),
which facilities and procedures shall be reasonably acceptable to the Company.
The Company may request additional facilities and procedures if necessary to
comply with applicable laws or industry standards. Vanguard shall maintain the
Books and Records at its principal administrative office, for the duration of
this Agreement and seven years thereafter; provided, however, that in the event
this agreement is terminated, Vanguard may, pursuant to applicable law, deliver
the Books and Records to the Company and/or a successor administrator rather
than maintain such Books and Records for seven years. The Books and Records
shall also be maintained in accordance with prudent standards of insurance
recordkeeping and as required by applicable law. The Company and Vanguard shall
both own the Books and Records and shall each retain the right of access to the
Books and Records to fulfill its contractual obligations to Contract owners,
claimants and the Company.
1.8 Access to Books and Records. The Company and any applicable regulatory
---------------------------
agency (including state insurance departments, the SEC and the NASD) shall have
full and free access, during ordinary business hours, to the Books and Records,
which shall be in a form usable by them. Each party shall cooperate with the
other party and all appropriate governmental authorities in connection with any
investigation or inquiry relating to this Agreement.
The Company or its duly authorized independent auditors have the right
under this Agreement to perform on-site reviews of Vanguard's operations and
audits of the Books and Records directly pertaining to the Contracts serviced by
Vanguard's facilities hereunder at Vanguard's facilities in accordance with
reasonable procedures and at reasonable frequencies, including a reasonable
period of time in advance of an announced SEC examination. Each party shall pay
for its own costs and expenses (including personnel time and materials) incurred
in connection with such audits.
1.9 Description of Books and Records.
--------------------------------
a. Vanguard shall maintain detailed books and records that reflect all
administered transactions specifically in regard to premiums,
withdrawals, cancellations, transfers, death claims, state and
federal tax withholding, premium taxes, administrator's fees,
contributions received and deposited and claims and authorized
expenses paid.
b. The detailed preparation, journalizing, and posting of such books and
records shall be made in accordance with the terms and conditions of
this Agreement and state insurance, SEC and NASD requirements, and,
if applicable, in accordance with ERISA, as amended and to enable the
insurer to complete the National Association of Insurance
Commissioners' annual financial statement.
3
<PAGE>
c. Vanguard shall maintain a cash receipt register of all premiums or
contributions received. The minimum detail required in the register
shall be: date received and deposited, the mode of payment, the
policy number, name of individual or group Contract owner.
d. The description of a disbursement shall be in sufficient detail to
identify the source document substantiating the purpose of the
disbursement, and shall include all of the following: (i) the check
number; (ii) the date of disbursement; (iii) the person to whom the
disbursement was made; (iv) the amount disbursed; and (v) ledger
account number. If the amount disbursed does not agree with the
amount billed or authorized, Vanguard shall prepare a written record
as to the application for the disbursement. All disbursements shall
be supported by evidential matter. The evidential matters must be
referenced in the journal entry so that they may be traced for
verification.
e. Vanguard shall prepare and maintain monthly financial institution
account reconciliations and provide these reconciliations to the
Company by the date noted in Exhibit A.
f. Vanguard shall render accounts to the Company detailing all
transactions and remit all money due to the Company under this
Agreement, the Contracts and the Participation Agreement (including
the mortality and expense risk charge) to the Company by the dates
set forth in Exhibit A. Vanguard will render an accounting to the
Company detailing all transactions performed by Vanguard pertaining
to the business underwritten by the Company by the dates set forth in
Exhibit A.
g. Vanguard shall maintain a customer complaint log in accordance with
state insurance, SEC and NASD requirements and shall file the
customer complaint log with the applicable regulatory agency if and
when required. Vanguard shall provide the Company with a copy of the
customer complaint log on a quarterly basis or more frequently if
reasonably requested by the Company. Vanguard shall promptly notify
the Company of all customer complaints involving a regulatory agency.
