<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1996
FILE NO. 811-8108
FILE NO. 33-70984
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 5 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF
1940 / /
AMENDMENT NO. 4 /X/
PROTECTIVE VARIABLE ANNUITY
SEPARATE ACCOUNT
(Exact Name of Registrant)
PROTECTIVE LIFE INSURANCE COMPANY
(Name of Depositor)
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, including Area Code: (205) 879-9230
------------------------
STEVE M. CALLAWAY, Esquire
Protective Life Insurance Company
2801 Highway 280 South
Birmingham, Alabama, 35223
(Name and Address of Agent for Services)
COPY TO:
STEPHEN E. ROTH, Esquire
Sutherland, Asbill & Brennan
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
(202) 383-0158
It is proposed that this filing become effective (check appropriate box):
/ / immediately upon filing pursuant to paragraph (b) of Rule 485;
/X/ on May 1, 1997 pursuant to paragraph (b) of Rule 485;
/ / 60 days after filing pursuant to paragraph (a) of Rule 485;
/ / on (date) pursuant to paragraph (a)(i) of Rule 485
/ / 75 days after filing pursuant to paragraph (a)(ii) of Rule 485;
/ / on date pursuant to paragraph (a)(ii) of Rule 485.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
registrant has previously registered an indefinite amount of securities under
the Securities Act of 1933. The registrant filed a Rule 24f-2 Notice for the
fiscal year ended December 31, 1996, on February 28, 1997.
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<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO RULES 481(A) AND 495(A)
Showing Location in Part A (Prospectus) and Part B (Statement of Additional
Information) of Registration Statement of Information Required by Form N-4.
ITEM OF FORM N-4 PROSPECTUS CAPTION
- ------------------------------------------- -----------------------------------
PART A
1. Cover Page.............................. Cover Page
2. Definitions............................. Definitions
3. Synopsis................................ Expense Tables; Summary
4. Condensed Financial Information......... Condensed Financial Information;
Yields and Total Returns
5. General Description of Registrant,
Depositor and Portfolio Companies...... The Company, Variable Account and
Funds
a. Depositor.......................... The Company, Variable Account and
Funds -- Protective Life Insurance
Company
b. Registrant......................... The Company, Variable Account and
Funds -- The Protective Variable
Annuity Separate Account
c. Portfolio Company.................. The Company, Variable Account and
Funds -- The Funds
d. Fund Prospectus.................... The Company, Variable Account and
Funds -- The Funds
e. Voting Rights...................... The Company, Variable Account and
Funds -- Voting Rights
f. Administrators..................... The Company, Variable Account and
Funds --
6. Deductions and Expenses................. Charges and Deductions
a. General............................ Charges and Deductions
b. Sales Load %....................... Charges and Deductions -- Surrender
Charge
c. Special Purchase Plan.............. Surrenders; Transfers
d. Commissions........................ Distribution of Contracts
e. Expenses -- Registrant............. Charges and Deductions
f. Fund Expenses...................... Charges and Deductions -- Other
Charges Including Investment
Management Fees of the Funds
g. Organizational Expenses............ N/A
7. General Description of Variable Annuity
Contracts.............................. Description of Variable Annuity
Contracts
a. (i) Allocation of Purchase Purchase Payments, Allocation of
Payments.......................... Purchase Payments
(ii) Transfers..................... Description of Variable Annuity
Contract -- Transfers; Payments
b. Changes............................ Description of Variable Annuity
Contract -- Modification
c. Inquiries.......................... Description of Variable Annuity
Contract -- Inquiries
8. Annuity Options......................... Annuity Options
9. Death Benefit........................... Description of Variable Annuity
Contract -- Death Benefit Before
Annuity Commencement Date; Payment
<PAGE>
ITEM OF FORM N-4 PROSPECTUS CAPTION
- ------------------------------------------- -----------------------------------
10. Purchases and Contract Value............ Description of Variable Annuity
Contract
a. Purchases.......................... Description of Variable Annuity
Contract -- Purchase Payments
b. Valuation.......................... Description of Variable Annuity
Contract -- Variable Account Value
c. Daily Calculation.................. Description of Variable Annuity
Contract -- Variable Account Value
d. Underwriter........................ Distribution of Contracts
11. Redemptions............................. Description of Variable Annuity
Contract
a. -- By Owners....................... Description of Variable Annuity
Contract -- Surrenders and Partial
Surrenders; Payments
-- By Annuitant.................... Description of Variable Annuity
Contract -- proceeds on Annuity
Commencement Date; Annuity Options
b. Delay in Payment................... Description of Variable Annuity
Contract -- Suspension or Delay in
Payments
c. Lapse.............................. Description of Variable Annuity
Contract -- Annuity Options
d. Free Look Period................... Description of Variable Annuity
Contract -- Free Look Period
12. Taxes................................... Federal Tax Matters
13. Legal Proceedings....................... Legal Proceedings
APPENDIX
14. Table of Contents in the Statement of
Additional Information................. Statements of Additional
Information Table of Contents
PART B
15. Cover Page.............................. Cover Page
16. Table of Contents....................... Statement of Additional Information
Table of Contents
17. General Information and History......... See Prospectus -- The Company,
Variable Account and Funds
18. Services
a. Fees and Expenses of Registrant.... N/A
b. Management Contract................ See Prospectus -- The Company,
Variable Account and Funds
c. Custodian and Independent Public Safekeeping of Account Assets;
Accountant........................ Experts
d. Assets of Registrants.............. Safekeeping of Accounts Assets
e. Affiliated Persons................. N/A
f. Principal Underwriter.............. See Prospectus -- Distribution of
Contracts
19. Purchase of Securities Being Offered.... See Prospectus -- Distribution of
Contracts
20. Underwriter............................. See Prospectus -- Distribution of
Contracts
21. Calculation of Performance Data......... Calculation of Yields and Total
Returns
22. Annuity Options......................... See Prospectus -- Annuity Options
23. Financial Statements.................... Financial Statements
<PAGE>
PART A
INFORMATION REQUIRED TO BE IN THE PROSPECTUS
<PAGE>
SUPPLEMENT DATED MAY 1, 1997
TO
PROSPECTUS DATED MAY 1, 1997
FOR
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED VARIABLE
AND FIXED ANNUITY CONTRACT
As of May 1, 1997, the Subaccounts of the Variable Account supported by
Funds of Oppenheimer Variable Account Funds, MFS-Registered Trademark- Variable
Insurance Trust, and Acacia Capital Corporation Calvert Responsibly Invested
Portfolios, as described on pages 10, 11 and 12 herein, are not yet available as
investment options under the Contracts. Protective Life will notify Contract
owners when these Subaccounts become available as investment options.
As of May 1, 1997, the DCA Fixed Account described on pages 18 and 19 herein
is not yet available as an allocation option for Purchase Payments under the
Contracts. Protective Life will notify Contract owners when the DCA Fixed
Account becomes available as a Purchase Payment allocation option.
As of May 1, 1997, the Portfolio Rebalancing feature described on page 17
herein is not yet available. Protective Life will notify Contract owners when
the Portfolio Rebalancing feature becomes available.
<PAGE>
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED
VARIABLE AND FIXED ANNUITY CONTRACT
ISSUED BY
Protective Life Insurance Company
2801 Highway 280 South
Birmingham, Alabama 35223
Telephone: 1-800-866-3555
This Prospectus describes the individual flexible premium deferred variable
and fixed annuity contract (the "Contract") offered by Protective Life Insurance
Company ("Protective Life"). The Contract is designed for individual investors
who desire to accumulate capital on a tax deferred basis for retirement or other
long term investment purpose. It may be purchased on a non-qualified basis. The
Contract may also be sold for use with retirement plans receiving special
federal income tax treatment under the Internal Revenue Code such as pension and
profit sharing plans, annuity purchase plans of public school systems and
universities and certain other tax-exempt organizations, individual retirement
accounts, and individual retirement annuities.
Purchase Payments will be allocated, as designated by the Owner(s), to one
or more of the Sub-Accounts of the Protective Variable Annuity Separate Account
(the "Variable Account"), or the Fixed Account (which is part of Protective
Life's General Account) or both. The assets of each Sub-Account will be invested
solely in a corresponding investment portfolio (each, a "Fund") of Protective
Investment Company, Oppenheimer Variable Account Funds,
MFS-Registered Trademark- Variable Insurance Trust, and Acacia Capital
Corporation Calvert Responsibly Invested Portfolios.
The Contract Value prior to the Annuity Commencement Date, except for the
Fixed Account Value, will vary according to the investment performance of the
Funds in which the selected Sub-Accounts are invested. The Owner(s) bear the
investment risk of amounts allocated to the Variable Account.
This Prospectus sets forth basic information about the Contract and the
Variable Account that a prospective investor should know before investing.
Additional information about the Contract and the Variable Account is contained
in the Statement of Additional Information, which has been filed with the
Securities and Exchange Commission. The Statement of Additional Information is
dated the same date as this Prospectus and is incorporated herein by reference.
The Table of Contents for the Statement of Additional Information is on Page 38
of this Prospectus. You may obtain a copy of the Statement of Additional
Information free of charge by writing or calling Protective Life at the address
or telephone number shown above.
PLEASE READ THIS PROSPECTUS CAREFULLY. INVESTORS SHOULD KEEP A COPY FOR
FUTURE REFERENCE. THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS
FOR EACH OF THE FUNDS.
AN INVESTMENT IN THE CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK, NOR IS THE CONTRACT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN
THE CONTRACT INVOLVES CERTAIN RISKS, INCLUDING THE LOSS OF PURCHASE PAYMENTS
(PRINCIPAL).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Definitions............................................................................................... 1
Expense Tables............................................................................................ 3
Summary................................................................................................... 7
Condensed Financial Information........................................................................... 9
The Company, Variable Account and Funds................................................................... 9
Protective Life Insurance Company....................................................................... 9
Protective Variable Annuity Separate Account............................................................ 9
Administration.......................................................................................... 10
The Funds............................................................................................... 10
Addition, Deletion or Substitution of Investments....................................................... 13
Description of the Contracts.............................................................................. 13
Issuance of a Contract.................................................................................. 14
Purchase Payments....................................................................................... 14
Free Look Period........................................................................................ 14
Allocation of Purchase Payments......................................................................... 14
Variable Account Value.................................................................................. 15
Transfers............................................................................................... 16
Surrenders and Partial Surrenders....................................................................... 17
The Fixed Account......................................................................................... 18
Death Benefit............................................................................................. 19
Suspension or Delay in Payments........................................................................... 20
Charges and Deductions.................................................................................... 21
Surrender Charge (Contingent Deferred Sales Charge)..................................................... 21
Administrative Charges.................................................................................. 22
Transfer Fee............................................................................................ 22
Mortality and Expense Risk Charge....................................................................... 22
Contract Maintenance Fee................................................................................ 22
Fund Expenses........................................................................................... 22
Premium Taxes........................................................................................... 23
Other Taxes............................................................................................. 23
Annuity Options........................................................................................... 23
Annuity Payment......................................................................................... 24
Death of Annuitant or Owner After Annuity Commencement Date............................................. 24
Yields and Total Returns.................................................................................. 24
Exchange Offer............................................................................................ 26
Federal Tax Matters....................................................................................... 27
Introduction............................................................................................ 27
The Company's Tax Status................................................................................ 28
Taxation of Annuities in General.......................................................................... 28
Tax Deferral During Accumulation Period................................................................. 28
Taxation of Partial and Full Surrenders................................................................. 29
Taxation of Annuity Payments............................................................................ 29
Taxation of Death Benefit Proceeds...................................................................... 30
Assignments, Pledges, and Gratuitous Transfers.......................................................... 30
Penalty Tax on Premature Distributions.................................................................. 30
Aggregation of Contracts................................................................................ 31
Qualified Retirement Plans................................................................................ 31
In General.............................................................................................. 31
Direct Rollovers........................................................................................ 33
Federal Income Tax Withholding............................................................................ 34
Matters Relating to Contracts Offered Prior to May 1, 1996................................................ 34
Loan Privilege.......................................................................................... 34
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
General Matters........................................................................................... 36
Modification............................................................................................ 36
Reports................................................................................................. 36
Inquiries............................................................................................... 36
Distribution of the Contracts............................................................................. 36
Legal Proceedings......................................................................................... 37
Voting Rights............................................................................................. 37
Financial Statements...................................................................................... 37
Statement of Additional Information Table of Contents..................................................... 38
</TABLE>
<PAGE>
DEFINITIONS
"We", "Us", "Our", "Protective Life", and "Company" refer to Protective Life
Insurance Company. "You" and "Your" refer to the person(s) who has been issued a
Contract.
ACCUMULATION UNIT: A unit of measurement used to calculate the Sub-Account
Value.
AGE: The age on the birthday immediately prior to any date for which age is
to be determined.
ANNUITANT: The person on whose life annuity payments are based. Annuity
payments will be made to the Annuitant unless otherwise requested by the Owner.
ANNIVERSARY VALUE: The sum of: (1) the Contract Value on a Contract
Anniversary; plus (2) all Purchase Payments made by the Owner since that
Contract Anniversary; minus (3) any partial surrenders, withdrawals and any
associated Surrender Charges made since that Contract Anniversary. An
Anniversary Value will be determined for each complete Contract Year through the
earlier of: (1) the deceased Owner's 80th birthday; or (2) the deceased Owner's
date of death.
ANNUITY OPTION: The benefit payout option selected by the Owner(s) for
annuity payments made by the Company.
BENEFICIARY: The person entitled to receive the Death Benefit upon the
death of any Owner prior to the Annuity Commencement Date.
Primary: Where a Primary Beneficiary is living, such person is the
Beneficiary. The Primary Beneficiary is the surviving Owner, if any. If
there is no surviving Owner, the Primary Beneficiary is the person named as
the "Primary Beneficiary" in the Contract application.
Contingent: Where no Primary Beneficiary is living, the "Contingent
Beneficiary", as named in the Contract application, is the Beneficiary.
Irrevocable: An Irrevocable Beneficiary is one whose consent is
necessary to change the Beneficiary or exercise certain other rights.
CODE: The Internal Revenue Code of 1986, as amended.
CONTRACT ANNIVERSARY: The same month and day as the Effective Date in each
subsequent year of the Contract.
CONTRACT VALUE: The sum of: (1) the Variable Account Value; and (2) the
Fixed Account Value at any time.
CONTRACT YEAR: Any period of 12 months commencing with the Effective Date
and each Contract Anniversary thereafter.
DCA FIXED ACCOUNT: The DCA fixed account is part of our General Account and
is not part of or dependent upon the investment performance of the Variable
Account. Only Purchase Payments may be allocated to this account, which is
available only in connection with dollar cost averaging.
DEATH BENEFIT: The amount payable to the Beneficiary upon the death of any
Owner prior to the Annuity Commencement Date. Only one Death Benefit is payable
under this Contract, even though the Contract may, in some circumstances,
continue beyond the time of any Owner's death.
EFFECTIVE DATE: The date shown on the Contract Specifications page and on
which this Contract takes effect. Contract Years are measured from the Effective
Date.
FIXED ACCOUNT: The Fixed Account is part of our General Account and is not
part of or dependent upon the investment performance of the Variable Account.
FIXED ACCOUNT VALUE: Prior to the Annuity Commencement Date, the total
amount equal to that part of any Purchase Payment(s) allocated to either the
Fixed Account or the DCA Fixed Account,
1
<PAGE>
increased by any amount transferred to the Fixed Account and any credited
interest and decreased by partial surrenders (including any surrender charges
and any applicable premium tax) and any amounts transferred out of the Fixed
Account and the DCA Fixed Account.
FUND: A separate investment portfolio in which a Sub-Account of the
Variable Account invests.
HOME OFFICE: 2801 Highway 280 South, Birmingham, Alabama 35223.
MAXIMUM ANNIVERSARY VALUE: The greatest Anniversary Value attained during
the period for which Anniversary Values are being determined.
NET ASSET VALUE PER SHARE: The value per share of any Fund as computed on
any Valuation Day as described in the Fund Prospectus.
NON-QUALIFIED CONTRACTS: Contracts which are not Qualified Contracts.
OWNER: The owner(s) of the Contract. Herein referred to as "you" or "your".
PIC: Protective Investment Company.
PURCHASE PAYMENT(S): The amount(s) deposited under this Contract.
QUALIFIED CONTRACTS: Contracts issued in connection with retirement plans
that receive favorable tax treatment under Sections 401,403,408 or 457 of the
Code.
QUALIFIED PLANS: Retirement plans that receive favorable tax treatment
under Sections 401, 403, 408, or 457 of the Code.
SUB-ACCOUNT: A separate division of the Variable Account. Each Sub-Account
invests in a corresponding Fund.
SUB-ACCOUNT VALUE: Prior to the Annuity Commencement Date, the total amount
equal to that part of any Purchase Payment(s) allocated to the Sub-Account, and
any amount transferred to a Sub-Account, adjusted by any interest income,
dividends, net capital gains or losses, realized or unrealized, and decreased by
partial surrenders (including any surrender charges and any applicable premium
tax) and any amounts transferred out of the Sub-Account.
SURRENDER VALUE: The amount available for a partial or full surrender which
shall equal the Fixed Account Value plus the Variable Account Value less any
applicable surrender charge, contract maintenance fee and any applicable premium
tax.
VALUATION DAY: Each day on which the New York Stock Exchange is open for
business.
VALUATION PERIOD: The period commencing at the close of regular trading on
the New York Stock Exchange on any Valuation Day and ending at the close of
regular trading on the next succeeding Valuation Day.
VARIABLE ACCOUNT: Protective Variable Annuity Separate Account; a separate
investment account of Protective Life into which Purchase Payment(s) may be
allocated.
VARIABLE ACCOUNT VALUE: The sum of all Sub-Account Values.
2
<PAGE>
EXPENSE TABLES
The following expense information assumes that the entire Contract Value is
Variable Account Value.
<TABLE>
<S> <C>
OWNER TRANSACTION EXPENSES
Sales Charge Imposed on Premiums...................................... None
Maximum Surrender Charge (contingent deferred sales charge)........... 7%
Transfer Processing Fee............................................... None*
ANNUAL CONTRACT MAINTENANCE FEE......................................... $35
ANNUAL ACCOUNT EXPENSES
(as a percentage of net assets)
Mortality and Expense Risk Charge..................................... 1.25%
Administration Charge................................................. 0.15%
-----
Total Account Expenses................................................ 1.40%
ANNUAL FUND EXPENSES
(as percentage of average net assets)
PIC FUNDS (1)
<CAPTION>
MONEY
MARKET
FUND
-----------
<S> <C>
Management (Advisory) Fees............................................. 0.60%
Other Expenses After Reimbursement.................................... 0.00%
-----
Total Annual Fund Expenses............................................
(after reimbursements) 0.60%
<CAPTION>
CORE U.S.
EQUITY
FUND
-----------
<S> <C>
Management (Advisory) Fees............................................. 0.80%
Other Expenses After Reimbursement.................................... 0.00%
-----
Total Annual Fund Expenses............................................
(after reimbursements) 0.80%
<CAPTION>
CAPITAL
GROWTH
FUND
-----------
<S> <C>
Management (Advisory) Fees............................................. 0.80%
Other Expenses After Reimbursement.................................... 0.00%
-----
Total Annual Fund Expenses............................................
(after reimbursements) 0.80%
<CAPTION>
SMALL CAP
EQUITY FUND
-----------
<S> <C>
Management (Advisory) Fees............................................. 0.80%
Other Expenses After Reimbursement.................................... 0.00%
-----
Total Annual Fund Expenses............................................
(after reimbursements) 0.80%
<CAPTION>
INTERNATIONAL
EQUITY FUND
-----------
<S> <C>
Management (Advisory) Fees............................................. 1.10%
Other Expenses After Reimbursement.................................... 0.00%
-----
Total Annual Fund Expenses............................................
(after reimbursements) 1.10%
<CAPTION>
GROWTH AND
INCOME FUND
-----------
<S> <C>
Management (Advisory) Fees............................................. 0.80%
Other Expenses After Reimbursement.................................... 0.00%
-----
Total Annual Fund Expenses............................................
(after reimbursements) 0.80%
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
GLOBAL
INCOME
FUND
-----------
Management (Advisory) Fees............................................. 1.10%
<S> <C>
Other Expenses After Reimbursement.................................... 0.00%
-----
Total Annual Fund Expenses............................................
(after reimbursements) 1.10%
OPPENHEIMER FUNDS (2)
</TABLE>
<TABLE>
<CAPTION>
CAPITAL
APPRECIATION
FUND
------------
<S> <C>
Management (Advisory) Fees............................................................... 0.72%
Other Expenses After Reimbursement...................................................... 0.03% -----
Total Annual Fund Expenses..............................................................
(after reimbursements) 0.75%
<CAPTION>
GROWTH
FUND
------------
<S> <C>
Management (Advisory) Fees............................................................... 0.75%
Other Expenses After Reimbursement...................................................... 0.04% -----
Total Annual Fund Expenses..............................................................
(after reimbursements) 0.79%
<CAPTION>
GROWTH &
INCOME
FUND
------------
<S> <C>
Management (Advisory) Fees............................................................... 0.75%
Other Expenses After Reimbursement...................................................... 0.25% -----
Total Annual Fund Expenses..............................................................
(after reimbursements) 1.00%
<CAPTION>
STRATEGIC
BOND
FUND
------------
<S> <C>
Management (Advisory) Fees............................................................... 0.75%
Other Expenses After Reimbursement...................................................... 0.10% -----
Total Annual Fund Expenses..............................................................
(after reimbursements) 0.85%
MFS FUNDS
<CAPTION>
MFS EMERGING
GROWTH
SERIES
------------
<S> <C>
Management (Advisory) Fees............................................................... 0.75%
Other Expenses After Reimbursement (3)(4)............................................... 0.25% -----
Total Annual Fund Expenses..............................................................
(after reimbursements) (4) 1.00%
<CAPTION>
MFS RESEARCH
SERIES
------------
<S> <C>
Management (Advisory) Fees............................................................... 0.75%
Other Expenses After Reimbursement (3)(4)............................................... 0.25% -----
Total Annual Fund Expenses..............................................................
(after reimbursements) (4) 1.00%
<CAPTION>
MFS GROWTH
WITH INCOME
SERIES
------------
<S> <C>
Management (Advisory) Fees............................................................... 0.75%
Other Expenses After Reimbursement (3)(4)............................................... 0.25% -----
Total Annual Fund Expenses..............................................................
(after reimbursements) (4) 1.00%
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
MFS TOTAL
RETURN
SERIES
------------
Management (Advisory) Fees............................................................... 0.75%
<S> <C>
Other Expenses After Reimbursement (3)(4)............................................... 0.25% -----
Total Annual Fund Expenses..............................................................
(after reimbursements) (4) 1.00%
CALVERT RESPONSIBLY INVESTED PORTFOLIOS (5)
<CAPTION>
CRI
STRATEGIC
GROWTH
PORTFOLIO
------------
<S> <C>
Management (Advisory) Fees............................................................... 1.71%
Other Expenses After Reimbursement...................................................... 0.59% -----
Total Annual Fund Expenses..............................................................
(after reimbursements) 2.30%
<CAPTION>
CRI BALANCED
PORTFOLIO
------------
<S> <C>
Management (Advisory) Fees............................................................... 0.71%
Other Expenses After Reimbursement...................................................... 0.13% -----
Total Annual Fund Expenses..............................................................
(after reimbursements) 0.84%
</TABLE>
- ------------------------------
* Protective Life reserves the right to charge a Transfer Fee in the future.
(See "Charges and Deductions".)
(1) The annual expenses listed for all of the PIC Funds are net of certain
reimbursements by PIC's investment manager. (See "The Funds".) Absent the
reimbursements, total expenses for the period ended December 31, 1996 were:
Money Market Fund 1.27%, CORE U.S. Equity Fund 0.91%, Small Cap Equity Fund
0.94%, International Equity Fund 1.38%, Growth and Income Fund 0.88%,
Capital Growth Fund 1.02%, and Global Income Fund 1.42%. PIC's investment
manager has voluntarily agreed to reimburse certain of each Fund's expenses
in excess of its management fees. Although this reimbursement may be ended
on 120 days notice to PIC, the investment manager has no present intention
of doing so.
(2) Oppenheimer Growth Fund expenses are net of certain reimbursements by the
investment manager. Absent the reimbursements, the Oppenheimer Growth Fund's
total expenses for the period ended December 31, 1996 were 0.81%.
(3) Each Series has an expense offset arrangement which reduces the Series'
custodian based fee based on the amount of cash maintained by the Series
with its custodian and dividend disbursing agent, and may enter into other
such arrangements and directed brokerage arrangements (which would also have
the effect of reducing the Series' expenses). Any such fee reductions are
not reflected under "Other Expenses."
(4) The investment advisor has agreed to bear expenses for each Series, subject
to reimbursement by each Series, such that each Series' "Other Expenses"
shall not exceed 0.25% of the average daily net assets of the Series during
the current fiscal year. See the Funds prospectus, "Information Concerning
Shares of Each Series -- Expenses." Otherwise, "Other Expenses" for the
Emerging Growth Series, Research Series, Growth With Income Series and Total
Return Series would be 0.41%, 0.73%, 1.32% and 1.35%, respectively, and
"Total Operating Expenses" would be 1.16%, 1.48%, 2.07% and 2.10%,
respectively, for these Series.
(5) The figures above are based on expenses for fiscal year 1996, and have been
restated to reflect an increase in transfer agency expenses of 0.03% for
each Portfolio expected to be incurred in 1997. Management (Advisory) Fees
includes for CRI Balanced and CRI Strategic Growth, includes a performance
adjustment, which depending on performance, could cause the fee to be as
high as 0.85% or as low as 0.55% for CRI Balanced, and as high as 1.85% or
as low as 1.55% for CRI Strategic Growth. "Other Expenses" reflect an
indirect fee. Net fund operating expenses after reductions for fees paid
indirectly (again, restated) would be 0.81% for CRI Balanced and 1.84% for
CRI Strategic Growth. Management (Advisory) Fees for CRI Strategic Growth
includes an administrative service fee of 0.20% paid to Advisor's affiliate.
The above tables are intended to assist the owner in understanding the costs
and expenses that he or she will bear directly or indirectly. The tables reflect
the expenses for the Account and reflect the investment management fees and
other expenses and total expenses for each Fund for the period January 1, 1996
to December 31, 1996. For a more complete description of the various costs and
expenses see "Charges and Deductions" and the prospectuses for each of the
Funds, which accompany this prospectus. IN ADDITION TO THE EXPENSES LISTED
ABOVE, PREMIUM TAXES VARYING FROM 0 TO 3.5% MAY BE APPLICABLE IN CERTAIN STATES.
5
<PAGE>
EXAMPLES
An Owner would pay the following expenses on a $1,000 investment, assuming a
5% annual return on assets:
1. If the Contract is surrendered at the end of the applicable time period:
<TABLE>
<CAPTION>
SUB-ACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PIC Money Market................................................... $91 $115 $142 $241
PIC CORE U.S. Equity............................................... 93 121 152 262
PIC Capital Growth................................................. 93 121 152 262
PIC Small Cap Equity............................................... 93 121 152 262
PIC International Equity........................................... 96 130 167 291
PIC Growth and Income.............................................. 93 121 152 262
PIC Global Income.................................................. 96 130 167 291
Oppenheimer Capital Appreciation................................... 93 120 149 256
Oppenheimer Growth................................................. 93 121 152 261
Oppenheimer Growth & Income........................................ 95 127 162 282
Oppenheimer Strategic Bond......................................... 94 123 155 267
MFS Emerging Growth................................................ 95 127 162 282
MFS Research....................................................... 95 127 162 282
MFS Growth With Income............................................. 95 127 162 282
MFS Total Return................................................... 95 127 162 282
CRI Strategic Growth............................................... 103 151 202 359
CRI Balanced....................................................... 93 121 151 260
</TABLE>
2. If the Contract is not surrendered or is annuitized* at the end of the
applicable time period:
<TABLE>
<CAPTION>
SUB-ACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PIC Money Market................................................... $21 $65 $112 $241
PIC CORE U.S. Equity............................................... 23 71 122 262
PIC Capital Growth................................................. 23 71 122 262
PIC Small Cap Equity............................................... 23 71 122 262
PIC International Equity........................................... 26 80 137 291
PIC Growth and Income.............................................. 23 71 122 262
PIC Global Income.................................................. 26 80 137 291
Oppenheimer Capital Appreciation................................... 23 70 119 256
Oppenheimer Growth................................................. 23 71 122 261
Oppenheimer Growth & Income........................................ 25 77 132 282
Oppenheimer Strategic Bond......................................... 24 73 125 267
MFS Emerging Growth................................................ 25 77 132 282
MFS Research....................................................... 25 77 132 282
MFS Growth With Income............................................. 25 77 132 282
MFS Total Return................................................... 25 77 132 282
CRI Strategic Growth............................................... 33 101 172 359
CRI Balanced....................................................... 23 72 123 263
</TABLE>
- ------------------------
* A surrender charge will be applied to the Contract Value upon annuitization
if the annuity option selected is for a certain period of less than five
years. (See "Charges and Deductions".)
6
<PAGE>
The examples assume that no transfer fee or premium taxes have been
assessed. The examples assume that the contract maintenance fee is $35. The
charge used in the above example is .0008%, reflecting the average account value
in force at the end of 1996, for purposes of the examples based on a $1,000
investment.
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE 5%
ANNUAL RETURN ASSUMED IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE GREATER OR LESS
THAN THE ASSUMED AMOUNT.
SUMMARY
THE CONTRACT
HOW IS A CONTRACT ISSUED? The Contract, an individual flexible premium
deferred variable and fixed annuity will be issued by Protective Life upon
receipt of completed application information and an initial Purchase Payment of
at least $2,000. (See "Issuance of Contract".)
WHAT ARE THE PURCHASE PAYMENTS? The minimum amount which Protective Life
will accept as an initial Purchase Payment is $2,000. Subsequent Purchase
Payments may be made at any time except for contracts issued in the State of
Oregon. The minimum subsequent Purchase Payment(s) that we will accept is (1)
$100 for Non-Qualified Contracts; and (2) $50 for Qualified Contracts. The
maximum aggregate Purchase Payments we will accept without Home Office approval
is $1,000,000. (See "Purchase Payments".)
CAN I CANCEL THE CONTRACT? You have the right to return the Contract within
a certain number of days (which varies by state and is never less than ten days)
after you receive it. The returned Contract will be treated as if it were never
issued. Protective Life will refund the Contract Value in states where
permitted. This amount may be more or less than the Purchase Payments. Where
required, we will refund Purchase Payments. (See "Free Look Period".)
CAN I TRANSFER AMOUNTS IN THE CONTRACT? Prior to the Annuity Commencement
Date, you may request transfers from one Sub-Account to another Sub-Account or
the Fixed Account. No transfers may be made into the DCA Fixed Account. At least
$100 must be transferred. Protective Life reserves the right to limit the
maximum amount that may be transferred from the Fixed Account to the greater of
(a) $2,500; or (b) 25% of the value of the Fixed Account per Contract Year. The
Company reserves the right to charge a Transfer Fee of $25 for each transfer
after the 12th transfer during such Contract Year. (See "Transfers".)
CAN I SURRENDER THE CONTRACT? Upon receipt of written notice at the Home
Office before the Annuity Commencement Date, you may surrender the Contract and
receive its Surrender Value. (See "Surrenders and Partial Surrenders".)
IS THERE A DEATH BENEFIT? If any Owner dies prior to the Annuity
Commencement Date and while this Contract is in force Protective Life will pay
the Beneficiary a Death Benefit. The Death Benefit will be determined as of the
end of the Valuation Period during which due proof of death is provided to us.
The Death Benefit that will be payable will depend upon the age of the deceased
Owner on the date of death.
In general, for Contracts issued after April 1996, if the Owner's death
occurs on, or before the deceased Owner's 90th birthday, the Death Benefit is
the greater of: (1) the Contract Value; or (2) total Purchase Payments made
under the Contract reduced by any partial surrenders, withdrawals and any
associated Surrender Charges; or (3) the Maximum Anniversary Value.
If the Owner's death occurs after the deceased Owner's 90th birthday, the
Death Benefit is the Contract Value.
7
<PAGE>
ARE THERE CHARGES AND DEDUCTIONS FROM MY CONTRACT? The following charges
and deductions are made in connection with the Contract:
SURRENDER CHARGES. The amount of any full or partial surrender is subject
to a surrender charge. The surrender charge is equal to a specified percentage
(maximum 7%) of each Purchase Payment surrendered. No surrender charge applies
to Contract Value in excess of total Purchase Payments. The surrender charge is
calculated using the assumption that the Contract Value in excess of total
Purchase Payments is surrendered before any Purchase Payments and that Purchase
Payments are surrendered on a first-in-first-out basis. (See "Surrender
Charge".)
MORTALITY AND EXPENSE RISK CHARGE. We will deduct a mortality and expense
risk charge to compensate us for assuming certain mortality and expense risks.
The charge is equal, on an annual basis, to 1.25% of the daily net asset value
of each Sub-Account (approximately .50% for mortality risk and .75% for expense
risk.)
ADMINISTRATION CHARGE. We will deduct an administration charge equal, on an
annual basis, to .15% of the daily net asset value of each Sub-Account.
CONTRACT MAINTENANCE FEE. A contract maintenance fee of $35 is deducted
from the Variable Account Value on each Contract Anniversary, and on any day
that the Contract is surrendered, if the surrender occurs on any day other than
the Contract Anniversary. Under certain circumstances, this fee may be waived.
(See "Contract Maintenance Fee".)
PREMIUM TAXES. If applicable, premium taxes will be deducted from the
Purchase Payment(s) when received, on full or partial surrender or from the
amount applied under an Annuity Option. Premium taxes imposed by the states
currently range up to 3.5%. (See "Premium Taxes".)
INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES OF THE FUNDS. The net assets
of each Sub-Account of the Variable Account will reflect the investment
management fee incurred by the corresponding Fund as well as other operating
expenses of that Fund. For each Fund, the investment manager is paid a daily fee
for its investment management services. The management fees are based on the
average daily net assets of the Fund. (See "Funds Expenses" and the Funds'
Prospectuses.)
WHAT ANNUITY OPTIONS ARE AVAILABLE? On the Annuity Commencement Date, the
Contract Value (less applicable premium tax) will be applied under an Annuity
Option, unless you choose to receive the Surrender Value in a lump sum.
The Annuity Options include: Payment for a Fixed Period; Life Income with
Payment for a Guaranteed Period; and Payments for a Fixed Amount. The amounts
payable under these Annuity Options do NOT vary with the investment experience
of the Variable Account. (See "Annuity Options".)
IS THE CONTRACT AVAILABLE FOR QUALIFIED RETIREMENT PLANS? The Contract may
be issued for use with retirement plans receiving special federal income tax
treatment under the Internal Revenue Code such as pension and profit sharing
plans, annuity purchase plans of public school systems and universities and
certain other tax-exempt organizations, individual retirement accounts, and
individual retirement annuities. (See "Federal Tax Matters".)
FEDERAL TAX STATUS
Generally, a distribution from the Contract, which includes a full or
partial surrender or payment of a death benefit,will result in taxable income if
there has been an increase in the Contract Value. In certain circumstances, a
10% penalty tax may also apply. (See "Federal Tax Matters".)
8
<PAGE>
CONDENSED FINANCIAL INFORMATION
At December 31, 1994, 1995 and 1996, net assets of the Variable Account were
represented by the following accumulation unit values and accumulation units.
The accumulation unit values shown for the beginning of the period are as of
March 14, 1994 (date of inception) except the Capital Growth Sub-Account which
is June 13, 1995 (date of inception). This information should be read in
conjunction with the Variable Account's financial statements and related notes
included in the Statement of Additional Information.
<TABLE>
<CAPTION>
ACCUMULATION UNIT VALUE*
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(MARCH 14, 1994) (DECEMBER 31, 1994) (DECEMBER 31, 1995) (DECEMBER 31, 1996)
----------------- --------------------- ------------------- -------------------
PIC Money Market Sub-Account............ 1.00 1.02 1.05 1.09
PIC Growth and Income Sub-Account....... 10.00 9.71 12.66 15.83
PIC International Equity Sub-Account.... 10.00 9.48 11.18 13.12
PIC Global Income Sub-Account........... 10.00 9.82 11.32 12.22
PIC Small Cap Equity Sub-Account........ 10.00 8.91 9.35 11.09
PIC CORE U.S. Equity Sub-Account........ 10.00 9.94 13.40 16.12
PIC Capital Growth Sub-Account.......... -- -- 10.36 12.48
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATION UNITS**
----------------------------------------------------------------
<S> <C> <C> <C>
(DECEMBER 31, 1994) (DECEMBER 31, 1995) (DECEMBER 31, 1996)
-------------------- -------------------- --------------------
PIC Money Market Sub-Account................... 3,034,056 4,273,270 5,577,082
PIC Growth and Income Sub-Account.............. 4,260,743 10,012,351 13,291,398
PIC International Equity Sub-Account........... 2,588,605 4,954,564 7,363,767
PIC Global Income Sub-Account.................. 1,457,712 2,438,238 3,081,317
PIC Small Cap Equity Sub-Account............... 2,347,968 4,579,808 5,797,119
PIC CORE U.S. Equity Sub-Account............... 1,682,927 4,128,798 6,300,382
PIC Capital Growth Sub-Account................. -- 930,249 2,419,601
</TABLE>
- ------------------------
* Accumulation unit values are rounded to the nearest whole cent.
** Accumulation units are rounded to the nearest unit.
THE COMPANY, VARIABLE ACCOUNT AND FUNDS
PROTECTIVE LIFE INSURANCE COMPANY
The Contracts are issued by Protective Life. Founded in 1907, Protective
Life provides individual life and health insurance, annuities, group life and
health insurance, and guaranteed investment contracts. Protective Life is
currently licensed to transact life insurance business in 49 states and the
District of Columbia. As of December 31, 1996, Protective Life had total assets
of approximately $8.2 billion. Protective Life is the principal operating
subsidiary of Protective Life Corporation ("PLC"), an insurance holding company
whose stock is traded on the New York Stock Exchange. PLC, a Delaware
corporation, had total assets of approximately $8.3 billion at December 31,
1996.
PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
The Protective Variable Annuity Separate Account is a separate investment
account of Protective Life. The Variable Account was established under Tennessee
law by the Board of Directors of Protective Life on October 11, 1993. The
Variable Account is registered with the Securities and Exchange Commission (the
"SEC") as a unit investment trust under the Investment Company Act of 1940 (the
"1940 Act") and meets the definition of a separate account under federal
securities laws. This registration does not involve supervision by the SEC of
the management or investment policies or practices of the Variable Account.
9
<PAGE>
Protective Life owns the assets of the Variable Account. These assets are
held separate from other assets and are not part of Protective Life's General
Account. Assets of the Variable Account equal to the reserves or other contract
liabilities of the Variable Account will not be charged with liabilities that
arise from any other business Protective Life conducts. Protective Life may
transfer to its General Account any assets of the Variable Account which exceed
the reserves and the Contract liabilities of the Variable Account (which will
always be at least equal to the aggregate Variable Account Value under the
Contracts). Protective Life may accumulate in the Variable Account the charge
for mortality and expense risks, and investment results applicable to those
assets that are in excess of the net assets supporting the Contracts.
The income, gains or losses, whether or not realized, from the assets of
each Sub-Account of the Variable Account are credited to or charged against that
Sub-Account without regard to any other income, gains or losses of Protective
Life. Each Sub-Account invests in shares of a corresponding Fund. Therefore, the
investment experience of your Contract depends on the experience of the Sub-
Accounts you select.
As of December 31, 1996, the Variable Account had seven Sub-Accounts: PIC
Money Market; PIC Select Equity (now called CORE U.S. Equity); PIC Capital
Growth; PIC Small Cap Equity; PIC International Equity; PIC Growth and Income;
and PIC Global Income. In 1997, ten additional Sub-Accounts are being added to
the Variable Account: Oppenheimer Capital Appreciation; Oppenheimer Growth;
Oppenheimer Growth & Income; Oppenheimer Strategic Bond; MFS Emerging Growth;
MFS Research; MFS Growth With Income; MFS Total Return; CRI Strategic Growth;
and CRI Balanced.
ADMINISTRATION
Protective Life Insurance Company performs the Contract administration at
its Home Office at 2801 Highway 280 South, Birmingham, Alabama 35223. Contract
administration includes processing applications for the Contracts and processing
Purchase Payments, transfers, surrenders and Death Benefit claims as well as
performing record maintenance and paying annuity benefits.
THE FUNDS
Each Sub-Account invests in a corresponding Fund. Each Fund is an investment
portfolio of one of the following investment companies: PIC (the "PIC Funds")
managed by Investment Distributors Advisory Services, Inc., and subadvised by
Goldman Sachs Asset Management or Goldman Sachs Asset Management International;
Oppenheimer Variable Account Funds (the "Oppenheimer Funds") managed by
OppenheimerFunds, Inc.; MFS Variable Insurance Trust (the "MFS Funds") managed
by Massachusetts Financial Services Company; or Acacia Capital Corporation
Calvert Responsibly Invested Portfolios (the"Calvert Responsibly Invested
Portfolios") managed by Calvert Asset Management Company, Inc. Shares of these
Funds are offered only to: (1) the Variable Account, (2) other separate accounts
of Protective Life supporting variable annuity contracts or variable life
insurance policies, (3) separate accounts of other life insurance companies
supporting variable annuity contracts or variable life insurance policies, and
(4) certain qualified retirement plans. Such shares are not offered directly to
investors but are available only through the purchase of such contracts or
policies or through such plans. See the prospectus for each Fund for details
about that Fund.
There is no guarantee that any Fund will meet its investment objectives.
Please refer to the prospectus for each of the Funds you are considering for
more information.
THE PIC FUNDS
PIC MONEY MARKET FUND. This Fund seeks to maximize current income to
the extent consistent with the preservation of capital and maintenance of
liquidity. This Fund will pursue its objective by investing exclusively in
high quality money market instruments. AN INVESTMENT IN THE MONEY MARKET
FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT AND THE FUND
CANNOT ASSURE THAT IT WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF
$1 PER SHARE.
10
<PAGE>
PIC CORE U.S. EQUITY (formerly Select Equity) FUND. This Fund seeks a
total return consisting of capital appreciation plus dividend income. This
Fund will pursue its objective by investing, under normal circumstances, at
least 90% of its total assets in equity securities selected using both
fundamental research and a variety of quantitative techniques that seek to
maximize the Fund's reward to risk ratio.
PIC CAPITAL GROWTH FUND This Fund seeks long-term capital growth. The
Fund will pursue its objective by investing, under normal circumstances, at
least 65% of its total assets in equity securities having long-term capital
appreciation potential.
PIC SMALL CAP EQUITY FUND. This Fund seeks long-term capital growth.
This Fund will pursue its objective by investing, under normal
circumstances, at least 65% of its total assets in equity securities of
companies with public stock market capitalizations of $1 billion or less at
the time of investment.
PIC INTERNATIONAL EQUITY FUND. This Fund seeks long-term capital
appreciation. This Fund will pursue its objective by investing, primarily in
equity and equity-related securities of companies that are organized outside
the United States or whose securities are primarily traded outside the
United States.
PIC GROWTH AND INCOME FUND. This Fund seeks long-term growth of capital
and growth of income. This Fund will pursue its objectives by investing,
under normal circumstances, at least 65% of its total assets in equity
securities having favorable prospects of capital appreciation and/ or
dividend paying ability.
PIC GLOBAL INCOME FUND. This Fund seeks high total return, emphasizing
current income and, to a lesser extent, providing opportunities for capital
appreciation. This Fund will pursue its objectives by investing in high
quality fixed-income securities of U.S. and foreign issuers and through
foreign currency transactions.
THE OPPENHEIMER FUNDS
CAPITAL APPRECIATION FUND. This Fund seeks to achieve capital
appreciation by investing in "growth-type" companies.
GROWTH FUND. This Fund seeks to achieve capital appreciation by
investing in securities of well-known established companies.
GROWTH & INCOME FUND. This Fund seeks a high total return (which
includes growth in the value of its shares as well as current income) from
equity and debt securities. From time to time this Fund may focus on small
to medium capitalization common stocks, bonds and convertible securities.
STRATEGIC BOND FUND. This Fund seeks a high level of current income
principally derived from interest on debt securities and seeks to enhance
such income by writing covered call options on debt securities.
THE MFS FUNDS
MFS EMERGING GROWTH SERIES. This Fund seeks to provide long-term growth
of capital.
MFS RESEARCH SERIES. This Fund seeks to provide long-term growth of
capital and future income.
MFS GROWTH WITH INCOME SERIES. This Fund seeks to provide reasonable
current income and long-term growth of capital and income.
11
<PAGE>
MFS TOTAL RETURN SERIES. This Fund seeks primarily to provide
above-average income (compared to a portfolio invested entirely in equity
securities) consistent with the prudent employment of capital and
secondarily to provide a reasonable opportunity for growth of capital and
income.
THE CALVERT RESPONSIBLY INVESTED PORTFOLIOS
CRI STRATEGIC GROWTH PORTFOLIO. This Fund seeks maximum long-term
growth through investments primarily in the equity securities of companies
that have little or no debt, high relative strength and substantial
management ownership. The Fund is designed to provide long-term growth of
capital by investing in enterprises that make a significant contribution to
society through their products and services and through the way they do
business.
CRI BALANCED PORTFOLIO. This Fund seeks to achieve a total return above
the rate of inflation through an actively managed, non-diversified portfolio
of common and preferred stocks, bonds, and money market instruments that
offer income and capital growth opportunity and that satisfy the social
concern criteria established for the Fund.
THERE IS NO ASSURANCE THAT THE STATED OBJECTIVES AND POLICIES OF ANY OF THE
FUNDS WILL BE ACHIEVED.
MORE DETAILED INFORMATION CONCERNING THE INVESTMENT OBJECTIVES, POLICIES AND
RESTRICTIONS OF THE FUNDS, THE EXPENSES OF THE FUNDS, THE RISKS ATTENDANT TO
INVESTING IN THE FUNDS AND OTHER ASPECTS OF THEIR OPERATIONS CAN BE FOUND IN THE
CURRENT PROSPECTUSES FOR THE FUNDS, WHICH ACCOMPANY THIS PROSPECTUS, AND THE
CURRENT STATEMENT OF ADDITIONAL INFORMATION FOR EACH OF THE FUNDS. THE FUNDS'
PROSPECTUSES SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE CONCERNING THE
ALLOCATION OF PURCHASE PAYMENTS OR TRANSFERS AMONG THE SUB-ACCOUNTS.
Each Fund sells its shares to the Variable Account in accordance with the
terms of a participation agreement between the appropriate investment company
and Protective Life. The termination provisions of these agreements vary. Should
a participation agreement relating to a Fund terminate, the Variable Account
would not be able to purchase additional shares of that Fund. In that event,
Owners would no longer be able to allocate Variable Account Value or Purchase
Payments to Sub-Accounts investing in that Fund. In certain circumstances, it is
also possible that a Fund may refuse to sell its shares to the Variable Account
despite the fact that the participation agreement relating to that Fund has not
been terminated. Should a Fund decide to discontinue selling its shares to the
Variable Account, Protective Life would not be able to honor requests from
Owners to allocate Purchase Payments or transfer Account Value to the
Sub-Account investing in shares of that Fund.
Protective Life has entered into agreements with the investment managers or
advisers of several of the Funds pursuant to which each such investment manager
or adviser pays Protective Life a servicing fee based upon an annual percentage
of the average daily net assets invested by the Variable Account (and other
separate accounts of Protective Life) in the Funds managed by that manager or
adviser. These fees are in consideration for administrative services provided to
the Funds by Protective Life. Payments of fees under these agreements by
managers or advisers do not increase the fees or expenses paid by the Funds or
their shareholders.
OTHER INVESTORS IN THE FUNDS
PIC currently sells shares of its Funds only to Protective Life as the
underlying investment for the Variable Account as well as for variable life
insurance contracts issued through Protective Life. PIC may in the future sell
shares of its Funds to other separate accounts of Protective Life or its life
insurance company affiliates supporting other variable annuity contracts or
variable life insurance contracts. In addition, upon obtaining regulatory
approval, PIC may sell shares to certain retirement plans qualifying under
Section 401 of the Code. Protective Life currently does not foresee any
disadvantages to Owners that would arise from the possible sale of shares to
support its variable life insurance contracts or those of its affiliates or from
the possible sale of shares to such retirement plans. However, the board of
directors of PIC will monitor events in order to identify any material
12
<PAGE>
irreconcilable conflicts that might possibly arise if such shares were also
offered to support variable annuity contracts other than the Contracts or
variable life insurance contracts or to retirement plans. In event of such a
conflict, the board of directors would determine what action, if any, should be
taken in response to the conflict. In addition, if Protective Life believes that
the PIC's response to any such conflicts insufficiently protects Owners, it will
take appropriate action on its own, including withdrawing the Account's
investment in the Fund. (See the PIC Prospectus for more detail.)
Shares of the Oppenheimer, MFS and Calvert Responsibly Invested Portfolios
Funds are sold to separate accounts of insurance companies, which may or may not
be affiliated with Protective Life or each other, a practice known as "shared
funding." They may also be sold to separate accounts to serve as the underlying
investment for both variable annuity contracts and variable life insurance
policies, a practice known as "mixed funding." As a result, there is a
possibility that a material conflict may arise between the interests of Owners
of Protective Life's Contracts, whose Contract Values are allocated to the
Variable Account, and of owners of other contracts whose contract values are
allocated to one or more other separate accounts investing in any one of the
Funds. Shares of some of these Funds may also be sold to certain qualified
pension and retirement plans. As a result, there is a possibility that a
material conflict may arise between the interests of Contract Owners generally
or certain classes of Contract Owners, and such retirement plans or participants
in such retirement plans. In the event of any such material conflicts,
Protective Life will consider what action may be appropriate, including removing
the Fund from the Variable Account or replacing the Fund with another fund. As
is the case with PIC, the board of directors (or trustees) of the Oppenheimer
Funds, MFS Funds and Calvert Funds monitors events related to their Funds to
identify possible material irreconcilable conflicts among and between the
interests of the Fund's various investors. There are certain risks associated
with mixed and shared funding and with the sale of shares to qualified pension
and retirement plans, as disclosed in each Fund's prospectus.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
Protective Life reserves the right, subject to applicable law, to make
additions to, deletions from, or substitutions for the shares that are held in
the Variable Account or that the Variable Account may purchase. If the shares of
a Fund are no longer available for investment or if in Protective Life's
judgment further investment in any Fund should become inappropriate in view of
the purposes of the Variable Account, Protective Life may redeem the shares, if
any, of that Fund and substitute shares of another registered open-end
management company or unit investment trust. Protective Life will not substitute
any shares attributable to a Contract's interest in the Variable Account without
notice and any necessary approval of the SEC and state insurance authorities.
Protective Life also reserves the right to establish additional Sub-Accounts
of the Variable Account, each of which would invest in shares corresponding to a
new Fund. Subject to applicable law and any required SEC approval, Protective
Life may, in its sole discretion, establish new Sub-Accounts or eliminate one or
more Sub-Accounts if marketing needs, tax considerations or investment
conditions warrant. Any new Sub-Accounts may be made available to existing
Owner(s) on a basis to be determined by Protective Life.
If any of these substitutions or changes are made, Protective Life may by
appropriate endorsement change the Contract to reflect the substitution or other
change. If Protective Life deems it to be in the best interest of Owner(s) and
Annuitants, and subject to any approvals that may be required under applicable
law, the Variable Account may be operated as a management company under the 1940
Act, it may be de-registered under that Act if registration is no longer
required, or it may be combined with other Protective Life separate accounts.
Protective Life reserves the right to make any changes to the Variable Account
required by the 1940 Act or other applicable law or regulation.
13
<PAGE>
DESCRIPTION OF THE CONTRACTS
The following sections describe the Contracts currently being offered.
Contracts with an Effective Date prior to May 1, 1996 and Contracts issued in
certain states after May 1, 1996 contain provisions that differ from those
described below. In particular, Death Benefit and certain Section 403(b)
provisions may be different. Refer to your Contract and Matters Relating to
Contracts Offered prior to May 1, 1996 on page 10 for these provisions.
ISSUANCE OF A CONTRACT
To purchase a Contract, certain application information and an initial
Purchase Payment must be submitted to Protective Life through a licensed
representative of Protective Life, who is also a registered representative of a
broker-dealer having a distribution agreement with Investment Distributors, Inc.
The minimum initial Purchase Payment is $2,000. Protective Life reserves the
right to accept or decline a request to issue a Contract. Contracts may be sold
to or in connection with retirement plans which do not qualify for special tax
treatment as well as retirement plans that qualify for special tax treatment
under the Code. Generally, the maximum age for Owners on the Effective Date is
85.
If the necessary application information for a Contract is accompanied by
the initial Purchase Payment, the initial Purchase Payment (less any applicable
premium tax) will be allocated to the Sub-Accounts, the Fixed Account or the DCA
Fixed Account as provided for in the application within two business days of
receipt of such Purchase Payment at the Home Office. If the necessary
application information is not received, Protective Life will retain the
Purchase Payment for up to five business days while it attempts to complete the
information. If the necessary application information is not complete after five
days, Protective Life will inform the applicant of the reason for the delay and
the initial Purchase Payment will be returned immediately unless the applicant
specifically consents to Protective Life retaining it until the information is
complete. Once the information is complete, the initial Purchase Payment will be
allocated to the appropriate Sub-Accounts, the Fixed Account and/or the DCA
Fixed Account within two business days.
Information necessary to complete an application may be transmitted to the
Company by telephone, facsimile, or electronic media.
PURCHASE PAYMENTS
Subsequent Purchase Payment(s) will be accepted by Protective Life except on
contracts issued in the State of Oregon prior to May 1, 1996, where a single
Purchase Payment only was acceptable. Protective Life retains the right to limit
the maximum Purchase Payment that can be made without Home Office approval. This
amount is currently $1,000,000. The minimum subsequent Purchase Payment that
will be accepted is (1) $100 for Non-Qualified Contracts; and (2) $50 for
Qualified Contracts.
Under an Automatic Purchase Payment plan, the Owner can select a monthly or
quarterly payment schedule pursuant to which Purchase Payments will be
automatically deducted from a bank account. Each payment must be at least $100.
FREE LOOK PERIOD
You have the right to return the Contract within a certain number of days
after you receive it by returning it to the Home Office or the sales
representative who sold it along with a written cancellation request. The number
of days is determined by state law (and is at least ten days) in the state where
the Owner resides. Return of the Contract by mail is effective on being received
by Us. We will treat the returned Contract as if it had never been issued.
However, Protective Life will refund the Contract Value in states where
permitted. This amount may be more or less than the aggregate amount of your
Purchase Payments up to that time. Where required, we will refund the Purchase
Payment.
ALLOCATION OF PURCHASE PAYMENTS
Owners must indicate in the application how Purchase Payments are to be
allocated among the Sub-Accounts, the Fixed Account and/or the DCA Fixed
Account. These allocation instructions apply
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to both initial and subsequent Purchase Payments. Owners may change the
allocation instructions in effect at any time by written request to Protective
Life. If such instructions are indicated by percentages, whole percentages must
be used. Owners may not allocate any Purchase Payment to more than 10 investment
options.
For Contracts issued in states where, upon cancellation during the free look
period, we return at least your Purchase Payments, we reserve the right to
allocate your initial Purchase Payment (and any subsequent Purchase Payment made
during the free look period) to the PIC Money Market Sub-Account until the
expiration of the number of days in the free look period starting from the date
the Contract is mailed from the Home Office. Thereafter, all Purchase Payments
will be allocated according to your allocation instructions then in effect.
TELEPHONE ALLOCATIONS. Allocations may also be made based upon instructions
given by telephone, provided written authorization to do so is given.
We will send you a confirmation of all instructions communicated by
telephone to determine if they are genuine. For telephone allocations we will
require a form of personal identification prior to acting on instructions
received by telephone. We will also make a tape-recording of the instructions
given by telephone. If we follow these procedures we will not be liable for any
losses due to unauthorized or fraudulent instructions. We reserve the right to
suspend telephone allocation privileges at any time for any class of contracts.
VARIABLE ACCOUNT VALUE
The Variable Account Value reflects the investment experience of the
Sub-Accounts to which it is allocated, any Purchase Payments allocated to the
Sub-Accounts, transfers in or out of the Sub-Accounts, or any partial surrenders
of Variable Account Value. There is no guaranteed minimum Variable Account
Value. The Contract's Variable Account Value therefore depends upon a number of
factors. The Variable Account Value for a Contract at any time is the sum of the
Sub-Account Values for the Contract on the Valuation Day.
DETERMINATION OF ACCUMULATION UNITS. For each Sub-Account, the Purchase
Payment(s) or transferred amounts are converted into Accumulation Units. The
number of Accumulation Units credited is determined by dividing the dollar
amount directed to each Sub-Account by the value of the Accumulation Unit for
that Sub-Account for the Valuation Day on which the Purchase Payment(s) or
transferred amount is invested in the Sub-Account. Therefore, Purchase Payments
allocated to or amounts transferred to a Sub-Account under a Contract increase
the number of Accumulation Units of that Sub-Account credited to the Contract.
Certain events will reduce the number of Accumulation Units of a Sub-Account
credited to a Contract. Partial surrenders or transfers from a Sub-Account will
result in the cancellation of the appropriate number of Accumulation Units of
that Sub-Account as will the following events: a surrender; death of any Owner;
the Annuity Commencement Date; and the deduction of the annual Contract
Maintenance Fee. Accumulation Units will be cancelled as of the end of the
Valuation Period in which Protective Life received notice of or instructions
regarding the event.
DETERMINATION OF ACCUMULATION UNIT VALUE. The Accumulation Unit value for
each Sub-Account was arbitrarily set initially at $10, except the PIC Money
Market Sub-Account, which was arbitrarily initially set at $1. Thereafter, the
Accumulation Unit value at the end of every Valuation Day is the Accumulation
Unit value at the end of the previous Valuation Day times the net investment
factor, as described below. The Sub-Account Value for a Contract is determined
on any day by multiplying the number of Accumulation Units attributable to the
Contract in that Sub-Account by the Accumulation Unit value for that Sub-Account
on that day.
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<PAGE>
NET INVESTMENT FACTOR. The net investment factor is an index that measures
the investment performance of a Sub-Account from one Valuation Period to the
next. Each Sub-Account has a net investment factor for each Valuation Period
which may be greater or less than one. Therefore, the value of an Accumulation
Unit may increase or decrease. The Net Investment Factor for any Sub-Account for
any Valuation Period is determined by dividing (1) by (2) and subtracting (3)
from the result, where:
(1) is the result of:
a. the net asset value per share of the Fund held in the Sub-Account,
determined at the end of the current Valuation Period; plus
b. the per share amount of any dividend or capital gain distributions
made by the Fund to the Sub-Account, if the "ex-dividend" date occurs
during the current Valuation Period; plus or minus
c. a per share charge or credit for any taxes reserved for, which is
determined by the Company to have resulted from the investment
operations of the Sub-Account.
(2) is the net asset value per share of the Fund held in the Sub-Account,
determined at the end of the last prior Valuation Period.
(3) is a daily factor representing the Mortality and Expense Risk Charge and the
Administration Charge deducted from the Sub-Account.
TRANSFERS
Upon our receipt of your written notice at any time prior to the Annuity
Commencement Date, you may transfer amounts in a Sub-Account to another
Sub-Account and/or the Fixed Account or, subject to certain restrictions,
amounts from the Fixed Account and the DCA Fixed Account to a Sub-Account. No
transfers may be made to the DCA Fixed Account. The minimum amount that may be
transferred is the lesser of $100 or the entire amount in any Sub-Account or the
Fixed Account or the DCA Fixed Account from which the transfer is to be made.
After the transfer, if the amount remaining in the Sub-Account(s), the Fixed
Account and/or the DCA Fixed Account from which the transfer is made would be
less than $100, then we will transfer the entire amount instead of the requested
amount. Transfers from the Fixed Account may be subject to a maximum amount that
may be transferred. The maximum amount that may be transferred from the Fixed
Account is the greater of (a) $2,500; or (b) 25% of the value of the Fixed
Account per Contract Year calculated as of the previous Contract Anniversary. We
reserve the right to limit transfers to no more than 12 per year. For each
additional transfer over 12 during each Contract Year, we reserve the right to
charge a Transfer Fee. The Transfer Fee, if any, will be deducted from the
amount being transferred. (See "Charges and Deductions -- Transfer Fee".)
TELEPHONE TRANSFERS. Transfers may be made based upon instructions given by
telephone, provided the appropriate election has been made on the application or
written authorization is provided.
We will send you a confirmation of all instructions communicated by
telephone. For telephone transfers we will require a form of personal
identification prior to acting on instructions received by telephone. We will
also make a tape-recording of the instructions given by telephone. If we follow
these procedures we will not be liable for any losses due to unauthorized or
fraudulent instructions. We reserve the right to suspend telephone transfer
privileges at any time for any class of contracts.
RESERVATION OF RIGHTS. We reserve the right without prior notice to modify,
restrict, suspend or eliminate the transfer privileges (including telephone
transfers) at any time, for any class of Contracts, for any reason. In
particular, we reserve the right to not honor transfers requested by a third
party holding a power of attorney from an Owner where that third party requests
simultaneous transfers on behalf of the Owners of two or more Contracts.
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DOLLAR COST AVERAGING. If you elect at the time of application or at any
time thereafter by written notice to Protective Life, you may systematically and
automatically transfer, on a monthly or quarterly basis, specified dollar
amounts from the DCA Fixed Account (no transfers are allowed into the DCA Fixed
Account) or to or from the Fixed Account or to or from any Sub-Account(s). This
is known as the dollar cost averaging method of investment. By transferring on a
regularly scheduled basis as opposed to allocating the total amount at one
particular time, an Owner may be less susceptible to the impact of market
fluctuations in Sub-Account Accumulation Units. Protective Life, however, makes
no guarantee that the dollar cost averaging method will result in a profit or
protection against loss.
You may elect dollar cost averaging for periods of at least 12 months or
greater. The minimum transfer, whether monthly or quarterly, is $100.
Dollar cost averaging transfers may be made on the 1st through the 28th day
of each month. If elected, transfers will commence on the day of the month that
you select following the end of the Free Look Period. If no day is selected,
transfers will occur on the same day of the month as your Contract Anniversary.
We will process dollar cost averaging transfers until the earlier of the
following (i) the number of designated transfers have been completed; or (ii)
the Owner instructs Protective Life in writing to cancel the automatic
transfers. If you stop Dollar Cost Averaging, any amounts remaining in the DCA
Fixed Account will be transferred to the Fixed Account.
Automatic transfers made to facilitate the dollar cost averaging will not
count toward the twelve transfers permitted each Contract Year if Protective
Life elects to limit transfers. We reserve the right to discontinue offering the
automatic transfers upon 30 days' written notice to the Owner.
PORTFOLIO REBALANCING. At the time of application or at any time thereafter
by written notice to Protective Life, you may instruct Protective Life to
automatically transfer, on a quarterly, semi-annual or annual basis, your
Variable Value among specified Sub-Accounts to achieve a particular percentage
allocation of Variable Account Value among such Sub-Accounts ("Portfolio
Rebalancing"). Such percentage allocations must be in whole numbers and must
allocate amounts only among the Sub-Accounts. No amounts will be transferred to
the Fixed Account or the DCA Fixed Account as part of Portfolio Rebalancing.
Unless you instruct otherwise when electing rebalancing, the percentage
allocation of your Variable Value for Portfolio Rebalancing will be based on
your Purchase Payment allocation instructions in effect at the time of
rebalancing. Any allocation instructions that you give us that differ from your
then current Purchase Payment allocation instructions will be deemed to be a
request to change your Purchase Payment allocation.
Once elected, Portfolio Rebalancing begins on the first quarterly,
semi-annual or annual anniversary following election. You may change or
terminate Portfolio Rebalancing by written instruction to Protective Life, or by
telephone if you have previously authorized us to take telephone instructions.
Portfolio Rebalancing transfers do not count as one of the 12 free transfers
available during any Contract Year. Protective Life reserves the right to
discontinue Portfolio Rebalancing upon written notice to you.
SURRENDERS AND PARTIAL SURRENDERS
PARTIAL SURRENDERS. At any time before the Annuity Commencement Date, an
Owner may make a partial surrender of the Contract Value. The Company will
withdraw the amount requested from the Contract Value as of the Valuation Period
during which written notice requesting the partial surrender is received. Any
applicable surrender charge will be deducted from the amount requested. (See
"Surrender Charge".)
In the case of certain Qualified Plans, federal tax law imposes restrictions
on the form and manner in which benefits may be paid. For example, spousal
consent may be needed in certain instances before a distribution may be made.
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The Owner may specify the amount of the partial surrender to be made from
any Sub-Account, the Fixed Account or the DCA Fixed Account. If the Owner does
not so specify, or if the amount in the designated account(s) is inadequate to
comply with the request, the partial surrender will be made from each
Sub-Account, the Fixed Account and the DCA Fixed Account based on the proportion
that such Sub-Account Value and Fixed Account Value bears to the total Contract
Value.
A partial surrender will have federal income tax consequences. (See
"Taxation of Partial and Full Surrenders".)
SURRENDER. At any time before the Annuity Commencement Date, the Owner may
request a surrender of the Contract for its Surrender Value. The Surrender Value
will be determined as of the end of the Valuation Day on which written notice
requesting surrender and the Contract are received at the Home Office. The
Surrender Value will be paid in a lump sum unless the Owner requests payment
under a payment option. A surrender will have federal income tax consequences.
(See "Taxation of Partial and Full Surrenders".)
SURRENDER AND PARTIAL SURRENDER RESTRICTIONS. The Owner's right to make
surrenders and partial surrenders is subject to any restrictions imposed by
applicable law or employee benefit plan.
RESTRICTIONS ON DISTRIBUTIONS FROM CERTAIN TYPES OF CONTRACTS. There are
certain restrictions on surrenders and partial surrenders of Contracts used as
funding vehicles for Code Section 403(b) retirement plans. Section 403(b) (11)
of the Code restricts the distribution under Section 403(b) annuity contracts
of: (i) contributions made pursuant to a salary reduction agreement in years
beginning after December 31, 1988; (ii) earnings on those contributions; and
(iii) earnings after December 31, 1988 on amounts attributable to salary
reduction contributions held as of December 31, 1988. Distributions of those
amounts may only occur upon the death of the employee, attainment of age 59 1/2,
separation from service, disability, or hardship. In addition, income
attributable to salary reduction contributions may not be distributed in the
case of hardship.
SYSTEMATIC WITHDRAWALS. You may elect at the time of application or at a
later date by properly completing an election form, to participate in the
systematic withdrawal plan. This plan allows you to pre-authorize periodic
partial surrenders prior to the Annuity Commencement Date. In order to
participate in the plan you must have: (1) made an initial Purchase Payment of
at least $12,000; or (2) a Contract Value as of the previous Contract
Anniversary equal to $12,000 or greater after deduction of surrender charges and
premium taxes. There are federal income tax consequences to systematic
withdrawals from the Contract and the Owner should, therefore, consult with his
or her tax advisor before participating in any systematic withdrawal plan.
When you elect systematic withdrawals, you will instruct Protective Life to
withdraw a level dollar amount from the Contract on a monthly or quarterly
basis. The minimum distribution requested must be at least $100. The maximum
amount which can be withdrawn under the plan each year is the greater of (1) 10%
of all Purchase Payments made, as of the date of the request, or (2) cumulative
earnings calculated as of each Contract Anniversary. Unless you instruct Us to
reduce the monthly withdrawal amount so that the annual amount would not exceed
the above limits, Protective Life will continue to process withdrawals for the
designated monthly amount. Once the amount of the withdrawals exceeds the above
limits, we reserve the right to deduct a Surrender Charge, if otherwise
applicable, from the remaining payments made during that Contract Year (See
"Surrender Charge".)
We will pay you the amount requested each month or quarter as applicable and
cancel Accumulation Units equal to that amount in accordance with the allocation
schedule in effect. If the amount to be withdrawn exceeds the Sub-Account's
Value, we will cease processing the systematic withdrawals.
Normally, systematic withdrawals are not subject to a Surrender Charge.
However, if you request a partial surrender that is not part of the systematic
withdrawal plan in a year when the systematic withdrawal plan has been utilized,
that partial surrender will be subject to any applicable Surrender
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Charge. (See "Surrender Charge".) Systematic withdrawals will terminate in the
event that a non-systematic withdrawal plan partial surrender is made from a
Contract participating in the plan and the Contract Value after the partial
surrender does not equal or exceed $12,000.
Systematic withdrawals may be discontinued by the Owner at any time upon
written request. We reserve the right to discontinue offering systematic
withdrawals upon written notice to You.
THE FIXED ACCOUNTS
Except in the State of Oregon, an Owner may allocate some or all of Purchase
Payments to the Fixed Account or the DCA Fixed Account and transfer some or all
of the Contract Value to the Fixed Account. The Fixed Account and the DCA Fixed
Account are part of Protective Life's general account. The assets of Protective
Life's general account support its insurance and annuity obligations and are
subject to Protective Life's general liabilities from business operations. Since
the Fixed Account and the DCA Fixed Account are part of the general account,
Protective Life assumes the risk of investment gain or loss on this amount.
Under the Contracts the Fixed Account Value is credited with rates of interest,
as described below.
The Fixed Account and the DCA Fixed Account have not been, and are not
required to be, registered with the SEC under the Securities Act of 1933, and
neither these accounts nor the Company's general account have been registered as
an investment company under the 1940 Act. Therefore, neither the Company's
general account, the Fixed Account, the DCA Fixed Account, nor any interests
therein are generally subject to regulation under the 1933 Act or the 1940 Act.
The disclosures relating to the general account, the Fixed Account and the DCA
Fixed Account included in this prospectus are for the Owner's information and
have not been reviewed by the SEC. However, such disclosures may be subject to
certain generally applicable provisions of federal securities law relating to
the accuracy and completeness of statements made in prospectuses.
Protective Life guarantees that the interest credited during the first
Contract Year to the initial Purchase Payment allocated to the Fixed Account or
the DCA Fixed Account will not be less than the rate shown in the Contract. The
interest rate credited to subsequent Purchase Payment(s) allocated to the Fixed
Account or the DCA Fixed Account, or amounts transferred to the Fixed Account
will be the annual effective interest rate in effect on the date the Purchase
Payment(s) is received by us or the date the transfer is made. The interest rate
is guaranteed to apply to such amounts for a twelve month period which begins on
the date the Purchase Payment(s) is allocated or the date the transfer is made.
After an interest rate guarantee expires as to a Purchase Payment or amount
transferred, (I.E., 12 months after the Purchase Payment(s) or transfer is
placed in the Fixed Account) we will credit interest on the portion of that
Purchase Payment or transferred amount remaining in the Fixed Account or the DCA
Fixed Account at the current interest rate in effect. New current interest rates
are effective for 12 months from the time they are first applied. We, in our
sole discretion, may declare a new current interest rate from time to time. The
initial annual effective interest rate and the current interest rates Protective
Life will credit are annual effective interest rates of not less than 3.00%. For
purposes of crediting interest, amounts deducted, transferred or withdrawn from
the Fixed Account or the DCA Fixed Account will be accounted for on a "first-in,
first-out" (FIFO) basis, independently applied to each account.
FIXED ACCOUNT VALUE. The Fixed Account Value at any time is equal to: (a)
the Purchase Payment(s) allocated to the Fixed Account and the DCA Fixed
Account; plus (b) amounts transferred to the Fixed Account; plus (c) interest
credited to the Fixed Account and the DCA Fixed Account; less (d) any partial
surrenders, or transfers from the Fixed Account and any Surrender Charges or
premium taxes deducted in connection with partial surrenders from the Fixed
Account and the DCA Fixed Account. Because Protective Life, at its sole
discretion, anticipates changing the current interest rate from time to time,
different allocations to the Fixed Account and the DCA Fixed Account and
transfers to the Fixed Account will be credited with different current interest
rates.
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DEATH BENEFIT
If any Owner dies before the Annuity Commencement Date and while this
Contract is in force, the Company will pay a Death Benefit to the Beneficiary.
In the case of certain Qualified Contracts, regulations promulgated by the
Treasury Department prescribe certain limitations on the designation of a
Beneficiary.
The Death Benefit will be determined as of the end of the Valuation Period
in which due proof of death is received by us. The Death Benefit that will be
payable will depend upon the age of the deceased Owner on the date of death.
If the Owner's death occurs on, or before the deceased Owner's 90th
birthday, the Death Benefit is the greater of: (1) the Contract Value; or (2)
total Purchase Payments made under the Contract reduced by any partial
surrenders, withdrawals and any associated Surrender Charges; or (3) the Maximum
Anniversary Value.
If the Owner's death occurs after the deceased Owner's 90th birthday, the
Death Benefit is the Contract Value.
Only one Death Benefit is payable under this Contract, even though the
Contract may, in some circumstances, continue beyond the time of any Owner's
death.
The Death Benefit may be taken in one sum immediately, as a full surrender
of the Contract. If the Death Benefit is not taken in one sum immediately, the
Death Benefit will become the new Contract Value as of the end of the Valuation
Period due proof of death is provided to us. The entire interest in the Contract
must be distributed within five years of the Owner's death unless:
(a) the entire interest in the Contract is distributed over the life of the
Beneficiary with distributions beginning within one year of the Owner's
death: or,
(b) the entire interest in the Contract is distributed over a period not
extending beyond the life expectancy of the Beneficiary with
distributions beginning within one year of the Owner's death; or
(c) the Beneficiary is the deceased Owner's spouse and elects, in lieu of
receiving the Death Benefit, to continue the Contract and become the new
Owner.
If the deceased Owner's spouse is the Beneficiary and elects to continue the
Contract and become the new Owner, upon such spouse's death, a Death Benefit
will become payable to the new Beneficiary (determined at the time of the
spouse's death). The Death Benefit will become the new Contract Value as of the
end of the Valuation Period due proof of the spouse's death is provided to us.
The entire interest in the Contract must be distributed within five years of the
spouse's death.
If any Owner is not a natural person, the death of the Annuitant will be
treated as the death of an Owner.
SUSPENSION OR DELAY IN PAYMENTS
Payments of a partial or full surrender of the Variable Account Value or
Death Benefit are usually made within seven (7) calendar days. However, the
Company may delay such payment of a partial or full surrender of the Variable
Account Value or Death Benefit for any period in the following circumstances:
1) when the New York Stock Exchange is closed; or
2) when trading on the New York Stock Exchange is restricted; or
3) when an emergency exists (as determined by the SEC as a result of which
(a) the disposal of securities in the Variable Account is not reasonably
practicable; or (b) it is not reasonably practicable to determine fairly
the value of the net assets of the Variable Account); or
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4) when the SEC, by order, so permits for the protection of security
holders.
Protective Life further reserves the right to delay payment of a partial or
full surrender of the Fixed Account Value for up to six months in those states
where applicable law requires us to reserve such right.
CHARGES AND DEDUCTIONS
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE)
GENERAL. No charge for sales expenses is deducted from Purchase Payments at
the time Purchase Payments are paid. However, within certain time limits
described below, a surrender charge (contingent deferred sales charge) is
deducted from the Contract Value if a partial surrender or surrender is made
before the Annuity Commencement Date. Also, a surrender charge may, in certain
circumstances, be deducted from amounts applied to Annuity Options 3 and 4. (See
"Annuity Options".)
CHARGE FOR PARTIAL WITHDRAWAL OR SURRENDER. The surrender charge is equal
to the percentage of each Purchase Payment surrendered as specified in the table
below. The surrender charge is separately calculated and applied to each
Purchase Payment at any time that the Purchase Payment is surrendered. No such
surrender charge applies to the Contract Value in excess of aggregate Purchase
Payments. The surrender charge is calculated using the assumption that all
Contract Value in excess of aggregate Purchase Payments is surrendered before
any Purchase Payments and that Purchase Payments are surrendered on a
first-in-first-out basis.
The surrender charge is as follows:
<TABLE>
<CAPTION>
NUMBER OF FULL YEARS
ELAPSED SURRENDER CHARGE AS A
BETWEEN THE DATE OF RECEIPT PERCENTAGE
OF PURCHASE PAYMENT(S) & OF PURCHASE PAYMENT WITHDRAWN
DATE OF SURRENDER IN A FULL YEAR
- --------------------------- -------------------------------
<S> <C>
Less than 1 7%
1 6%
2 5%
3 4%
4 3%
5 2%
6+ 0%
</TABLE>
In addition, this surrender charge is never applied to the payment of a
Death Benefit at the death of any Owner or to most systematic withdrawals. (See
"Death Benefits" and "Systematic Withdrawals.")
Surrenders will result in the cancellation of Accumulation Units from each
applicable Sub-Account(s) and/or in a reduction of the Fixed Account Value.
REDUCTION OR ELIMINATION OF SURRENDER CHARGE. Surrender Charges may be
decreased or waived on Contracts issued to a trustee, employer or similar entity
pursuant to a retirement plan or when sales are made in a similar arrangement
where offering the Contracts to a group of individuals under such a program
results in saving of sales expenses. The entitlement to such a reduction in
Surrender Charge will be determined by the Company.
In addition, Surrender Charges are waived for a surrender or partial
surrender of a Contract Value under Contracts issued to employees and registered
representatives of any member of the selling group and their spouses and minor
children, or to officers, directors, trustees or bona-fide full time employees
of Protective Life or the investment advisers of any of the Funds or their
affiliated companies (based upon the Owner's status at the time the Contract is
purchased).
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WAIVER OF SURRENDER CHARGES. Protective Life will waive Surrender Charges
in the event you, at any time after the first Contract Year, (1) enter for a
period of at least ninety (90) days a facility which is licensed by the State
and qualifies as a skilled nursing home facility under Medicare or Medicaid; or
(2) you are first diagnosed as having a terminal illness by a physician that is
not related to you or the Annuitant. The term "terminal illness" is defined in
the Contract. Written proof of a terminal illness satisfactory to Protective
Life must be submitted. Protective Life reserves the right to require an
examination by a physician of its choice. The Waiver of Surrender Charges
provision is not available in all states due to applicable insurance laws in
effect in various states.
ADMINISTRATIVE CHARGES
We will deduct an Administration Charge equal, on an annual basis, to .15%
of the daily net asset value of each Sub-Account in the Variable Account. This
deduction is made to reimburse Protective Life for expenses incurred in the
administration of the Contract and the Variable Account. The Administration
Charge is deducted only from the Variable Account Value.
TRANSFER FEE
Currently, there is no charge for transfers. Protective Life reserves the
right, however, to charge $25 for each transfer after the first 12 transfers in
any Contract Year. For the purpose of assessing the fee, each request would be
considered to be one transfer, regardless of the number of Sub-Accounts, the
Fixed Account or the DCA Fixed Account affected by the transfer in one day. The
fee would be deducted from the amount being transferred.
MORTALITY AND EXPENSE RISK CHARGE
To compensate Protective Life for assuming mortality and expense risks, we
deduct a daily mortality and expense risk charge equal on an annual basis, to
1.25% of the average annual daily net assets of the Variable Account,
(approximately 0.50% for mortality risk and 0.75% for expense risk).
The mortality risk Protective Life assumes is that Annuitant(s) may live for
a longer period of time than estimated when the guarantees in the Contract were
established. Because of these guarantees, each payee is assured that longevity
will not have an adverse effect on the annuity payments received. The mortality
risk that Protective Life assumes also includes a guarantee to pay a death
benefit if the Owner dies before the Annuity Commencement Date. The expense risk
that Protective Life assumes is the risk that the administration charge,
contract maintenance fee and transfer fees may be insufficient to cover actual
future expenses.
CONTRACT MAINTENANCE FEE
The contract maintenance fee is $35 and is deducted from the Variable
Account Value on each Contract Anniversary, and on any day that the Contract is
surrendered, if such surrender occurs on any day other than the Contract
Anniversary. The contract maintenance fee deduction will be allocated to the
Sub-Accounts in the same proportion as the Sub-Account Values in the Variable
Account. The contract maintenance fee will be waived by Protective Life in the
event the Premiums paid minus any withdrawals or partial surrenders, or the
Contract Value equals or exceeds $50,000 on the date(s) the contract maintenance
fee is to be deducted.
In addition, the contract maintenance fee may be reduced or waived for
Contracts issued to employees and registered representatives of any member of
the selling group and their spouses and minor children, or to officers,
directors, trustees, or bona-fide full time employees of Protective Life or the
investment advisers of any of the Funds or their affiliated companies (based
upon the Owner's status at the time the Contract is purchased). Such waiver or
reduction will only be made to the extent that Protective Life estimates that it
will incur lower administrative expenses or perform fewer administrative
services.
Protective Life reserves the right to waive the Contract Maintenance Fee for
Contracts issued to a trustee of a 401 plan or to employers purchasing Contracts
in connection with plans qualifying under Section 403(b) of the Code.
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FUND EXPENSES
The net assets of each Sub-Account of the Variable account will reflect the
investment management fees and other operating expenses incurred by the Funds.
For each Fund, an investment manager is paid a daily fee for its services. (See
the prospectuses for the Funds, which accompany this Prospectus.)
PREMIUM TAXES
Premium taxes will be deducted, if applicable. On any Contract subject to
premium taxes, the tax will be deducted, as provided under applicable law,
either from the Purchase Payment(s) when received, upon full or partial
surrenders, or from the amount applied to effect an annuity at the time annuity
payments commence. (Where applicable, the rate of these taxes currently ranges
up to 3.50%.)
OTHER TAXES
Currently, no charge will be made against the Variable Account for federal,
state or local taxes other than premium taxes. Protective Life may, however,
make such a charge in the future if income or gains within the Variable Account
will result in any federal income tax liability to Protective Life. Charges for
other taxes attributable to the Variable Account, if any, may also be made.
ANNUITY OPTIONS
Upon application for a Contract you select an Annuity Commencement Date. The
Annuity Commencement Date may not be later than the Annuitant's 85th birthday
unless approved by Protective Life. You may change the Annuity Commencement Date
and the Annuity Option selected from time to time, but any such change must be
made in writing and received at the Home Office within 30 days prior to the
scheduled Annuity Commencement Date. On the Annuity Commencement Date, the
Contract Value will be applied under any one of the following Annuity Options.
In the absence of such an election, the Contract Value will be applied on the
Annuity Commencement Date under Option 2 -- Life Income with Payments for a 10
Year Guaranteed Period.
The Annuity Options are fixed, which means that each Annuity Option has a
fixed and guaranteed amount to be paid during the annuity period that is not in
any way dependent upon the investment experience of the Variable Account.
The following Annuity Options may be elected. For Qualified Contracts,
certain restrictions apply.
OPTION 1 -- PAYMENT FOR A FIXED PERIOD. Equal monthly payments will be made
for any period of not less than 5 nor more than 30 years. The amount of each
payment depends on the total amount applied, the period selected and the monthly
payment rates we are using when the first payment is due.