1.10 Contingent Fees. Vanguard shall not receive commissions, fees, or charges
---------------
contingent upon savings obtained in the adjustment, settlement and payment of
losses covered by the Company obligations, but Vanguard may receive compensation
based on premiums or charges collected or the number of claims paid or processed
as may be provided for in any later amendments to this Agreement.
For services to be rendered by Vanguard, as provided in Section 1.1 of
this Agreement, Vanguard shall receive no compensation. But in any event
Vanguard shall receive the administration charge set forth in the Participation
Agreement.
Vanguard shall not receive from the Company or any covered individual any
compensation or other payments except as expressly set forth in this Agreement.
4
<PAGE>
1.11 Advertising. Vanguard may use only such advertising pertaining to the
-----------
business underwritten by the Company as has been approved in writing by the
Company in advance of its use. The Company shall have the prior approval of the
Director of the Department of Insurance, State of Idaho, before approving
advertising for use by Vanguard.
Vanguard shall maintain at its principal administrative office a complete
file of all advertisements, regardless of by whom written, created or designed,
which are used with respect to Contract owners or potential Contract owners of
the Contracts located in Georgia, with a notation indicating the manner and
extent of distribution and the form number of any policy advertised. Such file
shall be subject to inspection by the Office of Commissioner of Insurance of the
State of Georgia. All such advertisements shall be maintained in said file for a
period of not less than five years. Vanguard shall file with the Commissioner of
Insurance of the State of Georgia on or before March 1 of each year, a
certification executed by an authorized officer of the administrator wherein it
is stated that to the best of his knowledge, information and belief, the
advertisements disseminated by Vanguard with regard to the Contracts during the
preceding calendar year complied, or were made to comply in all respects, with
the advertising regulations of Georgia. The Company shall be solely responsible
for ensuring that all such advertisements provided to and approved in writing by
the Company comply in all respects with the advertising regulations of Georgia.
1.12 Underwriting. The underwriting of the insurance policies is the
------------
responsibility of the Company and Vanguard shall not provide any underwriting
services. The Company shall be responsible for determining the benefits, premium
rates, adjudication of claims, underwriting criteria and claims payment
procedures applicable to such coverage and for securing reinsurance, if any; the
rules pertaining to these matters must be provided, in writing, by the Company
to Vanguard.
1.13 Copy of Written Agreement. This Agreement shall be retained as part of
-------------------------
the official records of both the Company and Vanguard for the duration of this
Agreement plus seven years.
1.14 Compliance. Vanguard is licensed as a third party administrator in the
----------
Commonwealth of Pennsylvania and will seek and maintain a third party
administrator license in those states where it is required and will be in
material compliance with all laws, rules and regulations applicable to third
party administration of the Contracts.
1.15 Confidentiality of Personal Information. Information that identifies an
---------------------------------------
individual covered by a Contract is confidential and shall be kept confidential
in accordance with applicable law. In addition, all information provided by the
Company to Vanguard shall be kept confidential. During the time such information
is in Vanguard's custody or control, Vanguard shall take all reasonable
precautions to prevent disclosure or use of the information for a purpose
unrelated to administration of the Contract. Vanguard shall disclose such
information only: in response to a court order; for an examination conducted by
the applicable regulatory agency; to or at the request of the Company; or with
the written consent of the identified individual or his or her legal
representative. This Section 1.15 shall survive the termination of this
Agreement.
1.16 Liability. Each party shall only be responsible or liable to the other
---------
party for losses caused by the negligence, bad faith, malfeasance or misconduct
of such party or its employees or agents.
5
<PAGE>
1.17 Bond. Vanguard shall comply with the bond and insurance requirements of
----
each state in which it administers Contracts, and to the bonding requirements of
the SEC and NASD.
1.18 Agent, Broker, or Adjuster Licensing. With respect to Wyoming residents,
------------------------------------
Vanguard will not:
a. solicit applications for insurance or annuities for the Company,
negotiate insurance or annuities on behalf of the Company, or carry
out and countersign insurance policies unless licensed in Wyoming as
an agent;
b. on behalf of the Company, for compensation or fee, solicit, negotiate
or procure insurance or the renewal or continuance thereof for
Wyoming insured or prospective insureds unless licensed in Wyoming as
a broker;
c. adjust claims in Wyoming for the Company by investigating and
negotiating settlements unless licensed in Wyoming as an adjuster, or
an agent or broker who adjusts or assists in the adjustment of losses
arising under policies issued by the Company represented by that
agent or through that broker. Nothing herein shall be interpreted as
to prohibit Vanguard from engaging in ministerial or clerical
activities relating to the payment of claims.
SECTION 2 - MISCELLANEOUS
-------------
2.1 Ratifications. Except for the Participation Agreement, this Agreement,
-------------
including Exhibit A, constitutes the entire Agreement between the parties hereto
and supersedes any prior agreement with respect to the subject matter hereof,
whether written or oral.
2.2 Amendments and Modifications. No provision of this Agreement may be
----------------------------
amended, modified or waived except in a writing signed by the parties hereto.
2.3 Successors and Assigns. This Agreement is binding upon and shall inure to
----------------------
the benefit of the Company and Vanguard and their respective successors and
permitted assigns. This Agreement may not be assigned by either part without the
prior written consent of the other party.
2.4 Corporate Authority. Each party hereto represents and warrants to each
-------------------
other party that it is empowered under the applicable laws and regulations and
by its charter and by-laws to enter into and perform this Agreement and that all
requisite corporate proceedings have been taken to authorize it to enter into
and perform this Amendment.
2.5 Governing Law. This Agreement shall be governed by the laws of the
-------------
Commonwealth of Pennsylvania.
2.6 Severability. If any portion of this Agreement shall be held or made
------------
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
6
<PAGE>
2.7 Remedies Cumulative; No Waiver. No right, power or remedy granted or
------------------------------
reserved herein is intended to be exclusive of any other right, power or remedy,
but each and every such right, power and remedy shall be cumulative and
concurrent and in addition to any other right, remedy or power hereunder or
under law. No delay or omission by either party to exercise any right, power or
remedy in connection with a default shall exhaust or impair any such right,
power or remedy or shall be construed to be a waiver of such default or
acquiescence therein.
2.8 Arbitration. Any dispute arising out of or related to this Agreement,
-----------
which cannot be resolved by negotiation, shall be settled by binding arbitration
in accordance with and subject to the Commercial Arbitration Rules of the
American Arbitration Association then applicable (the "Rules"). Unless otherwise
mutually agreed upon by the parties, the arbitration hearings will be held in
the City of Philadelphia, PA. A panel of three arbitrators will be selected in
accordance with the Rules and the arbitrators will allow such discovery as is
appropriate and consistent with the purposes of arbitration in accomplishing
fair, speedy and cost effective resolution of disputes. The arbitrators will
reference the rules of evidence and the Federal Rules of Civil Procedure then in
effect in setting the scope of discovery. Judgment upon the award rendered in
any such arbitration may be entered in any court having jurisdiction thereof, or
application may be made to such court for a judicial acceptance of the award and
an enforcement, as the law of such jurisdiction may require or allow.
2.9 Errors and Omissions. Any inadvertent error or omission made by either
--------------------
party in connection with this Agreement which has been corrected within 30 days,
shall not constitute a material breach of the Agreement or render the Agreement
null and void.
2.10 Notice Addresses. Any notice to be given by one party to the other shall
----------------
be (i) personally delivered or (ii) mailed certified mail postage prepaid, if to
Vanguard, at Vanguard Financial Center, 100 Vanguard Boulevard, Malvern PA
19355, Attn: Pauline C. Scalvino, and if to the Company, at 400 West Market
Street, Louisville, Kentucky 40202, Attn: Sarah Strange.
7
<PAGE>
EXECUTED as of the date first written above.
VANGUARD:
--------
THE VANGUARD GROUP, INC.