OPTION 2 -- LIFE INCOME WITH PAYMENTS FOR A GUARANTEED PERIOD. Equal
monthly payments are based on the life of the named Annuitant. Payments will
continue for the lifetime of the Annuitant with payments guaranteed for 10 or 20
years. Protective Life may make other periods available. Payments stop at the
end of the selected guaranteed period or when the named person dies, whichever
is later.
OPTION 3 -- PAYMENTS FOR A FIXED AMOUNT. Equal monthly payments will be
made of an agreed fixed amount. The amount of each payment may not be less than
$10 for each $1,000 applied. Interest will be credited each month on the unpaid
balance and added to it. This interest will be at a rate set by us, but not less
than an effective rate of 3% per year. Payments continue until the amount we
hold runs out. The last payment will be for the balance only.
OPTION 4 -- The total amount applied may be used to purchase an annuity of
any kind issued by us on the date this option is elected.
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A surrender charge will not be applied to the Contract Value when the
Contract Value is applied to an Annuity Option on the Annuity Commencement Date
provided that annuity payments are made for the lifetime of the Annuitant or for
a period certain of at least 5 years. In certain circumstances, therefore,
application of Contract Value to Annuity Options 3 and 4 could result in the
imposition of a surrender charge.
After the death of the Annuitant, any remaining payments shall be payable to
the Beneficiary unless you specified otherwise before the Annuitant's death.
MINIMUM AMOUNTS. We reserve the right to pay the total amount of this
Contract in one lump sum, if less than $5,000. If monthly payments are less than
$100, we may make payments quarterly, semi-annually, or annually at our option.
If we have available at the time an Annuity Option is elected, options or
rates on a more favorable basis than those guaranteed, the higher benefits shall
apply.
ANNUITY PAYMENT
The first payment under any Annuity Option will generally be made one month
following the Annuity Commencement Date. Subsequent payments will be made in
accordance with the manner of payment selected.
The Annuity Option elected must result in a payment of an amount at least
equal to the minimum payment amount according to Protective Life's rules then in
effect. If at any time payments are less than the minimum payment amount, we
have the right to change the frequency to an interval resulting in a payment at
least equal to the minimum. If any amount due is less than the minimum per year,
we may make other arrangements that are equitable to the Annuitant.
Once annuity payments have commenced, no surrender of the annuity benefit
can be made.
DEATH OF ANNUITANT OR OWNER AFTER ANNUITY COMMENCEMENT DATE
In the event of the death of any Owner on or after the Annuity Commencement
Date, the Beneficiary will become the new Owner. If any Owner or Annuitant dies
on or after the Annuity Commencement Date and before all the benefits under the
Annuity Option selected have been paid, any remaining portion of such benefits
will be paid out at least as fast as under the Annuity Option being used when
the Owner or Annuitant died.
YIELDS AND TOTAL RETURNS
From time to time, Protective Life may advertise or include in sales
literature yields, effective yields, and total returns for the Sub-Accounts.
THESE FIGURES ARE BASED ON HISTORIC RESULTS AND DO NOT INDICATE OR PROJECT
FUTURE PERFORMANCE. Certain Funds have been in existence prior to the
commencement of the offering of the Contract described in this prospectus, and
prior to the investment by the Sub-Accounts in such Funds. The Variable Account
may advertise the performance of the Sub-Accounts that invest in these Funds for
these prior periods. The performance information of any period prior to the
commencement of the offering of the Contract and the investments by the Sub-
Accounts is calculated as if the Contract had been offered during those periods
and the Sub-Account had invested in those Funds during those periods, using
current charges and expenses. Protective Life may, from time to time, advertise
or include in sales literature Sub-Account performance relative to certain
performance rankings and indices compiled by independent organizations. More
detailed information as to the calculation of performance information, as well
as comparisons with unmanaged market indices, appears in the Statement of
Additional Information.
Yields, effective yields, and total returns for the Sub-Accounts are based
on the investment performance of the corresponding Funds. The Funds' performance
also reflects the Funds' expenses. Certain of the expenses of each Fund may be
reimbursed by the investment manager. (See the Prospectuses for the Funds.)
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The yield of the PIC Money Market Sub-Account refers to the annualized
income generated by an investment in the Sub-Account over a specified seven-day
period. The yield is calculated by assuming that the income generated for that
seven-day period is generated each seven day period over a 52 week period and is
shown as a percentage of the investment. The effective yield is calculated
similarly but when annualized the income earned by an investment in-the
Sub-Account is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment.
The yield of a Sub-Account (except the PIC Money Market Sub-Account) refers
to the annualized income generated by an investment in the Sub-Account over a
specified 30 day or one-month period. The yield is calculated by assuming that
the income generated by the investment during that 30 day or one month period is
generated each period over a 12 month period and is shown as a percentage of the
investment.
The total return of a Sub-Account refers to return quotations assuming an
investment under a Contract has been held in the Sub-Account for various periods
of time including, but not limited to, a period measured from the date the
Sub-Account commenced operations. Average annual return refers to total return
quotations that are annualized based on an average return over various periods
of time.
The average annual total return quotations represent the average annual
compounded rates of return that would equate an initial investment of $1,000
under a Contract to the redemption value of that investment as of the last day
of each of the periods for which the quotations are provided. Average annual
total return information shows the average percentage change in the value of an
investment in the Sub-Account from the beginning date of the measuring period to
the end of that period. This standardized version of average annual total return
reflects all historical investment results, less all charges and deductions
applied against the Sub-Account (including any Surrender Charge that would apply
if an Owner terminated the Contract at the end of each period indicated, but
excluding any deductions for premium taxes). When a Sub-Account other than the
PIC Money Market Sub-Account has been in operation for one, five and ten years,
respectively, the standard version average annual total return for these periods
will be provided.
In addition to the standard version of average annual total return described
above, total return performance information computed on two different
non-standard bases may be used in advertisements or sales literature. Average
annual total return information may be presented, computed on the same basis as
the standard version except deductions will include neither the surrender charge
nor the Contract maintenance fee. In addition, Protective Life may from time to
time disclose average annual total return in other non-standard formats and
cumulative total return for Contracts funded by the Sub-Accounts.
Protective Life may, from time to time, also disclose yield, standard
average annual total returns, and non-standard total returns for the Funds.
Non-standard performance data will only be disclosed if the standard
performance data for the required periods is also disclosed. For additional
information regarding the calculation of other performance data, please refer to
the Statement of Additional Information.
In advertising and sales literature, the performance of each Sub-Account may
be compared to the performance of other variable annuity issuers in general or
to the performance of particular types of variable annuities investing in mutual
funds, or investment portfolios of mutual funds with investment objectives
similar to each of the Sub-Accounts. Lipper Analytical Services, Inc.
("Lipper"), the Variable Annuity Research Data Service ("VARDS"), and
Morningstar Inc. ("Morningstar") are independent services which monitor and rank
the performance of variable annuity issuers in each of the major categories of
investment objectives on an industry-wide basis.
Lipper and Morningstar rankings include variable life insurance issuers as
well as variable annuity issuers. VARDS rankings compare only variable annuity
issuers. The performance analyses prepared by Lipper, Morningstar and VARDS each
rank such issuers on the basis of total return,
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assuming reinvestment of distributions, but do not take sales charges,
redemption fees, or certain expense deductions at the separate account level
into consideration. In addition, VARDS prepares risk adjusted rankings, which
consider the effects of market risk on total return performance. This type of
ranking provides data as to which funds provide the highest total return within
various categories of funds defined by the degree of risk inherent in their
investment objectives.
Advertising and sales literature may also compare the performance of each
Sub-Account to the Standard & Poor's Index of 500 Common Stocks, a widely used
measure of stock performance. This unmanaged index assumes the reinvestment of
dividends but does not reflect any "deduction" for the expense of operating or
managing an investment portfolio. Other independent ranking services and indices
may also be used as a source of performance comparison.
Protective Life may also report other information including the effect of
tax-deferred compounding on a Sub-Account's investment returns, or returns in
general, which may be illustrated by tables, graphs, or charts.
All income and capital gains derived from Sub-Account investments are
reinvested and can lead to substantial long-term accumulation of assets,
provided that the underlying Fund's investment experience is positive.
EXCHANGE OFFER
The Company is offering to owners of certain modified guaranteed annuity
contracts issued by it the opportunity to exchange such a contract for a
Contract. Owners of ProSaver Modified Guaranteed Annuity Contracts and ProSaver
Platinum Modified Guaranteed Annuity Contracts (collectively "ProSaver MGA
Contracts") may, any time prior to the annuity commencement date under such
contracts, exchange their ProSaver MGA Contract for this Contract. Contracts are
offered to owners of ProSaver MGA Contracts on the same basis as Contracts are
offered to any other purchaser. All charges and deductions described in this
prospectus are equally applicable to Contracts received in an exchange or
purchased by ProSaver MGA Contract owners and to Contracts sold to other
purchasers. Applicable surrender charges and market value adjustments will be
assessed under a ProSaver MGA Contract in connection with an exchange,
surrender, or partial surrender of a ProSaver MGA Contract.
The Contracts differ from the ProSaver MGA Contracts in many significant
respects. Most importantly, Contract Value under the Contracts may consist,
entirely or in part, of Variable Account Value which fluctuates in response to
the net investment return of the Variable Account. In contrast, account value
under the ProSaver MGA Contracts reflects interest credited by the Company at
rates guaranteed for certain guaranteed periods of time. The value before the
end of the guaranteed period under the ProSaver MGA Contracts reflects changing
current interest rates and does not vary with the investment performance of a
separate account. Furthermore, Fixed Account Value under the Contracts is
computed and credited on a basis substantially different from that of the
ProSaver MGA Contracts. In particular, unlike a ProSaver MGA Contract, a
surrender, partial surrender or transfer of Fixed Account Value under a Contract
is never subject to a market value adjustment. In contrast, account value under
a ProSaver MGA Contract is reduced or increased by, among other things, a market
value adjustment when surrenders, partial surrenders or transfers are made from
a sub-account prior to the expiration of a guaranteed period. In addition,
interest rates applicable to fixed account values under the Contracts are
guaranteed for one year periods whereas rates applicable to the ProSaver MGA
Contracts may be guaranteed for significantly longer time periods.
Other significant differences between the Contracts and the ProSaver MGA
Contracts may include: (1) additional charges applicable under the Contracts
such as the mortality and expense risk charge, the administration charge and
annual contract maintenance fee that are not found in the ProSaver MGA
Contracts, (2) a contract loan provision under the Contracts, when used in
connection with certain Qualified Plans, that is not available under the
ProSaver MGA Contracts, (3) different surrender charges, (4) different death
benefits, (5) different annuity option purchase rates, and
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(6) differences in federal and state laws and regulations applicable to each of
the types of contracts. Owners of ProSaver MGA Contracts should refer to their
contract forms and to their prospectus for such contracts for a complete
description of the ProSaver MGA Contract. Copies of the most recent ProSaver MGA
Contract prospectus are available free of charge from Protective Life at its
home office.
Owners of ProSaver MGA Contracts should carefully consider whether it will
be advantageous to replace such a contract with a Contract. IT MAY NOT BE
ADVANTAGEOUS TO EXCHANGE A PROSAVER MGA CONTRACT FOR A CONTRACT (OR TO SURRENDER
IN FULL OR IN PART A PROSAVER MGA CONTRACT AND USE THE SURRENDER OR PARTIAL
SURRENDER PROCEEDS TO PURCHASE A CONTRACT) EXCEPT AT THE EXPIRATION OF ALL
GUARANTEED PERIODS IN ORDER TO AVOID APPLICATION OF A MARKET VALUE ADJUSTMENT
AND A SURRENDER CHARGE.
Sales representatives offering the Contracts to ProSaver MGA Contract owners
will generally receive a sales commission. The maximum sales commission that may
be paid is 7% of Purchase Payments, not including subsequent asset-based
commissions. (See "Distribution of the Contracts".)
TAX CONSIDERATIONS. Protective Life believes that an exchange of a
non-qualified ProSaver MGA Contract for a Contract generally should be treated
as a nontaxable exchange of annuity contracts within the meaning of Section 1035
of the Code. A Contract received in exchange will generally be treated as a
newly issued contract as of the effective date of the Contract. This could have
various tax consequences, E.G., aggregation with other annuity contracts issued
during the same calendar year as the exchange. (See "Federal Tax Matters".)
IF YOU SURRENDER YOUR NON-QUALIFIED PROSAVER MGA CONTRACT IN WHOLE OR IN
PART AND AFTER RECEIPT OF THE PROCEEDS YOU USE THE SURRENDER PROCEEDS OR PARTIAL
SURRENDER PROCEEDS TO PURCHASE A CONTRACT IT WILL NOT BE TREATED AS A TAX-FREE
EXCHANGE. THE SURRENDER PROCEEDS WILL GENERALLY BE INCLUDIBLE IN INCOME (TO THE
EXTENT OF ANY INCOME IN THE PROSAVER MGA CONTRACT) AND A 10% PENALTY TAX MAY
APPLY IF THE SURRENDER IS MADE BEFORE THE TAXPAYER REACHES AGE 59 1/2.
Special tax considerations apply to exchanges of, or transfers of amounts
from, a ProSaver MGA Contract issued in connection with a Qualified Plan to a
Contract.
Owners of ProSaver MGA Contracts should consult their tax advisors before
exchanging a ProSaver MGA Contract for this Contract, or before surrendering in
whole or in part their ProSaver MGA Contract and using the proceeds to purchase
this Contract.
FEDERAL TAX MATTERS
INTRODUCTION
The following discussion of the federal income tax treatment of the Contract
is not exhaustive, does not purport to cover all situations, and is not intended
as tax advice. The federal income tax treatment of the Contract is unclear in
certain circumstances, and a qualified tax adviser should always be consulted
with regard to the application of law to individual circumstances. This
discussion is based on the Code, Treasury regulations, and interpretations
existing on the date of this Prospectus. These authorities, however, are subject
to change by Congress, the Treasury Department, and judicial decisions.
This discussion does not address state or local tax consequences associated
with the purchase of the Contract. In addition, PROTECTIVE LIFE MAKES NO
GUARANTEE REGARDING ANY TAX TREATMENT -- FEDERAL, STATE OR LOCAL -- OF ANY
CONTRACT OR OF ANY TRANSACTION INVOLVING A CONTRACT.
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THE COMPANY'S TAX STATUS
Protective Life is taxed as a life insurance company under the Code. Since
the operations of the Variable Account are a part of, and are taxed with, the
operations of the Company, the Variable Account is not separately taxed as a
"regulated investment company" under the Code. Under existing federal income tax
laws, investment income and capital gains of the Variable Account are not taxed
to the extent they are applied under a Contract. Protective Life does not
anticipate that it will incur any federal income tax liability attributable to
such income and gains of the Variable Account, and therefore does not intend to
make provision for any such taxes. If Protective Life is taxed on investment
income or capital gains of the Variable Account, then Protective Life may impose
a charge against the Variable Account in order to make provision for such taxes.
TAXATION OF ANNUITIES IN GENERAL
TAX DEFERRAL DURING ACCUMULATION PERIOD
Under existing provisions of the Code, except as described below, any
increase in an Owner's Contract Value is generally not taxable to the Owner
until received, either in the form of annuity payments as contemplated by the
Contracts, or in some other form of distribution. However, this rule applies
only if (1) the investments of the Variable Account are "adequately diversified"
in accordance with Treasury Department regulations, (2) the Company, rather than
the Owner, is considered the owner of the assets of the Variable Account for
federal income tax purposes, and (3) the Owner is an individual (or an
individual is treated as the Owner for tax purposes).
DIVERSIFICATION REQUIREMENTS. The Code and Treasury Department regulations
prescribe the manner in which the investments of a segregated asset account,
such as the Variable Account, are to be "adequately diversified." If the
Variable Account fails to comply with these diversification standards, the
Contract will not be treated as an annuity contract for federal income tax
purposes and the Owner would generally be taxable currently on the excess of the
Contact Value over the premiums paid for the Contact. Protective Life expects
that the Variable Account, through the Funds, will comply with the
diversification requirements prescribed by the Code and Treasury Department
regulations.
OWNERSHIP TREATMENT. In certain circumstances, variable annuity contract
owners may be considered the owners, for federal income tax purposes, of the
assets of a segregated asset account, such as the Variable Account, used to
support their contracts. In those circumstances, income and gains from the
segregated asset account would be includible in the contract owners' gross
income. The Internal Revenue Service (the "IRS") has stated in published rulings
that a variable contract owner will be considered the owner of the assets of a
segregated asset account if the owner possesses incidents of ownership in those
assets, such as the ability to exercise investment control over the assets. In
addition, the Treasury Department announced, in connection with the issuance of
regulations concerning investment diversification, that those regulations "do
not provide guidance concerning the circumstances in which investor control of
the investments of a segregated asset account may cause the investor, rather
than the insurance company, to be treated as the owner of the assets in the
account." This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which policyholders may direct their
investments to particular sub-accounts [of a segregated asset account] without
being treated as owners of the underlying assets." As of the date of this
Prospectus, no such guidance has been issued.
The ownership rights under the Contract are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that contract owners were not owners of the assets of a segregated
asset account. For example, the owner of this Contract has the choice of more
investment options to which to allocate purchase payments and Variable Account
values, and may be able to transfer among investment options more frequently
than in such rulings. These differences could result in the Owner being treated
as the owner of the assets of the Variable Account and thus subject to current
taxation on the income and gains from those assets. In addition,
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the Company does not know what standards will be set forth in the regulations or
rulings which the Treasury Department has stated it expects to issue. Protective
Life therefore reserves the right to modify the Contract as necessary to attempt
to prevent Contract Owners from being considered the owners of the assets of the
Variable Account. However, there is no assurance such efforts would be
successful.
NON-NATURAL OWNER. As a general rule, Contracts held by "non-natural
persons" such as a corporation, trust or other similar entity, as opposed to a
natural person, are not treated as annuity contracts for federal tax purposes.
The income on such Contracts (as defined in the tax law) is taxed as ordinary
income that is received or accrued by the Owner of the Contract during the
taxable year. There are several exceptions to this general rule for nonnatural
Owners. First, Contracts will generally be treated as held by a natural person
if the nominal owner is a trust or other entity which holds the Contract as an
agent for a natural person. However, this special exception will not apply in
the case of any employer who is the nominal owner of a Contract under a
non-qualified deferred compensation arrangement for its employees.
In addition, exceptions to the general rule for non-natural Owners will
apply with respect to (1) Contracts acquired by an estate of a decedent by
reason of the death of the decedent, (2) certain Qualified Contracts, (3)
Contracts purchased by employers upon the termination of certain Qualified
Plans, (4) certain Contracts used in connection with structured settlement
agreements, and (5) Contracts purchased with a single purchase payment when the
annuity starting date is no later than a year from purchase of the Contract and
substantially equal periodic payments are made, not less frequently than
annually, during the annuity period.
The remainder of this discussion assumes that the Contract will be treated
as an annuity contract for federal income tax purposes.
TAXATION OF PARTIAL AND FULL SURRENDERS
In the case of a partial surrender, amounts received generally are
includible in income to the extent the Owner's Contract Value before the
surrender exceeds his or her "investment in the contract." In the case of a full
surrender, amounts received are includible in income to the extent they exceed
the "investment in the contract." For these purposes, the investment in the
contract at any time equals the total of the Purchase Payments made under the
Contract to that time (to the extent such payments were neither deductible when
made nor excludable from income as, for example, in the case of certain
contributions to Qualified Contracts) less any amounts previously received from
the Contract which were not included in income. Partial and full surrenders may
be subject to federal income tax withholding requirements. (See Federal Income
Tax Withholding.) In addition, in the case of partial and full surrenders from
certain Qualified Plans, mandatory withholding requirements may apply, unless a
"direct rollover" of the amount surrendered is made. (See "Direct Rollovers".)
Under the Waiver of Surrender Charges provision of the Contract, amounts
distributed may not be subject to Surrender Charges if the Owner has a terminal
illness or if the Owner enters, for a period of at least 90 days, certain
nursing home facilities. Such distributions will be treated as surrenders for
federal tax purposes.
The Contract provides a Death Benefit that in certain circumstances may
exceed the greater of the Purchase Payments and the Contract Value. As described
elsewhere in this Prospectus, the Company imposes certain charges with respect
to the Death Benefit. It is possible that these charges (or some portion
thereof) could be treated for federal tax purposes as a partial surrender of the
Contract.
TAXATION OF ANNUITY PAYMENTS
Normally, the portion of each annuity payment taxable as ordinary income is
equal to the excess of the payment over the exclusion amount. The exclusion
amount is the amount determined by multiplying (1) the payment by (2) the ratio
of the investment in the contract, adjusted for any period certain or refund
feature, to the total expected amount of annuity payments for the term of the
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Contract (determined under Treasury Department regulations). Annuity payments
may be subject to federal income tax withholding requirements. (See Federal
Income Tax Withholding.) In addition, in the case of annuity payments from
certain Qualified Plans, mandatory withholding requirements may apply, unless a
"direct rollover" of such annuity payments is made. (See Direct Rollovers.)
Once the total amount of the investment in the contract is excluded using
this ratio, annuity payments will be fully taxable. If annuity payments cease
because of the death of the Annuitant and before the total amount of the
investment in the contract is recovered, the unrecovered amount generally will
be allowed as a deduction.
There may be special income tax issues present in situations where the Owner
and the Annuitant are not the same person and are not married to one another. A
tax advisor should be consulted in those situations.
TAXATION OF DEATH BENEFIT PROCEEDS
Prior to the Annuity Commencement Date, amounts may be distributed from a
Contract because of the death of an Owner or, in certain circumstances, the
death of the Annuitant. Such Death Benefit proceeds are includible in income as
follows: (1) if distributed in a lump sum, they are taxed in the same manner as
a full surrender, as described above, or (2) if distributed under an Annuity
Option, they are taxed in the same manner as annuity payments, as described
above. After the Annuity Commencement Date, where a guaranteed period exists
under an Annuity Option, and the Annuitant dies before the end of that period,
payments made to the Beneficiary for the remainder of that period are includible
in income as follows: (1) if received in a lump sum, they are included in income
to the extent that they exceed the unrecovered investment in the contract at
that time, or (2) if distributed in accordance with the existing Annuity Option
selected, they are fully excluded from income until the remaining investment in
the contract is deemed to be recovered, and all annuity payments thereafter are
fully includible in income.
Proceeds payable on death may be subject to federal income tax withholding
requirements. (See "Federal Income Tax Withholding".) In addition, in the case
of such proceeds from certain Qualified Plans, mandatory withholding
requirements may apply, unless a "direct rollover" of such proceeds is made.
(See "Direct Rollovers".)
ASSIGNMENTS, PLEDGES, AND GRATUITOUS TRANSFERS
Other than in the case of Contracts issued in connection with certain
Qualified Plans (which generally cannot be assigned or pledged), any assignment
or pledge (or agreement to assign or pledge) any portion of the Contract Value
is treated for federal income tax purposes as a surrender of such amount or
portion. The investment in the contract is increased by the amount includible as
income with respect to such assignment or pledge, though it is not affected by
any other aspect of the assignment or pledge (including its release). If an
Owner transfers a Contract without adequate consideration to a person other than
the Owner's spouse (or to a former spouse incident to divorce), the Owner will
be taxed on the difference between his or her Contract Value and the investment
in the contract at the time of transfer. In such case, the transferee's
investment in the contract will be increased to reflect the increase in the
transferor's income.
PENALTY TAX ON PREMATURE DISTRIBUTIONS
Where a Contract has not been issued in connection with a Qualified Plan,
there generally is a 10% penalty tax on the amount of any payment from the
Contract that is includable in income unless the payment is: (a) received on or
after the Owner reaches age 59 1/2; (b) attributable to the Owner's becoming
disabled (as defined in the tax law); (c) made on or after the death of the
Owner or, if the Owner is not an individual, on or after the death of the
primary annuitant (as defined in the tax law); (d) made as a series of
substantially equal periodic payments (not less frequently than annually) for
the life (or life expectancy) of the Annuitant or the joint lives (or joint life
expectancies) of the Annuitant and a designated beneficiary (as defined in the
tax law), or (e) made under a Contract purchased with a single Purchase Payment
when the annuity starting date is no later than a year from
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purchase of the Contract and substantially equal periodic payments are made, not
less frequently than annually, during the annuity period. (Similar rules,
discussed below, apply in the case of certain Contracts issued in connection
with Qualified Plans.)
AGGREGATION OF CONTRACTS
In certain circumstances, the amount of an annuity payment or a surrender
from a Contract that is includible in income may be determined by combining some
or all of the annuity contracts owned by an individual not issued in connection
with Qualified Plans. For example, if a person purchases a Contract offered by
this Prospectus and also purchases at approximately the same time an immediate
annuity issued by Protective Life, the IRS may treat the two contracts as one
contract. In addition, if a person purchases two or more deferred annuity
contracts from the same insurance company (or its affiliates) during any
calendar year, all such contracts will be treated as one contract for purposes
of determining whether any payment not received as an annuity (including
surrenders prior to the Annuity Commencement Date) is includible in income. The
effects of such aggregation are not clear; however, it could affect the amount
of a withdrawal or an annuity payment that is taxable and the amount which might
be subject to the 10% penalty tax described above.
QUALIFIED RETIREMENT PLANS
IN GENERAL
The Contracts are also designed for use in connection with certain types of
retirement plans which receive favorable treatment under the Code. Numerous
special tax rules apply to the participants in Qualified Plans and to Contracts
used in connection with Qualified Plans. Therefore, no attempt is made in this
Prospectus to provide more than general information about use of the Contract
with the various types of Qualified Plans.
The tax rules applicable to Qualified Plans vary according to the type of
plan and the terms and conditions of the plan itself. For example, both the
amount of the contribution that may be made, and the tax deduction or exclusion
that the Owner may claim for such contribution, are limited under Qualified
Plans and vary with the type of plan. Also, for both withdrawals and annuity
payments under Qualified Contracts, there many be no "investment in the
contract" and the total amount received may be taxable. Similarly, loans from
Qualified Contracts, where available, are subject to a variety of limitations,
including restrictions as to the amount that may be borrowed, the duration of
the loan, and the manner in which the loan must be repaid. (Owners should always
consult their tax advisors and retirement plan fiduciaries prior to exercising
any loan privileges that are available.)
If this Contract is used in connection with a Qualified Plan, the Owner and
Annuitant must be the same individual. In addition, special rules apply to the
time at which distributions must commence and the form in which the
distributions must be paid. For example, the length of any guarantee period may
be limited in some circumstances to satisfy certain minimum distribution
requirements under the Code. Furthermore, failure to comply with minimum
distribution requirements applicable to Qualified Plans will result in the
imposition of an excise tax. This excise tax generally equals 50% of the amount
by which a minimum required distribution exceeds the actual distribution from
the Qualified Plan. In the case of Individual Retirement Accounts or Annuities
("IRAs"), distributions of minimum amounts (as specified in the tax law) must
generally commence by April 1 of the calendar year following the calendar year
in which the Owner attains age 70 1/2. In the case of certain other Qualified
Plans, distributions of such minimum amounts must generally commence by the
later of this date or April 1 of the calendar year following the calendar year
in which the employee retires.
There is a 10% penalty tax on the taxable amount of payments from certain
Qualified Contracts. There are exceptions to this penalty tax which vary
depending on the type of Qualified Plan. In the case of an IRA, exceptions
provide that the penalty tax does not apply to a payment (a) received on or
after the Owner reaches age 59 1/2, (b) received on or after the Owner's death
or because of the Owner's disability (as defined in the tax law), or (c) made as
a series of substantially equal periodic payments (not less frequently than
annually) for the life (or life expectancy) of the Owner or for the joint lives
(or
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joint life expectancies) of the Owner and his designated beneficiary (as defined
in the tax law). These exceptions, as well as certain others not described
herein, generally apply to taxable distributions from other Qualified Plans
(although, in the case of plans qualified under sections 401 and 403, exception
"c" above for substantially equal periodic payments applies only if the Owner
has separated from service).
When issued in connection with a Qualified Plan, a Contract will be amended
as generally necessary to conform to the requirements of the plan. However,
Owners, Annuitants, and Beneficiaries are cautioned that the rights of any
person to any benefits under Qualified Plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the Contract. In addition, the Company shall not be bound by terms and
conditions of Qualified Plans to the extent such terms and conditions contradict
the Contract, unless the Company consents.
Following are brief descriptions of various types of Qualified Plans in
connection with which the Company may issue a Contract.
INDIVIDUAL RETIREMENT ACCOUNTS AND ANNUITIES. Section 408 of the Code
permits eligible individuals to contribute to an individual retirement program
known as IRAs. IRAs are subject to limits on the amounts that may be
contributed, the persons who may be eligible and on the time when distributions
may commence. Also, subject to the direct rollover and mandatory withholding
requirements (discussed below), distributions from certain Qualified Plans may
be "rolled over" on a tax-deferred basis into an IRA.
IRAs generally may not invest in life insurance contracts, but an annuity
that is purchased by, or used as, an IRA may provide a death benefit that equals
the greater of the premiums paid and the contract's cash value. The Contract
provides a Death Benefit that in certain circumstances may exceed the greater of
the Purchase Payments and the Contract Value. It is possible that the Death
Benefit could be viewed as violating the prohibition on investment in life
insurance contracts with the result that the Contract would not be viewed as
satisfying the requirements of an IRA.
SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRAS). Section 408(k) of the Code allows
employers to establish simplified employee pension plans for their employees,
using the employees' IRAs for such purposes, if certain criteria are met. Under
these plans the employer may, within specified limits, make deductible
contributions on behalf of the employees to IRAs. Employers intending to use the
Contract in connection with such plans should seek competent advice.
In particular, employers should consider that IRAs generally may not invest
in life insurance contracts, but an annuity that is purchased by, or used as, an
IRA may provide a death benefit that equals the greater of the premiums paid and
the contract's cash value. The Contract provides a Death Benefit that in certain
circumstances may exceed the greater of the Purchase Payments and the Contract
Value. It is possible that the Death Benefit could be viewed as violating the
prohibition on investment in life insurance contracts with the result that the
Contract would not be viewed as satisfying the requirements of an IRA.
CORPORATE AND SELF-EMPLOYED ("H.R. 10" AND "KEOGH") PENSION AND
PROFIT-SHARING PLANS. Sections 401(a) and 403(a) of the Code permit corporate
employers to establish various types of tax-favored retirement plans for
employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as
amended, commonly referred to as "H.R. 10" or "Keogh," permits self-employed
individuals also to establish such tax-favored retirement plans for themselves
and their employees. Such retirement plans may permit the purchase of the
Contract in order to provide benefits under the plans. The Contract provides a
Death Benefit that in certain circumstances may exceed the greater of the
Purchase Payments and the Contract Value. It is possible that such Death Benefit
could be characterized as an incidental death benefit. There are limitations on
the amount of incidental benefits that may be provided under pension and profit
sharing plans. In addition, the provision of such benefits may result in
currently taxable income to participants. Employers intending to use the
Contract in connection with such plans should seek competent advice.
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SECTION 403(B) POLICIES. Section 403(b) of the Code permits public school
employees and employees of certain types of charitable, educational and
scientific organizations specified in Section 501(c)(3) of the Code to have
their employers purchase annuity contracts for them and, subject to certain
limitations, to exclude the amount of purchase payments from gross income for
tax purposes. Purchasers of the Contracts for use as a "Section 403(b) Policy"
should seek competent advice as to eligibility, limitations on permissible
amounts of purchase payments and other tax consequences associated with such
Contracts. In particular, purchasers and their advisers should consider that the
Contract provides a Death Benefit that in certain circumstances may exceed the
greater of the Purchase Payments and the Contract Value. It is possible that
such Death Benefit could be characterized as an incidental death benefit. If the
Death Benefit were so characterized, this could result in currently taxable
income to purchasers. In addition, there are limitations on the amount of
incidental death benefits that may be provided under a Section 403(b) Policy.
Even if the Death Benefit under the Contract were characterized as an incidental
death benefit, it is unlikely to violate those limits unless the purchaser also
purchases a life insurance contract as part of his or her Section 403(b) Policy.
Section 403(b) Policies contain restrictions on withdrawals of (i)
contributions made pursuant to a salary reduction agreement in years beginning
after December 31, 1988, (ii) earnings on those contributions, and (iii)
earnings after December 31, 1988 on amounts attributable to salary reduction
contributions held as of December 31, 1988. These amounts can be paid only if
the employee has reached age 59 1/2, separated from service, died, become
disabled, or in the case of hardship. Amounts permitted to be distributed in the
event of hardship are limited to actual contributions; earnings thereon can not
be distributed on account of hardship. (These limitations on withdrawals do not
apply to the extent the Company is directed to transfer some or all of the
Contract Value to the issuer of another Section 403(b) Policy or into a Section
403(b)(7) custodial account.)
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS. Section 457 of the Code permits employees of state and local
governments and tax-exempt organizations to defer a portion of their
compensation without paying current taxes. The employees must be participants in
an eligible deferred compensation plan. Generally, a Contract purchased by a
state or local government or a tax-exempt organization will not be treated as an
annuity contract for federal income tax purposes. Those who intend to use the
Contracts in connection with such plans should seek competent advice.
DIRECT ROLLOVERS
If your Contract is used in connection with a pension, profit-sharing, or
annuity plan qualified under sections 401(a) or 403(a) of the Code, or is a
Section 403(b) Policy, any "eligible rollover distribution" from the Contract
will be subject to direct rollover and mandatory withholding requirements. An
eligible rollover distribution generally is any taxable distribution from a
qualified pension plan under section 401(a) of the Code, qualified annuity plan
under section 403(a) of the Code, or section 403(b) annuity or custodial
account, excluding certain amounts (such as minimum distributions required under
section 401(a)(9) of the Code and distributions which are part of a "series of
substantially equal periodic payments" made for life or a specified period of 10
years or more).
Under these requirements, federal income tax equal to 20% of the eligible
rollover distribution will be withheld from the amount of the distribution.
Unlike withholding on certain other amounts distributed from the Contract,
discussed below, you cannot elect out of withholding with respect to an eligible
rollover distribution. However, this 20% withholding will not apply if, instead
of receiving the eligible rollover distribution, you elect to have it directly
transferred to certain Qualified Plans. Prior to receiving an eligible rollover
distribution, you will receive a notice (from the plan administrator or the
Company) explaining generally the direct rollover and mandatory withholding
requirements and how to avoid the 20% withholding by electing a direct transfer.
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FEDERAL INCOME TAX WITHHOLDING
Protective Life will withhold and remit to the federal government a part of
the taxable portion of each distribution made under a Contract unless the
distributee notifies Protective Life at or before the time of the distribution
that he or she elects not to have any amounts withheld. In certain
circumstances, Protective Life may be required to withhold tax. The withholding
rates applicable to the taxable portion of periodic annuity payments (other than
eligible rollover distributions) are the same as the withholding rates generally
applicable to payments of wages. In addition, the withholding rate applicable to
the taxable portion of non-periodic payments (including surrenders prior to the
Annuity Commencement Date) is 10%. Regardless of whether you elect not to have
federal income tax withheld, you are still liable for payment of federal income
tax on the taxable portion of the payment. As discussed above, the withholding
rate applicable to eligible rollover distributions is 20%.
MATTERS RELATING TO CONTRACTS OFFERED PRIOR TO MAY 1, 1996
Contracts offered prior to May 1, 1996 and Contracts issued in certain
states after May 1, 1996 are different in certain regards including but not
limited to providing a different guaranteed Death Benefit than the Death Benefit
described on page 19, and different procedures relating to the Death Benefit
than those described elsewhere in this Prospectus. (For a list of these states,
please contact our Home Office or your registered representative.) Purchasers of
Contracts with the different guaranteed Death Benefit must refer to the
discussion below together with other sections of this Prospectus in order to
determine their rights and benefits under the Contract.
The following description of the Death Benefit and Loan Privilege for
section 403(b) Contracts issued prior to May 1, 1996 should be substituted or
added in their entirety for the related descriptions found elsewhere in this
Prospectus. The page references listed below indicate where in the Prospectus
the substituted descriptions can be found.
A. SUMMARY (PAGE 7)
The paragraphs in the Summary describing the Death Benefit provided in this
Contract should be revised to read as follows:
IS THERE A DEATH BENEFIT? If any Owner dies prior to the Annuity
Commencement Date, a Death Benefit will be payable. The Death Benefit will be
determined as of the end of the Valuation Period during which due proof of death
is provided to us. The guaranteed Death Benefit is equal to the sum of: (1) the
Fixed Account Value; plus (2) the greater of: (a) the Variable Account Value; or
(b) the total Purchase Payment(s) allocated to the Variable Account less
previous transfers from the Variable Account, partial surrenders, and any
applicable Surrender Charge(s) and Contract Maintenance Fees, increased by
amounts transferred to the Variable Account and interest at a compounded annual
effective interest rate of 5% credited as of each Contract Anniversary up to any
Owner's 80th birthday. (See "Death Benefit".)
B. SURRENDERS AND PARTIAL SURRENDERS (PAGE 17).
A new section entitled "Loan Privilege" should be added to read as follows
at the of the section.
LOAN PRIVILEGE
Protective Life offers a loan privilege to Owners of section 403(b)
Contracts that were issued prior to May 1, 1996 that are not subject to Title 1
of ERISA. Owners of such Contracts may obtain loans using the Contract as the
only security for the loan. Loans are subject to provisions of the Code and to
applicable retirement program rules. Tax advisors and retirement plan advisors
should be consulted prior to exercising loan privileges.
The amount available for a loan at any given time is the lesser of (1) 80%
of the Contract Value less any outstanding debt under the Contract (including
any accrued interest thereon), or (2) the amount permitted as a loan under
federal tax law. The minimum loan amount is $1,000. The maximum amount permitted
as a loan under federal tax law generally equals the amount which, when added to
existing debt under the Contract, does not exceed the lesser of (1) $50,000
(reduced by any excess of
34
<PAGE>
the highest outstanding debt during the one year period ending on the day before
the date on which the current loan is made, over the outstanding debt on the
date the current loan is made), or (2) $10,000 or, if greater, one-half of the
Contract Value. For purposes of determining the amount permitted as a loan under
the federal tax law, certain employer plans must be aggregated. A tax advisor
should be consulted for purposes of determining the maximum amount which may be
taken and treated as a loan, rather than as a taxable distribution, for federal
income tax purposes.
Loans will be made only upon written request of the Owner. Protective Life
will make loans within seven days of receiving a properly completed loan
application, subject to postponement under the same circumstances that payment
of surrenders may be postponed. (See "Suspension or Delay in Payments".) When an
Owner requests a loan, Protective Life will reduce the Owner's Contract Value
(on a pro rata basis among investments in the Sub-Accounts, the Fixed Account
and the DCA Fixed Account, unless the Owner requests otherwise) by the amount of
the loan and transfer that amount to the loan account, which is part of
Protective Life's general account. Amounts in the loan account will not
participate in the investment experience of any Sub-Account. Loans must be
repaid within five years, repayments must be made at least quarterly, and
repayments must be made in substantially equal amounts. However, the repayment
period of a loan may be longer than five years if the purpose of the loan is to
acquire a principal residence for the Owner. The Owner may prepay the loan, in
whole or in part, at any time while the Contract is in force. Failure to make
timely loan repayments may give rise to taxable income.
When the loan is repaid, the amount of the repayment will be transferred
from the loan account back into the Variable Account and the Fixed Account. The
Owner may designate the manner in which a repayment is to be allocated.
Otherwise, repayments will be allocated in accordance with the Owner's most
recent instructions for allocations. On each Contract Anniversary, Protective
Life will transfer from the Contract Value (from the Sub-Accounts, the Fixed
Account and the DCA Fixed Account, in the same manner as described above) to the
loan account the amount by which the debt on the Contract exceeds the balance in
the loan account.
Protective Life charges interest of 6% per year on Contract loans. Loan
interest is payable on amounts in arrears and, unless paid in cash, the accrued
loan interest is added to the amount of the debt and bears interest at 6% as
well. Protective Life credits interest with respect to amounts held in the loan
account at a rate of 4% per year. Consequently, the net cost of loans under the
Contract is 2%. If on any date debt under a Contract exceeds the Contract Value,
the Contract will be in default. In such case, an Owner will receive a notice
indicating the payment needed to bring the Contract out of default and will have
a thirty-one (31) day grace period within which to pay the default amount. If
the required payment is not made within the grace period, the Contract may be
terminated without value.
The amount of any debt will be deducted from the death benefit. In addition,
debt, whether or not repaid, will have a permanent effect on the Contract Value
because the investment results of the Fixed and Variable Accounts will apply
only to the unborrowed portion of the Contract Value. The longer debt is
outstanding, the greater the effect is likely to be.
C. DEATH BENEFIT (PAGE 19)
If any Owner dies before the Annuity Commencement Date, a guaranteed Death
Benefit will be paid to the Beneficiary. In the case of certain Qualified
Contracts, regulations promulgated by the Treasury Department prescribe certain
limitations on the designation of a Beneficiary.
The guaranteed Death Benefit will be determined as of the end of the
Valuation Period in which due proof of death is received by us. The guaranteed
Death Benefit at any age will be equal to the sum of: (1) the Fixed Account
Value; plus (2) the greater of: (a) the Variable Account Value; or (b) the total
Purchase Payment(s) allocated to the Variable Account less previous transfers
from the Variable Account, partial surrenders, and any applicable Surrender
Charges(s) and Contract Maintenance
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Fees, increased by amounts transferred to the Variable Account (this subtotal is
called "Death Benefit Account Value") and interest at a compounded annual
effective interest rate of 5% credited to the Death Benefit Account Value as of
each Contract Anniversary, on or before any Owner's 80th birthday.