By /s/ Raymond J. Klapinsky
------------------------------
Name Raymond J. Klapinsky
----------------------------
Title Managing Director
---------------------------
PROVIDIAN:
---------
PROVIDIAN LIFE AND HEALTH
INSURANCE COMPANY
By /s/ William L. Busler
------------------------------
Name William L. Busler
----------------------------
Title Executive Vice President
---------------------------
FIRST PROVIDIAN LIFE AND HEALTH
INSURANCE COMPANY
By /s/ William L. Busler
------------------------------
Name William L. Busler
----------------------------
Title Exec. V.P.
---------------------------
8
<PAGE>
EXHIBIT A
- ---------
ADMINISTRATIVE SERVICES
(Responsibility for each item is indicated by V for Vanguard, C for Company and
V/C for a joint responsibility of both Vanguard and Company.)
A. CONTRACT ISSUANCE/SUBSEQUENT PAYMENTS
1. Review new applications, apply issuance criteria to application for
Contract. (V)
2. Notify Contract owner or annuitant of any error or missing data
needed to establish Contract within SEC guidelines of accepting the
funds within two days or return funds within five days. (V)
3. If issuance criteria met, prepare contract schedule page, prepare
issued Contract, and mail Contract to Contract Owners. (V)
4. Establish and maintain participant, annuitant, and Contract Owner
records, as applicable, on authorized storage/retrieval systems. (V)
5. Print and maintain supply of confirmation statements. Prepare and
mail confirmation statements of purchases to Contract Owners. (V)
6. Deposit monies received with application into the designated
account (see "Accounting/Auditing", below). (V)
7. Print and maintain inventory of issue-related forms, Contracts and
endorsements. (V)
8. During the free-look period, premiums will be invested in accordance
with the terms of the contract and prospectus.
9. Update the Contract Owner master records and other records to reflect
payments received, and the allocation of each payment received. (V)
B. ACCOUNTING/AUDITING
1. Deposit cash received under the Contracts into a designated bank
account. (V)
2. Photocopy and microfilm all checks. Balance, edit, endorse and
prepare daily deposits. (V)
9
<PAGE>
3. Transfer funds from the depository account to the custodian bank. (V)
4. On returned items, reverse transactions, prepare reports, and
communicate with Contract Owner. (V)
5. Receive funds from custodian accounts for transfer into disbursement
account. (V)
6. Prepare disbursement checks (see "Disbursement" below). (V)
7. Generate accounting information necessary to post entries to transfer
agency bank account reconciliation. (V)
8. Cooperate on annual audit of Separate Accounts and other audits, as
required, which are conducted for purposes of financial statement
certification and publication. The Company will give at least 30 days
notice. (V)
Additionally, accommodate other client and/or regulatory audits, as
required. The Company will notify Vanguard of client and /or
regulatory time frames as soon as possible.
9. Retain systems generated reports in accordance with a retention
schedule mutually established within the Participation, Market
Consulting and Administration Agreement in Schedule 1.6(b)(iv).
Provide access to such reports for internal and external auditing.
(V)
10. Perform daily balancing of Vantage-One and RPS cycle reports (system
check from nightly cycle), Vantage-One and RPS accounting extract and
Vantage-One and RPS disbursement extract. (C)
During the daily balancing described above, forced balances and/or
invalid Journal entries may occur. When these errors occur, the
Company and Vanguard will work together to determine the cause of the
error, perform the proper corrections, and develop and implement
procedures if deemed necessary to ensure the error does not reoccur.
(C/V)
11. Company will perform daily balancing for the Separate Account
including the following reconciliations: Separate Account shares to
Fund Shares, Separate Account units to customer units on Vantage-One,
RPS and the spreadsheets for annuitized customers tracked manually,
and Separate Account assets to liabilities.
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Separate Account Shares to Fund Shares
--------------------------------------
Company will communicate the difference to Vanguard, work with
Vanguard to determine the cause of the difference and agree upon the
appropriate resolution.