The Death Benefit may be taken in one sum immediately as a full surrender of
the Contract. If the Death Benefit is not taken in one sum immediately the
Contract will be continued with the Death Benefit becoming the new current
Contract Value. Any increase in the Contract Value will be allocated to and
among the Fixed Account and Sub-Accounts in proportion to their values
immediately prior to the Owner's death. If the Death Benefit is not taken in one
sum immediately, the entire interest in the Contract must be distributed within
five years of the Owner's death unless:
(a) the entire interest in the Contract is distributed over the life of the
Beneficiary with distributions beginning within one year of the Owner's
death; or
(b) the entire interest in the Contract is distributed over a period not
extending beyond the life expectancy of the Beneficiary with
distributions beginning within one year of the Owner's death; or
(c) the Beneficiary is the deceased Owner's spouse and elects to continue
the Contract and become the new Owner.
If the deceased Owner's spouse is the Beneficiary and elects to continue the
Contract and become the new Owner, upon such spouse's death, the entire interest
in the Contract is payable to the new Beneficiary (determined at the time of the
spouse's death) and must be distributed within five years of the spouse's death.
If any Owner is not a natural person, the death of the Annuitant will be
treated as the death of an Owner.
GENERAL MATTERS
MODIFICATION
No change or waiver of the terms of this Contract is valid unless made by
us, in writing, and approved by our President, Vice President or Secretary. We
reserve the right to change the provisions of this Contract to conform to any
applicable laws, or applicable regulations or rulings issued by a government
agency.
REPORTS
Once per calendar quarter, Protective Life will send to each Owner, at the
Owner's last known address, a report showing the Contract Value, Sub-Account
Values, and Fixed Account Value along with information regarding current
investment allocations as well as any other information required by law.
INQUIRIES
Inquiries regarding a Contract may be made by writing to Protective Life at
its Home Office.
DISTRIBUTION OF THE CONTRACTS
The Contracts will be offered on a continuous basis and Protective Life does
not anticipate discontinuing the offering of the Contracts. Nevertheless,
Protective Life reserves the right to discontinue the offering at any time.
Investment Distributors, Inc. serves as principal underwriter (as defined in the
1940 Act) for the Contracts. Investment Distributors, Inc. has agreed to use its
best efforts to sell the Contracts. Investment Distributors, Inc. is a
wholly-owned subsidiary of PLC and has the same address as Protective Life.
Applications for Contracts are solicited by agents who are licensed by
applicable state insurance authorities to sell Protective Life's Contracts and
who are also registered representatives of broker/dealers having a distribution
agreement with Investment Distributors, Inc. or broker/dealers having a
distribution agreement with such broker/dealer. Investment Distributors, Inc. is
an affiliate of Protective Life Insurance Company and is registered with the SEC
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under the Securities Exchange Act of 1934 as a broker/dealer. Investment
Distributors, Inc. is a member of the National Association of Securities
Dealers, Inc. The maximum commission Protective Life will pay is 7.0% of the
Purchase Payments for the sale of a Contract, not including subsequent
asset-based commissions.
LEGAL PROCEEDINGS
There are at present no legal proceedings to which the Variable Account is a
party or the assets of the Variable Account are subject. Protective Life is
involved in pending and threatened proceedings in which claims for monetary
damages or penalties may be asserted. Management, after consultation with legal
counsel, does not believe that such proceedings are material, nor does it
anticipate the ultimate liability arising from any such proceeding would be
material, to Protective Life in relation to its total assets. Such proceedings
are not related to the Variable Account.
VOTING RIGHTS
In accordance with its view of applicable law, Protective Life will vote the
Fund shares held in the Variable Account at special shareholder meetings of the
Funds in accordance with instructions received from persons having voting
interests in the corresponding Sub-Accounts. If, however, the 1940 Act or any
regulation thereunder should be amended, or if the present interpretation
thereof should change, or Protective Life determines that it is allowed to vote
such shares in its own right, it may elect to do so.
The number of votes which are available to an Owner will be calculated
separately for each Sub-Account of the Variable Account, and may include
fractional votes. The number of votes attributable to a Sub-Account will be
determined by applying an Owner's percentage interest, if any, in a particular
Sub-Account to the total number of votes attributable to that Sub-Account. An
Owner holds a voting interest in each Sub-Account to which the Variable Account
Value is allocated. The Owner has voting interest only prior to the Annuity
Commencement Date.
The number of votes which are available to the Owner will be determined as
of the date coincident with the date established by the Fund for determining
shareholders eligible to vote at the relevant meeting of that Fund. Voting
instructions will be solicited by written communication prior to such meeting in
accordance with procedures established by the Fund.
Shares as to which no timely instructions are received and shares held by
Protective Life in a Sub-Account as to which no Owner has a beneficial interest
will be voted in proportion to the voting instructions which are received with
respect to all Contracts participating in that Sub-Account. Voting instructions
to abstain on any item to be voted upon will be applied to reduce the votes
eligible to be cast on that item.
Each person having a voting interest in a Sub-Account will receive proxy
materials, reports, and other material relating to the appropriate Fund.
FINANCIAL STATEMENTS
The audited statement of assets and liabilities of The Protective Variable
Annuity Separate Account (comprised of seven sub-accounts) as of December 31,
1996 and 1995 and the related statements of operations and changes in net assets
for the years ended December 31, 1996 and 1995 as well as the Report of
Independent Accountants are contained in the Statement of Additional
Information.
The audited consolidated balance sheets for Protective Life as of December
31, 1996 and 1995 and the related consolidated statements of income,
stockholder's equity, and cash flows for the three years in the period ended
December 31, 1996 and the related financial statement schedules as well as the
Report of Independent Accountants are contained in the Statement of Additional
Information.
37
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
ADDITIONAL CONTRACT PROVISIONS............................................................................ 2
The Contract............................................................................................ 2
Error in Age or Sex..................................................................................... 2
Incontestability........................................................................................ 2
Non-Participation....................................................................................... 2
Assignment.............................................................................................. 2
CALCULATION OF YIELDS AND TOTAL RETURNS................................................................... 2
PIC Money Market Sub-Account Yield...................................................................... 2
Other Sub-Account Yields................................................................................ 3
Average Annual Total Returns............................................................................ 4
Other Total Returns..................................................................................... 5
Effect of the Contract Maintenance Fee on Performance Data.............................................. 5
SAFEKEEPING OF ACCOUNT ASSETS............................................................................. 5
STATE REGULATION.......................................................................................... 6
RECORDS AND REPORTS....................................................................................... 6
LEGAL MATTERS............................................................................................. 6
EXPERTS................................................................................................... 6
OTHER INFORMATION......................................................................................... 6
FINANCIAL STATEMENTS...................................................................................... 7
</TABLE>
38
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PART B
INFORMATION REQUIRED TO BE IN THE
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
2801 Highway 280 South
Birmingham, Alabama 35223
Telephone: (205) 879-9230
STATEMENT OF ADDITIONAL INFORMATION
PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
INDIVIDUAL FLEXIBLE PREMIUM
DEFERRED VARIABLE AND FIXED ANNUITY CONTRACT
This Statement of Additional Information contains information in addition to
the information described in the Prospectus for the individual flexible premium
deferred variable and fixed annuity contract (the "Contract") offered by
Protective Life Insurance Company. This Statement of Additional Information is
not a Prospectus. It should be read only in conjunction with the Prospectuses
for the Contract and the Funds. The Prospectus is dated the same as this
Statement of Additional Information. You may obtain a copy of the Prospectus by
writing or calling us at our address or phone number shown above.
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS MAY 1, 1997
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
ADDITIONAL CONTRACT PROVISIONS............................................................................ 2
The Contract............................................................................................ 2
Error in Age or Sex..................................................................................... 2
Incontestability........................................................................................ 2
Non-Participation....................................................................................... 2
Assignment.............................................................................................. 2
CALCULATION OF YIELDS AND TOTAL RETURNS................................................................... 2
PIC Money Market Sub-Account Yield...................................................................... 2
Other Sub-Account Yields................................................................................ 3
Average Annual Total Returns............................................................................ 4
Other Total Returns..................................................................................... 5
Effect of the Contract Maintenance Fee on Performance Data.............................................. 5
SAFEKEEPING OF ACCOUNT ASSETS............................................................................. 5
STATE REGULATION.......................................................................................... 6
RECORDS AND REPORTS....................................................................................... 6
LEGAL MATTERS............................................................................................. 6
EXPERTS................................................................................................... 6
OTHER INFORMATION......................................................................................... 6
FINANCIAL STATEMENTS...................................................................................... 7
</TABLE>
<PAGE>
ADDITIONAL CONTRACT PROVISIONS
THE CONTRACT
This Contract, any riders and/or endorsements attached as well as the
Application, constitute the entire contract. All statements in the application
shall be deemed representations and not warranties.
ERROR IN AGE OR SEX
Questions in the Application concern the Annuitant's and Owner(s)' date of
birth and sex. If the dates of birth or sex given are not correct, the benefits
under this Contract will be adjusted to the amount which would have been payable
at the correct age and sex. If we made any underpayments on account of any
misstatement, the amount of any underpayment shall be immediately paid in one
sum. Any overpayments made shall be deducted from the current or succeeding
payments due under this Contract.
INCONTESTABILITY
The Contract shall not be contestable by us.
NON-PARTICIPATION
The Contract is not eligible for dividends and will not participate in
Protective Life's surplus or profits.
ASSIGNMENT
By written notice to us, an Owner may assign his or her rights under a
Contract. The assignment must be filed with the Home Office. We assume no
responsibility for the validity of any assignment and any claim under any
assignment is subject to proof of interest and the extent of the assignment.
CALCULATION OF YIELDS AND TOTAL RETURNS
From time to time, Protective Life may disclose yields, total returns, and
other performance data pertaining to the Contracts for a Sub-Account. Such
performance data will be computed or accompanied by performance data computed,
in accordance with the standards defined by the Securities and Exchange
Commission ("SEC").
Because of the charges and deductions imposed under a Contract, yields for
the Sub-Accounts will be lower than the yields for their respective Funds. The
calculations of yields, total returns, and other performance data do not reflect
the effect of premium tax that may be applicable to a particular Contract.
Premium taxes currently range from 0% to 3.50% of premium based on the state in
which the Contract is sold.
PIC MONEY MARKET SUB-ACCOUNT YIELD
From time to time, advertisements and sales literature may quote the current
annualized yield of the PIC Money Market Sub-Account for a seven-day period in a
manner which does not take into consideration any realized or unrealized gain,
or losses on shares of the PIC Money Market Fund or on its portfolio securities.
This current annualized yield is computed by determining the net change
(exclusive of realized gains and losses on the sale of securities and unrealized
appreciation and depreciation) at the end of the seven day period in value of a
hypothetical account under a Contract having a balance of 1 Accumulation Unit of
the PIC Money Market Sub-Account at the beginning of the period, dividing such
net change in account value by the value of the hypothetical account at the
beginning of the period to determine the base period return, and annualizing
this quotient on a 365-day basis. The net change in account value reflects: 1)
net income from the PIC Money Market Fund attributable to the hypothetical
account; and 2) charges and deductions imposed under the Contract attributable
to the hypothetical account. The charges and deductions reflect the per unit
charges for the hypothetical account for: 1) the Annual Contract Maintenance
Fee; 2) Administration Charge; and 3) the Mortality and
2
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Expense Risk Charge. For purposes of calculating current yields for a Contract,
an average per unit Contract Maintenance Fee is used based on the $35 Contract
Maintenance Fee deducted at the end of each Contract Year. Current Yield will be
calculated according to the following formula:
Current Yield = ((NCS-ES)/UV) X (365/7)
<TABLE>
<S> <C>
Where:
NCS the net change in the value of the Fund (exclusive of unrealized gains or losses
on the sale of securities and unrealized appreciation and depreciation) for the
seven-day period attributable to a hypothetical Account having a balance of 1
Sub-Account Accumulation Unit.
ES per unit expenses attributable to the hypothetical account for the seven-day
period.
UV The Accumulation Unit value on the first day of the seven-day period.
</TABLE>
The effective yield of the PIC Money Market Sub-Account determined on a
compounded basis for the same seven-day period may also be quoted.
The effective yield is calculated by compounding the unannualized base
period return according to the following formula:
Effective Yield = (1 + ((NCS-ES)/UV))365/7 - 1
<TABLE>
<S> <C>
Where:
NCS the net change in the value of the portfolio (exclusive of realized gains and
losses on the sale of securities and unrealized appreciation and depreciation)
for the seven-day period attributable to a hypothetical account having a balance
of 1 Sub-Account Accumulation Unit.
ES per Accumulation Unit expenses attributable to the hypothetical account for the
seven-day period.
UV the Accumulation Unit value for the first day of the seven-day period.
</TABLE>
Because of the charges and deductions imposed under the Contract, the
current and effective yields for the PIC Money Market Sub-Account will be lower
than such yields for the PIC Money Market Fund.
The current and effective yields on amounts held in the PIC Money Market
Sub-Account normally will fluctuate on a daily basis. THEREFORE, THE DISCLOSED
YIELD FOR ANY GIVEN PAST PERIOD IS NOT AN INDICATION OR REPRESENTATION OF FUTURE
YIELDS OR RATES OF RETURN. The PIC Money Market Sub-Account's actual yield is
affected by changes in interest rates on money market securities, average
portfolio maturity of the PIC Money Market Fund, the types of quality of
portfolio securities held by the PIC Money Market Fund and the PIC Money Market
Fund's operating expenses. Yields on amounts held in the PIC Money Market
Sub-Account may also be presented for periods other than a seven day period.
OTHER SUB-ACCOUNT YIELDS
From time to time, sales literature or advertisements may quote the current
annualized yield of one or more of the Sub-Accounts (except the PIC Money Market
Sub-Account) for a Contract for 30-day or one-month periods. The annualized
yield of a Sub-Account refers to income generated by the Sub-Account over a
specific 30 day or one month period. Because the yield is annualized, the yield
generated by a Sub-Account during a 30-day or one-month period is assumed to be
generated each period over a 12-month period.
The yield is computed by: 1) dividing the net investment income of the Fund
attributable to the Sub-Account Accumulation Units less Sub-Account expenses for
the period; by 2) the maximum
3
<PAGE>
offering price per Accumulation Unit on the last day of the period times the
daily average number of units outstanding for the period; by 3) compounding that
yield for a six-month period; and by 4) multiplying that result by 2. Expenses
attributable to the Sub-Account include the Annual Contract Maintenance Fee, the
Administration Charge and the Mortality and Expense Risk Charge. The yield
calculation assumes an Contract Maintenance Fee of $35 per year per Contract
deducted at the end of each Contract Year. For purposes of calculating the
3(1-day or one-month yield), an average administration fee per dollar of
Contract value in the Variable Account is used to determine the amount of the
charge attributable to the Sub-Account for the 30-day or one-month period. The
30 day or one month yield is calculated according to the following formula:
Yield = 2 X [(((N1-ES)/(U X UV)) + 1)(6) - 1]
<TABLE>
<S> <C>
Where:
N1 net income of the Fund for the 30 day or one month period attributable to the
Sub-Account Accumulation Units.
ES expenses of the Sub-Account for the 30 day or one month period.
U the average number of Accumulation Units outstanding.
UV the Accumulation Unit value at the close (highest) of the last day in the 30 day
or one month period.
</TABLE>
Because of the charges and deductions imposed under the Contracts, the yield
for the Sub-Account will be lower than the yield for the corresponding Fund.
The yield on the amounts held in the Sub-Accounts normally will fluctuate
over time. Therefore, the disclosed yield for any given past period is not an
indication or representation of future yields or rates of return. The
Sub-Account's actual yield is affected by the types and quality of portfolio
securities held by the corresponding Fund and its operating expenses.
Yield calculations do not take into Account the Surrender Charge under the
Contract equal to 2% to 7% of premiums paid during the six years prior to the
surrender (including the year in which the surrender is made) on amounts
surrendered under the Contract.
AVERAGE ANNUAL TOTAL RETURNS
From time to time, sales literature or advertisements may also quote average
annual total returns for one or more of the Sub-Accounts for various periods of
time.
Until a Sub-Account has been in operation for 10 years, Protective Life will
always include quotes of standard average annual total return for the period
measured from the date the Fund in which that Sub-Account invests began
operations. When a Sub-Account invests in a Fund that has been in operation for
1, 5, and 10 years, respectively, the standard annual total return for these
periods will be provided. Average annual total returns for other periods of time
may, from time to time, also be disclosed.
Average annual total returns represent the average annual compounded rates
of return that would equate an initial investment of $1,000 under a Contract to
the redemption value of that investment as of the last day of each of the
periods. The ending date of each period for which total return quotations are
provided will generally be for the most recent month-end practicable considering
the type and media of the communication and will be stated in the communication.
Average annual total returns will be calculated using Sub-Account unit
values computed on each Valuation Day based on the performance of the
Sub-Account's underlying Fund, the deductions for the Mortality and Expense Risk
Charge and the Administration Charge. The average annual total return
calculation also assumes that the Contract Maintenance Fee is $35 per year per
contract deducted at the end of each Contract Year. For purposes of calculating
standard average annual total return, an average per dollar Contract Maintenance
fee attributable to the hypothetical account for
4
<PAGE>
the period for the quotation standard average annual total returns will
therefore reflect a deduction of the Surrender Charge for any period less than
eight years. The total return will then be calculated according to the following
formula:
TR = (ERV/P)1/N - 1
<TABLE>
<S> <C> <C>
Where:
TR = the average annual total return net of Sub-Account recurring charges.
ERV = the ending redeemable value (net of any applicable surrender charge) of the
hypothetical account at the end of the period.
P = a hypothetical single purchase payment of $1,000.
N = the number of years in the period.
</TABLE>
OTHER TOTAL RETURNS
From time to time, sales literature or advertisements may also quote average
annual total returns that do not reflect the Surrender Charge and in certain
cases the Contract maintenance fee may be assumed to be waived. These are
calculated in exactly the same way as standard average annual total returns
described above, except that the ending redeemable value of the hypothetical
account for the period is replaced with an ending value for the period that does
not take into account any charges on amounts surrendered and in certain cases
the Contract maintenance fee may be assumed to be waived.
Protective Life may disclose cumulative total returns in conjunction with
the standard formats described above. The cumulative total returns will be
calculated using the following formula:
CTR = (ERV/P) - 1
<TABLE>
<S> <C> <C>
Where:
CTR = The cumulative total return net of Sub-Account recurring charges for the
period.
ERV = The ending redeemable value of the hypothetical investment at the end of
the period. (In certain cases the Contract maintenance fee may be assumed
to be waived.)
P = A hypothetical single Purchase Payment of $1,000.
</TABLE>
EFFECT OF THE CONTRACT MAINTENANCE FEE ON PERFORMANCE DATA
The Contract provides for a $35 Annual Contract Maintenance Fee to be
deducted annually at the end of each Contract Year, from the Sub-Accounts based
on the proportion that the value of each such account bears to the total
Contract Account Value. For purposes of reflecting the Contract Maintenance Fee
in yield and total return quotations, the annual charge is converted into a per
dollar per day charge based on the average Variable Contract Value of all
Contracts on the last day of the period for which quotations are provided. The
per-dollar per-day average charge is then adjusted to reflect the basis upon
which the particular quotation is calculated.
SAFEKEEPING OF ACCOUNT ASSETS
Title to the assets of the Variable Account are held by Protective Life. The
assets are kept physically segregated and held separate and apart from the
Company's General Account assets and from the assets in any other separate
account.
Records are maintained of all purchases and redemptions of Fund shares held
by each of the Sub-Accounts.
5
<PAGE>
The officers and employees of Protective Life are covered by an insurance
company blanket bond issued in the amount of $15 million dollars. The bond
insures against dishonest and fraudulent acts of officers and employees.
STATE REGULATION
Protective Life is subject to regulation and supervision by the Department
of Insurance of the State of Tennessee which periodically examines its affairs.
It is also subject to the insurance laws and regulations of all jurisdictions
where it is authorized to do business. A copy of the Contract form has been
filed with, and where required approved by, insurance officials in each
jurisdiction where the Contracts are sold. Protective Life is required to submit
annual statements of its operations, including financial statements, to the
insurance departments of the various jurisdictions in which it does business for
the purposes of determining solvency and compliance with local insurance laws
and regulations.
RECORDS AND REPORTS
Protective Life will maintain all records and accounts relating to the
Variable Account. As presently required by the 1940 Act and regulations
promulgated thereunder, reports containing such information as may be required
under the Act or by any other applicable law or regulation will be sent to
Owner(s) periodically at the last known address.
LEGAL MATTERS
Sutherland, Asbill & Brennan of Washington, D.C. has provided advice on
certain matters relating to the federal securities laws.
EXPERTS
The statement of assets and liabilities of The Protective Variable Annuity
Separate Account (comprised of seven sub-accounts) as of December 31, 1996 and
1995 and the related statements of operations and changes in net assets for the
years ended December 31, 1996 and 1995 included in this Statement of Additional
Information and in the registration statement have been included herein in
reliance on the report of Coopers and Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
The consolidated balance sheets of Protective Life as of December 31, 1996
and 1995 and the related consolidated statements of income, stockholder's equity
and cash flows for each of the three years in the period ended December 31, 1996
and the related financial statement schedules included in this Statement of
Additional Information and in the registration statement have been included
herein in reliance on the report. Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
OTHER INFORMATION
A registration statement has been filed with the SEC under the Securities
Act of 1933 as amended, with respect to the Contracts discussed in this
Statement of Additional Information. Not all the information set forth in the
registration statement, amendments and exhibits thereto has been included in
this Statement of Additional Information. Statements contained in this Statement
of Additional Information concerning the content of the Contracts and other
legal instruments are intended to be summaries. For a complete statement of the
terms of these documents, reference should be made to the instruments filed with
the SEC at 450 Fifth Street, N.W., Washington, DC 20549.
6
<PAGE>
FINANCIAL STATEMENTS
The audited statement of assets and liabilities of The Protective Variable
Annuity Separate Account (comprised of seven sub-accounts as of December 31,
1996 and 1995 and the related statements of operations and changes in net assets
for the years ended December 31, 1996 and 1995 as well as the Report of
Independent Accountants are contained herein.
The audited consolidated balance sheets for Protective Life as of December
31, 1996 and 1995 and the related consolidated statements of income,
stockholder's equity, and cash flows for the years ended December 31, 1996, 1995
and 1994 as well as the Report of Independent Accountants are contained herein.
7
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
Report of Independent Accountants.................................................... F-2
Statement of Assets and Liabilities as of December 31, 1996.......................... F-3
Statement of Assets and Liabilities as of December 31, 1995.......................... F-4
Statement of Operations for the period ended December 31, 1996....................... F-5
Statement of Operations for the period from March 14, 1994 (date of inception)
through December 31, 1995........................................................... F-6
Statement of Changes in Net Assets for the period ended December 31, 1996............ F-7
Statement of Changes in Net Assets for the period from March 14, 1994 (date of
inception) through December 31, 1995................................................ F-8
Notes to Financial Statements........................................................ F-9
PROTECTIVE LIFE INSURANCE COMPANY
Report of Independent Accountants.................................................... F-14
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994.................................................... F-15
Consolidated Balance Sheets as of December 31, 1996 and 1995......................... F-16
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 1996, 1995 and 1994.................................................... F-17
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994.................................................... F-18
Notes to Consolidated Financial Statements........................................... F-19
Financial Statement Schedules:
Schedule III--Supplementary Insurance Information.................................... F-40
Schedule IV--Reinsurance............................................................. F-41
</TABLE>
All other schedules to the consolidated financial statements required by
Article 7 of Regulation S-X are not required under the related instructions or
are inapplicable and therefore have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contractowners and Board of Directors
of Protective Life Insurance Company
We have audited the financial statements of The Protective Variable Annuity
Separate Account (comprised of seven sub-accounts as of December 31, 1996 and
1995) included on pages F-3 through F-12 of this registration statement on Form
N-4. These financial statements are the responsibility of the management of The
Protective Variable Annuity Separate Account. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of shares owned as of December 31, 1996 and 1995, with the transfer
agent, State Street Bank and Trust. 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 The Protective Variable
Annuity Separate Account as of December 31, 1996 and 1995, the results of its
operations, and the changes in its net assets for the years then ended, in
conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
March 14, 1997
F-2
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
GROWTH AND INTERNATIONAL SMALL CAP SELECT
MONEY MARKET INCOME EQUITY GLOBAL INCOME EQUITY EQUITY
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
------------- ------------ -------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investment in Protective
Investment Company at market
value.......................... $ 6,106,516 $210,437,396 $ 96,613,499 $ 37,653,564 $64,304,118 $$101,547,462
Receivable from Protective Life
Insurance Company.............. 67 32 1 17
------------- ------------ -------------- -------------- ------------ --------------
Total Assets................ 6,106,516 210,437,463 96,613,531 37,653,565 64,304,118 101,547,479
------------- ------------ -------------- -------------- ------------ --------------
LIABILITIES
Payable to Protective Life
Insurance Company.............. 2 1,837
------------- ------------ -------------- -------------- ------------ --------------
NET ASSETS...................... $ 6,106,514 $210,437,463 $ 96,613,531 $ 37,653,565 $64,302,281 $ 101,547,479
------------- ------------ -------------- -------------- ------------ --------------
------------- ------------ -------------- -------------- ------------ --------------
<CAPTION>
CAPITAL GROWTH
SUB-ACCOUNT
--------------
<S> <C>
ASSETS
Investment in Protective
Investment Company at market
value.......................... $ 30,194,123
Receivable from Protective Life
Insurance Company.............. 2
--------------
Total Assets................ 30,194,125
--------------
LIABILITIES
Payable to Protective Life
Insurance Company..............
--------------
NET ASSETS...................... $ 30,194,125
--------------
--------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF ASSETS & LIABILITIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
MONEY GROWTH AND INTERNATIONAL GLOBAL SMALL CAP SELECT CAPITAL
MARKET INCOME EQUITY INCOME EQUITY EQUITY GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- ------------ ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investment in Protective
Investment Company at market
value.......................... $5,069,725 $128,075,984 $58,841,698 $31,085,316 $43,829,693 $56,723,469 $10,715,962
Receivable from Protective Life
Insurance Company.............. 656 13,682 39,251 4,345 1
----------- ------------ ------------- ----------- ----------- ----------- -----------
Total Assets................ 5,070,381 128,089,666 58,880,949 31,085,316 43,829,693 56,727,814 10,715,963
----------- ------------ ------------- ----------- ----------- ----------- -----------
LIABILITIES
Payable to Protective Life
Insurance Company.............. 9 12,448
----------- ------------ ------------- ----------- ----------- ----------- -----------
NET ASSETS...................... $5,070,381 $128,089,666 $58,880,949 $31,085,307 $43,817,245 $56,727,814 $10,715,963
----------- ------------ ------------- ----------- ----------- ----------- -----------
----------- ------------ ------------- ----------- ----------- ----------- -----------
Held for the benefit of
contractowners................. $4,527,278 $126,791,235 $55,439,027 $27,603,498 $42,857,683 $55,353,296 $9,646,655
Attributable to Protective Life
Insurance Company.............. 543,103 1,298,431 3,441,922 3,481,809 959,562 1,374,518 1,069,308
----------- ------------ ------------- ----------- ----------- ----------- -----------
NET ASSETS...................... $5,070,381 $128,089,666 $58,880,949 $31,085,307 $43,817,245 $56,727,814 $10,715,963
----------- ------------ ------------- ----------- ----------- ----------- -----------
----------- ------------ ------------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
GROWTH AND INTERNATIONAL SMALL CAP
MONEY MARKET INCOME EQUITY GLOBAL INCOME EQUITY SELECT EQUITY
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
------------ ------------ -------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends....................... $ 248,305 $3,507,449 $ 38,511 $2,275,316 $ 169,888 $1,160,405
EXPENSE
Mortality and expense risk and
administrative charges......... 71,685 2,340,504 1,098,610 461,193 785,356 1,112,352
------------ ------------ -------------- -------------- ------------ --------------
Net investment income (loss).... 176,620 1,166,945 (1,060,099) 1,814,123 (615,468) 48,053
------------ ------------ -------------- -------------- ------------ --------------
NET REALIZED AND UNREALIZED GAINS
ON INVESTMENTS
Net realized gain from redemption
of investment shares............. 281,848 708,750 87,277 88,867 395,474
Capital gain distribution......... 13,670,980 1,981,161 594,633 6,634,413 2,376,286
------------ ------------ -------------- -------------- ------------ --------------
Net realized gain on
investments...................... 13,952,828 2,689,911 681,910 6,723,280 2,771,760
Net unrealized appreciation on
investments during the period.... 24,330,426 10,642,866 244,006 2,301,054 11,947,834
------------ ------------ -------------- -------------- ------------ --------------
Net realized and unrealized gain
on investments................... 38,283,254 13,332,777 925,916 9,024,334 14,719,594
------------ ------------ -------------- -------------- ------------ --------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS........ $ 176,620 $39,450,199 $12,272,678 $2,740,039 $ 8,408,866 $14,767,647
------------ ------------ -------------- -------------- ------------ --------------
------------ ------------ -------------- -------------- ------------ --------------
<CAPTION>
CAPITAL
GROWTH
SUB-ACCOUNT
------------
<S> <C>
INVESTMENT INCOME
Dividends....................... $ 315,147
EXPENSE
Mortality and expense risk and
administrative charges......... 280,793
------------
Net investment income (loss).... 34,354
------------
NET REALIZED AND UNREALIZED GAINS
ON INVESTMENTS
Net realized gain from redemption
of investment shares............. 143,094
Capital gain distribution......... 399,865
------------
Net realized gain on
investments...................... 542,959
Net unrealized appreciation on
investments during the period.... 3,490,010
------------
Net realized and unrealized gain
on investments................... 4,032,969
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS........ $ 4,067,323
------------
------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
MONEY GROWTH AND INTERNATIONAL GLOBAL SMALL CAP SELECT CAPITAL
MARKET INCOME EQUITY INCOME EQUITY EQUITY GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- ----------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends................... $250,293 $1,951,172 $2,156,956 $2,247,841 $ 363,638 $ 598,538 $ 80,038
EXPENSE
Mortality and expense risk
and administrative
charges.................... 60,322 1,143,860 528,362 289,867 457,024 479,112 31,831
----------- ----------- ------------- ----------- ----------- ----------- -----------
Net investment income
(loss)..................... 189,971 807,312 1,628,594 1,957,974 (93,386) 119,426 48,207
----------- ----------- ------------- ----------- ----------- ----------- -----------
NET REALIZED AND UNREALIZED
GAINS (LOSSES) ON INVESTMENTS
Net realized gain (loss) from
redemption of investment
shares....................... 1,665 2,202 2,816 4,554 219 (107)
Capital gain distribution..... 3,237,795 537,311 495,325 839,755
----------- ----------- ------------- ----------- ----------- ----------- -----------
Net realized gain (loss) on
investments.................. 3,239,460 2,202 540,127 499,879 839,974 (107)
Net unrealized appreciation on
investments during the
period....................... 15,447,106 5,944,351 894,555 1,111,428 8,665,501 180,135
----------- ----------- ------------- ----------- ----------- ----------- -----------
Net realized and unrealized
gain on investments.......... 18,686,566 5,946,553 1,434,682 1,611,307 9,505,475 180,028
----------- ----------- ------------- ----------- ----------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.... $189,971 $19,493,878 $7,575,147 $3,392,656 $1,517,921 $9,624,901 $228,235
----------- ----------- ------------- ----------- ----------- ----------- -----------
----------- ----------- ------------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
GROWTH AND INTERNATIONAL SMALL CAP SELECT
MONEY MARKET INCOME EQUITY GLOBAL INCOME EQUITY EQUITY
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
---------------- ------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss).. $ 176,620 $ 1,166,945 $ (1,060,099) $ 1,814,123 $ (615,468) $ 48,053
Net realized gain on
investments.................. 13,952,828 2,689,911 681,910 6,723,280 2,771,760
Net unrealized appreciation of
investments during the
period....................... 24,330,426 10,642,866 244,006 2,301,054 11,947,834
---------------- ------------- -------------- -------------- ------------- --------------
Net increase in net assets
resulting from operations.... 176,620 39,450,199 12,272,678 2,740,039 8,408,866 14,767,647
---------------- ------------- -------------- -------------- ------------- --------------
FROM VARIABLE ANNUITY CONTRACT
TRANSACTIONS
Contractowners' net
payments..................... 3,253,963 32,897,893 21,531,594 7,193,776 11,302,973 22,772,322
Contract maintenance fees..... (1,848) (97,514) (44,293) (14,330) (35,324) (41,846)
Surrenders.................... (1,685,935) (4,734,273) (2,001,419) (1,335,682) (1,991,392) (2,341,900)
Death benefits................ (23,760) (1,013,995) (524,985) (297,967) (446,636) (382,788)
Transfer (to) from other
portfolios................... (130,107) 17,202,066 10,331,059 1,886,745 4,344,711 11,517,266
---------------- ------------- -------------- -------------- ------------- --------------
Net increase in net assets
resulting from variable
annuity contract
transactions................. 1,412,313 44,254,177 29,291,956 7,432,542 13,174,332 31,523,054
---------------- ------------- -------------- -------------- ------------- --------------
Capital withdrawal by
Protective Life Insurance
Company...................... (552,800) (1,356,579) (3,832,052) (3,604,323) (1,098,162) (1,471,036)
---------------- ------------- -------------- -------------- ------------- --------------
Total increase in net assets.. 1,036,133 82,347,797 37,732,582 6,568,258 20,485,036 44,819,665
NET ASSETS
Beginning of Year............. 5,070,381 128,089,666 58,880,949 31,085,307 43,817,245 56,727,814
---------------- ------------- -------------- -------------- ------------- --------------
End of Year................... $ 6,106,514 $ 210,437,463 $ 96,613,531 $ 37,653,565 $ 64,302,281 $ 101,547,479
---------------- ------------- -------------- -------------- ------------- --------------
---------------- ------------- -------------- -------------- ------------- --------------
<CAPTION>
CAPITAL GROWTH
SUB-ACCOUNT
--------------
<S> <C>
FROM OPERATIONS
Net investment income (loss).. $ 34,354
Net realized gain on
investments.................. 542,959
Net unrealized appreciation of
investments during the
period....................... 3,490,010
--------------
Net increase in net assets
resulting from operations.... 4,067,323
--------------
FROM VARIABLE ANNUITY CONTRACT
TRANSACTIONS
Contractowners' net
payments..................... 11,385,928
Contract maintenance fees..... (9,250)
Surrenders.................... (581,887)
Death benefits................ (91,171)
Transfer (to) from other
portfolios................... 5,858,727
--------------
Net increase in net assets
resulting from variable
annuity contract
transactions................. 16,562,347
--------------
Capital withdrawal by
Protective Life Insurance
Company...................... (1,151,508)
--------------
Total increase in net assets.. 19,478,162
NET ASSETS
Beginning of Year............. 10,715,963
--------------
End of Year................... $ 30,194,125
--------------
--------------
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
MONEY GROWTH AND INTERNATIONAL GLOBAL SMALL CAP SELECT CAPITAL
MARKET INCOME EQUITY INCOME EQUITY EQUITY GROWTH
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------- ------------ ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss).. $189,971 $ 807,312 $ 1,628,594 $1,957,974 $ (93,386 ) $ 119,426 $ 48,207
Net realized gain (loss) on
investments.................. 3,239,460 2,202 540,127 499,879 839,974 (107 )
Net unrealized appreciation of
investments during the
period....................... 15,447,106 5,944,351 894,555 1,111,428 8,665,501 180,135
----------- ------------ ------------- ----------- ----------- ----------- -----------
Net increase in net assets
resulting from operations.... 189,971 19,493,878 7,575,147 3,392,656 1,517,921 9,624,901 228,235
----------- ------------ ------------- ----------- ----------- ----------- -----------
FROM VARIABLE ANNUITY CONTRACT
TRANSACTIONS
Contractowners' net payments.. 6,126,751 45,477,435 16,054,696 7,765,493 14,325,776 20,446,022 6,122,896
Contract maintenance fees..... (732) (47,199) (25,982) (9,878 ) (23,081 ) (19,334 ) (389 )
Surrenders.................... (50,606) (1,504,565) (673,544) (653,836 ) (473,441 ) (456,144 ) (27,006 )
Death benefits................ (105,389) (511,376) (437,588) (395,149 ) (402,785 ) (52,809 )
Transfer (to) from other
portfolios................... (4,702,127) 22,838,526 8,972,784 3,696,604 7,032,614 9,448,460 3,396,023
----------- ------------ ------------- ----------- ----------- ----------- -----------
Net increase in net assets
resulting from variable
annuity contract
transactions................. 1,267,897 66,252,821 23,890,366 10,403,234 20,459,083 29,366,195 9,491,524
----------- ------------ ------------- ----------- ----------- ----------- -----------
Capital contribution from
Protective Life Insurance
Company...................... 996,204
----------- ------------ ------------- ----------- ----------- ----------- -----------
Total increase in net
assets....................... 1,457,868 85,746,699 31,465,513 13,795,890 21,977,004 38,991,096 10,715,963
NET ASSETS
Beginning of Year............. 3,612,513 42,342,967 27,415,436 17,289,417 21,840,241 17,736,718
----------- ------------ ------------- ----------- ----------- ----------- -----------
End of Year................... $5,070,381 $128,089,666 $58,880,949 $31,085,307 $43,817,245 $56,727,814 $10,715,963
----------- ------------ ------------- ----------- ----------- ----------- -----------
----------- ------------ ------------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
OF PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATION
The Protective Variable Annuity Separate Account (Separate Account) was
established by Protective Life Insurance Company (Protective Life) under the
provisions of Tennessee law and commenced operations on March 14, 1994. The
Separate Account is an investment account to which net proceeds from individual
flexible premium deferred variable annuity contracts (the Contracts) are
allocated until maturity or termination of the Contracts.
Protective Life has structured the Separate Account into a unit investment
trust form registered with the U.S. Securities and Exchange Commission under the
Investment Company Act of 1940, as amended. The Separate Account is comprised of
the following sub-accounts: Money Market, Growth and Income, International
Equity, Global Income, Small Cap Equity, Select Equity, and Capital Growth. The
Capital Growth sub-account was added June 13, 1995, with sales beginning July 3,
1995. Funds are transferred to Protective Investment Company (the Fund) in
exchange for shares of the corresponding portfolio of the Fund.
Gross premiums from the Contracts are allocated to the sub-accounts in
accordance with contractowner instructions and are recorded as variable annuity
contract transactions in the statement of changes in net assets. Such amounts
are used to provide money to pay contract values under the Contracts (Note 4).
The Separate Account's assets are the property of Protective Life.
Contractowners may allocate some or all of gross premiums or transfer some
or all of the contract value to the fixed account, which is part of Protective
Life's general account. The assets of Protective Life's general account support
its insurance and annuity obligations and are subject to Protective Life's
general liabilities from business operations.
Transfers to/from other portfolios, included in the statement of changes in
net assets, are transfers between the individual sub-accounts and the
sub-accounts and the fixed account.
2. SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT VALUATION: Investments are made in shares and are valued at the
net asset values of the respective portfolios. Transactions with the Funds are
recorded on the trade date. Dividend income is recorded on the ex-dividend date.
REALIZED GAINS AND LOSSES: Realized gains and losses on investments include
gains and losses on redemptions of the Fund's shares (determined on the
last-in-first-out (LIFO) basis) and capital gain distributions from the Fund.
DIVIDEND INCOME AND CAPITAL GAIN DISTRIBUTIONS: Dividend income and capital
gain distributions are recorded on the ex-dividend date. Distributions are from
net investment income and net realized gains recorded in the Investment Company
financials.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
various estimates that affect the reported amounts of assets and liabilities, at
the date of the financial statements, as well as the reported amounts of income
and expenses, during the reporting period. Actual results could differ from
those estimates.
FEDERAL INCOME TAXES: The operation of the Separate Account is included in
the Federal income tax return of Protective Life. Under the provisions of the
Contracts, Protective Life has the right to charge the Separate Account for
Federal income tax attributable to the Separate Account. No charge is currently
being made against the Separate Account for such tax.
F-9
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
OF PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS: Certain reclassifications have been made in previously
reported financial statements and accompanying notes to make the prior year
amounts comparable to those of the current year. Such reclassifications had no
effect on previously reported net assets.
3. INVESTMENTS
At December 31, 1996, the investments by the respective sub-accounts were as
follows:
<TABLE>
<CAPTION>
SHARES COST MARKET VALUE
------------- ---------------- ----------------
<S> <C> <C> <C>
Money Market......................................... 6,106,516 $ 6,106,516 $ 6,106,516
Growth and Income.................................... 14,837,344 $ 171,509,698 $ 210,437,396
International Equity................................. 7,509,791 $ 80,404,907 $ 96,613,499
Global Income........................................ 3,699,891 $ 36,893,699 $ 37,653,564
Small Capital........................................ 6,416,426 $ 62,547,565 $ 64,304,118
Select Equity........................................ 6,578,183 $ 81,272,809 $ 101,547,462
Capital Growth....................................... 2,387,531 $ 26,523,976 $ 30,194,123
</TABLE>
At December 31, 1995, the investments by the respective sub-accounts were as
follows:
<TABLE>
<CAPTION>
SHARES COST MARKET VALUE
------------- ---------------- ----------------
<S> <C> <C> <C>
Money Market......................................... 5,069,725 $ 5,069,725 $ 5,069,725
Growth and Income.................................... 10,500,900 $ 113,478,580 $ 128,075,984
International Equity................................. 5,327,322 $ 53,276,947 $ 58,841,698
Global Income........................................ 3,085,550 $ 30,569,472 $ 31,085,316
Small Capital........................................ 4,689,953 $ 44,376,148 $ 43,829,693
Select Equity........................................ 4,327,028 $ 48,397,125 $ 56,723,469
Capital Growth....................................... 1,009,714 $ 10,535,827 $ 10,715,962
</TABLE>
During the year ended December 31, 1996, transactions in shares were as
follows:
<TABLE>
<CAPTION>
MONEY GROWTH & INTERNATIONAL GLOBAL SMALL SELECT CAPITAL
MARKET INCOME EQUITY INCOME CAPITAL EQUITY GROWTH
----------- ----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Shares purchased.............. 10,013,890 3,458,329 2,374,625 866,789 1,384,189 2,173,261 1,447,658
Shares received from
reinvestment of dividends.... 247,679 1,220,863 159,071 282,658 689,037 225,031 56,182
----------- ----------- ------------ ----------- ----------- ----------- -----------
Total shares acquired......... 10,261,569 4,679,192 2,533,696 1,149,447 2,073,226 2,398,292 1,503,840
Shares redeemed............... (9,224,778) (342,748) (351,227) (535,106) (346,753) (147,137) (126,023)
----------- ----------- ------------ ----------- ----------- ----------- -----------
Net increase in shares
owned........................ 1,036,791 4,336,444 2,182,469 614,341 1,726,473 2,251,155 1,377,817
Shares owned, beginning of the
period....................... 5,069,725 10,500,900 5,327,322 3,085,550 4,689,953 4,327,028 1,009,714
----------- ----------- ------------ ----------- ----------- ----------- -----------
Shares owned, end of the
period....................... 6,106,516 14,837,344 7,509,791 3,699,891 6,416,426 6,578,183 2,387,531
----------- ----------- ------------ ----------- ----------- ----------- -----------
----------- ----------- ------------ ----------- ----------- ----------- -----------
Cost of shares acquired....... $10,260,885 $62,406,535 $30,711,029 $11,715,743 $21,754,619 $34,540,135 $17,294,534
----------- ----------- ------------ ----------- ----------- ----------- -----------
----------- ----------- ------------ ----------- ----------- ----------- -----------
Cost of shares redeemed....... $(9,224,094) $(4,375,417) $(3,583,069) $(5,391,516) $(3,583,202) $(1,664,451) $(1,306,385)
----------- ----------- ------------ ----------- ----------- ----------- -----------
----------- ----------- ------------ ----------- ----------- ----------- -----------
</TABLE>
F-10
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
OF PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
During the year ended December 31, 1995, transactions in shares were as
follows:
<TABLE>
<CAPTION>
MONEY GROWTH & INTERNATIONAL GLOBAL SMALL SELECT CAPITAL
MARKET INCOME EQUITY INCOME CAPITAL EQUITY GROWTH*
----------- ----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Seed money shares.............. 100,000
Shares purchased............... 6,574,118 5,729,393 2,342,381 1,118,638 2,280,032 2,427,119 907,363
Shares received from
reinvestment of dividends..... 250,293 431,665 195,153 276,357 91,939 109,717 7,542
----------- ----------- ------------ ----------- ----------- ----------- -----------
Total shares acquired.......... 6,824,411 6,161,058 2,537,534 1,394,995 2,371,971 2,536,836 1,014,905
Shares redeemed................ (5,373,174) (39,022) (68,403) (117,597) (118,857) (10,636) (5,191)
----------- ----------- ------------ ----------- ----------- ----------- -----------
Net increase in shares owned... 1,451,237 6,122,036 2,469,131 1,277,398 2,253,114 2,526,200 1,009,714
Shares owned, beginning of the
period........................ 3,618,488 4,378,864 2,858,191 1,808,152 2,436,839 1,800,828
----------- ----------- ------------ ----------- ----------- ----------- -----------
Shares owned, end of the
period........................ 5,069,725 10,500,900 5,327,322 3,085,550 4,689,953 4,327,028 1,009,714
----------- ----------- ------------ ----------- ----------- ----------- -----------
----------- ----------- ------------ ----------- ----------- ----------- -----------
Cost of shares acquired........ $ 6,824,411 $70,760,045 $26,263,351 $14,101,639 $22,017,719 $30,455,928 $10,590,244
----------- ----------- ------------ ----------- ----------- ----------- -----------
----------- ----------- ------------ ----------- ----------- ----------- -----------
Cost of shares redeemed........ $ 5,373,177 $ 436,285 $ 751,065 $ 1,192,350 $ 1,112,200 $ 115,409 $ 54,417
----------- ----------- ------------ ----------- ----------- ----------- -----------
----------- ----------- ------------ ----------- ----------- ----------- -----------
</TABLE>
- ------------------------
* date of inception, June 13, 1995
4. RELATED PARTY TRANSACTIONS
Contractowners' net payments represent premiums received from policyholders
less certain deductions made by Protective Life. These deductions may include
(1) premium tax charges, (2) surrender charges, and (3) transfer fees.
There are no sales expenses deducted from premiums at the time the premiums
are paid.
Premium taxes, when applicable, will be deducted, as provided under
applicable law, either from premiums when received, upon full or partial
surrenders of the contract or from the amount applied to effect an annuity at
the time annuity payments commence.
If a Contract has not been in force for six years, upon surrender or for
certain withdrawals, a surrender charge is deducted from the proceeds. Surrender
charges may be decreased or waived on Contracts meeting certain restrictions as
determined by Protective Life. Surrender charges of $355,926 and $97,112 were
assessed on surrenders of $14,672,488 and $3,839,142 during 1996 and 1995,
respectively.
Protective Life has the right to charge $25 for each transfer after the
first twelve transfers in any contract year. No transfer fees were assessed in
1996 or 1995, as no customer has requested more than twelve transfers in a
contract year.
An administrative charge is assessed on an annual basis equal to .15% of the
daily net asset value of each sub-account in the Separate Account.
The Separate Account is charged a daily mortality and expense risk charge at
an annual rate of 1.25% of the net asset value of each Sub-Account. Protective
Life assumes mortality risk in that annuitants may live for a longer period of
time than estimated when the guarantees in the Contract were established. The
expense risk that Protective Life assumes is the risk that administrative
charges, contract maintenance fees, and transfer fees may be insufficient to
cover actual future expenses. The mortality risk that Protective Life assumes
also includes a guarantee to pay a death
F-11
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
OF PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
benefit if the contractowner dies before the annuity commencement date. The
death benefit payable to the designated beneficiary depends on the age of the
deceased owner on the date of death and the provision for death benefits at the
purchase date of the annuity. If the policy was purchased before May 1, 1996,
the guaranteed death benefit is equal to the sum of: (1) the Fixed Account Value
(payable directly from Protective Life); plus (2) the greater of: (a) the
Separate Account value, or (b) the total net premiums allocated to the Separate
Account less previous transfers from the Separate Account, partial surrenders,
and any applicable surrender charges and contract maintenance fees, increased by
amounts transferred to the Separate Account and interest at a compounded annual
effective interest rate of 5% credited as of each contract anniversary up to any
contractowner's 80th birthday. If the policy was purchased after May 1, 1996,
and the owners death is prior to the Owner's 90th birthday, the Death Benefit is
the greater of: (1) the Contract Value; or (2) total Purchase Payments made
under the Contract reduced by any partial surrenders, withdrawals and associated
Surrender Charges; or (3) the Maximum Anniversary Value. If the Owner's death
occurs after the deceased Owner's 90th birthday, the Death Benefit is the
Contract Value.
A contract maintenance fee of $35 is deducted on each contract anniversary
date, and on any day that the contract is surrendered, if such surrender occurs
on any day other than the contract anniversary date. The contract fee may be
waived under certain circumstances. Contract maintenance fees assessed were
$244,405 and $126,595 during 1996 and 1995, respectively.
The net assets of each sub-account of the Separate Account reflect the
investment management fees and other operating expenses incurred by the Funds.
Protective Life offers a loan privilege to contractowners of section 403(b)
policies that are not subject to Title I of ERISA. Such contractowners may
obtain loans using the Contract as the only security for the loan. Loans are
subject to provisions of the Internal Revenue Code of 1986, as amended, and to
applicable retirement program rules. Loans outstanding approximated $289,000 and
$157,000 at December 31, 1996 and 1995, respectively.
F-12
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants.................................................... F-14
Consolidated Statements of Income for the years ended
December 31, 1996, 1995, and 1994................................................... F-15
Consolidated Balance Sheets as of December 31, 1996 and 1995......................... F-16
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 1996, 1995, and 1994................................................... F-17
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994................................................... F-18
Notes to Consolidated Financial Statements........................................... F-19
Financial Statement Schedules:
Schedule III -- Supplementary Insurance Information................................ F-40
Schedule IV -- Reinsurance......................................................... F-41
</TABLE>
All other schedules to the consolidated financial statements required by
Article 7 of Regulation S-X are not required under the related instructions or
are inapplicable and therefore have been omitted.
F-13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Stockholder
Protective Life Insurance Company
Birmingham, Alabama
We have audited the consolidated financial statements and the financial
statement schedules of Protective Life Insurance Company and Subsidiaries
included on pages F-15 through F-41 of this registration statement on Form N-4.
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Protective Life
Insurance Company and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
COOPERS & LYBRAND L.L.P.
February 11, 1997
Birmingham, Alabama
F-14
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
<S> <C> <C> <C>
1996 1995 1994
----------- ----------- -----------
REVENUES
Premiums and policy fees (net of reinsurance ceded: 1996-$308,174;
1995-$333,173; 1994-$172,575).......................................... $ 462,050 $ 411,682 $ 402,772
Net investment income.................................................... 498,781 458,433 408,933
Realized investment gains (losses)....................................... 5,510 1,951 6,298
Other income............................................................. 5,010 1,355 11,977
----------- ----------- -----------
971,351 873,421 829,980
----------- ----------- -----------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
1996-$215,424; 1995-$247,224; 1994-$112,922)........................... 626,893 553,100 517,110
Amortization of deferred policy acquisition costs........................ 91,001 82,700 88,089
Other operating expenses (net of reinsurance ceded: 1996-$81,839;
1995-$84,855; 1994-$14,326)............................................ 128,148 119,888 119,203
----------- ----------- -----------
846,042 755,688 724,402
----------- ----------- -----------
INCOME BEFORE INCOME TAX................................................... 125,309 117,733 105,578
INCOME TAX EXPENSE (BENEFIT)
Current.................................................................. 44,908 47,009 37,586
Deferred................................................................. (2,142) (6,972) (4,731)
----------- ----------- -----------
42,766 40,037 32,855
----------- ----------- -----------
NET INCOME................................................................. $ 82,543 $ 77,696 $ 72,723
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-15
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
<S> <C> <C>
1996 1995
---------- ----------
ASSETS
Investments:
Fixed maturities, at market (amortized cost: 1996-$4,648,525; 1995-$3,789,926)......... $4,662,997 $3,891,932
Equity securities, at market (cost: 1996-$31,669; 1995-$35,448)........................ 35,250 38,711
Mortgage loans on real estate.......................................................... 1,503,781 1,835,057
Investment real estate, net of accumulated depreciation (1996-$911; 1995-$1,032)....... 14,172 20,788
Policy loans........................................................................... 166,704 143,372
Other long-term investments............................................................ 29,193 43,875
Short-term investments................................................................. 101,215 46,891
---------- ----------
Total investments.................................................................... 6,513,312 6,020,626
Cash..................................................................................... 114,384 6,198
Accrued investment income................................................................ 70,541 61,004
Accounts and premiums receivable, net of allowance for uncollectible amounts
(1996-$2,525; 1995-$2,342)............................................................. 43,469 35,492
Reinsurance receivables.................................................................. 332,614 271,018
Deferred policy acquisition costs........................................................ 488,201 410,183
Property and equipment, net.............................................................. 35,489 34,211
Receivables from related parties......................................................... 1,961
Other assets............................................................................. 14,636 13,096
Assets related to separate accounts...................................................... 550,697 324,904
---------- ----------
$8,163,343 $7,178,693
---------- ----------
---------- ----------
LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims...................................................... $2,448,449 $1,928,154
Unearned premiums...................................................................... 257,553 193,767
---------- ----------
2,706,002 2,121,921
Guaranteed investment contract deposits.................................................. 2,474,728 2,451,693
Annuity deposits......................................................................... 1,331,067 1,280,069
Other policyholders' funds............................................................... 142,221 134,380
Other liabilities........................................................................ 117,847 109,538
Accrued income taxes..................................................................... 1,854 838
Deferred income taxes.................................................................... 37,722 67,420
Indebtedness to related parties.......................................................... 25,014 34,693
Liabilities related to separate accounts................................................. 550,697 324,904
---------- ----------
Total liabilities.................................................................... 7,387,152 6,525,456
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES -- NOTE G
REDEEMABLE PREFERRED STOCK, $1.00 par value, at redemption value Shares authorized and
issued: 2,000.......................................................................... 2,000
----------
STOCKHOLDER'S EQUITY
Preferred Stock, $1.00 par value, shares authorized and issued: 2,000, liquidation
preference $2,000...................................................................... 2
Common Stock, $1.00 par value............................................................ 5,000 5,000
Shares authorized and issued: 5,000,000
Additional paid-in capital............................................................... 237,992 144,494
Net unrealized gains on investments (net of income tax: 1996-$3,601; 1995-$31,157)....... 6,688 57,863
Retained earnings........................................................................ 532,088 449,645
Note receivable from PLC Employee Stock Ownership Plan................................... (5,579) (5,765)
---------- ----------
Total stockholder's equity........................................................... 776,191 651,237
---------- ----------
$8,163,343 $7,178,693
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTE
NET RECEIVABLE
ADDITIONAL UNREALIZED FROM
PREFERRED COMMON PAID-IN GAINS (LOSSES) RETAINED PLC
STOCK STOCK CAPITAL ON INVESTMENTS EARNINGS ESOP
--------------- ----------- ----------- -------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993.......... $ 5,000 $ 126,494 $ 39,284 $ 305,176 $ (5,964)
Net income for 1994............... 72,723
Preferred dividends ($425 per
share).......................... (850)
Decrease in net unrealized gains
on investments.................. (146,816)
Decrease in note receivable from
PLC ESOP........................ 28
--
----------- ----------- -------------- --------- -----------
Balance, December 31, 1994.......... 5,000 126,494 (107,532) 377,049 (5,936)
Net income for 1995............... 77,696
Common dividends ($1.00 per
share).......................... (5,000)
Preferred dividends ($50 per
share).......................... (100)
Increase in net unrealized gains
on investments.................. 165,395
Capital contribution from PLC..... 18,000
Decrease in note receivable from
PLC ESOP........................ 171
--
----------- ----------- -------------- --------- -----------
Balance, December 31, 1995.......... 5,000 144,494 57,863 449,645 (5,765)
Net income for 1996............... 82,543
Redemption feature of preferred
stock removed-Note I............ $ 2 1,998
Preferred dividends ($50 per
share).......................... (100)
Decrease in net unrealized gains
on investments.................. (51,175)
Capital contribution from PLC..... 91,500
Decrease in note receivable from
PLC ESOP........................ 186
--
----------- ----------- -------------- --------- -----------
Balance, December 31, 1996.......... $ 2 $ 5,000 $ 237,992 $ 6,688 $ 532,088 $ (5,579)
--
--
----------- ----------- -------------- --------- -----------
----------- ----------- -------------- --------- -----------
<CAPTION>
TOTAL
STOCKHOLDER'S
EQUITY
-------------
<S> <C>
Balance, December 31, 1993.......... $ 469,990
Net income for 1994............... 72,723
Preferred dividends ($425 per
share).......................... (850)
Decrease in net unrealized gains
on investments.................. (146,816)
Decrease in note receivable from
PLC ESOP........................ 28
-------------
Balance, December 31, 1994.......... 395,075
Net income for 1995............... 77,696
Common dividends ($1.00 per
share).......................... (5,000)
Preferred dividends ($50 per
share).......................... (100)
Increase in net unrealized gains
on investments.................. 165,395
Capital contribution from PLC..... 18,000
Decrease in note receivable from
PLC ESOP........................ 171
-------------
Balance, December 31, 1995.......... 651,237
Net income for 1996............... 82,543
Redemption feature of preferred
stock removed-Note I............ 2,000
Preferred dividends ($50 per
share).......................... (100)
Decrease in net unrealized gains
on investments.................. (51,175)
Capital contribution from PLC..... 91,500
Decrease in note receivable from
PLC ESOP........................ 186
-------------
Balance, December 31, 1996.......... $ 776,191
-------------
-------------
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------
<S> <C> <C> <C>
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................................. $ 82,543 $ 77,696 $ 72,723
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of deferred policy acquisition costs..................... 91,001 84,501 88,089
Capitalization of deferred policy acquisition costs................... (77,078) (89,266) (127,566)
Depreciation expense.................................................. 5,333 4,317 4,280
Deferred income taxes................................................. (2,442) (6,971) (4,731)
Accrued income taxes.................................................. 893 5,537 (12,182)
Interest credited to universal life and investment products........... 280,377 286,710 260,081
Policy fees assessed on universal life and investment products........ (116,401) (100,840) (85,532)
Change in accrued investment income and other receivables............. (70,987) (161,924) (32,242)
Change in policy liabilities and other policyholder funds of
traditional life and health products................................ 133,621 201,353 61,322
Change in other liabilities........................................... 7,209 (3,270) 18,564
Other (net)........................................................... (4,281) (6,634) (1,475)
----------- ----------- -----------
Net cash provided by operating activities................................. 329,788 291,209 241,331
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reduction of investments:
Investments available for sale........................................ 1,327,323 2,014,060 386,498
Other................................................................. 168,898 78,568 153,945
Sale of investments:
Investment available for sale......................................... 1,569,119 1,523,454 630,095
Other................................................................. 568,218 141,184 59,550
Cost of investments acquired:
Investments available for sale........................................ (3,798,631) (3,626,877) (1,807,658)
Other................................................................. (400,322) (540,648) (220,839)
Acquisitions and bulk reinsurance assumptions........................... 264,126 106,435
Purchase of property and equipment...................................... (6,899) (5,629) (4,889)
Sale of property and equipment.......................................... 288 286 470
----------- ----------- -----------
Net cash used in investing activities..................................... (307,880) (415,602) (696,393)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit arrangements and long-term debt......... 941,438 1,162,700 572,586
Capital contribution from PLC........................................... 91,500 18,000
Principal payments on line of credit arrangements and long-term debt.... (941,438) (1,162,700) (572,704)
Principal payment on surplus note to PLC................................ (10,000) (4,750) (9,500)
Dividends to stockholder................................................ (100) (5,100) (850)
Investment product deposits and change in universal life deposits....... 949,122 908,063 1,417,980
Investment product withdrawals.......................................... (944,244) (785,622) (976,401)
----------- ----------- -----------
Net cash provided by financing activities................................. 86,278 130,591 431,111
----------- ----------- -----------
INCREASE(DECREASE) IN CASH................................................ 108,186 6,198 (23,951)
CASH AT BEGINNING OF YEAR................................................. 6,198 0 23,951
----------- ----------- -----------
CASH AT END OF YEAR....................................................... $ 114,384 $ 6,198 $ 0
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year:
Interest on debt...................................................... $ 4,633 $ 6,029 $ 5,029
Income taxes.......................................................... 43,478 $ 41,397 $ 49,765
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Reduction of principal on note from ESOP................................ $ 186 $ 171 $ 28
Acquisitions and bulk reinsurance assumptions
Assets acquired....................................................... $ 296,935 $ 613 $ 117,349
Liabilities assumed................................................... (364,862) (21,800) (166,595)
----------- ----------- -----------
Net................................................................... $ (67,927) $ (21,187) $ (49,246)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of Protective Life
Insurance Company and subsidiaries ("Protective") are prepared on the basis of
generally accepted accounting principles. Such accounting principles differ from
statutory reporting practices used by insurance companies in reporting to state
regulatory authorities. (See also Note B.)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make various estimates
that affect the reported amounts of assets and liabilities, disclosures of
contingent assets and liabilities, as well as the reported amounts of revenues
and expenses.
ENTITIES INCLUDED
The consolidated financial statements include the accounts, after
intercompany eliminations, of Protective Life Insurance Company and its
wholly-owned subsidiaries including Wisconsin National Life Insurance Company
("Wisconsin National") and American Foundation Life Insurance Company ("American
Foundation"). Protective is a wholly-owned subsidiary of Protective Life
Corporation ("PLC"), an insurance holding company.
NATURE OF OPERATIONS
Protective markets individual life insurance; group life, health, dental,
and cancer insurance; annuities and investment products; credit life and
disability insurance; and guaranteed investment contracts. Its products are
distributed nationally through independent agents and brokers; through
stockbrokers and financial institutions to their customers; through company
sales representatives; and through other insurance companies. Protective also
seeks to acquire blocks of insurance policies from other insurers.
The operating results of companies in the insurance industry have
historically been subject to significant fluctuations due to competition,
economic conditions, interest rates, investment performance, maintenance of
insurance ratings, and other factors.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1995 Protective adopted Statement of Financial Accounting Standards
("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition
and Disclosures." Under these new standards, a loan is considered impaired,
based on current information and events, if it is probable that Protective will
be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. The measurement of
impaired loans is generally based on the present value of expected future cash
flows discounted at the historical effective interest rate, except that all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral. The adoption of this accounting standard did not have a
material effect on Protective's financial statements.
In 1995 PLC adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
which changes the way stock-based compensation expense is measured and requires
additional disclosures relating to
F-19
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PLC's stock-based compensation plans. The adoption of this accounting standard
did not have a material effect on PLC's or Protective's financial statements.
In 1996 Protective adopted SFAS No. 120, "Accounting and Reporting by Mutual
Life Insurance Enterprises and by Insurance Enterprises for Certain
Long-Duration Participating Contracts;" SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of;"
and SFAS No. 122, "Accounting for Mortgage Servicing Rights." The adoption of
these accounting standards did not have a material effect on Protective's
financial statements.
INVESTMENTS
Protective has classified all of its investments in fixed maturities, equity
securities, and short-term investments as "available for sale."
Investments are reported on the following bases less allowances for
uncollectible amounts on investments, if applicable:
- Fixed maturities (bonds, bank loan participations, and redeemable
preferred stocks) -- at current market value.
- Equity securities (common and nonredeemable preferred stocks) -- at
current market value.
- Mortgage loans on real estate -- at unpaid balances, adjusted for loan
origination costs, net of fees, and amortization of premium or discount.
- Investment real estate -- at cost, less allowances for depreciation
computed on the straight-line method. With respect to real estate acquired
through foreclosure, cost is the lesser of the loan balance plus
foreclosure costs or appraised value.
- Policy loans -- at unpaid balances.
- Other long-term investments -- at a variety of methods similar to those
listed above, as deemed appropriate for the specific investment.
- Short-term investments -- at cost, which approximates current market
value.
Substantially all short-term investments have maturities of three months or
less at the time of acquisition and include approximately $3.4 million in bank
deposits voluntarily restricted as to withdrawal.
As prescribed by SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," certain investments are recorded at their market values
with the resulting unrealized gains and losses reduced by a related adjustment
to deferred policy acquisition costs, net of income tax reported as a component
of stockholder's equity. The market values of fixed maturities increase or
decrease as interest rates fall or rise. Therefore, although the adoption of
SFAS No. 115 does not affect Protective's operations, its reported stockholder's
equity will fluctuate significantly as interest rates change.
F-20
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Protective's balance sheets at December 31, prepared on the basis of
reporting investments at amortized cost rather than at market values, are as
follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Total investments............................................... $ 6,495,259 $ 5,915,357
Deferred policy acquisition costs............................... 495,965 426,432
All other assets................................................ 1,161,830 747,884
------------- -------------
$ 8,153,054 $ 7,089,673
------------- -------------
------------- -------------
Deferred income taxes........................................... $ 34,121 $ 36,263
All other liabilities........................................... 7,349,430 6,458,036
------------- -------------
7,383,551 6,494,299
Redeemable preferred stock...................................... 2,000
Stockholder's equity............................................ 769,503 593,374
------------- -------------
$ 8,153,054 $ 7,089,673
------------- -------------
------------- -------------
</TABLE>
Realized gains and losses on sales of investments are recognized in net
income using the specific identification basis.
DERIVATIVE FINANCIAL INSTRUMENTS
Protective does not use derivative financial instruments for trading
purposes. Combinations of futures contracts and options on treasury notes are
currently being used as hedges for asset/liability management of certain
investments, primarily mortgage loans on real estate, mortgage-backed
securities, and liabilities arising from interest-sensitive products such as
guaranteed investment contracts and individual annuities. Realized investment
gains and losses on such contracts are deferred and amortized over the life of
the hedged asset. Net realized losses of $0.2 million and $15.2 million were
deferred in 1996 and 1995 respectively. At December 31, 1996 and 1995, options
and open futures contracts with notional amounts of $805.0 million and $25.0
million, respectively, had net unrealized losses of $1.9 million and $0.6
million respectively.
Protective uses interest rate swap contracts to convert certain investments
from a variable to a fixed rate of interest. At December 31, 1996, related open
interest rate swap contracts with a notional amount of $150.3 million were in a
$0.7 million net unrealized loss position. At December 31, 1995, related open
interest rate swap contracts with a notional amount of $170.3 million were in a
$1.3 million net unrealized gain position.
CASH
Cash includes all demand deposits reduced by the amount of outstanding
checks and drafts.
PROPERTY AND EQUIPMENT
Property and equipment are reported at cost. Protective uses both
accelerated and straight-line methods of depreciation based upon the estimated
useful lives of the assets. Major repairs or improvements are capitalized and
depreciated over the estimated useful lives of the assets. Other repairs are
F-21
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
expensed as incurred. The cost and related accumulated depreciation of property
and equipment sold or retired are removed from the accounts, and resulting gains
or losses are included in income.
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Home office building................................................... $ 36,586 $ 35,284
Other, principally furniture and equipment............................. 35,401 30,356
--------- ---------
71,987 65,640
Accumulated depreciation............................................... 36,498 31,429
--------- ---------
$ 35,489 $ 34,211
--------- ---------
--------- ---------
</TABLE>
SEPARATE ACCOUNTS
Protective operates separate accounts, some in which Protective bears the
investment risk and others in which the investments risk rests with the
contractholder. The assets and liabilities related to separate accounts in which
Protective does not bear the investment risk are valued at market and reported
separately as assets and liabilities related to separate accounts in the
accompanying consolidated financial statements.
REVENUES, BENEFITS, CLAIMS, AND EXPENSES
- Traditional Life and Health Insurance Products -- Traditional life
insurance products consist principally of those products with fixed and
guaranteed premiums and benefits and include whole life insurance
policies, term life insurance policies, limited-payment life insurance
policies, and certain annuities with life contingencies. Life insurance
and immediate annuity premiums are recognized as revenue when due. Health
insurance premiums are recognized as revenue over the terms of the
policies. Benefits and expenses are associated with earned premiums so
that profits are recognized over the life of the contracts. This is
accomplished by means of the provision for liabilities for future policy
benefits and the amortization of deferred policy acquisition costs.
Liabilities for future policy benefits on traditional life insurance
products have been computed using a net level method including assumptions
as to investment yields, mortality, persistency, and other assumptions
based on Protective's experience modified as necessary to reflect
anticipated trends and to include provisions for possible adverse
deviation. Reserve investment yield assumptions are graded and range from
2.5% to 7.0%. The liability for future policy benefits and claims on
traditional life and health insurance products includes estimated unpaid
claims that have been reported to Protective and claims incurred but not
yet reported. Policy claims are charged to expense in the period that the
claims are incurred.
F-22
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Activity in the liability for unpaid claims is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
Balance beginning of year................................. $ 73,642 $ 79,462 $ 77,191
Less reinsurance........................................ 3,330 5,024 3,973
----------- --------- ---------
Net balance beginning of year............................. 70,312 74,438 73,218
----------- --------- ---------
Incurred related to:
Current year.............................................. 288,816 217,366 203,453
Prior year................................................ (2,417) (8,337) (6,683)
----------- --------- ---------
Total incurred.......................................... 286,399 209,029 196,770
----------- --------- ---------
Paid related to:
Current year.............................................. 197,163 164,321 148,548
Prior year................................................ 57,812 48,834 47,002
----------- --------- ---------
Total paid.............................................. 254,975 213,155 195,550
----------- --------- ---------
Net balance end of year................................... 101,736 70,312 74,438
Plus reinsurance........................................ 6,423 3,330 5,024
----------- --------- ---------
Balance end of year....................................... $ 108,159 $ 73,642 $ 79,462
----------- --------- ---------
----------- --------- ---------
</TABLE>
- Universal Life and Investment Products -- Universal life and investment
products include universal life insurance, guaranteed investment
contracts, deferred annuities, and annuities without life contingencies.
Revenues for universal life and investment products consist of policy fees
that have been assessed against policy account balances for the costs of
insurance, policy administration, and surrenders. That is, universal life
and investment product deposits are not considered revenues in accordance
with generally accepted accounting principles. Benefit reserves for
universal life and investment products represent policy account balances
before applicable surrender charges plus certain deferred policy
initiation fees that are recognized in income over the term of the
policies. Policy benefits and claims that are charged to expense include
benefit claims incurred in the period in excess of related policy account
balances and interest credited to policy account balances. Interest credit
rates for universal life and investment products ranged from 3.0% to 9.4%
in 1996.
At December 31, 1996, Protective estimates the fair value of its
guaranteed investment contracts to be $2,462.0 million using discounted
cash flows. The surrender value of Protective's annuities which
approximates fair value was $1,322.3 million.
- Policy Acquisition Costs -- Commissions and other costs of acquiring
traditional life and health insurance, universal life insurance, and
investment products that vary with and are primarily related to the
production of new business have been deferred. Traditional life and health
insurance acquisition costs are amortized over the premium-payment period
of the related policies in proportion to the ratio of annual premium
income to total anticipated premium income. Acquisition costs for
universal life and investment products are being amortized over the lives
of the policies in relation to the present value of estimated gross
profits from surrender charges and investment, mortality, and expense
margins. Under SFAS No. 97, "Accounting and
F-23
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reporting by Insurance Enterprises for Certain Long-Duration Contracts and
for Realized Gains and Losses from the Sale of Investments," Protective
makes certain assumptions regarding the mortality, persistency, expenses,
and interest rates it expects to experience in future periods. These
assumptions are to be best estimates and are to be periodically updated
whenever actual experience and/or expectations for the future change from
initial assumptions. Additionally, relating to SFAS No. 115, these costs
have been adjusted by an amount equal to the amortization that would have
been recorded if unrealized gains or losses on investments associated with
Protective's universal life and investment products had been realized.
The cost to acquire blocks of insurance representing the present value of
future profits from such blocks of insurance is also included in deferred policy
acquisition costs. For acquisitions occurring after 1988, Protective amortizes
the present value of future profits over the premium payment period including
accrued interest at 8%. The unamortized present value of future profits for such
acquisitions was approximately $138.2 million and $102.5 million at December 31,
1996 and 1995, respectively. During 1996 $57.6 million of present value of
future profits on acquisitions made during the year was capitalized, and $10.8
million was amortized. The unamortized present value of future profits for all
acquisitions was $155.9 million at December 31, 1996 and $123.9 million at
December 31, 1995.
PARTICIPATING POLICIES
Participating business comprises approximately 1% of the individual life
insurance in force and 2% of the individual life insurance premium income.
Policyholder dividends totaled $4.1 million in 1996 and $2.6 million in 1995 and
1994.
INCOME TAXES
Protective uses the asset and liability method of accounting for income
taxes. Income tax provisions are generally based on income reported for
financial statement purposes. Deferred federal income taxes arise from the
recognition of temporary differences between the bases of assets and liabilities
determined for financial reporting purposes and the bases determined for income
tax purposes. Such temporary differences are principally related to the deferral
of policy acquisition costs and the provision for future policy benefits and
expenses.
RECLASSIFICATIONS
Certain reclassifications have been made in the previously reported
financial statements and accompanying notes to make the prior year amounts
comparable to those of the current year. Such reclassifications had no effect on
net income, total assets, or stockholder's equity.
NOTE B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with generally accepted
accounting principles ("GAAP") differ in some respects from the statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. The most significant differences are: (a) acquisition costs of
obtaining new business are deferred and amortized over the approximate life of
the policies rather than charged to operations as incurred, (b) benefit
liabilities are computed using a net level method
F-24
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES (CONTINUED)
and are based on realistic estimates of expected mortality, interest, and
withdrawals as adjusted to provide for possible unfavorable deviation from such
assumptions, (c) deferred income taxes are provided for temporary differences
between financial and taxable earnings, (d) the Asset Valuation Reserve and
Interest Maintenance Reserve are restored to stockholder's equity, (e) furniture
and equipment, agents' debit balances, and prepaid expenses are reported as
assets rather than being charged directly to surplus (referred to as nonadmitted
items), (f) certain items of interest income, principally accrual of mortgage
and bond discounts are amortized differently, and (g) bonds are stated at market
instead of amortized cost.
The reconciliations of net income and stockholder's equity prepared in
conformity with statutory reporting practices to that reported in the
accompanying consolidated financial statements are as follows:
<TABLE>
<CAPTION>
NET INCOME STOCKHOLDER'S EQUITY
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1996 1995 1994
--------- --------- --------- --------- --------- ---------
In conformity with statutory reporting practices:
Protective Life Insurance Company.................... $ 97,779 $ 105,744 $ 54,812 $ 454,320 $ 322,416 $ 304,858
Wisconsin National Life Insurance Company............ 15,011 10,954 10,132 66,577 62,529 57,268
American Foundation Life Insurance Company........... 2,558 3,330 3,072 18,031 18,781 20,327
Capital Investors Life Insurance Company............. 81 182 170 1,458 1,315 1,125
Empire General Life Assurance Corporation............ 905 1,003 690 20,509 20,685 21,270
Protective Life Insurance Corporation of Alabama..... 484 546 69 2,660 2,675 2,133
Protective Life Insurance Company of Kentucky........ 19 3,030
Community National Assurance Company................. 5,100
Consolidation elimination............................ (14,500) (6,500) (115,365) (103,985) (100,123)
--------- --------- --------- --------- --------- ---------
102,337 115,259 68,945 456,320 324,416 306,858
Additions (deductions) by adjustment:
Deferred policy acquisition costs, net of
amortization....................................... (2,830) (765) 41,718 488,201 410,183 434,200
Policy liabilities and accruals...................... (11,633) (48,330) (34,632) (192,628) (186,512) (140,298)
Deferred income tax.................................. 2,142 6,972 4,731 (37,722) (67,420) 14,667
Asset Valuation Reserve.............................. 64,233 105,769 24,925
Interest Maintenance Reserve......................... (2,142) (1,235) (1,716) 17,682 14,412 3,583
Nonadmitted items.................................... 21,610 20,603 21,445
Timing and valuation differences on mortgage loans on
real estate and fixed maturity investments......... 5,913 (619) (961) (1,708) 27,158 6,258
Net unrealized gains and losses on investments....... 4,361 55,765 (106,913)
Realized investment gains (losses)................... (468) 6,781 (6,664)
Noninsurance affiliates.............................. 11,104 (22) 154,143 (9) 0
Consolidation elimination............................ (16,858) 2,515 (4,415) (191,049) (46,222) (162,835)
Other adjustments, net............................... (5,022) (2,860) 5,717 (7,252) (4,906) (4,815)
--------- --------- --------- --------- --------- ---------
In conformity with generally accepted accounting
principles........................................... $ 82,543 $ 77,696 $ 72,723 $ 776,191 $ 653,237 $ 397,075
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
F-25
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE C -- INVESTMENT OPERATIONS
Major categories of net investment income for the years ended December 31
are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Fixed maturities........................................................... $ 310,353 $ 272,942 $ 237,264
Equity securities.......................................................... 2,124 1,338 2,435
Mortgage loans on real estate.............................................. 153,463 162,135 141,751
Investment real estate..................................................... 1,875 1,855 1,950
Policy loans............................................................... 10,378 8,958 8,397
Other, principally short-term investments.................................. 51,637 40,348 35,062
----------- ----------- -----------
529,830 487,576 426,859
Investment expenses........................................................ 31,049 29,143 17,926
----------- ----------- -----------
$ 498,781 $ 458,433 $ 408,933
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Realized investment gains (losses) for the years ended December 31 are
summarized as follows:
<TABLE>
<S> <C> <C> <C>
Fixed maturities............................................ $ (7,101) $ 6,118 $ (8,646)
Equity securities........................................... 1,733 44 7,735
Mortgage loans and other investments........................ 10,878 (4,211) 7,209
--------- --------- ---------
$ 5,510 $ 1,951 $ 6,298
--------- --------- ---------
--------- --------- ---------
</TABLE>
Protective has established an allowance for uncollectible amounts on
investments. The allowance totaled $30.9 million at December 31, 1996 and $32.7
million at December 31, 1995. Additions and reductions to the allowance are
included in realized investment gains (losses). Without such additions/
reductions, Protective had net realized investment gains of $3.7 million in
1996, net realized investment losses of $0.5 million in 1995, and net realized
investment gains of $6.3 million in 1994.
In 1996, gross gains on the sale of investments available for sale (fixed
maturities, equity securities and short-term investments) were $6.9 million and
gross losses were $11.8 million. In 1995, gross gains were $18.0 million and
gross losses were $11.8 million. In 1994, gross gains on the sale of fixed
maturities were $15.2 million and gross losses were $16.4 million.
F-26
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
The amortized cost and estimated market values of Protective's investments
classified as available for sale at December 31 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1996 COST GAINS LOSSES VALUES
- ----------------------------------------------------------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Fixed maturities:
Bonds:
Mortgage-backed........................................ $ 2,192,978 $ 29,925 $ 20,810 $ 2,202,093
United States Government and authorities............... 348,318 661 1,377 347,602
States, municipalities, and political subdivisions..... 5,515 47 9 5,553
Public utilities....................................... 364,692 2,205 337 366,560
Convertibles and bonds with warrants................... 679 0 158 521
All other corporate bonds.............................. 1,679,276 33,879 29,388 1,683,767
Bank loan participations................................. 49,829 0 0 49,829
Redeemable preferred stocks.............................. 7,238 60 226 7,072
------------- ----------- ----------- -------------
4,648,525 66,777 52,305 4,662,997
Equity securities.......................................... 31,669 9,570 5,989 35,250
Short-term investments..................................... 101,215 0 0 101,215
------------- ----------- ----------- -------------
$ 4,781,409 $ 76,347 $ 58,294 $ 4,799,462
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1995 COST GAINS LOSSES VALUES
- ---------------------------------------------------------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Fixed maturities:
Bonds:
Mortgage-backed....................................... $ 2,006,858 $ 46,934 $ 4,017 $ 2,049,775
United States Government and authorities.............. 105,388 2,290 101 107,577
States, municipalities, and political subdivisions.... 10,888 702 0 11,590
Public utilities...................................... 322,110 5,904 770 327,244
Convertibles and bonds with warrants.................. 638 0 145 493
All other corporate bonds............................. 1,117,376 59,045 7,573 1,168,848
Bank loan participations................................ 220,811 0 0 220,811
Redeemable preferred stocks............................. 5,857 61 324 5,594
------------- ----------- ----------- -------------
3,789,926 114,936 12,930 3,891,932
Equity securities......................................... 35,448 6,438 3,175 38,711
Short-term investments.................................... 46,891 0 0 46,891
------------- ----------- ----------- -------------
$ 3,872,265 $ 121,374 $ 16,105 $ 3,977,534
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
F-27
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
The amortized cost and estimated market values of fixed maturities at
December 31, by expected maturity, are shown below. Expected maturities are
derived from rates of prepayment that may differ from actual rates of
prepayment.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUES
------------- -------------
<S> <C> <C>
1996
- ------------------------------------------------------------------------------------
Due in one year or less......................................................... $ 417,463 $ 420,774
Due after one year through five years........................................... 1,547,805 1,546,278
Due after five years through ten years.......................................... 2,090,149 2,095,781
Due after ten years............................................................. 593,108 600,164
------------- -------------
$ 4,648,525 $ 4,662,997
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUES
------------- -------------
<S> <C> <C>
1995
- ------------------------------------------------------------------------------------
Due in one year or less......................................................... $ 409,514 $ 411,839
Due after one year through five years........................................... 1,087,735 1,101,226
Due after five years through ten years.......................................... 1,477,807 1,524,555
Due after ten years............................................................. 814,870 854,312
------------- -------------
$ 3,789,926 $ 3,891,932
------------- -------------
------------- -------------
</TABLE>
The approximate percentage distribution of Protective's fixed maturity
investments by quality rating at December 31 is as follows:
<TABLE>
<CAPTION>
RATING 1996 1995
- ---------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
AAA......................................................................................... 48.3% 56.1%
AA.......................................................................................... 4.4 4.5
A........................................................................................... 22.6 12.6
BBB
Bonds..................................................................................... 21.1 19.0
Bank loan participations.................................................................. 0.1 0.4
BB or Less
Bonds..................................................................................... 2.5 2.0
Bank loan participations.................................................................. 0.9 5.3
Redeemable preferred stocks................................................................. 0.1 0.1
--------- ---------
100.0% 100.0%
--------- ---------
--------- ---------
</TABLE>
At December 31, 1996 and 1995, Protective had bonds which were rated less
than investment grade of $117.5 million and $75.7 million, respectively, having
an amortized cost of $137.0 million and $82.2 million, respectively.
Additionally, Protective had bank loan participations which were rated less
F-28
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE C -- INVESTMENT OPERATIONS (CONTINUED)
than investment grade of $43.6 million and $206.0 million, respectively, having
an amortized cost of $43.6 million and $206.0 million, respectively.