Separate Account Units to Customer Units on Vantage-One or RPS
--------------------------------------------------------------
Company will communicate the difference to Vanguard, work with
Vanguard to determine the cause of the difference and agree upon the
appropriate resolution.
Separate Account Units to RPS Manual Spreadsheets
-------------------------------------------------
Company will communicate the difference to Vanguard, work with
Vanguard to determine the cause of the difference and agree upon the
appropriate resolution.
Separate Account Assets to Liabilities
--------------------------------------
Company will communicate the difference (i.e. breakage) to Vanguard,
work with Vanguard to determine the cause of the difference (that is
in excess of the normal level of breakage) and agree upon the
appropriate resolution. Vanguard and Company will mutually agree upon
what is considered a normal level of breakage. (C)
C. PRICING/VALUATION
1. Company will perform daily the calculation for the accumulation and
annuity (payout) unit values for the Separate Account in accordance
with the prospectus and the Statement of Additional Information.
Company will also perform daily the calculation of the M&E factor
included in the unit value calculation. Vanguard will use its best
efforts to provide, in a mutually agreed upon format, the NAV and
dividend and capital gain rate and share balance by 6:00 p.m. EST on
each day the NYSE is open. (C/V)
2. Vanguard will communicate to Company any corrections to the NAV,
dividend rate, or capital gain rate as soon as the error is detected.
Company will maintain a record of corrections of the accumulation and
annuity (payout) unit values for the Separate Account in accordance
with applicable federal securities laws, rules and regulations. For
errors not caused by corrections to the NAV, dividend rate, or
capital gain rate,
11
<PAGE>
Company will communicate the unit value corrections to Vanguard as
soon as the error is detected. Company will also communicate to
Vanguard when the unit value has been corrected on the administrative
system so that Vanguard can reverse and reapply the affected
transactions. Company will work with the recordkeeper to correct unit
values in the administrative system. All corrections will be verified
by Company. (C/V)
3. Vanguard will determine daily the purchases and redemptions (trade
sheets) activity by fund and notify the fund manager. Vanguard will
provide daily to Company the purchases and redemptions transacted on
the Vantage-One and RPS systems by fund, as well as purchases and
redemptions of the annuitized customers tracked manually. Company
will determine daily the purchases and redemptions activity by fund.
Company will use the activity by fund in processing the share
balances by fund and will confirm these share balances as indicated
per item B11 above. (C/V)
D. CONTRACT OWNER SERVICE/RECORD MAINTENANCE
1. Process Contract owner service requests, including informational
requests, endorsement/acknowledgment, beneficiary changes, transfer
of assets between investment vehicles, and changes of any other
information maintained on the system. (V)
2. Respond directly to questions or inquiries relating to transaction
records or current account value. (V)
3. Review daily system reports confirming changes made to participant,
annuitant or Contract owner accounts. (V)
4. Process Contract owner service requests within the following
standards (V):
- New Policy Issue 2 business days
- Subsequent Premium same business day
- Surrenders/Partial Withdrawals 1 business day
- Correspondence -
- Financial 2 business days
- Non-Financial 5 business days
5. Provide client service within agreed upon guidelines. Provide results
monthly to the Company. (V)
- 90% of all calls answered within 20 seconds.
- Average "Speed of Answer" 20 seconds or less
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- Abandonment Rate of 3% or less
6. Provide quarterly customer statements. (V)
E. DISBURSEMENTS (SURRENDERS; CLAIMS)
1. Receive requests for partial or full surrenders, and death claims
from Contract owners and beneficiaries. (V)
2. Process surrender requests and death claims against the Contract
owner master files. (V)
3. Prepare checks for surrenders, partial withdrawals, death claims and
forward to Contract owner, beneficiary or designated payee, after
withholding appropriate Federal and State taxes. (V)
4. Prepare and mail confirmation statements of disbursement transactions
to Contract owners. (V)
5. Print and maintain check supply. (V)
6. Follow up on outstanding checks on a periodic basis and escheat
unclaimed funds to states based on individual state requirements. (V)
F. ANNUITY BENEFIT PROCESSING -- FOR FIXED PAYOUTS AND VARIABLE PAYOUTS
Fixed
-----
1. Receive information with respect to annuitants going into the annuity
(payout) phase. Fixed annuity election reports are forwarded to the
Company. Funds are wired from Vanguard, 10 business days before first
payment is due. (V/C)
Vanguard is to provide the following information in order for the
Company to process a fixed annuitization. The information is needed
for a fixed annuitization on the 10th business day prior to the due
date of the first payment on the annuitized contract.