The change in unrealized gains (losses), net of income tax on fixed maturity
and equity securities for the years ended December 31 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- ------------
<S> <C> <C> <C>
Fixed maturities.......................................................... $ (56,898) $ 199,024 $ (175,723)
Equity securities......................................................... $ 207 $ 2,740 $ (5,342)
</TABLE>
At December 31, 1996, all of Protective's mortgage loans were commercial
loans of which 78% were retail, 8% were office buildings, and 7% were
warehouses. Protective specializes in making mortgage loans on either
credit-oriented or credit-anchored commercial properties, most of which are
strip shopping centers in smaller towns and cities. No single tenant's leased
space represents more than 4% of mortgage loans. Approximately 84% of the
mortgage loans are on properties located in the following states listed in
decreasing order of significance: South Carolina, Florida, Georgia, Tennessee,
Texas, North Carolina, Alabama, Virginia, Mississippi, Kentucky, Ohio, Indiana,
Arizona, and Washington.
Many of the mortgage loans have call provisions after five to seven years.
Assuming the loans are called at their next call dates, approximately $126.7
million would become due in 1997, $761.8 million in 1998 to 2001, and $250.8
million in 2002 to 2006.
At December 31, 1996, the average mortgage loan was $1.7 million, and the
weighted average interest rate was 9.3%. The largest single mortgage loan was
$13.6 million. While Protective's mortgage loans do not have quoted market
values, at December 31,1996 and 1995, Protective estimates the market value of
its mortgage loans to be $1,581.7 million and $2,001.1 million, respectively,
using discounted cash flows from the next call date.
At December 31, 1996 and 1995, Protective's problem mortgage loans and
foreclosed properties totaled $23.7 million and $26.1 million, respectively.
Protective's mortgage loans are collateralized by real estate, any assessment of
impairment is based upon the estimated fair value of the real estate. Based on
Protective's evaluation of its mortgage loan portfolio, Protective does not
expect any material losses on its mortgage loans.
Certain investments, principally real estate, with a carrying value of $18.8
million were nonincome producing for the twelve months ended December 31, 1996.
Protective believes it is not practicable to determine the fair value of its
policy loans since there is no stated maturity, and policy loans are often
repaid by reductions to policy benefits. Policy loan interest rates generally
range from 4.5% to 8.0%. The fair values of Protective's other long-term
investments approximate cost.
F-29
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE D -- FEDERAL INCOME TAXES
Protective's effective income tax rate varied from the maximum federal
income tax rate as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate applied to pretax income........................ 35.0% 35.0% 35.0%
Dividends received deduction and tax-exempt interest.............................. (0.4) (0.5) (0.4)
Low-income housing credit......................................................... (0.6) (0.7) (0.7)
Tax benefits arising from prior acquisitions and other adjustments................ 0.1 0.2 (2.8)
--- --- ---
Effective income tax rate......................................................... 34.1% 34.0% 31.1%
--- --- ---
--- --- ---
</TABLE>
The provision for federal income tax differs from amounts currently payable
due to certain items reported for financial statement purposes in periods which
differ from those in which they are reported for income tax purposes.
Details of the deferred income tax provision for the years ended December 31
are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Deferred policy acquisition costs........................................... $ (16,321) $ (11,606) $ 34,561
Benefit and other policy liability changes.................................. 15,542 52,496 (52,288)
Temporary differences of investment income.................................. (1,163) (34,175) 15,524
Other items................................................................. (200) (13,687) (2,528)
---------- ---------- ----------
$ (2,142) $ (6,972) $ (4,731)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The components of Protective's net deferred income tax liability as of
December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred income tax assets
Policy and policyholder liability reserves............................................ $ 80,151 $ 63,830
Other................................................................................. 2,503 2,303
----------- -----------
82,654 66,133
----------- -----------
Deferred income tax liabilities:
Deferred policy acquisition costs..................................................... 117,696 102,154
Unrealized gain on investments........................................................ 2,680 31,399
----------- -----------
120,376 133,553
----------- -----------
Net deferred income tax liability..................................................... $ 37,722 $ 67,420
----------- -----------
----------- -----------
</TABLE>
Under pre-1984 life insurance company income tax laws, a portion of
Protective's gain from operations which was not subject to current income
taxation was accumulated for income tax purposes in a memorandum account
designated as Policyholders' Surplus. The aggregate accumulation in this account
at December 31, 1996 was approximately $50.7 million. Should the accumulation in
the Policyholders' Surplus account exceed certain stated maximums, or should
distributions including cash dividends be made to PLC in excess of approximately
$439 million, such excess would be subject
F-30
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE D -- FEDERAL INCOME TAXES (CONTINUED)
to federal income taxes at rates then effective. Deferred income taxes have not
been provided on amounts designated as Policyholders' Surplus. Protective does
not anticipate involuntarily paying income tax on amounts in the Policyholders'
Surplus accounts.
Protective's income tax returns are included in the consolidated income tax
returns of PLC. The allocation of income tax liabilities among affiliates is
based upon separate income tax return calculations.
NOTE E -- DEBT
At December 31, 1996, PLC had borrowed under a term note that contains,
among other provisions, requirements for maintaining certain financial ratios,
and restrictions on indebtedness incurred by PLC's subsidiaries including
Protective. Additionally, PLC, on a consolidated basis, cannot incur debt in
excess of 50% of its total capital.
Protective has arranged sources of credit to temporarily fund scheduled
investment commitments. Protective expects that the rate received on its
investments will equal or exceed its borrowing rate. Protective had no such
temporary borrowings outstanding at December 31, 1996 and 1995.
Included in indebtedness to related parties are three surplus debentures
issued by Protective to PLC. At December 31, 1996, the balance of the three
surplus debentures combined was $24.7 million. Future maturities of these
debentures are $4.7 million in 1997 and $20.0 million in 2003.
Interest expense on borrowed money totaled $4.6 million, $6.0 million, and
$5.0 million, in 1996, 1995, and 1994, respectively.
NOTE F -- ACQUISITIONS
In June 1995 Protective acquired through coinsurance a block of term life
insurance policies. In January 1996 Protective acquired through coinsurance a
block of life insurance policies. In June 1996 Protective acquired through
coinsurance a block of credit life insurance policies. In December 1996
Protective acquired a small life insurance company and acquired through
coinsurance a block of life insurance policies.
These transactions have been accounted for as purchases, and the results of
the transactions have been included in the accompanying financial statements
since the effective dates of the agreements.
NOTE G -- COMMITMENTS AND CONTINGENT LIABILITIES
Under insurance guaranty fund laws, in most states, insurance companies
doing business therein can be assessed up to prescribed limits for policyholder
losses incurred by insolvent companies. Protective does not believe such
assessments will be materially different from amounts already provided for in
the financial statements. Most of these laws do provide, however, that an
assessment may be excused or deferred if it would threaten an insurer's own
financial strength.
A number of civil jury verdicts have been returned against life and health
insurers in the jurisdictions in which Protective does business involving the
insurers' sales practices, alleged agent misconduct, failure to properly
supervise agents, and other matters. Increasingly these lawsuits have resulted
in the award of substantial judgments against the insurer that are
disproportionate to the
F-31
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE G -- COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
actual damages, including material amounts of punitive damages. In some states,
juries have substantial discretion in awarding punitive damages which creates
the potential for unpredictable material adverse judgments in any given punitive
damage suit. Protective and its subsidiaries, like other life and health
insurers, from time to time are involved in such litigation. Pending litigation
includes a class action filed in Jefferson County (Birmingham), Alabama with
respect to cancer premium refunds. Although the outcome of any litigation cannot
be predicted with certainty, Protective believes that at the present time there
are no pending or threatened lawsuits that are reasonably likely to have a
material adverse effect on the financial position of Protective.
NOTE H -- STOCKHOLDER'S EQUITY AND RESTRICTIONS
At December 31, 1996, approximately $413 million of consolidated
stockholder's equity excluding net unrealized gains and losses represented net
assets of Protective that cannot be transferred in the form of dividends, loans,
or advances to PLC. In general, dividends up to specified levels are considered
ordinary and may be paid thirty days after written notice to the insurance
commissioner of the state of domicile unless such commissioner objects to the
dividend prior to the expiration of such period. Dividends in larger amounts are
considered extraordinary and are subject to affirmative prior approval by such
commissioner. The maximum amount that would qualify as ordinary dividends to PLC
by Protective in 1997 is estimated to be $98 million.
NOTE I -- PREFERRED STOCK
PLC owns all of the 2,000 shares of preferred stock issued by Protective's
subsidiary, American Foundation. During 1996, American Foundation's articles of
incorporation were amended such that the preferred stock is redeemable solely at
the discretion of American Foundation. At December 31, 1995 the preferred stock
was reported "Redeemable Preferred Stock", whereas at December 31, 1996 it is
reported as a component of stockholder's equity. The stock pays, when and if
declared, annual minimum cumulative dividends of $50 per share, and
noncumulative participating dividends to the extent American Foundation's
statutory earnings for the immediately preceding fiscal year exceed $1 million.
Dividends of $0.1 million, $0.1 million, and $0.9 million were paid to PLC in
1996, 1995, and 1994, respectively.
NOTE J -- RELATED PARTY MATTERS
Receivables from related parties consisted of receivables from affiliates
under control of PLC in the amount of $2.0 million at December 31, 1995.
Protective routinely receives from or pays to affiliates under the control of
PLC reimbursements for expenses incurred on one another's behalf. Receivables
and payables among affiliates are generally settled monthly.
On August 6, 1990, PLC announced that its Board of Directors approved the
formation of an Employee Stock Ownership Plan ("ESOP"). On December 1, 1990,
Protective transferred to the ESOP 520,000 shares of PLC's common stock held by
it in exchange for a note. The outstanding balance of the note, $5.6 million at
December 31, 1996, is accounted for as a reduction to stockholder's equity. The
stock will be used to match employee contributions to PLC's existing 401(k)
Plan. The ESOP shares are dividend paying. Dividends on the shares are used to
pay the ESOP's note to Protective.
F-32
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE J -- RELATED PARTY MATTERS (CONTINUED)
Protective leases furnished office space and computers to affiliates. Lease
revenues were $3.7 million in 1996, $3.1 million in 1995, and $2.8 million in
1994. Protective purchases data processing, legal, investment and management
services from affiliates. The costs of such services were $50.4 million, $38.1
million, and $29.8 million in 1996, 1995, and 1994, respectively. Commissions
paid to affiliated marketing organizations of $7.4 million, $10.9 million, and
$10.1 million in 1996, 1995, and 1994, respectively, were included in deferred
policy acquisition costs.
Certain corporations with which PLC's directors were affiliated paid
Protective premiums and policy fees for various types of group insurance. Such
premiums and policy fees amounted to $31.2 million, $21.2 million, and $21.1
million in 1996, 1995, and 1994, respectively. Protective and/or PLC paid
commissions, interest, and service fees to these same corporations totaling $5.0
million, $5.3 million, and $4.9 million, in 1996, 1995, and 1994, respectively.
For a discussion of indebtedness to related parties, see Note E.
NOTE K -- BUSINESS SEGMENTS
Protective operates predominantly in the life and accident and health
insurance industry. The following table sets forth total revenues, income before
income tax, and identifiable assets of Protective's business segments. The
primary components of revenues are premiums and policy fees, net investment
income, and realized investment gains and losses. Premiums and policy fees are
attributed directly to each business segment. Net investment income is allocated
based on directly related assets required for transacting that segment of
business. In the 1996 first quarter, Protective changed the way it allocates
certain expenses to its business segments. Accordingly, prior period segment
results have been restated to reflect the change.
Realized investment gains (losses) and expenses are allocated to the
segments in a manner which most appropriately reflects the operations of that
segment. Unallocated realized investment gains (losses) are deemed not to be
associated with any specific segment.
Assets are allocated based on policy liabilities and deferred policy
acquisition costs directly attributable to each segment.
F-33
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE K -- BUSINESS SEGMENTS (CONTINUED)
There are no significant intersegment transactions.
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
TOTAL REVENUES
Acquisitions......................................................... $ 213,199 $ 193,544 $ 171,259
Financial Institutions............................................... 87,320 72,758 107,481
Group................................................................ 174,971 159,263 148,835
Guaranteed Investment Contracts...................................... 206,407 199,468 184,212
Individual Life...................................................... 169,306 139,424 122,915
Investment Products.................................................. 110,821 104,984 80,076
Corporate and Other.................................................. 2,810 3,059 9,936
Unallocated Realized Investment Gains (Losses)....................... 6,517 921 5,266
------------- ------------- -------------
$ 971,351 $ 873,421 $ 829,980
------------- ------------- -------------
------------- ------------- -------------
Acquisitions......................................................... 21.9% 22.2% 20.7%
Financial Institutions............................................... 9.0 8.3 12.9
Group................................................................ 18.0 18.2 17.9
Guaranteed Investment Contracts...................................... 21.3 22.8 22.3
Individual Life...................................................... 17.4 16.0 14.7
Investment Products.................................................. 11.4 12.0 9.7
Corporate and Other.................................................. 0.3 0.4 1.2
Unallocated Realized Investment Gains (Losses)....................... 0.7 0.1 0.6
------------- ------------- -------------
100.0% 100.0% 100.0%
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-34
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE K -- BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
INCOME BEFORE INCOME TAX
Acquisitions......................................................... $ 53,564 $ 50,376 $ 37,719
Financial Institutions............................................... 8,966 7,701 7,544
Group................................................................ 821 9,107 10,122
Guaranteed Investment Contracts...................................... 32,130 28,979 31,933
Individual Life...................................................... 15,898 16,206 15,957
Investment Products.................................................. 9,823 10,933 (796)
Corporate and Other.................................................. (2,410) (6,490) (2,167)
Unallocated Realized Investment Gains (Losses)....................... 6,517 921 5,266
------------- ------------- -------------
$ 125,309 $ 117,733 $ 105,578
------------- ------------- -------------
------------- ------------- -------------
Acquisitions......................................................... 42.7% 42.8% 35.7%
Financial Institutions............................................... 7.2 6.5 7.1
Group................................................................ 0.7 7.7 9.6
Guaranteed Investment Contracts...................................... 25.6 24.6 30.2
Individual Life...................................................... 12.7 13.8 15.1
Investment Products.................................................. 7.8 9.3 (0.7)
Corporate and Other.................................................. (1.9) (5.5) (2.0)
Unallocated Realized Investment Gains (Losses)....................... 5.2 0.8 5.0
------------- ------------- -------------
100.0% 100.0% 100.0%
------------- ------------- -------------
------------- ------------- -------------
IDENTIFIABLE ASSETS
Acquisitions......................................................... $ 1,579,253 $ 1,255,542 $ 1,204,883
Financial Institutions............................................... 344,866 265,132 211,652
Group................................................................ 233,640 240,222 215,904
Guaranteed Investment Contracts...................................... 2,608,037 2,536,939 2,211,079
Individual Life...................................................... 1,034,960 887,927 752,168
Investment Products.................................................. 1,871,887 1,578,789 1,284,186
Corporate and Other.................................................. 490,700 414,142 230,832
------------- ------------- -------------
$ 8,163,343 $ 7,178,693 $ 6,110,704
------------- ------------- -------------
------------- ------------- -------------
Acquisitions......................................................... 19.3% 17.5% 19.7%
Financial Institutions............................................... 4.2 3.7 3.5
Group................................................................ 2.9 3.3 3.5
Guaranteed Investment Contracts...................................... 32.0 35.3 36.2
Individual Life...................................................... 12.7 12.4 12.3
Investment Products.................................................. 22.9 22.0 21.0
Corporate and Other.................................................. 6.0 5.8 3.8
------------- ------------- -------------
100.0% 100.0% 100.0%
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-35
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE L -- EMPLOYEE BENEFIT PLANS
PLC has a defined benefit pension plan covering substantially all of its
employees. The plan is not separable by affiliates participating in the plan.
However, approximately 80% of the participants in the plan are employees of
Protective. The benefits are based on years of service and the employee's
highest thirty-six consecutive months of compensation. PLC's funding policy is
to contribute amounts to the plan sufficient to meet the minimum finding
requirements of ERISA plus such additional amounts as PLC may determine to be
appropriate from time to time. Contributions are intended to provide not only
for benefits attributed to service to date but also for those expected to be
earned in the future.
The actuarial present value of benefit obligations and the funded status of
the plan taken as a whole at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $14,720 in 1996 and $16,676 in
1995..................................................................................... $ 15,475 $ 17,415
--------- ---------
Projected benefit obligation for service rendered to date.................................. $ 25,196 $ 24,877
Plan assets at fair value (group annuity contract with Protective)......................... 19,779 18,254
--------- ---------
Plan assets less than the projected benefit obligation..................................... (5,417) (6,623)
Unrecognized net loss from past experience different from that assumed..................... 3,559 4,882
Unrecognized prior service cost............................................................ 705 805
Unrecognized net transition asset.......................................................... (67) (84)
--------- ---------
Net pension liability recognized in balance sheet.......................................... $ (1,220) $ (1,020)
--------- ---------
--------- ---------
</TABLE>
Net pension cost includes the following components for the years ended
December 31:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the year................................. $ 1,908 $ 1,540 $ 1,433
Interest cost on projected benefit obligation................................... 1,793 1,636 1,520
Actual return on plan assets.................................................... (1,674) (1,358) (1,333)
Net amortization and deferral................................................... 374 114 210
--------- --------- ---------
Net pension cost................................................................ $ 2,401 $ 1,932 $ 1,830
--------- --------- ---------
--------- --------- ---------
</TABLE>
Protective's share of the net pension cost was $1.5 million, $1.2 million,
and $1.2 million, in 1996, 1995, and 1994, respectively.
Assumptions used to determine the benefit obligations as of December 31 were
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Weighted average discount rate....................................................... 7.75% 7.25% 8.00%
Rates of increase in compensation level.............................................. 5.75% 5.25% 6.00%
Expected long-term rate of return on assets.......................................... 8.50% 8.50% 8.50%
</TABLE>
Assets of the pension plan are included in the general assets of Protective.
Upon retirement, the amount of pension plan assets vested in the retiree is used
to purchase a single premium annuity from
F-36
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE L -- EMPLOYEE BENEFIT PLANS (CONTINUED)
Protective in the retiree's name. Therefore, amounts presented above as plan
assets exclude assets relating to retirees.
PLC also sponsors an unfunded Excess Benefits Plan, which is a nonqualified
plan that provides defined pension benefits in excess of limits imposed by
federal income tax law. At December 31, 1996 and 1995, the projected benefit
obligation of this plan totaled $7.2 million and $5.7 million, respectively.
In addition to pension benefits, PLC provides limited healthcare benefits to
eligible retired employees until age 65. The postretirement benefit is provided
by an unfunded plan. At December 31, 1996 and 1995, the liability for such
benefits totaled $1.4 million and $1.5 million, respectively. The expense
recorded by PLC was $0.1 million in 1996 and $0.2 million in 1995 and 1994.
PLC's obligation is not materially affected by a 1% change in the healthcare
cost trend assumptions used in the calculation of the obligation.
Life insurance benefits for retirees are provided through the purchase of
life insurance policies upon retirement equal to the employees' annual
compensation. This plan is partially funded at a maximum of $50,000 face amount
of insurance.
PLC sponsors a defined contribution plan which covers substantially all
employees. Employee contributions are made on a before-tax basis as provided by
Section 401(k) of the Internal Revenue Code. In 1990, PLC established an
Employee Stock Ownership Plan to match employee contributions to PLC's 401(k)
Plan. In 1994, a stock bonus was added to the 401(k) Plan for employees who are
not otherwise under a bonus plan. Expense related to the ESOP consists of the
cost of the shares allocated to participating employees plus the interest
expense on the ESOP's note payable to Protective less dividends on shares held
by the ESOP. At December 31, 1996, PLC had committed 52,388 shares to be
released to fund employee benefits. The expense recorded by PLC for these
employee benefits was $1.0 million, $0.7 million and $0.6 million in 1996, 1995,
and 1994, respectively.
NOTE M -- STOCK BASED COMPENSATION
Certain Protective employees participate in PLC's Performance Share Plan and
receive stock appreciation rights (SARs) from PLC.
Since 1973 PLC has had a Performance Share Plan to motivate senior
management to focus on PLC's long-range earnings performance. The criterion for
payment of performance share awards is based upon a comparison of PLC's average
return on average equity over a four year award period (earlier upon the death,
disability or retirement of the executive, or in certain circumstances, of a
change in control of PLC) to that of a comparison group of publicly held life
insurance companies, multiline insurers, and insurance holding companies. If
PLC's results are below the median of the comparison group, no portion of the
award is earned. If PLC's results are at or above the 90th percentile, the award
maximum is earned. Under the plan approved by stockholders in 1992, up to
1,200,000 shares may be issued in payment of awards. The number of shares
granted in 1996, 1995, and 1994 were 52,290, 72,610, and 62,140 shares,
respectively, having an approximate market value on the grant date of $1.8
million, $1.6 million, and $1.4 million, respectively. At December 31, 1996,
outstanding awards measured at target and maximum payouts were 279,648 and
375,470 shares, respectively. The expense recorded by PLC for the Performance
Share Plan was $3.0 million, $2.9 million, and $3.6 million in 1996, 1995, and
1994, respectively.
F-37
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE M -- STOCK BASED COMPENSATION (CONTINUED)
During 1996, stock appreciation rights (SARs) were granted to certain
executives of PLC to provide long-term incentive compensation based on the
performance of PLC's Common Stock. Under this arrangement PLC will pay (in
shares of PLC Common Stock) an amount equal to the difference between the
specified base price of PLC's Common Stock and the market value at the exercise
date. The SARs are exercisable after five years (earlier upon the death,
disability or retirement of the executive, or in certain circumstances, of a
change in control of PLC) and expire in 2006 or upon termination of employment.
The number of SARs granted during 1996 and outstanding at December 31, 1996 was
337,500. The SARs have a base price of $34.875 per share of PLC Common Stock
(the market price on the grant date was $35.00 per share). The estimated fair
value of the SARs on the grant date was $3.0 million. This estimate was derived
using the Roll-Geske variation of the Black-Sholes option pricing model.
Assumptions used in the pricing model are as follows: expected volatility rate
of 15% (approximately equal to that of the S & P Life Insurance Index), a risk
free interest rate of 6.35%, a dividend yield rate of 1.97%, and an expected
exercise date of August 15, 2002. The expense recorded by PLC for the SARs was
$0.2 million in 1996.
NOTE N -- REINSURANCE
Protective assumes risks from and reinsures certain parts of its risks with
other insurers under yearly renewable term, coinsurance, and modified
coinsurance agreements. Yearly renewable term and coinsurance agreements are
accounted for by passing a portion of the risk to the reinsurer. Generally, the
reinsurer receives a proportionate part of the premiums less commissions and is
liable for a corresponding part of all benefit payments. Modified coinsurance is
accounted for similarly to coinsurance except that the liability for future
policy benefits is held by the original company, and settlements are made on a
net basis between the companies. While the amount retained on an individual life
will vary based upon age and mortality prospects of the risk Protective,
generally, will not carry more than $500,000 individual life insurance on a
single risk.
Protective has reinsured approximately $18.8 billion, $17.5 billion, and
$8.6 billion, in face amount of life insurance risks with other insurers
representing $113.5 million, $116.1 million, and $46.0 million of premium income
for 1996,1995, and 1994, respectively. Protective has also reinsured accident
and health risks representing $194.7 million, $217.1 million, and $126.5
million, of premium income for 1996, 1995, and 1994, respectively. In 1996 and
1995, policy and claim reserves relating to insurance ceded of $325.9 million
and $266.9 million respectively are included in reinsurance receivables. Should
any of the reinsurers be unable to meet its obligation at the time of the claim,
obligation to pay such claim would remain with Protective. At December 31, 1996
and 1995, Protective had paid $6.7 million and $4.1 million, respectively, of
ceded benefits which are recoverable from reinsurers.
During 1995 Protective entered into a reinsurance agreement whereby most of
Protective's new credit insurance sales are being ceded to a reinsurer. Included
in the preceding paragraph are credit life and credit accident and health
insurance premiums of $47.7 million and $55.3 million respectively, and reserves
totaling $135.8 million which were ceded during 1996. Also included are credit
life and credit accident and health insurance premiums of $68.2 million and
$57.6 million, respectively, and reserves totaling $100.8 million which were
ceded during 1995.
F-38
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS)
NOTE O -- ESTIMATED MARKET VALUES OF FINANCIAL INSTRUMENTS
The carrying amount and estimated market values of Protective's financial
instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
ESTIMATED ESTIMATED
CARRYING MARKET CARRYING MARKET
AMOUNT VALUES AMOUNT VALUES
------------- ------------- ------------- -------------
Assets (see Notes A and C):
Investments:
Fixed maturities................................... $ 4,662,997 $ 4,662,997 $ 3,891,932 $ 3,891,932
Equity securities.................................. 35,250 35,250 38,711 38,711
Mortgage loans on real estate...................... 1,503,781 1,581,694 1,835,057 2,001,100
Short-term investments............................. 101,215 101,215 46,891 46,891
Cash................................................. 114,384 114,384 6,198 6,198
Other (see Note A):
Futures contracts.................................. (1,708) (633)
Interest rate swaps................................ (679) 1,299
</TABLE>
F-39
<PAGE>
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
COL. A COL. B COL. C COL. D COL. E COL. F COL. G
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
GIC AND
FUTURE ANNUITY
DEFERRED POLICY DEPOSITS PREMIUMS REALIZED
POLICY BENEFITS AND OTHER AND NET INVESTMENT
ACQUISITION AND UNEARNED POLICYHOLDERS' POLICY INVESTMENT GAINS
SEGMENT COSTS COSTS PREMIUMS FUNDS FEES INCOME (1) (LOSSES)
- -------------------------------- ----------- ---------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1996:
Acquisitions.................. $ 156,172 $1,117,159 $ 1,087 $ 251,450 $ 106,543 $ 106,015 $ 0
Financial Institutions........ 32,040 119,242 253,154 1,880 73,422 13,898 0
Group......................... 27,944 119,010 2,572 83,632 156,530 16,249 0
Guaranteed Investment
Contracts................... 1,164 149,755 0 2,474,728 0 214,369 (7,963)
Individual Life............... 220,232 793,370 685 15,577 116,710 48,442 3,098
Investment Products........... 50,637 149,743 0 1,120,557 8,189 98,719 3,858
Corporate and Other........... 12 170 55 192 656 1,089 0
Unallocated Realized
Investment Gains (Losses)... 0 0 0 0 0 0 6,517
----------- ---------- ----------- ------------- ----------- ----------- -----------
TOTAL....................... $ 488,201 $2,448,449 $ 257,553 $ 3,948,016 $ 462,050 $ 498,781 $ 5,510
----------- ---------- ----------- ------------- ----------- ----------- -----------
----------- ---------- ----------- ------------- ----------- ----------- -----------
Year Ended December 31, 1995:
Acquisitions.................. $ 123,889 $ 851,994 $ 590 $ 250,550 $ 98,501 $ 95,018 $ 0
Financial Institutions........ 36,283 84,162 189,973 1,495 65,669 9,276 0
Group......................... 24,974 123,279 2,806 85,925 142,483 14,329 0
Guaranteed Investment
Contracts................... 993 68,704 0 2,451,693 0 203,376 (3,908)
Individual Life............... 186,496 672,569 336 14,709 99,018 40,237 0
Investment Products........... 37,534 127,104 0 1,061,507 4,566 95,661 4,938
Corporate and Other........... 14 342 62 263 1,445 536 0
Unallocated Realized
Investment Gains (Losses)... 0 0 0 0 0 0 921
----------- ---------- ----------- ------------- ----------- ----------- -----------
TOTAL....................... $ 410,183 $1,928,154 $ 193,767 $ 3,866,142 $ 411,682 $ 458,433 $ 1,951
----------- ---------- ----------- ------------- ----------- ----------- -----------
----------- ---------- ----------- ------------- ----------- ----------- -----------
Year Ended December 31, 1994:
Acquisitions.................. $ 110,203 $ 856,889 $ 381 $ 266,828 $ 86,376 $ 84,350 $ 532
Financial Institutions........ 68,060 43,198 99,798 2,758 98,027 9,451
Group......................... 22,685 116,324 2,905 84,689 131,096 14,903
Guaranteed Investment
Contracts................... 996 0 0 2,281,674 0 181,212 3,000
Individual Life............... 162,186 571,070 320 13,713 84,925 37,986
Investment Products........... 70,053 102,705 0 1,027,527 1,635 81,062 (2,500)
Corporate and Other........... 17 4,109 75 263 713 (31)
Unallocated Realized
Investment Gains (Losses)... 0 0 0 0 0 0 5,266
----------- ---------- ----------- ------------- ----------- ----------- -----------
TOTAL....................... $ 434,200 $1,694,295 $ 103,479 $ 3,677,452 $ 402,772 $ 408,933 $ 6,298
----------- ---------- ----------- ------------- ----------- ----------- -----------
----------- ---------- ----------- ------------- ----------- ----------- -----------
<CAPTION>
- --------------------------------
<S> <C> <C> <C>
COL. A COL. H COL. I COL. J
- --------------------------------
AMORTIZATION
BENEFITS OF DEFERRED
AND POLICY OTHER
SETTLEMENT ACQUISITION OPERATING
SEGMENT EXPENSES COSTS EXPENSES (1)
- -------------------------------- ----------- ------------- ------------
<S> <C> <C> <C>
Year Ended December 31, 1996:
Acquisitions.................. $ 118,181 $ 17,162 $ 24,292
Financial Institutions........ 42,781 24,900 10,673
Group......................... 125,797 5,326 43,027
Guaranteed Investment
Contracts................... 169,927 509 3,840
Individual Life............... 96,404 28,393 28,611
Investment Products........... 73,093 14,710 13,197
Corporate and Other........... 710 1 4,508
Unallocated Realized
Investment Gains (Losses)... 0 0 0
----------- ------------- ------------
TOTAL....................... $ 626,893 $ 91,001 $ 128,148
----------- ------------- ------------
----------- ------------- ------------
Year Ended December 31, 1995:
Acquisitions.................. $ 100,016 $ 20,601 $ 22,551
Financial Institutions........ 24,020 26,809 14,229
Group......................... 109,447 3,052 37,657
Guaranteed Investment
Contracts................... 165,963 386 4,140
Individual Life............... 80,067 20,403 22,748
Investment Products........... 72,111 11,446 10,494
Corporate and Other........... 1,476 3 8,069
Unallocated Realized
Investment Gains (Losses)... 0 0 0
----------- ------------- ------------
TOTAL....................... $ 553,100 $ 82,700 $ 119,888
----------- ------------- ------------
----------- ------------- ------------
Year Ended December 31, 1994:
Acquisitions.................. $ 97,649 $ 14,460 $ 21,431
Financial Institutions........ 46,360 36,592 16,984
Group......................... 98,930 2,724 37,059
Guaranteed Investment
Contracts................... 147,383 892 4,004
Individual Life............... 67,451 18,771 20,736
Investment Products........... 58,424 14,647 7,801
Corporate and Other........... 913 3 11,188
Unallocated Realized
Investment Gains (Losses)... 0 0 0
----------- ------------- ------------
TOTAL....................... $ 517,110 $ 88,089 $ 119,203
----------- ------------- ------------
----------- ------------- ------------
</TABLE>
- ------------------------
(1) Allocations of Net Investment Income and Other Operating Expenses are based
on a number of assumptions and estimates and results would change if
different methods were applied.
F-40
<PAGE>
SCHEDULE IV -- REINSURANCE
PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COL. A COL. B COL. C COL. D COL. E COL. F
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996:
Life insurance in force......... $53,052,020 $18,840,221 $16,275,386 $50,487,185 32.2%
----------- ----------- ----------- ----------- ---
----------- ----------- ----------- ----------- ---
Premiums and policy fees:
Life insurance.................. $ 272,331 $ 113,487 $ 129,717 $ 288,561 45.0%
Accident and health insurance... 338,709 194,687 29,467 173,489 17.0%
----------- ----------- ----------- -----------
TOTAL........................... $ 611,040 $ 308,174 $ 159,184 $ 462,050
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Year Ended December 31, 1995:
Life insurance in force......... $50,346,719 $17,524,366 $11,537,144 $44,359,497 26.0%
----------- ----------- ----------- ----------- ---
----------- ----------- ----------- ----------- ---
Premiums and policy fees:
Life insurance.................. $ 308,422 $ 116,091 $ 66,565 $ 258,896 25.7%
Accident/health insurance....... 356,285 217,082 13,583 152,786 8.9%
----------- ----------- ----------- -----------
TOTAL........................... $ 664,707 $ 333,173 $ 80,148 $ 411,682
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Year Ended December 31, 1994:
Life insurance in force......... $40,909,454 $ 8,639,272 $ 8,968,166 $41,238,348 21.7%
----------- ----------- ----------- ----------- ---
----------- ----------- ----------- ----------- ---
Premiums and policy fees:
Life insurance.................. $ 256,840 $ 46,029 $ 31,032 $ 241,843 12.8%
Accident/health insurance....... 283,884 126,546 3,591 160,929 2.2%
----------- ----------- ----------- -----------
TOTAL........................... $ 540,724 $ 172,575 $ 34,623 $ 402,772
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
F-41
<PAGE>
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
All required financial statements are included in Part A and Part B of this
Registration Statement.
(b) Exhibits:
<TABLE>
<C> <S> <C>
1. Resolution of the Board of Directors of Protective Life Insurance
Company authorizing establishment of the Protective Life Variable
Annuity Separate Account**
2. Not applicable
3. (a) Form of Underwriting Agreement among Protective Life
Insurance Company, Investment Distributors, Inc. and the
Protective Life Variable Annuity Separate Account**
(b) Form of Distribution Agreement between Investment
Distributors, Inc. and broker/ dealers**
4. (a) Form of Individual Flexible Premium Deferred Variable and
Fixed Annuity Contract*
(b) Endorsement**
(c) Qualified Retirement Plan Endorsement**
(d) Individual Retirement Annuity Endorsement**
(e) Tax Sheltered Annuity Endorsement**
(f) ERISA Tax-Sheltered Annuity Endorsement**
(g) Section 457 Deferred Compensation Plan Endorsement**
(h) Death Benefit Endorsement (96)***
(i) Tax Sheltered Annuity Endorsement (96)***
5. Form of Contract Applications**
6. (a) Charter of Protective Life Insurance Company.*
(b) By-Laws of Protective Life Insurance Company.*
7. Not applicable
8. (a) Participation/Distribution Agreement**
(b) Participation Agreement (Oppenheimer Variable Account Funds)
(c) Participation Agreement (MFS Variable Insurance Trust)
(d) Participation Agreement (Acacia Capital Corporation)
9. Opinion and Consent of Steve M. Callaway, Esq.
10. (a) Consent of Sutherland, Asbill & Brennan, L.L.P.
(b) Consent of Coopers & Lybrand L.L.P.
11. No financial statements will be omitted from Item 23
12. Not applicable
13. Not applicable
14. Powers of Attorney
</TABLE>
- ------------------------
* Incorporated herein by reference to the initial filing of the Form N-4
Registration Statement, (File No. 33-70984) filed with the Commission on
October 28, 1993.
** Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Form N-4 Registration Statement, (File No. 33-70984) filed with the
Commission on February 23, 1994.
*** Incorporated herein by reference to Post-Effective Amendment No. 4 to the
Form N-4 Registration Statement, (File No. 33-70984) filed with the
Commission on April 8, 1996.
C-1
<PAGE>
Item 25. DIRECTORS AND OFFICERS OF DEPOSITOR.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL BUSINESS ADDRESS POSITION AND OFFICES WITH DEPOSITOR
- ----------------------------------------------- -----------------------------------------------------------------
<S> <C>
Drayton Nabers, Jr. Chairman of the Board
John D. Johns President, and Director
R. Stephen Briggs Executive Vice President, Director
Ormond L. Bentley Executive Vice President, Group, and Director
Carolyn King Senior Vice President, Investment Products Division, and Director
Deborah J. Long Senior Vice President, General Counsel, Secretary, and Director
Jim E. Massengale Executive Vice President, Acquisitions, and Director
Steven A. Schultz Senior Vice President, Financial Institutions, and Director
Wayne E. Stuenkel Senior Vice President and Chief Actuary, and Director
A.S. Williams, III Executive Vice President, Investments, Treasurer, and Director
Judy Wilson Senior Vice President, Guaranteed Investment Contracts
J. Russell Bailey, Jr. Vice President, Group
Michael B. Ballard Vice President, Individual Life Marketing
Harvey S. Benjamin Vice President, Investment Products Operations
Danny L. Bentley Senior Vice President, Group, and Director
Richard J. Bielen Senior Vice President, Investments, and Director
Marcus N. Bowen Vice President, Individual Life Insurance, Regional Development
Linda C. Cleveland Vice President, Acquisition Administration
Chris Calos Vice President, Group Sales
Jerry W. DeFoor Vice President and Controller and Chief Accounting Officer
James D. Dondero Vice President, Equity Marketing, Individual Life
Kevin M. Dunphy Vice President, Business Systems
Kenneth A. Eaise Vice President and Chief Underwriter, Individual Life
Brent E. Fritz Vice President, Individual Life Product Development
James T. Helton III Vice President and Group Actuary
Lawrence G. Merrill Vice President, Investment Products Marketing
John O'Sullivan Vice President and Actuary, Investment Products Division
Carl E. Price Vice President, Group Direct Marketing
Charles M. Prior Vice President, Investments
T. Michael Presley Vice President and Actuary, Financial Institutions
David C. Stevens Vice President, Group Operations
Carl S. Thigpen Vice President, Investments and Assistant Secretary
Charles H. Wagner Vice President, Financial Institutions
Alan E. Watson Vice President, Individual Life
Thomas W. Willingham Vice President, Individual Life Operations and Assistant
Secretary
Banks M. Wood Vice President, Sales and Marketing, Financial Institutions
</TABLE>
- ------------------------
* Unless otherwise indicated, principal business address is 2801 Highway 280
South, Birmingham, Alabama 35223.
C-2
<PAGE>
Item 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR AND
REGISTRANT
The registrant is a segregated asset account of the Company and is therefore
owned and controlled by the Company. All of the Company's outstanding voting
common stock is owned by Protective Life Corporation. Protective Life
Corporation is described more fully in the prospectus included in this
registration statement. Various companies and other entities controlled by
Protective Life Corporation may therefore be considered to be under common
control with the registrant or the Company. Such other companies and entities,
together with the identity of the owners of their common stock (where
applicable), are set forth in the following
See organization chart on following page
C-3
<PAGE>
PROTECTIVE LIFE CORPORATION
ORGANIZATIONAL CHART
as of March 19, 1997
PROTECTIVE LIFE CORPORATION
(Ultimate Controlling Person)
Delaware Corporation
TIN 95-2492236
PROTECTIVE LIFE INSURANCE COMPANY (TENNESSEE)
Parent Company Owns 100% of Stock
TIN 63-0169720
NAIC CO 68136
WISCONSIN NATIONAL LIFE INSURANCE COMPANY (WISCONSIN)
PLIC Owns 100% of Stock
TIN 39-0714280
NAIC CO 70580
PROTECTIVE LIFE INSURANCE CORPORATION OF ALABAMA (ALABAMA)
PLIC Owns 100% of Stock
TIN 63-1088714
NAIC CO 62868
EMPIRE GENERAL LIFE ASSURANCE CORPORATION (formerly, National
Old Line Insurance Company) (TENNESSEE)
PLIC Owns 100% of Stock
TIN 63-1073929
NAIC CO 94285
AMERICAN FOUNDATION LIFE INSURANCE COMPANY (ALABAMA)
PLIC Owns 100% of Voting Stock; PLC Owns 100% of
Non-Voting Preferred Stock
TIN 63-0761690
NAIC CO 88536
COMMUNITY NATIONAL ASSURANCE COMPANY (OHIO)
PLICO Owns 100% of Voting Stock
TIN 31-0628424
NAIC CO 69647
PROEQUITIES OF TEXAS, INC. (formerly Protective Assigned
Benefits Company) (TEXAS)
PLIC Owns 100% of Stock
TIN 75-2366969
CAPITAL INVESTORS LIFE INSURANCE COMPANY (ARIZONA)
PLIC Owns 100% of Stock
TIN 56-1407737
NAIC CO 62456
PROTECTIVE INVESTMENT COMPANY (MARYLAND)
PLIC Separate Account Owns 100% of Stock
TIN 52-1854793
PROTECTIVE FINANCE CORPORATION (DELAWARE)
PLIC Owns 100% of Stock
TIN 51-0372969
PROTECTIVE LIFE INSURANCE COMPANY OF KENTUCKY (KENTUCKY)
PLIC Owns 100% of Stock
TIN 61-1306729
INVESTMENT DISTRIBUTORS, INC. (TENNESSEE)
Parent Company Owns 100% of Stock
TIN 63-1100710
INVESTMENT DISTRIBUTORS ADVISORY SERVICES, INC. (TENNESSEE)
Parent Company Owns 100% of Stock
TIN 63-1100711
PES OF MARYLAND, INC. (MARYLAND)
Parent Company Owns 100% of Stock
TIN 52-1841605
PES OF OHIO, INC. (OHIO)
Parent Company Owns 100% of Stock
TIN 34-1749375
FIRST PROTECTIVE INSURANCE GROUP, INC. (ALABAMA)
Parent Company Owns 100% of Stock
TIN 63-0846761
HOTEL DEVELOPMENT COMPANY, INC. (ALABAMA)
Parent Company Owns 100% of Stock
TIN 63-0938078
PROEQUITIES, INC.