a) Contract amount
b) Annuitization form (including W4P and W9 tax information)
c) Tax Cost Basis of Original Premium
d) Birth Date Verification (copy of birth certificate or driver's
license)
13
<PAGE>
e) Copy of Quote or date annuitization paperwork received at
Vanguard
f) If joint annuitant, need their date of birth
g) Address of where to mail the check
h) Account number for direct deposits
i) Beneficiary information
Variable
2. Variable annuity election requests are handled by Vanguard with the
exclusion ratio calculated by the Company and verified by Vanguard. The
Company calculates the amount of the initial annuity payment for variable
payout based on tables attached to the Contract and the current annuity
unit value calculated 10 business days prior to the annuitization date.
(C/V)
Both parties will coordinate the transfer of the appropriate information
necessary to complete calculations and communicate results.
G. TAXES
1. Vanguard is to collect and account for premium taxes as appropriate,
instruct Company to remit the taxes and wire premium dollars to the
Company. The Company shall inform Vanguard of any changes in state
regulations regarding the imposition of premium taxes. The Company
will remit all premium taxes due. (V/C)
2. Vanguard is to collect and account for all federal and state
withholding as appropriate, and wire the dollar amount of such taxes
collected to the Company. The Company shall inform Vanguard of any
changes in federal and state regulations regarding the imposition of
federal and state taxes. The Company will remit all federal and state
taxes due. (V)
3. Vanguard is to prepare and maintain premium tax and other federal and
state tax records by Contract owner and by state. (V)
H. FINANCIAL AND MANAGEMENT REPORTS
1. REPORTS TO BE PREPARED MONTHLY BY THE DATES OUTLINED BELOW FOR
SEPARATE ACCOUNT IV & B
DATE RECEIVED
BY OTHER PARTY
--------------
a) M&E and admin report (C) Last business day of month
14
<PAGE>
b) Separate Account General Ledger (C) 1st business day
c) Federal & State Withholding and Premium 1st business day
Tax Information (V)
d) Bank Statements/Reconciliation-- 5th business day
the Insurance Company (V)
e) Reconciliation of Premiums in 5th business day
Suspense to balance in Receipt
Bank Account (V)
2. MONTHLY REPORTS FROM THE VANTAGE ONE AND RPS SYSTEMS TO BE PROVIDED
BY VANGUARD TO THE COMPANY
DATE RECEIVED
BY THE COMPANY
--------------
a) Suspense File List (V) 4th business day
b) Investment Vehicle Report (V) 4th business day
c) Reserve Listing Calculation Results (V) 4th business day
d) Mortality Gain/Loss Detail (V) 4th business day
e) Detail Account Reporting (V) daily with a day lag
f) Variable Fund Value (V) 1st business day
g) RPS feed to PCATS system (V) 4th business day
h) Minimum Death Benefit Report (V) 4th business day
i) Annuity Statutory Reserve (V) 1st business day
following year end
j) CO5 (Vantage One Report) (V) Daily (by 8:00 a.m.)
k) Others as requested by the Company's internal or external auditors
l) Others as requested by the Company's accounting areas as needed to prepare
financial statements or perform analysis.