(formerly Protective Equity Services, Inc.) (ALABAMA)
Parent Company Owns 100% of Stock
TIN 63-0879387
PROTECTIVE BENEFITS COMMUNICATIONS, INC. (MISSOURI)
Parent Company Owns 100% of Stock
TIN 43-1199343
PROTECTIVE BENEFITS COMMUNICATIONS OF ALABAMA, INC. (ALABAMA)
Parent Company Owns 100% of Stock
TIN 63-1178606
PROTECTIVE BENEFITS COMMUNICATIONS OF OHIO, INC. (OHIO)
Parent Company Owns 100% of Stock
TIN 31-1474499
PROTECTIVE BENEFITS COMMUNICATIONS OF TEXAS, INC. (TEXAS)
Parent Company Owns 100% of Voting Common Stock
TIN 74-2794466
FINANCIAL PROTECTION MARKETING, INC. (formerly R.L.
Herndon & Associates, Inc. (INDIANA)
Parent Company Owns 100% of Stock
TIN 35-1349213
VOLUNTARY BENEFITS INTERNATIONAL, INC. (ALABAMA)
Parent Company Owns 100% of Stock
TIN 53-0984208
PRODUCT RESOURCE GROUP, INC. (ALABAMA)
Parent Company Owns 100% of Stock
TIN 63-1087298
SPECIALTY ASSET MANAGEMENT CORPORATION (DELAWARE)
Parent Company Owns 100% of Stock
TIN 52-1836315
PROTECTIVE ASSET MANAGEMENT, L.L.C.
(Delaware Limited Liability Company)
SAMCO has 60% Interest
TIN (applied for)
PROTECTIVE LLC HOLDING, INC. (DELAWARE)
Parent Company Owns 100% of Stock
TIN 63-1114345
PLC CAPITAL L.L.C.
(Delaware Limited Liability Company)
Class A Interest Owned by PLC; Class B Interest Owned
by Protective LLC Holding, Inc.
TIN 63-1114346
LIPPO PROTECTIVE LIFE INSURANCE COMPANY LIMITED (HONG KONG)
Parent Company Owns 50% of Stock
NATIONAL HEALTH CARE SYSTEMS OF FLORIDA, INC. (FLORIDA)
Parent Company Owns 100% of Stock
TIN 59-1597007
DENTICARE OF ARKANSAS, INC (ARKANSAS)
National Health Care Systems of Florida, Inc Owns 100% of Stock
TIN 73-1274680
DENTICARE OF OKLAHOMA, INC. (OKLAHOMA)
National Health Care Systems of Florida, Inc. Owns 100% of Stock
TIN 73-1153844
DENTICARE OF ALABAMA, INC. (ALABAMA)
National Health Care Systems of Florida, Inc. Owns 100% of Stock
TIN 59-3063687
DENTICARE, INC. (FLORIDA)
National Health Care Systems of Florida, Inc. Owns 100% of Stock
TIN 59-1652450
DENTICARE, INC. (KENTUCKY)
National Health Care Systems of Florida, Inc. Owns 100% of Stock
TIN 59-2228719
WISCONSIN DENTAL SERVICE PLAN, INC. (WISCONSIN)
National Health Care Systems of Florida, Inc. Owns 100% of Stock
TIN
PROTECTIVE REAL ESTATE HOLDINGS, INC. (DELAWARE)
Parent Company Owns 100% of Stock
TIN 52-1985171
QUICK QUOTE INSURANCE AGENCY, INC. (NEVADA)
PLC Owns 34.32% of Stock (Includes Voting Convertible
Preferred & Common)
TIN 88-0340083
C-4
<PAGE>
Item 27. NUMBER OF CONTRACTOWNERS.
As of the date of this filing, there were 15,508 contract owners of
individual flexible premium deferred variable and fixed annuity contracts
offered by Registrant.
Item 28. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article XI of the By-laws of Protective Life provides, in substance, that
any of Protective Life's directors and officers, who is a party or is threatened
to be made a party to any action, suit or proceeding, other than an action by or
in the right of Protective Life, by reason of the fact that he is or was an
officer or director, shall be indemnified by Protective Life against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such claim,
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of Protective
Life and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful. If the claim, action or suit is or
was by or in the right of Protective Life to procure a judgment in its favor,
such person shall be indemnified by Protective Life against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with the
defense or settlement of such action or suit if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
Protective Life, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to Protective
Life unless and only to the extent that the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which such court shall
deem proper. To the extent that a director or officer has been successful on the
merits or otherwise in defense of any such action, suit or proceeding, or in
defense of any claim, issue or matter therein, he shall be indemnified by
Protective Life against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith, not withstanding that he has
not been successful on any other claim issue or matter in any such action, suit
or proceeding. Unless ordered by a court, indemnification shall be made by
Protective Life only as authorized in the specific case upon a determination
that indemnification of the officer or director is proper in the circumstances
because he has met the applicable standard of conduct. Such determination shall
be made (a) by the Board of Directors by a majority vote of a quorum consisting
of directors who were not parties to, or who have been successful on the merits
or otherwise with respect to, such claim action, suit or proceeding, or (b) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion or (c) by the shareholders.
In addition, the executive officers and directors are insured by PLC's
Directors' and Officers' Liability Insurance Policy including Company
Reimbursement and are indemnified by a written contract with PLC which
supplements such coverage.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
C-5
<PAGE>
Item 29. PRINCIPAL UNDERWRITER.
(a)Investment Distributors, Inc. ("IDI") is the principal underwriter of the
Contracts as defined in the Investment Company Act of 1940. IDI is also
principal underwriter for the Fund and for the Protective Life Variable
Separate Account.
(b)The following information is furnished with respect to the officers and
directors of Investment Distributors, Inc.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION AND OFFICES
BUSINESS ADDRESS* POSITION AND OFFICES WITH REGISTRANT
- -------------------------------- ----------------------- ---------------------------------------
<S> <C> <C>
Briggs, Robert Stephen President, Chief Executive Vice President, Director
Executive Officer and
Director
Ballard, Michael B. Director Vice President, Individual Life
Marketing
Merrill, Lawrence G. Director Vice President, Investment Products
Marketing
King, Carolyn Secretary, Chief Senior Vice President, Investment
Compliance Officer Products
Schmitt, David Financial Operations None
Principal
O'Sullivan, John Director Vice President and Actuary, Investment
Products
Callaway, Steve M. Director None
</TABLE>
- ------------------------
* Unless otherwise indicated, principal business address is 2801 Highway 280
South, Birmingham, Alabama, 35223.
Item 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts and records required to be maintained by Section 31(c) of the
Investment Company Act of 1940 and the rules thereunder are maintained by
Protective Life Insurance Company at 2801 Highway 280 South, Birmingham, Alabama
35223.
Item 31. MANAGEMENT SERVICES.
All management contracts are discussed in Part A or Part B.
Item 32. UNDERTAKINGS.
(a)Registrant hereby undertakes to file a post-effective amendment to this
registration statement as frequently as is necessary to ensure that the
audited financial statements in the registration statement are never more
than sixteen (16) months old for so long as payments under the variable
annuity contracts may be accepted.
(b)Registrant hereby undertakes to include either (1) as part of any
application to purchase a contract offered by the Prospectus, a space
that an applicant can check to request a Statement of Additional
Information, or (2) a postcard or similar written communication affixed
to or included in the Prospectus that the applicant can remove to send
for a Statement of Additional Information; and
(c)Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statement required to be made available
under this Form promptly upon written or oral request.
(d)The Company represents that in connection with its offering of the
Contracts as funding vehicles for retirement plans meeting the
requirements of Section 403(b) of the Internal Revenue Code of 1986, it
is relying on a no-action letter dated November 28, 1988, to the
C-6
<PAGE>
American Council of Life Insurance (Ref. No. IP-6-88) regarding Sections
22(e), 27(c)(1), and 27(d) of the Investment Company Act of 1940, and
that paragraphs numbered (1) through (4) of that letter will be complied
with.
(e)Protective Life hereby represents that the fees and charges deducted
under the Contract, in the aggregate, are reasonable in relation to the
services rendered, the expenses expected to be incurred, and the risks
assumed by Protective Life.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, Protective Variable Annuity
Separate Account, certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this Registration Statement and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Birmingham, State of Alabama on April
29, 1997.
PROTECTIVE VARIABLE ANNUITY
SEPARATE ACCOUNT
By: /s/ JOHN D. JOHNS
--------------------------------------
John D. Johns, President
Protective Life Insurance Company
PROTECTIVE LIFE INSURANCE COMPANY
By: /s/ JOHN D. JOHNS
--------------------------------------
John D. Johns, President
Protective Life Insurance Company
Pursuant to the requirements of the Securities Act of 1933, the 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> <C>
(i) Principal Executive Officer
/s/ DRAYTON NABERS, JR.
------------------------------------- Chairman of the Board April 29, 1997
Drayton Nabers, Jr.
(ii) Principal Financial Officer
/s/ JOHN D. JOHNS
------------------------------------- President April 29, 1997
John D. Johns
(iii) Principal Accounting Officer
/s/ JERRY W. DEFOOR
------------------------------------- Vice President and Controller, April 29, 1997
Jerry W. DeFoor and Chief Accounting Officer
(iv) Board of Directors:
/s/ DRAYTON NABERS, JR.
------------------------------------- Director April 29, 1997
Drayton Nabers, Jr.
/s/ JOHN D. JOHNS
------------------------------------- Director April 29, 1997
John D. Johns
*
------------------------------------- Director April 29, 1997
Ormond L. Bentley
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
----------------------------------------------- --------------------------------- -----------------
<S> <C> <C> <C>
*
------------------------------------- Director April 29, 1997
R. Stephen Briggs
*
------------------------------------- Director April 29, 1997
Jim E. Massengale
*
------------------------------------- Director April 29, 1997
Wayne E. Stuenkel
*
------------------------------------- Director April 29, 1997
A. S. Williams III
*
------------------------------------- Director April 29, 1997
Steven A. Schultz
*
------------------------------------- Director April 29, 1997
Deborah A. Long
*
------------------------------------- Director April 29, 1997
Carolyn King
*
------------------------------------- Director April 29, 1997
Richard J. Bielen
*
------------------------------------- Director April 29, 1997
Danny L. Bentley
*By: /s/ STEVE M. CALLAWAY
-------------------------------------
Steve M. Callaway
ATTORNEY-IN-FACT
</TABLE>
<PAGE>
FILE NO. 33-704984
FILE NO. 811-8108
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
PROTECTIVE LIFE INSURANCE COMPANY
EXHIBITS
TO
FORM N-4
POST-EFFECTIVE AMENDMENT NO. 5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- --- ------------------------------------------------------------
<C> <S> <C>
1. Resolution of the Board of Directors of Protective Life Insurance
Company authorizing establishment of the Protective Life Variable
Annuity Separate Account**
2. Not applicable
3. (a) Form of Underwriting Agreement among Protective Life
Insurance Company, Investment Distributors, Inc. and the
Protective Life Variable Annuity Separate Account**
(b) Form of Distribution Agreement between Investment
Distributors, Inc. and broker/dealers**
4. (a) Form of Individual Flexible Premium Deferred Variable and
Fixed Annuity Contract*
(b) Endorsement**
(c) Qualified Retirement Plan Endorsement**
(d) Individual Retirement Annuity Endorsement**
(e) Tax Sheltered Annuity Endorsement**
(f) ERISA Tax-Sheltered Annuity Endorsement**
(g) Section 457 Deferred Compensation Plan Endorsement**
(h) Death Benefit Endorsement (96)***
(i) Tax Sheltered Annuity Endorsement (96)***
5. Form of Contract Applications**
6. (a) Charter of Protective Life Insurance Company.*
(b) By-Laws of Protective Life Insurance Company.*
7. Not applicable
8. (a) Participation/Distribution Agreement**
(b) Participation Agreement (Oppenheimer Variable Account Funds)
(c) Participation Agreement (MFS Variable Insurance Trust)
(d) Participation Agreement (Acacia Capital Corporation)
9. Opinion and Consent of Steve M. Callaway, Esq.
10. (a) Consent of Sutherland, Asbill & Brennan, L.L.P.
(b) Consent of Coopers & Lybrand L.L.P.
11. No financial statements will be omitted from Item 23
12. Not applicable
13. Not applicable
14. Powers of Attorney
</TABLE>
- ------------------------
* Incorporated herein by reference to the initial filing of the Form N-4
Registration Statement, (File No. 33-70984) filed with the Commission on
October 28, 1993.
** Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Form N-4 Registration Statement, (File No. 33-70984) filed with the
Commission on February 23, 1994.
*** Incorporated herein by reference to Post-Effective Amendment No. 4 to the
Form N-4 Registration Statement, (File No. 33-70984) filed with the
Commission on April 8, 1996.
<PAGE>
PARTICIPATION AGREEMENT
By and Among
OPPENHEIMER VARIABLE ACCOUNT FUNDS,
PROTECTIVE LIFE INSURANCE COMPANY
and
OPPENHEIMERFUNDS, INC.
THIS AGREEMENT, made and entered into as of the 1st day of
May, 1997 by and among Protective Life Insurance Company, a Tennessee
corporation (hereinafter the "Company") on its own behalf and on behalf of each
separate account of the Company named in Schedule 1 to this Agreement, as may be
amended from time to time by mutual consent (each account referred to as the
"Account"), Oppenheimer Variable Account Funds, an open-end diversified
management investment company organized under the laws of the State of
Massachusetts (hereinafter the "Fund") and OppenheimerFunds, Inc., a Colorado
Corporation (hereinafter the "Adviser").
WHEREAS, the Fund engages in business as an open-end
management investment company and was established for the purpose of serving as
the investment vehicle for separate accounts established for variable life
insurance policies and variable annuity contracts to be offered by insurance
companies (hereinafter "Participating Insurance Companies"); and
WHEREAS, beneficial interests in the Fund are divided into
several series of shares, each representing the interest in a particular managed
portfolio (collectively the "Portfolios") of securities and other assets (the
Portfolios covered by this Agreement are specified in Schedule 2 attached hereto
as may be amended from time to time by mutual consent); and
WHEREAS, the Fund has obtained an order from the
Securities and Exchange Commission (alternatively referred to as the "SEC" or
the "Commission"), dated July 16, 1986 (File No. 812-6234), granting
Participating Insurance Companies and variable annuity and variable life
insurance
<PAGE>
separate accounts exemptions from the provisions of sections 9(a), 13(a), 15(a),
and 15(b) of the Investment Company Act of 1940, as amended, (hereinafter the
"1940 Act") and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent
necessary to permit shares of the Fund to be sold to and held by variable
annuity and variable life insurance separate accounts of both affiliated and
unaffiliated life insurance companies (hereinafter the "Mixed and Shared Funding
Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management
investment company under the 1940 Act and its shares are registered under the
Securities Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the Adviser is registered as an investment
adviser under the Investment Advisers Act of 1940 and serves as the investment
adviser to the Fund;
WHEREAS, the Company has registered or will register
certain variable annuity and/or life insurance contracts (hereinafter
"Contracts") under the 1933 Act (unless an exemption from registration is
available); and
WHEREAS, the Account is a duly organized, validly existing
segregated asset account, established by resolution of the Board of Directors of
the Company under the insurance laws of the State of Tennessee, to set aside and
invest assets attributable to the Contracts. (The Contract(s) and the
Account(s) covered by the Agreement are specified in Schedule 2 attached hereto,
as may be amended from time to time by mutual consent); and
WHEREAS, the Company has registered the Account as a unit
investment trust under the 1940 Act (unless an exemption from registration is
available); and
WHEREAS, to the extent permitted by applicable insurance
laws and regulations, the Company intends to purchase shares in the Portfolios
named in Schedule 2 on behalf of the Account to fund the Contracts named in
Schedule 3 and the Fund is authorized to sell such shares to unit investment
trusts such as the Account at net asset value;
-2-
<PAGE>
NOW, THEREFORE, in consideration of their mutual promises,
the Fund, the Adviser and the Company agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1. The Fund agrees to sell to the Company those shares
of the Fund which the Company orders on behalf of the Account, executing such
orders on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the order for the shares of the Fund. For purposes
of this Section 1.1, the Company shall be the designee of the Fund for receipt
of such orders from each Account and receipt by such designee shall constitute
receipt by the Fund; provided that the Fund receives written (or facsimile)
notice of such order on the next following Business Day by no later than 10:00
A.M. New York time; however, the Company undertakes to use its best efforts to
provide such notice to the Fund by no later than 9:30 A.M. New York time.
"Business Day" shall mean any day on which the New York Stock Exchange is open
for trading and on which the Fund calculates its net asset value pursuant to the
rules of the SEC.
1.2. The Company shall pay for Fund shares on the next
Business Day after an order to purchase Fund shares is made in accordance with
Section 1.1 hereof. Payment shall be in federal funds transmitted by wire
pursuant to instructions of the Fund's Treasurer or by a credit for any shares
redeemed.
1.3. The Fund agrees to make an indefinite number of Fund
shares available for purchase at the applicable net asset value per share by the
Company for their separate Accounts listed in Schedule 2, on those days on which
the Fund calculates its net asset value pursuant to rules of the SEC; provided,
however, that the Board of Trustees of the Fund (hereinafter the "Trustees") may
refuse to sell shares of any Portfolio to any person, or suspend or terminate
the offering of shares of any Portfolio if such action is required by law or by
regulatory authorities having jurisdiction or is, in the sole discretion of the
Trustees, acting in good faith and in light of their fiduciary duties under
federal and any applicable state laws, in the best interests of the shareholders
of any Portfolio.
-3-
<PAGE>
1.4. The Fund agrees that shares of the Fund will be sold
only to Participating Insurance Companies and their separate accounts, qualified
pension and retirement plans or such other persons as are permitted under
applicable provisions of the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code"), and regulations promulgated thereunder, the sale of
which will not impair the tax treatment currently afforded the contracts.
1.5. The Fund shall not sell Fund shares to any insurance
company or separate account unless a contractual obligation is in effect with
respect to such sales to abide by the conditions of the Mixed and Shared Funding
Exemptive Order that are addressed in Section 3.4 and Article VII of this
Agreement.
1.6. The Fund agrees to redeem for cash, upon the
Company's request, any full or fractional shares of the Fund held by the
Company, executing such requests on a daily basis at the net asset value next
computed after receipt by the Fund or its designee of the request for
redemption. For purposes of this Section 1.6, the Company shall be the designee
of the Fund for receipt of requests for redemption and receipt by such designee
shall constitute receipt by the Fund; provided that the Fund receives written
(or facsimile) notice of such request for redemption on the next following
Business Day by no later than 10:00 A.M. New York time; however the Company
undertakes to use its best efforts to provide such notice to the Fund by no
later than 9:30 A.M. New York time.
1.7. The Fund shall pay for the Fund shares that are
redeemed within the time period specified in the Fund's prospectus or statement
of additional information, provided, however, that if the Fund does not pay for
the Fund shares that are redeemed on the next Business Day after a request to
redeem shares is made, then the Fund shall apply any such delay in redemptions
uniformly to all holders of shares of that Portfolio. Payment shall be in
federal funds transmitted by wire pursuant to the instructions of the Company or
by a credit toward any shares purchased on the Business Day on which the
redemption payment is made.
-4-
<PAGE>
1.8. The Company agrees to purchase and redeem the shares
of the Portfolios named in Schedule 2 offered by the then current prospectus and
statement of additional information of the Fund in accordance with the
provisions of such prospectus and statement of additional information. The
Company shall not permit any person other than a Contract owner to give
instructions to the Company which would require the Company to redeem or
exchange shares of the Fund.
1.9. Issuance and transfer of the Funds' shares will be by
book entry only. Stock certificates will not be issued to the Company or the
Account. Purchase and redemption orders for Fund shares will be recorded in an
appropriate title for each Account or the appropriate subaccount of each
Account.
1.10. The Fund shall furnish notice as soon as
reasonably practicable to the Company of any income, dividends or capital gain
distributions payable on the Portfolio's shares. The Company hereby elects to
receive all such dividends and distributions as are payable on the Portfolio
shares in additional shares of that Portfolio. The Company reserves the right
to revoke this election on 10 business days notice and thereafter to receive all
such dividends and distributions in cash. The Fund shall notify the Company of
the number of shares so issued as payment of such dividends and distributions.
1.11. The Fund shall make the net asset value per
share for each Portfolio available to the Company on a daily basis as soon as
reasonably practical after the net asset value per share is calculated and shall
use its best efforts to make such net asset value per share available by 6:30
p.m. New York time. If the Fund provides materially incorrect share net asset
value information, the Fund shall make an adjustment to the number of shares
purchased or redeemed for the Accounts to reflect the correct net asset value
per share. Any material error in the calculation or reporting of net asset value
per share, dividend or capital gains information shall be reported promptly upon
discovery to the Company.
-5-
<PAGE>
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the
Contracts are or will be registered under the 1933 Act (unless an exemption from
registration is available) and, that the Contracts will be issued and sold in
compliance in all material respects with all applicable federal and state laws
and that the sale of the Contracts shall comply in all material respects with
state insurance suitability requirements. The Company further represents and
warrants that it is an insurance company duly organized and in good standing
under applicable state law and that it has registered the Account as a unit
investment trust in accordance with the provisions of the 1940 Act to serve as a
segregated investment account for the Contracts, and that it will maintain such
registration for so long as any Contracts are outstanding or until registration
is no longer required under federal and state securities laws. The Company
shall amend the registration statement under the 1933 Act for the Contracts and
the registration statement under the 1940 Act for the Account from time to time
as required in order to effect the continuous offering of the Contracts or as
may otherwise be required by applicable law. The Company shall register and
qualify the Contracts for sale in accordance with the securities laws of the
various states only if and to the extent deemed necessary by the Company.
2.2. Subject to Article VI hereof, the Company represents
that it believes that the Contracts are currently and at the time of issuance
will be treated as life insurance or annuity contracts under applicable
provisions of the Internal Revenue Code and that it will make every effort to
maintain such treatment and that it will notify the Fund and the Adviser
immediately upon having a reasonable basis for believing that the Contracts have
ceased to be so treated or that they might not be so treated in the future.
2.3. The Fund represents and warrants that Fund shares
sold pursuant to this Agreement shall be registered under the 1933 Act and duly
authorized for issuance in accordance with applicable law and that the Fund is
and shall take all reasonable steps to remain, registered under the 1940
-6-
<PAGE>
Act for as long as the Fund shares are sold. The Fund shall amend the
registration statement for its shares under the 1933 Act and the 1940 Act from
time to time as required in order to effect the continuous offering of its
shares. The Fund shall register and qualify the shares for sale in accordance
with the laws of the various states only if and to the extent deemed advisable
by the Fund.
2.4. The Fund represents that it is currently qualified as
a Regulated Investment Company under Subchapter M of the Internal Revenue Code
and that it will make every effort to maintain such qualification (under
Subchapter M or any successor or similar provision) and that it will notify the
Company immediately upon having a reasonable basis for believing that it has
ceased to so qualify or that it might not so qualify in the future.
2.5. If the Fund considers the adoption of one or more
plans under Rule 12b-1 under the 1940 Act to finance distribution expenses (a
"12b-1 Plan"), the Company agrees to provide the Trustees any information as may
be reasonably necessary for the Trustees to determine whether to adopt a 12b-1
Plan or Plans. The Fund shall notify the Company upon commencing to finance
distribution expenses pursuant to Rule 12b-1.
2.6. The Fund represents that it is lawfully organized and
validly existing under the laws of the Commonwealth of Massachusetts and that it
does and intends to continue to comply with applicable provisions of the 1940
Act.
2.7. The Adviser represents and warrants that it is and
intends to remain duly registered under all applicable federal and state
securities laws and that it shall perform its obligations for the Fund in
compliance with any applicable state and federal securities laws.
2.8. The Fund and Adviser each represent and warrant that
all of its respective Directors, Trustees, officers, employees, investment
advisers, and transfer agent of the Fund are and shall continue to be at all
times covered by a blanket fidelity bond (which may, at the Fund's election, be
in the form of a joint insured bond) or similar coverage for the benefit of the
Fund in an amount not less than the
-7-
<PAGE>
minimal coverage as required currently by Section 17(g) and Rule 17g-1 of the
1940 Act or related provisions as may be promulgated from time to time. The
aforesaid Bond shall include coverage for larceny and embezzlement and shall be
issued by a reputable insurance company.
2.9. The Company represents and warrants that all of its
directors, officers, employees, agents, investment advisers, and other
individuals and entities dealing with the money and/or securities of the Fund
are covered by a blanket fidelity bond or similar coverage in an amount not less
than $3 million. The aforesaid includes coverage for larceny and embezzlement
and is issued by a reputable insurance company. The Company agrees that any
amount received under such bond in connection with claims that derive from
arrangements described in this Agreement will be paid by the Company for the
benefit of the Fund. The Company agrees to make all reasonable efforts to see
that this bond or another bond containing these provisions is always in effect,
and agrees to notify the Fund and the Adviser in the event that such coverage no
longer applies.
ARTICLE III. PROSPECTUS AND PROXY STATEMENTS; VOTING
3.1. The Fund or the Adviser, at its expense, shall
provide a typewritten copy of the Fund's current prospectus and other assistance
as is reasonably necessary in order for the Company once each year (or more
frequently if the prospectus for the Fund is supplemented or amended) to have
the prospectus for the Contracts and the Fund's prospectus printed together in
one document. Upon request, the Adviser shall be permitted to review and
approve the typeset form of the Fund's prospectus prior to such printing.
3.2. The Fund's prospectus shall state that the statement
of additional information for the Fund is available from the Fund (or its
transfer agent) and shall print and provide such Statement to the Company and to
any owner of a Contract or prospective owner who requests such Statement at the
Fund's expense.
-8-
<PAGE>
3.3. The Fund or the Adviser, at its expense, shall
provide the Company with a typewritten copy of the Fund's communications to
shareholders for printing and distributing to Contract owners and with copies of
the Fund's proxy material and semi-annual and annual reports to shareholders (or
may, at the Fund or the Adviser's option, reimburse the Company for the pro rata
cost of printing such reports) in such quantities as the Company shall
reasonably require, for distributing to Contract owners at the Company's
expense. Upon request, the Adviser shall be permitted to review and approve the
typeset form of such proxy material, communications and shareholder reports
prior to such printing.
3.4. If and to the extent required by law (or the Mixed
and Shared Funding Exemptive Order) the Company shall:
(i) solicit voting instructions from Contract
owners;
(ii) vote the Fund shares in accordance with
instructions received from Contract owners
or participants; and
(iii) vote Fund shares for which no instructions
have been received in the same proportion
as Fund shares of such Portfolio for which
instructions have been received from the
Company's Contract owners;
so long as and to the extent that the SEC continues to interpret the 1940 Act to
require pass-through voting privileges for variable Contract owners. The
Company reserves the right to vote Fund shares held in any Account in its own
right, to the extent permitted by law.
3.5. The Fund will comply with all applicable provisions
of the 1940 Act requiring voting by shareholders.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be
furnished, to the Fund or its designee, each piece of sales literature or other
promotional material in which the Fund or the Adviser is
-9-
<PAGE>
named, at least fifteen business days prior to its use. No such material shall
be used if the Fund or its designee reasonably objects in writing to such use
within fifteen business days after receipt of such material.
4.2. The Company shall not give any information or make
any representations or statements on behalf of the Fund or the Adviser
concerning either of them in connection with the sale of the Contracts other
than the information or representations contained in the registration statement
or prospectus for the Fund shares, as such registration statement and prospectus
may be amended or supplemented from time to time, or in reports or proxy
statements for the Fund, or in sales literature or other promotional material
approved by the Fund or its designee, except with the permission of the Fund.
The Fund agrees to respond to any request for approval in a prompt and timely
basis.
4.3. The Adviser or Fund shall furnish or cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material which the Adviser or Fund prepared or caused to be
prepared, in which the Company or its separate account is named, at least
fifteen business days prior to its use. No such material shall be used if the
Company or its designee reasonably objects in writing to such use within fifteen
business days after receipt of such material.
4.4. The Adviser and the Fund shall not give any
information or make any representations on behalf of the Company or concerning
the Company, each Account, or the Contracts, other than information or
representations contained in (i) the registration statement or prospectus for
the Contracts, as such registration statement and prospectus may be amended or
supplemented from time to time, (ii) reports for the Account which are in the
public domain or approved by the Company for distribution to Contract owners or
participants, or (iii) sales literature or other promotional material approved
by the Company or its designee, except with the permission of the Company. The
Company agrees to respond to any request for approval on a prompt and timely
basis.
4.5. The Fund will provide to the Company at least one
complete copy of all registration statements, prospectuses, statements of
additional information, reports, proxy statements, sales
-10-
<PAGE>
literature and other promotional materials in which the Company or its separate
account is named, applications for exemptions, requests for no-action letters,
and all amendments to any of the above, that relate to any Portfolio or its
shares, contemporaneously with the filing of such document with the SEC or other
regulatory authorities.
4.6. The Company will provide to the Fund at least one
complete copy of all registration statements, prospectuses, statements of
additional information, reports, solicitations for voting instructions, sales
literature and other promotional materials, applications for exemptions,
requests for no action letters, and all amendments to any of the above, that
relate to the Contracts or each Account, contemporaneously with the filing of
such document with the SEC or other regulatory authorities.
4.7. For purposes of this Article IV, the phrase "sales
literature or other promotional material" includes, but is not limited to,
advertisements (such as material published, or designed for use in, a newspaper,
magazine, or other periodical, radio, television, telephone or tape recording,
videotape display, signs or billboards, motion pictures, electronic media, or
other public media), sales literature (I.E., any written communication
distributed or made generally available to customers or the public, including
brochures, circulars, research reports, market letters, form letters, seminar
texts, reprints or excerpts of any other advertisement, sales literature, or
published article), educational or training materials or other communications
distributed or made generally available to some or all agents or employees of
the Adviser, registration statements, prospectuses, statements of additional
information, shareholder reports, and proxy materials and any other material
constituting sales literature or advertising under NASD rules, the 1940 Act or
the 1933 Act.
4.8. The Company agrees and acknowledges that the Adviser
is the sole owner of the OppenheimerFunds, Inc. clasped hands mark and that all
use of any designation comprised in whole or part of such mark under this
Agreement shall inure to the benefit of the Adviser or the Fund. The Company
shall not use such mark on its own behalf or on behalf of each Account in
connection with
-11-
<PAGE>
marketing the Contracts without prior written consent of the Adviser, which
consent shall not be unreasonably withheld, delayed or conditioned. Upon
termination of this Agreement for any reason, the Company shall cease all use of
any such mark.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund and Adviser shall pay no fee or other
compensation to the Company under this Agreement, and the Company shall pay no
fee or other compensation to the Fund or Adviser, except as provided herein or
in any other written agreement.
5.2. All expenses incident to performance by each party of
its respective duties under this Agreement shall be paid by that party. The
Fund shall see to it that all its shares are registered and authorized for
issuance in accordance with applicable federal law and, if and to the extent
advisable by the Fund, in accordance with applicable state laws prior to their
sale. The Fund shall bear the expenses for the cost of registration and
qualification of the Fund's shares, preparation and filing of the Fund's
prospectus and registration statement, proxy materials and reports, the
preparation of all statements and notices required by any federal or state law,
and all applicable taxes on the issuance and transfer of the Fund's shares to
the Company.
5.3. The Company shall bear the expenses of distributing
the Fund's prospectus to Contract owners and prospective Contract owners and of
distributing the Fund's proxy materials, communications and reports to such
Contract owners.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the
Contracts in such a manner as to ensure that the Contracts will be treated as
variable contracts under the Internal Revenue Code and the regulations issued
thereunder. Without limiting the scope of the foregoing, the Fund will comply
with Section 817(h) of the Internal Revenue Code and Treasury Regulation
1.817-5, relating to the diversification requirements for variable annuity,
endowment, or life insurance contracts and any
-12-
<PAGE>
amendments or other modifications to such Section or Regulations. In the event
of a breach of this Article VI by the Fund, it will take all reasonable steps
(a) to notify the Company of such breach and (b) to adequately diversify the
Fund so as to achieve compliance within the grace period afforded by Treasury
Regulation 1.817-5.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board of Trustees of the Fund (the "Board") will
monitor the Fund for the existence of any material irreconcilable conflict
between the interests of the Contract owners of all separate accounts investing
in the Fund. An irreconcilable material conflict may arise for a variety of
reasons, including: (a) an action by any state insurance regulatory authority;
(b) a change in applicable federal or state insurance, tax, or securities laws
or regulations, or a public ruling, private letter ruling, no-action or
interpretative letter, or any similar action by insurance, tax, or securities
regulatory authorities; (c) an administrative or judicial decision in any
relevant proceeding; (d) the manner in which the investments of any Portfolio
are being managed; (e) a difference in voting instructions given by
Participating Insurance Companies or by variable annuity contract and variable
life insurance Contract owners; or (f) a decision by an insurer to disregard the
voting instructions of Contract owners. The Board shall promptly inform the
Company if it determines that an irreconcilable material conflict exists and the
implications thereof.
7.2. The Company has reviewed a copy of the Mixed and
Shared Funding Exemptive Order, and in particular, has reviewed the conditions
to the requested relief set forth therein. The Company agrees to be bound by
the responsibilities of a participating insurance company as set forth in the
Mixed and Shared Funding Exemptive Order, including without limitation the
requirement that the Company report any potential or existing conflicts of which
it is aware to the Board. The Company agrees to assist the Board in carrying
out its responsibilities in monitoring such conflicts under the Mixed and Shared
Funding Exemptive Order, by providing the Board in a timely manner with all
information
-13-
<PAGE>
reasonably necessary for the Board to consider any issues raised. This
includes, but is not limited to, an obligation by the Company to inform the
Board whenever Contract owner voting instructions are disregarded and by
confirming in writing, at the Fund's request, that the Company is unaware of any
such potential or existing material irreconcilable conflicts.
7.3. If it is determined by a majority of the Board, or a
majority of its disinterested Trustees, that a material irreconcilable conflict
exists, the Company and the relevant Participating Insurance Companies shall, at
their expense and to the extent reasonably practicable (as determined by a
majority of the disinterested Trustees), take whatever steps are necessary to
remedy or eliminate the irreconcilable material conflict, up to and including:
(1) withdrawing the assets allocable to some or all of the separate accounts
from the Fund or any Portfolio and reinvesting such assets in a different
investment medium, including (but not limited to) another Portfolio of the Fund,
or submitting the question whether such segregation should be implemented to a
vote of all affected Contract owners and, as appropriate, segregating the assets
of any appropriate group (I.E., variable annuity Contract owners or life
insurance Contract owners, of one or more Participating Insurance Companies)
that votes in favor of such segregation, or offering to the affected Contract
owners the option of making such a change; and (2) establishing a new registered
management investment company or managed separate account.
7.4. If the Company's disregard of voting instructions
could conflict with the majority of Contract owners voting instructions, and if
the Company and/or the Fund and the Adviser reasonably determine that a material
irreconcilable conflict (as set forth in the Mixed and Shared Funding Exemptive
Order) may arise as a result, then the Company may be required, at the Fund's
election, to withdraw the Account's investment in the Fund and terminate this
Agreement. Any such withdrawal and termination must take place within six (6)
months after the Fund gives written notice that this provision is being
implemented. Until such withdrawal and termination is implemented, the Fund
shall continue to accept and implement orders by the Company for the purchase
and redemption of shares of the Fund. Such
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<PAGE>
withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.5. If a material irreconcilable conflict arises because
a particular state insurance regulator's decision applicable to the Company
conflicts with the majority of other state regulators, then the Company will
withdraw the Account's investment in the Fund and terminate this Agreement
within six (6) months after the Fund informs the Company in writing that it has
determined that such decision has created an irreconcilable material conflict.
Until such withdrawal and termination is implemented, the Fund shall continue to
accept and implement orders by the Company for the purchase and redemption of
shares of the Fund, subject to applicable regulatory limitation. Such withdrawal
and termination shall be limited to the extent required by the foregoing
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.6. For purposes of Sections 7.3 through 7.6 of this
Agreement, a majority of the disinterested members of the Board shall determine
whether any proposed action adequately remedies any irreconcilable material
conflict, but in no event will the Fund be required to establish a new funding
medium for the Contracts. The Company shall not be required by Section 7.3 to
establish a new funding medium for the Contracts if an offer to do so has been
declined by vote of a majority of Contract owners materially adversely affected
by the irreconcilable material conflict. In the event that the Board determines
that any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination, provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.7. Upon request, the Company shall at least annually
submit to the Board such reports, materials or data as the Board may reasonably
request so that the Board may fully carry out the
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<PAGE>
duties imposed upon it as delineated in the Mixed and Shared Funding Exemptive
Order, and said reports, materials and data shall be submitted more frequently
if deemed appropriate by the Board.
7.8. If and to the extent that Rule 6e-2 and Rule 6e-3(T)
are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any
provision of the Act or the rules promulgated thereunder with respect to mixed
or shared funding (as defined in the Mixed and Shared Funding Exemptive Order)
on terms and conditions materially different from those contained in the Mixed
and Shared Funding Exemptive Order, the (a) the Fund and/or the Participating
Insurance Companies (including the Company), as appropriate, shall take such
reasonable steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as
amended, and Rule 6e-3, as adopted, to the extent such rules are applicable; and
(b) Sections 3.4, 7.1, 7.2, 7.3, 7.4 and 7.5 of this Agreement shall continue in
effect only to the extent that terms and conditions substantially identical to
such Sections are contained in such Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
(a). The Company agrees to indemnify and hold
harmless the Fund and the Adviser, each member of their Board of Trustees or
Board of Directors, each of their officers and each person, if any, who controls
the Fund within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.1) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Company) or litigation (including reasonable legal
and other expenses), to which the Indemnified Parties may become subject under
any statute, regulation, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Fund's shares or the
Contracts and:
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<PAGE>
(i) arise out of or are based upon any untrue
statement or alleged untrue statement of
any material fact contained in the
registration statement, prospectus or
statement of additional information for the
Contracts or contained in the Contracts or
sales literature or other promotional
material for the Contracts (or any
amendment or supplement to any of the
foregoing), or arise out of or are based
upon the omission or the alleged omission
to state therein a material fact required
to be stated therein or necessary to make
the statements therein not misleading in
light of the circumstances which they were
made; provided that this agreement to
indemnify shall not apply as to any
Indemnified Party if such statement or
omission or such alleged statement or
omission was made in reliance upon and in
conformity with information furnished to
the Company by or on behalf of the Fund or
the Adviser for use in the registration
statement, prospectus or statement of
additional information for the Contracts or
in the Contracts or sales literature (or
any amendment or supplement) or otherwise
for use in connection with the sale of the
Contracts or Fund shares; or
(ii) arise out of or as a result of statements
or representations by or on behalf of the
Company (other than statements or
representations contained in the Fund
registration statement, Fund prospectus or
sales literature or other promotional
material of the Fund not supplied by the
Company or persons under its control) or
wrongful conduct of the Company or persons
under its control, with respect to the sale
or distribution of the Contracts or Fund
shares, provided any such statement or
representation or such wrongful conduct was
not made in reliance upon and in conformity
with information furnished to the Company
by or on behalf of the Advisor or the Fund;
or
(iii) arise out of any untrue statement or
alleged untrue statement of a material fact
contained in the Fund registration
statement, Fund prospectus, statement of
additional information or sales literature
or other promotional material of the Fund
or any amendment thereof or supplement
thereto or the omission or alleged omission
to state therein a material fact required
to be stated therein or necessary to make
the statements therein not misleading in
light of the circumstances in which they
were made, if such statement or omission
was made in reliance upon information
furnished to the Fund or the Adviser by or
on behalf of the Company or persons under
its control; or
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<PAGE>
(iv) arise out of or result from any material
breach of any representation and/or
warranty made by the Company in this
Agreement or arise out of or result from
any other material breach of this Agreement
by the Company.
except to the extent provided in Sections 8.1(b) and 8.3 hereof. This
indemnification shall be in addition to any liability which the Company may
otherwise have.
(b). The Company shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement.
8.2. INDEMNIFICATION BY ADVISER AND FUND
8.2(a)(1). The Adviser agrees to indemnify and hold
harmless the Company and each of its directors and officers and each person, if
any, who controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Adviser) or litigation (including
reasonable legal and other expenses) to which the Indemnified Parties may become
subject under any statute, regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements are related to the sale or acquisition of the Fund's
shares or the Contracts and:
(i) arise out of or are based upon any untrue
statement or alleged untrue statement of
any material fact contained in the
registration statement, prospectus,
statement of additional information or
sales literature of the Fund (or any
amendment or supplement to any of the
foregoing), or arise out of or are based
upon the omission or the alleged omission
to state therein a material fact required
to be stated therein or necessary to make
the statements therein not misleading in
light of the circumstances in which they
were made; provided that this agreement to
indemnify shall not apply as to any
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<PAGE>
Indemnified Party if such statement or
omission or such alleged statement or
omission was made in reliance upon and in
conformity with information furnished to
the Adviser or the Fund by or on behalf of
the Company for use in the Contracts, the
Contract or Fund registration statement,
prospectus or statement of additional
information, or sales literature or other
promotional material for the Contracts or
of the Fund; or
(ii) arise out of or as a result of statements
or representations (other than statements
or representations contained in the
Contracts or in the Contract or Fund
registration statement, the Contract or
Fund prospectus, statement of additional
information, or sales literature or other
promotional material for the Contracts or
of the Fund not supplied by the Adviser or
the Fund or persons under the control of
the Adviser or the Fund respectively) or
wrongful conduct of the Adviser or persons
under its control, with respect to the sale
or distribution of the Contracts, provided
any such statement or representation or
such wrongful conduct was not made in
reliance upon and in conformity with
information furnished to the Adviser or the
Fund by or on behalf of the Company; or
(iii) arise out of any untrue statement or
allegedly untrue statement of a material
fact contained in a registration statement,
prospectus, statement of additional
information or sales literature covering
the Contracts (or any amendment thereof
or supplement thereto), or the omission or
alleged omission to state therein a
material fact required to be stated therein
or necessary to make the statement or
statements therein not misleading in light
of the circumstances in which they were
made, if such statement or omission was
made in reliance upon information furnished
to the Company by or on behalf of the Fund
or persons under the control of the
Adviser; or
(iv) arise out of or result from any material
breach of any representation and/or
warranty made by the Adviser in this
Agreement or arise out of or result from
any other material breach of this Agreement
by the Adviser;
(v) arise out of or result from the materially
incorrect or untimely calculation or
reporting of the daily net asset value per
share or dividend or capital gain
distribution rate;
except to the extent provided in Sections 8.2(b) and 8.3 hereof. This
indemnification shall be in addition to any liability which the Adviser may
otherwise have.