m) Payment Account Control Report(AD-134)(V) 8:00 a.m. after cycle runs
n) VVAP Extract File (V) Daily
I. AGENT LICENSE RECORDKEEPING
1. Report the following agent license status information to the Company
(V):
a) Address changes
b) Name changes should be reported to each State with a copy
to the Company.
c) New Agents to be licensed/appointed as it relates to the Vanguard
Variable Annuity Plan
2. The Company will track and monitor individual agent license status
and compliance with individual continuing education requirements. (C)
15
<PAGE>
J. ADDITIONAL SERVICES
1. The Company will calculate daily the Mortality and Expense Risk Charge (M&E)
and Administrative charges. The Company will provide a statement and
supporting documentation to Vanguard the evening of the last business day of
the month detailing the M&E and Administrative charges owed by fund for
Separate Account IV and B. Vanguard will wire the Company an amount equal to
the M&E charge on the statement on the second business day except when the
difference between the Company's statement and Vanguard's records is greater
than 20%. Should this occur, Vanguard will provide to the Company a list of
the discrepancies by fund and both Vanguard and Company will cooperate to
reconcile the difference within five business days. Vanguard is not
responsible for wiring the M&E to the Company until it has received the
statement from the Company.
Vanguard will perform a review of the M&E and Administrative charges per the
Company's statements to its records. If the discrepancies between the
Company's and Vanguard's calculation is less than 20%, Vanguard will provide
to the Company a list of the discrepancies by fund. Both Vanguard and the
Company will cooperate to resolve the discrepancies prior to the 10th
business day following the end of the month in question. Any funds owed
between Vanguard and the Company will be wired on the 10th business day.
The above procedures will begin on a date mutually agreed to by Vanguard and
the Company. (V/C)
2. Vanguard will ensure that the administrative system controls are in place to
ensure the accuracy of the annual maintenance fee due Vanguard. Separate
Accounts IV and B will remit to Vanguard no later than the fourth business
day of the month the total for the previous month. (V)
3. Maintain an appropriate Disaster Recovery Contingency Plan for the annuity
business. (V/C)
K. PROXY PROCESSING
1. The Company is to receive record date information and proxy
solicitation from Vanguard's Legal Department. (V)
2. Vanguard will perform proxy solicitation using Vanguard proxy tape
information. (V)
16
<PAGE>
L. PERIODIC REPORTS TO CONTRACT OWNERS
1. Based on necessary information provided by Vanguard in a timely
manner, tax reporting will be performed by the Company in accordance
with procedures mutually agreed upon by the Company and Vanguard. (C)
2. Respond to requests from plan administrators or trustees for
information affecting the plan or participants for qualified plans.
(V)
3. Prepare semi-annual and annual reports for the funds in compliance
with the Investment Company Act of 1940 for the benefit of the
Separate Account shareholders. (V)
M. TRANSACTION AND BREAKAGE GAIN/LOSS
1. Transaction gain/loss should be funded by Vanguard to the Separate
Account on a daily basis. (V)
2. The Company will provide a report of breakage amounts to Vanguard as
of the end of the previous month with supporting documentation no
later than the 1st business day following the end of the previous
month. Vanguard will fund breakage to the Separate Account within
three (3) business days of notification. (V/C)
These time frames may be modified through mutual agreement by Vanguard and the
Company.
N. MORTALITY GAIN/LOSS
1. Mortality gain/loss should be funded by the Company to the Separate
Account when deemed necessary by Company. Company will provide a
statement annually to Vanguard for the necessary withdrawals and
fundings for mortality gain/loss at that time. (C)
O. BANK ACCOUNTS
1. Company shall be deemed the co-owner with Vanguard of the bank
accounts established for deposits into and withdrawals from the
Separate Account.
17
<PAGE>
EXHIBIT 9(a)
April 30, 1998
First Providian Life & Health Insurance Company Administrative Offices 520
Columbia Drive Johnson City, New York 13790
RE: First Providian Life & Health Insurance Company 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. 10 (the "Amendment") to the Registration Statement on
Form N-4, File No. 33-39946 (the "Registration Statement") under the Securi-
ties Act of 1933, as amended (the "Act"), of First Providian Life & Health In-
surance Company Separate Account B ("Separate Account B"). Separate Account B
receives and invests premiums allocated to it under a flexible premium multi-
funded annuity contract (the "Annuity Contract"). The Annuity Contract is of-
fered in the manner described in the prospectus contained in the Registration
Statement (the "Prospectus").
In my capacity as legal adviser to First Providian Life & Health Insurance
Company, I hereby confirm the establishment of Separate Account B pursuant to
a resolution adopted by the Board of Directors of First Providian Life &
Health Insurance Company for a separate account for assets applicable to the
Annuity Contract, pursuant to the provisions of Section 46 of the New York In-
surance Statutes. In addition, I have made such examination of the law in ad-
dition 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 pro-
fessional opinion that:
1. First Providian Life & Health Insurance Company is a corporation duly
organized and validly existing under the laws of the State of New York.
2. Separate Account B is an account established and maintained by First
Providian Life & Health Insurance Company 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 are 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
First Providian Life & Health Insurance Company may conduct.
3. Assets allocated to Separate Account B will be owned by First Providian
Life & Health Insurance Company. The assets in Separate Account B at-
tributable to the Annuity Contract generally are not chargeable with li-
abilities arising out of any other business which First Providian Life &
Health Insurance Company may conduct. The assets of Separate Account B
are available to cover the general liabilities of First Providian Life &
Health Insurance Company only to the extent that the assets of Separate
Account B exceed the liabilities arising under the Annuity Contracts.
4. The Annuity Contracts have been duly authorized by First Providian Life
& Health Insurance Company and, when sold in jurisdictions authorizing
such sales, in accordance with the Registration Statement, will consti-
tute validly issued and binding obligations of First Providian Life &
Health Insurance Company in accordance with their terms.
5. Owners of the Annuity Contracts as such, will not be subject to any de-
ductions, charges or assessments imposed by First Providian Life &
Health Insurance Company other than those provided in the Annuity Con-
tract.
I hereby consent to the use of this opinion as an exhibit to the Amendment
and to the reference to my name under the heading "Legal Matters" in the Pro-
spectus.
Very truly yours,
/s/ Kimberly A. Scouller
Kimberly A. Scouller
Assistant General Counsel
<PAGE>
EXHIBIT 9(b)
JORDEN BURT BOROS CICCHETTI BERENSON & JOHNSON LLP
1025 THOMAS JEFFERSON STREET, N.W.
SUITE 400-EAST
WASHINGTON, D.C. 20007-0805
(202) 965-8100
TELECOPIER (202) 965-8104
April 30, 1998
First Providian Life & Health Insurance Company
520 Columbia Drive Johnson
City, New York 13790
Ladies and Gentlemen:
We hereby consent to the reference to our name under the caption "Legal Mat-
ters" in the Prospectus contained in Post-Effective Amendment No. 10 to the
Registration Statement on Form N-4 (file No. 33-39946) filed by First
Providian Life & Health Insurance Company and First Providian Life & Health
Insurance Company Separate Account B with the Securities and Exchange Commis-
sion under the Securities Act of 1933 and the Investment Company Act of 1940.
Very truly yours,
/s/ Jorden Burt Boros Cicchetti Berenson & Johnson LLP
Jorden Burt Boros Cicchetti Berenson & Johnson LLP
<PAGE>
EXHIBIT NO. (10)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Auditors" and to
the use of our reports dated April 24, 1998, with respect to the financial
statements of First Providian Life and Health Insurance Company Separate Ac-
count B and the statutory-basis financial statements of First Providian Life
and Health Insurance Company in Post-Effective Amendment No. 10 to the Regis-
tration Statement (Form N-4 No. 33-39946 and related Prospectus of First
Providian Life and Health Insurance Company Separate Account B.
/s/ Ernst & Young LLP
Louisville, Kentucky
April 24, 1998