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<PAGE>
8.2(a)(2) The Fund agrees to indemnify and hold harmless
the Indemnified Parties [as defined in Section 8.2(a)(1)] against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Fund) or litigation (including reasonable legal and
other expenses) to which the Indemnified Parties may become subject under any
statute, regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements
are related to the operations of the Fund and:
(i) arise out of or are based upon (a) any untrue
statement or alleged untrue statement of any
material fact or (b) the omission or the alleged
omission to state therein a material fact
required to be stated therein or necessary to
make the statements made therein, in light of
the circumstances in which they were made, not
misleading, if such fact, statement or omission
is contained in the Contracts, or in the
registration statement for the Fund or the
Contracts, or in the prospectus or statement of
additional information for the Contracts or the
Fund, or in any amendment to any of the
foregoing, or in sales literature or other
promotional material for the Contracts or of the
Fund, provided, however, that this agreement to
indemnify shall not apply as to any Indemnified
Party if such statement, fact or omission or
such alleged statement, fact or omission was
made in reliance upon and in conformity with
information furnished to the Adviser or the Fund
by or on behalf of the Indemnified Party; or
(ii) arise out of or as a result of statements or
representations (other than statements or
representations contained in the Contracts or in
the Contract or Fund registration statement, the
Contract or Fund prospectus, statement of
additional information, or sales literature or
other promotional material for the Contracts or
of the Fund not supplied by the Adviser or the
Fund or persons under the control of the Adviser
or the Fund respectively) or wrongful conduct
of the Fund or persons under its control with
respect to the sale or distribution of
Contracts, provided any such statement or
representation or such wrongful conduct was not
made in reliance upon and in conformity with
information furnished to the Adviser or the Fund
by or on behalf of the Company; or
(iii) arise out of or result from any material
breach of any representation and/or warranty
made by the Fund in this Agreement or arise out
of or result from any other material breach of
this Agreement by the Fund (including a
failure, whether unintentional or in good faith
or otherwise, to comply with the
diversification requirements specified in
Article VI of this Agreement);
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<PAGE>
(iv) arise out of or result from the materially
incorrect or untimely calculation or reporting
of the daily net asset value per share or
dividend or capital gain distribution rate;
except to the extent provided in Section 8.2(b) and 8.3 hereof. This
indemnification shall be in addition to any liability which the Fund may
otherwise have.
(b). The Fund and Adviser shall not be liable under
this indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement.
8.3 INDEMNIFICATION PROCEDURE
Any person obligated to provide indemnification under this
Article VIII ("indemnifying party" for the purpose of this Section 8.3) shall
not be liable under the indemnification provisions of this Article VIII with
respect to any claim made against a party entitled to indemnification under this
Article VIII ("indemnified party" for the purpose of this Section 8.3) unless
such indemnified party shall have notified the indemnifying party in writing
within a reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
indemnified party (or after such party shall have received notice of such
service on any designated agent), but failure to notify the indemnifying party
of any such claim shall not relieve the indemnifying party from any liability
which it may have to the indemnified party against whom such action is brought
under the indemnification provisions of this Article VIII, except to the extent
that the failure to notify results in the failure of actual notice to the
indemnifying party and such indemnifying party is damaged solely as a result of
failure to give such notice. In case any such action is brought against the
indemnified party, the indemnifying party will be entitled to participate, at
its own expense, in the defense thereof. The indemnifying party also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After
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<PAGE>
notice from the indemnifying party to the indemnified party of the indemnifying
party's election to assume the defense thereof, the indemnified party shall bear
the fees and expenses of any additional counsel retained by it, and the
indemnifying party will not be liable to such party under this Agreement for any
legal or other expenses subsequently incurred by such party independently in
connection with the defense thereof other than reasonable costs of
investigation, unless (i) the indemnifying party and the indemnified party shall
have mutually agreed to the retention of such counsel or (ii) the named parties
to any such proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both parties
by the same counsel would be inappropriate due to actual or potential differing
interests between them. The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent but if settled
with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment.
A successor by law of the parties to this Agreement shall
be entitled to the benefits of the indemnification contained in this Article
VIII. The indemnification provisions contained in this Article VIII shall
survive any termination of this Agreement.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions
hereof interpreted under and in accordance with the laws of the State of New
York.
9.2. This Agreement shall be subject to the provisions of
the 1933, 1934 and 1940 Acts, and the rules and regulations and rulings
thereunder, including such exemptions from those statutes, rules and regulations
as the SEC may grant (including, but not limited to, the Mixed and Shared
Funding Exemptive Order) and the terms hereof shall be interpreted and construed
in accordance therewith.
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<PAGE>
ARTICLE X. TERMINATION
10.1 This Agreement shall terminate:
(a) at the option of any party upon six month's
advance written notice to the other parties unless otherwise agreed in a
separate written agreement among the parties; or
(b) at the option of the Company to the extent that
shares of Portfolios are not reasonably available to meet the requirements of
the Contracts as determined by the Company reasonably and in good faith; or
(c) at the option of the Fund or the Adviser upon
institution of formal proceedings against the Company by the NASD, the SEC, the
insurance commission of any state or any other regulatory body regarding the
Company's duties under this Agreement or related to the sale of the Contracts,
the administration of the Contracts, the operation of the Account, or the
purchase of the Fund shares, which would have a material adverse effect on the
Company's ability to perform its obligations under this Agreement; or
(d) at the option of the Company upon institution of
formal proceedings against the Fund or the Adviser by the NASD, the SEC, or any
state securities or insurance department or any other regulatory body, which
would have a material adverse effect on the Adviser's or the Fund's ability to
perform its obligations under this Agreement; or
(e) at the option of the Company or the Fund upon
receipt of any necessary regulatory approvals or the vote of the Contract owners
having an interest in the Account (or any subaccount) to substitute the shares
of another investment company for the corresponding Portfolio shares of the Fund
in accordance with the terms of the Contracts for which those Portfolio shares
had been selected to serve as the underlying investment media. The Company will
give 45 days prior written notice to the Fund of the date of any proposed vote
or other action taken to replace the Fund's shares; or
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<PAGE>
(f) at the option of the Company or the Fund upon a
determination by a majority of the Board, or a majority of the disinterested
Board members, that an irreconcilable material conflict exists among the
interests of (i) all Contract owners of variable insurance products of all
separate accounts or (ii) the interests of the Participating Insurance Companies
investing in the Fund as delineated in Article VII of this Agreement; or
(g) at the option of the Company if the Fund ceases
to qualify as a Regulated Investment Company under Subchapter M of the Internal
Revenue Code, or under any successor or similar provision, or if the Company
reasonably believes that the Fund may fail to so qualify; or
(h) at the option of the Company if the Fund fails
to meet the diversification requirements specified in Article VI hereof or if
the Company reasonably believes that the Fund will fail to meet such
requirements; or
(i) at the option of any party to this Agreement,
upon another party's material breach of any provision of this Agreement; or
(j) at the option of the Company, if the Company
determines in its sole judgment exercised in good faith, that either the Fund
or the Adviser has suffered a material adverse change in its business,
operations or financial condition since the date of this Agreement or is the
subject of material adverse publicity which is likely to have a material adverse
impact upon the business and operations of the Company; or
(k) at the option of the Fund or the Adviser, if the
Fund or Adviser respectively, shall determine in its sole judgment exercised in
good faith, that the Company has suffered a material adverse change in its
business, operations or financial condition since the date of this Agreement or
is the subject of material adverse publicity which is likely to have a material
adverse impact upon the business and operations of the Fund or the Adviser; or
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<PAGE>
(l) subject to the Fund's compliance with Article VI
hereof, at the option of the Fund in the event any of the Contracts are not
issued or sold in accordance with applicable requirements of federal and/or
state law. Termination shall be effective immediately upon notice by the Fund
to terminate the Agreement.
10.2 NOTICE REQUIREMENT.
(a) In the event that any termination of this
Agreement is based upon the provisions of Article VII, such prior written notice
shall be given in advance of the effective date of termination as required by
such provisions.
(b) In the event that any termination of this
Agreement is based upon the provisions of Sections 10.1(b) - (d) or 10.1(g) -
(i), prompt written notice of the election to terminate this Agreement for cause
shall be furnished by the party terminating the Agreement to the non-terminating
parties, with said termination to be effective upon receipt of such notice by
the non-terminating parties.
(c) In the event that any termination of this
Agreement is based upon the provisions of Sections 10.1(j) or 10.1(k), prior
written notice of the election to terminate this Agreement for cause shall be
furnished by the party terminating this Agreement to the non-terminating
parties. Such prior written notice shall be given by the party terminating this
Agreement to the non-terminating parties at least 30 days before the effective
date of termination.
10.3 It is understood and agreed that the right to
terminate this Agreement pursuant to Section 10.1(a) may be exercised for any
reason or for no reason.
10.4. EFFECT OF TERMINATION.
(a) Notwithstanding any termination of this
Agreement pursuant to Section 10.1 of this Agreement and subject to Section 1.3
of this Agreement, the Company may require the Fund to continue to make
available additional shares of the Fund pursuant to the terms and conditions of
this Agreement as provided in paragraph (b) below, for all Contracts in effect
on the effective date of
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<PAGE>
termination of this Agreement (hereinafter referred to as "Existing Contracts").
Specifically, without limitation, the owners of the Existing Contracts shall be
permitted to reallocate investments in the Fund, redeem investments in the Fund
and/or invest in the Fund upon the making of additional purchase payments under
the Existing Contracts. The parties agree that this Section 10.4 shall not
apply to any terminations under Article VII and the effect of such Article VII
terminations shall be governed by Article VII of this Agreement.
(b) If shares of the Fund continue to be made
available after termination of this Agreement pursuant to this Section 10.4, the
provisions of this Agreement shall remain in effect except for Section 10.1(a)
and thereafter the Fund, the Adviser, or the Company may terminate the
Agreement, as so continued pursuant to this Section 10.4, upon written notice to
the other party, such notice to be for a period that is reasonable under the
circumstances but need not be for more than 90 days.
10.5 Except as necessary to implement Contract owner
initiated or approved transactions, or as required by state insurance laws or
regulations, the Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in the Account), and the Company shall not prevent Contract owners from
allocating payments to a Portfolio that was otherwise available under the
Contracts, until 90 days after the Company shall have notified the Fund or the
Adviser of its intention to do so.
ARTICLE XI. NOTICES
Any notice shall be deemed duly given only if sent by
hand, evidenced by written receipt or by certified mail, return receipt
requested, to the other party at the address of such party set forth below or at
such other address as such party may from time to time specify in writing to the
other party. All notices shall be deemed given on the date received or rejected
by the addressee.
If to the Fund:
Oppenheimer Variable Account Funds
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<PAGE>
6801 Tucson Way
Englewood, CO 80112
Attn: George Bowen, Vice President, Secretary &
Treasurer
If to the Adviser:
OppenheimerFunds, Inc.
2 World Trade Center
New York, NY 10048-0669
Attn: Andrew J. Donohue, Esq.
Executive Vice President and General Counsel
If to the Company:
Protective Life Insurance Company
2801 Highway 280 South
Birmingham, AL 35223
Attn: Steven M. Callaway, Esq.
With a copy to:
Sutherland, Asbill & Brennan
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
Attn: David S. Goldstein, Esq.
ARTICLE XII. MISCELLANEOUS
12.1. The Company and the Adviser each understand and
agree that the obligations of the Fund under this Agreement are not binding upon
any shareholder or Trustee of the Fund personally, but bind only the Fund and
the Fund's property; the Company and the Adviser each represent that it has
notice of the provisions of the Declaration of Trust of the Fund disclaiming
shareholder and Trustee liability for acts or obligations of the Fund.
12.2. Subject to the requirements of legal process and
regulatory authority, each party hereto shall treat as confidential and all
information reasonably identified as confidential in writing by any other party
hereto (including without limitation the names and addresses of the owners of
the Contracts) and, except as contemplated by this Agreement, shall not
disclose, disseminate or utilize such confidential
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<PAGE>
information until such time as it may come into the public domain without the
express written consent of the affected party .
12.3. The captions in this Agreement are included for
convenience of reference only and in no way define or delineate any of the
provisions hereof or otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in
two or more counterparts, each of which taken together shall constitute one and
the same instrument.
12.5. If any provision of this Agreement shall be held
or made invalid by a court decision, statute, rule or otherwise, the remainder
of the Agreement shall not be affected thereby.
12.6. This Agreement shall not be assigned by any
party hereto without the prior written consent of all the parties.
12.7. Each party hereto shall cooperate with each
other party and all appropriate governmental authorities (including without
limitation the SEC, the NASD and state insurance regulators) and shall permit
such authorities reasonable access to its books and records in connection with
any investigation or inquiry relating to this Agreement or the transactions
contemplated hereby.
12.8. Each party represents that the execution and
delivery of this Agreement and the consummation of the transactions contemplated
herein have been duly authorized by all necessary corporate or trust action, as
applicable, by such party and when so executed and delivered this Agreement will
be the valid and binding obligation of such party enforceable in accordance with
its terms.
12.9. Except as may otherwise be required under
Article VII, the rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
12.10. It is understood by the parties that this
Agreement is not an exclusive arrangement in any respect.
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<PAGE>
12.11. The foregoing constitutes the entire Agreement
between the parties hereto, and shall not be modified, amended or assigned
except by an Agreement in writing signed by an authorized representative of each
such party.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed as of the date specified
below.
PROTECTIVE LIFE INSURANCE COMPANY
By its authorized officer,
By: /s/ CAROLYN KING
-----------------------------------
Title: Senior Vice President
--------------------------------
Date: April 28, 1997
---------------------------------
OPPENHEIMER VARIABLE ACCOUNT FUNDS
By its authorized officer,
By: ANDREW J. DONOHUE
----------------------------------
Title: Secretary
-------------------------------
Date: April 24, 1997
--------------------------------
OPPENHEIMERFUNDS, INC.
By its authorized officer,
By: ANDREW J. DONOHUE
----------------------------------
Title: Executive Vice President
-------------------------------
Date: April 24, 1997
--------------------------------
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<PAGE>
SCHEDULE 1
Protective Variable Annuity Separate Account
Protective Variable Life Separate Account
-30-
<PAGE>
SCHEDULE 2
Portfolios of Oppenheimer Variable Account Funds:
Oppenheimer Capital Appreciation Fund
Oppenheimer Growth Fund
Oppenheimer Growth & Income Fund
Oppenheimer Strategic Bond Fund
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<PAGE>
SCHEDULE 3
Individual flexible premium deferred variable and fixed annuity contract
Individual flexible premium variable and fixed life insurance policy contract
legag\protect.2
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<PAGE>
PARTICIPATION AGREEMENT
AMONG
MFS VARIABLE INSURANCE TRUST,
PROTECTIVE LIFE INSURANCE COMPANY
AND
MASSACHUSETTS FINANCIAL SERVICES COMPANY
THIS AGREEMENT, made and entered into this 29th day of April 1997, by and
among MFS VARIABLE INSURANCE TRUST, a Massachusetts business trust (the
"Trust"), PROTECTIVE LIFE INSURANCE COMPANY, a Tennessee corporation (the
"Company") on its own behalf and on behalf of each of the segregated asset
accounts of the Company set forth in Schedule A hereto, as may be amended from
time to time (the "Accounts"), and MASSACHUSETTS FINANCIAL SERVICES COMPANY, a
Delaware corporation ("MFS").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and its shares are registered or will be registered under the Securities Act of
1933, as amended (the "1933 Act");
WHEREAS, shares of beneficial interest of the Trust are divided into
several series of shares, each representing the interests in a particular
managed pool of securities and other assets;
WHEREAS, the series of shares of the Trust offered by the Trust to the
Company and the Accounts are set forth on Schedule A attached hereto (each, a
"Portfolio," and, collectively, the "Portfolios");
WHEREAS, MFS is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state securities
law, and is the Trust's investment adviser;
WHEREAS, the Company will issue certain variable annuity and/or variable
life insurance contracts (individually, the "Policy" or, collectively, the
"Policies") which, if required by applicable law, will be registered under the
1933 Act;
WHEREAS, the Accounts are duly organized, validly existing segregated asset
accounts, established by resolution of the Board of Directors of the Company, to
set aside and invest assets attributable to the aforesaid variable annuity
and/or variable life insurance contracts that are allocated to the Accounts (the
Policies and the Accounts covered by this Agreement, and each corresponding
Portfolio covered by this Agreement in which the Accounts invest, is specified
in Schedule A attached hereto as may be modified from time to time);
WHEREAS, the Company has registered or will register the Accounts as unit
investment trusts under the 1940 Act (unless exempt therefrom);
WHEREAS, MFS Fund Distributors, Inc. (the "Underwriter") is registered as a
broker-dealer with the Securities and Exchange Commission (the "SEC") under the
Securities Exchange Act of 1934, as amended (hereinafter the "1934 Act"), and is
a member in good standing of the National Association of Securities Dealers,
Inc. (the "NASD");
WHEREAS, Investment Distributors, Inc., the underwriter for the individual
variable annuity and the variable life policies, is registered as a broker-
dealer with the SEC under the 1934 Act and is a member in good standing of the
NASD; and
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WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in one or more of the
Portfolios specified in Schedule A attached hereto (the "Shares") on behalf of
the Accounts to fund the Policies, and the Trust intends to sell such Shares to
the Accounts at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Trust, MFS,
and the Company agree as follows:
ARTICLE I. SALE OF TRUST SHARES
1.1. The Trust agrees to sell to the Company those Shares which the
Accounts order (based on orders placed by Policy holders on that Business
Day, as defined below) and which are available for purchase by such
Accounts, executing such orders on a daily basis at the net asset value
next computed after receipt by the Trust or its designee of the order for
the Shares. For purposes of this Section 1.1, the Company shall be the
designee of the Trust for receipt of such orders from Policy owners and
receipt by such designee shall constitute receipt by the Trust; PROVIDED
that the Trust receives notice of such orders by 10:00 a.m. New York time
on the next following Business Day and that the Company uses its best
efforts to provide the Trust with such notice by 9:30 a.m. New York time on
the next following Business Day. "Business Day" shall mean any day on
which the New York Stock Exchange, Inc. (the "NYSE") is open for trading
and on which the Trust calculates its net asset value pursuant to the rules
of the SEC.
1.2. The Trust agrees to make the Shares available indefinitely for
purchase at the applicable net asset value per share by the Company and the
Accounts on those days on which the Trust calculates its net asset value
pursuant to rules of the SEC and the Trust shall calculate such net asset
value on each day which the NYSE is open for trading. Notwithstanding the
foregoing, the Board of Trustees of the Trust (the "Board") may refuse to
sell any Shares to the Company and the Accounts, or suspend or terminate
the offering of the Shares if such action is required by law or by
regulatory authorities having jurisdiction or is, in the sole discretion of
the Board acting in good faith and in light of its fiduciary duties under
federal and any applicable state laws, necessary in the best interest of
the Shareholders of such Portfolio.
1.3. The Trust and MFS agree that the Shares will be sold only to
insurance companies which have entered into participation agreements with
the Trust and MFS (the "Participating Insurance Companies") and their
separate accounts, qualified pension and retirement plans and MFS or its
affiliates. The Trust and MFS will not sell Trust shares to any insurance
company or separate account unless an agreement containing provisions
substantially the same as Articles III and VII of this Agreement is in
effect to govern such sales. The Company will not resell the Shares except
to the Trust or its agents.
1.4. The Trust agrees to redeem for cash, on the Company's request, any
full or fractional Shares held by the Accounts (based on orders placed by
Policy owners on that Business Day), executing such requests on a daily
basis at the net asset value next computed after receipt by the Trust or
its designee of the request for redemption. For purposes of this Section
1.4., the Company shall be the designee of the Trust for receipt of
requests for redemption from Policy owners and receipt by such designee
shall constitute receipt by the Trust; provided that the Trust receives
notice of such request for redemption by 10:00 a.m. New York time on the
next following Business Day and that the Company uses its best efforts to
provide the Trust with such notice by 9:30 a.m. New York time on the next
following Business Day.
1.5. Each purchase, redemption and exchange order placed by the Company
shall be placed separately for each Portfolio and shall not be netted with
respect to any Portfolio. However, with respect to payment of the purchase
price by the Company and of redemption proceeds by the Trust, the Company
and the Trust shall net purchase and redemption orders with respect to each
Portfolio and shall transmit one net payment for all of the Portfolios in
accordance with Section 1.6 hereof.
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1.6. In the event of net purchases, the Company shall pay for the Shares
by 2:00 p.m. New York time on the next Business Day after an order to
purchase the Shares is made in accordance with the provisions of Section
1.1. hereof. In the event of net redemptions, the Trust shall pay the
redemption proceeds by 2:00 p.m. New York time on the next Business Day
after an order to redeem the shares is made in accordance with the
provisions of Section 1.4. hereof. All such payments shall be in federal
funds transmitted by wire.
1.7. Issuance and transfer of the Shares will be by book entry only.
Stock certificates will not be issued to the Company or the Accounts. The
Shares ordered from the Trust will be recorded in an appropriate title for
the Accounts or the appropriate subaccounts of the Accounts.
1.8. The Trust shall furnish same day notice (by wire or telephone
followed by written confirmation) to the Company of any dividends or
capital gain distributions payable on the Shares. The Company hereby
elects to receive all such dividends and distributions as are payable on a
Portfolio's Shares in additional Shares of that Portfolio. The Trust shall
notify the Company of the number of Shares so issued as payment of such
dividends and distributions.
1.9. The Trust or its custodian shall make the net asset value per share
for each Portfolio available to the Company on each Business Day as soon as
reasonably practical after the net asset value per share is calculated and
shall use its best efforts to make such net asset value per share available
by 6:30 p.m. New York time. In the event that the Trust is unable to meet
the 6:30 p.m. time stated herein, it shall provide additional time for the
Company to place orders for the purchase and redemption of Shares. Such
additional time shall be equal to the additional time which the Trust takes
to make the net asset value available to the Company. If the Trust
provides materially incorrect share net asset value information, the Trust
shall make an adjustment to the number of shares purchased or redeemed for
the Accounts to reflect the correct net asset value per share. Any
material error in the calculation or reporting of net asset value per
share, dividend or capital gains information shall be reported promptly
upon discovery to the Company.
ARTICLE II. CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS
2.1. The Company represents and warrants that the Policies are or will be
registered under the 1933 Act or are exempt from or not subject to
registration thereunder, and that the Policies will be issued, sold, and
distributed in compliance in all material respects with all applicable
state and federal laws, including without limitation the 1933 Act, the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and the 1940
Act. The Company further represents and warrants that it is an insurance
company duly organized and in good standing under applicable law and that
it has legally and validly established the Account as a segregated asset
account under applicable law and has registered or, prior to any issuance
or sale of the Policies, will register the Accounts as unit investment
trusts in accordance with the provisions of the 1940 Act (unless exempt
therefrom) to serve as segregated investment accounts for the Policies, and
that it will maintain such registration for so long as any Policies are
outstanding. The Company shall amend the registration statements under the
1933 Act for the Policies and the registration statements under the 1940
Act for the Accounts from time to time as required in order to effect the
continuous offering of the Policies or as may otherwise be required by
applicable law. The Company shall register and qualify the Policies for
sales in accordance with the securities laws of the various states only if
and to the extent deemed necessary by the Company.
2.2. Subject to Article VI hereof, the Company represents and warrants
that the Policies are currently and at the time of issuance will be treated
as life insurance, endowment or annuity contract under applicable
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
that it will maintain such treatment and that it will notify the Trust or
MFS immediately upon having a reasonable basis for believing that the
Policies have ceased to be so treated or that they might not be so treated
in the future.
2.3. The Company represents and warrants that Investment Distributors,
Inc., the underwriter for the individual variable annuity and the variable
life policies, is a member in good standing of the NASD and is a
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registered broker-dealer with the SEC. The Company represents and warrants
that the Company and Investment Distributors, Inc. will sell and distribute
such policies in accordance in all material respects with all applicable
state and federal securities laws, including without limitation the 1933
Act, the 1934 Act, and the 1940 Act.
2.4. The Trust and MFS represent and warrant that the Shares sold
pursuant to this Agreement shall be registered under the 1933 Act, duly
authorized for issuance and sold in compliance with the laws of The
Commonwealth of Massachusetts and all applicable federal and state
securities laws and that the Trust is and shall remain registered under the
1940 Act. The Trust shall amend the registration statement for its Shares
under the 1933 Act and the 1940 Act from time to time as required in order
to effect the continuous offering of its Shares. The Trust shall register
and qualify the Shares for sale in accordance with the laws of the various
states only if and to the extent deemed necessary by the Trust.
2.5. MFS represents and warrants that the Underwriter is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC.
The Trust and MFS represent that the Trust and the Underwriter will sell
and distribute the Shares in accordance in all material respects with all
applicable state and federal securities laws, including without limitation
the 1933 Act, the 1934 Act, and the 1940 Act.
2.6. The Trust represents that it is lawfully organized and validly
existing under the laws of The Commonwealth of Massachusetts and that it
does and will comply in all material respects with the 1940 Act and any
applicable regulations thereunder.
2.7. MFS represents and warrants that it is and shall remain duly
registered under all applicable federal securities laws and that it shall
perform its obligations for the Trust in compliance in all material
respects with any applicable federal securities laws and with the
securities laws of The Commonwealth of Massachusetts. MFS represents and
warrants that it is not subject to state securities laws other than the
securities laws of The Commonwealth of Massachusetts and that it is exempt
from registration as an investment adviser under the securities laws of The
Commonwealth of Massachusetts.
2.8. No less frequently than annually, the Company shall submit to the
Board such reports, material or data as the Board may reasonably request so
that it may carry out fully the obligations imposed upon it by the
conditions contained in the exemptive application pursuant to which the SEC
has granted exemptive relief to permit mixed and shared funding (the "Mixed
and Shared Funding Exemptive Order").
2.9. The Trust and MFS represent that they have used their best efforts
to maintain the Trust's investment policies, fees and expenses in
compliance with the insurance laws and regulations of the state of
California; and the Trust and MFS further represent and warrant that they
shall use their best efforts to comply in all material respects with the
insurance laws and regulations of the state of Tennessee and any additional
state, to the extent that such laws or regulations are specifically
provided to the Trust or MFS in writing by the Company.
ARTICLE III. PROSPECTUS AND PROXY STATEMENTS; VOTING
3.1. At least annually, the Trust or its designee shall provide the
Company, free of charge, with as many copies of the current prospectus
(describing only the Portfolios listed in Schedule A hereto) for the Shares
as the Company may reasonably request for distribution to existing Policy
owners whose Policies are funded by such Shares. The Trust or its designee
shall provide the Company, at the Company's expense, with as many copies of
the current prospectus for the Shares as the Company may reasonably request
for distribution to prospective purchasers of Policies. If requested by
the Company in lieu thereof, the Trust or its designee shall provide such
documentation (including a "camera ready" copy of the new prospectus as set
in type or, at the request of the Company, as a diskette in the form sent
to the financial printer) and other assistance as is reasonably necessary
in order for the parties hereto once each year (or more frequently if the
prospectus for
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the Shares is supplemented or amended) to have the prospectus for the
Policies and the prospectus for the Shares printed together in one
document; the expenses of such printing to be apportioned between (a) the
Company and (b) the Trust or its designee in proportion to the number of
pages of the Policy and Shares' prospectuses, taking account of other
relevant factors affecting the expense of printing, such as covers,
columns, graphs and charts; the Trust or its designee to bear the cost of
printing the Shares' prospectus portion of such document for distribution
to owners of existing Policies funded by the Shares and the Company to bear
the expenses of printing the portion of such document relating to the
Accounts; PROVIDED, however, that the Company shall bear all printing
expenses of such combined documents where used for distribution to
prospective purchasers or to owners of existing Policies not funded by the
Shares. In the event that the Company requests that the Trust or its
designee provides the Trust's prospectus in a "camera ready" or diskette
format, the Trust shall be responsible for providing the prospectus in the
format in which it or MFS is accustomed to formatting prospectuses and
shall bear the expense of providing the prospectus in such format (E.G.,
typesetting expenses), and the Company shall bear the expense of adjusting
or changing the format to conform with any of its prospectuses.
3.2. The prospectus for the Shares shall state that the statement of
additional information for the Shares is available from the Trust or its
designee. The Trust or its designee, at its expense, shall print and
provide such statement of additional information to the Company (or a
master of such statement suitable for duplication by the Company) for
distribution to any owner of a Policy funded by the Shares. The Trust or
its designee, at the Company's expense, shall print and provide such
statement to the Company (or a master of such statement suitable for
duplication by the Company) for distribution to a prospective purchaser who
requests such statement or to an owner of a Policy not funded by the
Shares.
3.3. The Trust or its designee shall provide the Company free of charge
copies, if and to the extent applicable to the Shares, of the Trust's proxy
materials, reports to Shareholders and other communications to Shareholders
in such quantity as the Company shall reasonably require for distribution
to Policy owners.
3.4. Notwithstanding the provisions of Sections 3.1, 3.2, and 3.3 above,
or of Article V below, the Company shall pay the expense of printing or
providing documents to the extent such cost is considered a distribution
expense. Distribution expenses would include by way of illustration, but
are not limited to, the printing of the Shares' prospectus or prospectuses
for distribution to prospective purchasers or to owners of existing
Policies not funded by such Shares.
3.5. The Trust hereby notifies the Company that it may be appropriate to
include in the prospectus pursuant to which a Policy is offered disclosure
regarding the potential risks of mixed and shared funding.
3.6. If and to the extent required by law, the Company shall:
(a) solicit voting instructions from Policy owners;
(b) vote the Shares in accordance with instructions received
from Policy owners; and
(c) vote the Shares for which no instructions have been received
in the same proportion as the Shares of such Portfolio for
which instructions have been received from Policy owners;
so long as and to the extent that the SEC continues to interpret the 1940
Act to require pass through voting privileges for variable contract owners.
Subject to applicable law, the Company will in no way recommend action in
connection with or oppose or interfere with the solicitation of proxies for
the Shares held for such Policy owners. The Company reserves the right to
vote shares held in any segregated asset account in its own right, to the
extent permitted by law. Participating Insurance Companies shall be
responsible for assuring that each of their separate accounts holding
Shares calculates voting privileges in the manner required by the Mixed and
Shared Funding Exemptive Order. The Trust and MFS will notify the Company
of any changes of interpretations or amendments to the Mixed and Shared
Funding Exemptive Order.
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ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Trust or its designee, each piece of sales literature or other promotional
material in which the Trust, MFS, any other investment adviser to the
Trust, or any affiliate of MFS are named, at least three (3) Business Days
prior to its use. No such material shall be used if the Trust, MFS, or
their respective designees reasonably objects to such use within three (3)
Business Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statement on behalf of the Trust, MFS, any other
investment adviser to the Trust, or any affiliate of MFS or concerning the
Trust or any other such entity in connection with the sale of the Policies
other than the information or representations contained in the registration
statement, prospectus or statement of additional information for the
Shares, as such registration statement, prospectus and statement of
additional information may be amended or supplemented from time to time, or
in reports or proxy statements for the Trust, or in sales literature or
other promotional material approved by the Trust, MFS or their respective
designees, except with the permission of the Trust, MFS or their respective
designees. The Trust, MFS or their respective designees each agrees to
respond to any request for approval on a prompt and timely basis. The
Company shall adopt and implement procedures reasonably designed to ensure
that information concerning the Trust, MFS or any of their affiliates which
is intended for use only by brokers or agents selling the Policies (I.E.,
information that is not intended for distribution to Policy owners or
prospective Policy owners) is so used, and neither the Trust, MFS nor any
of their affiliates shall be liable for any losses, damages or expenses
relating to the improper use of such broker only materials. The parties
hereto agree that this Section 4.2 is not intended to designate nor
otherwise imply that the Company is an underwriter or distributor of the
Trust's shares.
4.3. The Trust or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature
or other promotional material in which the Company and/or the Accounts is
named, at least three (3) Business Days prior to its use. No such material
shall be used if the Company or its designee reasonably objects to such use
within three (3) Business Days after receipt of such material.
4.4. The Trust and MFS shall not give, and agree that the Underwriter
shall not give, any information or make any representations on behalf of
the Company or concerning the Company, the Accounts, or the Policies in
connection with the sale of the Policies other than the information or
representations contained in a registration statement, prospectus, or
statement of additional information for the Policies, as such registration
statement, prospectus and statement of additional information may be
amended or supplemented from time to time, or in reports for the Accounts,
or in sales literature or other promotional material approved by the
Company or its designee, except with the permission of the Company. The
Company or its designee agrees to respond to any request for approval on a
prompt and timely basis. To the extent representatives of the Trust or MFS
interact with brokers and agents selling the Policies, the Trust and MFS
shall adopt and implement procedures reasonably designed to ensure that
information concerning the Trust, MFS or any of their affiliates that is
intended for use only by such brokers or agents (I.E., information that is
not intended for distribution to owners of the Policies or prospective
owners of the Policies) is so used, and neither the Company, its affiliates
nor the Accounts shall be liable for any losses, damages or expenses
relating to the improper use of such broker only materials. The parties
hereto agree that this Section 4.4. is neither intended to designate nor
otherwise imply that MFS is an underwriter or distributor of the Policies.
4.5. The Company and the Trust (or its designee in lieu of the Company or
the Trust, as appropriate) will each provide to the other at least one
complete copy of all registration statements, prospectuses, statements of
additional information, reports, proxy statements, sales literature and
other promotional materials, applications for exemptions, requests for no-
action letters, and all amendments to any of the above, that relate to the
Policies, or to the Trust or its Shares, prior to or contemporaneously with
the filing of such document
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with the SEC or other regulatory authorities. The Company and the Trust
shall also each promptly inform the other of the results of any examination
by the SEC (or other regulatory authorities) that relates to the Policies,
the Trust or its Shares, and the party that was the subject of the
examination shall provide the other party with a copy of relevant portions
of any "deficiency letter" or other correspondence or written report
regarding any such examination.
4.6. The Trust and MFS will provide the Company with as much notice as is
reasonably practicable of any proxy solicitation for any Portfolio, and of
any material change in the Trust's registration statement, particularly any
change resulting in change to the registration statement or prospectus or
statement of additional information for any Account. The Trust and MFS
will cooperate with the Company so as to enable the Company to solicit
proxies from Policy owners or to make changes to its prospectus, statement
of additional information or registration statement, in an orderly manner.
The Trust and MFS will make reasonable efforts to attempt to have changes
affecting Policy prospectuses become effective simultaneously with the
annual updates for such prospectuses.
4.7. For purpose of this Article IV and Article VIII, the phrase "sales
literature or other promotional material" includes but is not limited to
advertisements (such as material published, or designed for use in, a
newspaper, magazine, or other periodical, radio, television, telephone or
tape recording, videotape display, signs or billboards, motion pictures, or
other public media), and sales literature (such as brochures, circulars,
reprints or excerpts or any other advertisement, sales literature, or
published articles), distributed or made generally available to customers
or the public, educational or training materials or communications
distributed or made generally available to some or all agents or employees.
ARTICLE V. FEES AND EXPENSES
5.1. The Trust shall pay no fee or other compensation to the Company
under this Agreement, and the Company shall pay no fee or other
compensation to the Trust, except that if the Trust or any Portfolio adopts
and implements a plan pursuant to Rule 12b-1 under the 1940 Act to finance
distribution and Shareholder servicing expenses, then, subject to obtaining
any required exemptive orders or regulatory approvals, the Trust may make
payments to the Company or to the underwriter for the Policies if and in
amounts agreed to by the Trust in writing. Each party, however, shall, in
accordance with the allocation of expenses specified in Articles III and V
hereof, reimburse other parties for expenses initially paid by one party
but allocated to another party. In addition, nothing herein shall prevent
the parties hereto from otherwise agreeing to perform, and arranging for
appropriate compensation for, other services relating to the Trust and/or
to the Accounts.
5.2. The Trust or its designee shall bear the expenses for the cost of
registration and qualification of the Shares under all applicable federal
and state laws, including preparation and filing of the Trust's
registration statement, and payment of filing fees and registration fees;
preparation and filing of the Trust's proxy materials and reports to
Shareholders; setting in type and printing its prospectus and statement of
additional information (to the extent provided by and as determined in
accordance with Article III above); setting in type and printing the proxy
materials and reports to Shareholders (to the extent provided by and as
determined in accordance with Article III above); the preparation of all
statements and notices required of the Trust by any federal or state law
with respect to its Shares; all taxes on the issuance or transfer of the
Shares; and the costs of distributing the Trust's prospectuses and proxy
materials to owners of Policies funded by the Shares and any expenses
permitted to be paid or assumed by the Trust pursuant to a plan, if any,
under Rule 12b-1 under the 1940 Act. The Trust shall not bear any expenses
of marketing the Policies.
5.3. The Company shall bear the expenses of distributing the Shares'
prospectus or prospectuses in connection with new sales of the Policies and
of distributing the Trust's Shareholder reports to Policy owners. The
Company shall bear all expenses associated with the registration,
qualification, and filing of the Policies under applicable federal
securities and state insurance laws; the cost of preparing, printing and
distributing
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the Policy prospectus and statement of additional information; and the cost
of preparing, printing and distributing annual individual account
statements for Policy owners as required by state insurance laws.
ARTICLE VI. DIVERSIFICATION AND RELATED LIMITATIONS
6.1. The Trust and MFS represent and warrant that each Portfolio of the
Trust will meet the diversification requirements of Section 817 (h) (1) of
the Code and Treas. Reg. 1.817-5, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts,
as they may be amended from time to time (and any revenue rulings, revenue
procedures, notices, and other published announcements of the Internal
Revenue Service interpreting these sections), as if those requirements
applied directly to each such Portfolio. In the event that any Portfolio
is not so diversified at the end of any applicable quarter, the Trust and
MFS will make every effort to: (a) adequately diversify the Portfolio so
as to achieve compliance within the grace period afforded by Treas. Reg.
1.817.5, and (b) notify the Company.
6.2. The Trust and MFS represent that each Portfolio will elect to be
qualified as a Regulated Investment Company under Subchapter M of the Code
and that they will maintain such qualification (under Subchapter M or any
successor or similar provision).
ARTICLE VII. POTENTIAL MATERIAL CONFLICTS
7.1. The Trust agrees that the Board, constituted with a majority of
disinterested trustees, will monitor each Portfolio of the Trust for the
existence of any material irreconcilable conflict between the interests of
the variable annuity contract owners and the variable life insurance policy
owners of the Company and/or affiliated companies ("contract owners")
investing in the Trust. The Board shall have the sole authority to
determine if a material irreconcilable conflict exists, and such
determination shall be binding on the Company only if approved in the form
of a resolution by a majority of the Board, or a majority of the
disinterested trustees of the Board. The Board will give prompt notice of
any such determination to the Company.
7.2. The Company agrees that it will be responsible for assisting the
Board in carrying out its responsibilities under the conditions set forth
in the Trust's exemptive application pursuant to which the SEC has granted
the Mixed and Shared Funding Exemptive Order by providing the Board, as it
may reasonably request, with all information necessary for the Board to
consider any issues raised and agrees that it will be responsible for
promptly reporting any potential or existing conflicts of which it is aware
to the Board including, but not limited to, an obligation by the Company to
inform the Board whenever contract owner voting instructions are
disregarded. The Company also agrees that, if a material irreconcilable
conflict arises, it will at its own cost remedy such conflict up to and
including (a) withdrawing the assets allocable to some or all of the
Accounts from the Trust or any Portfolio and reinvesting such assets in a
different investment medium, including (but not limited to) another
Portfolio of the Trust, or submitting to a vote of all affected contract
owners whether to withdraw assets from the Trust or any Portfolio and
reinvesting such assets in a different investment medium and, as
appropriate, segregating the assets attributable to any appropriate group
of contract owners that votes in favor of such segregation, or offering to
any of the affected contract owners the option of segregating the assets
attributable to their contracts or policies, and (b) establishing a new
registered management investment company and segregating the assets
underlying the Policies, unless a majority of Policy owners materially
adversely affected by the conflict have voted to decline the offer to
establish a new registered management investment company.
7.3. A majority of the disinterested trustees of the Board shall
determine whether any proposed action by the Company adequately remedies
any material irreconcilable conflict. In the event that the Board
determines that any proposed action does not adequately remedy any material
irreconcilable conflict, the Company will withdraw from investment in the
Trust each of the Accounts designated by the disinterested trustees and
terminate this Agreement within six (6) months after the Board informs the
Company in writing of the
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foregoing determination; PROVIDED, HOWEVER, that such withdrawal and
termination shall be limited to the extent required to remedy any such
material irreconcilable conflict as determined by a majority of the
disinterested trustees of the Board.
7.4. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules promulgated thereunder with respect to mixed or
shared funding (as defined in the Mixed and Shared Funding Exemptive Order)
on terms and conditions materially different from those contained in the
Mixed and Shared Funding Exemptive Order, then (a) the Trust and/or the
Participating Insurance Companies, as appropriate, shall take such steps as
may be necessary to comply with Rule 6e-2 and 6e-3(T), as amended, and Rule
6e-3, as adopted, to the extent such rules are applicable; and (b) Sections
3.5, 3.6, 7.1, 7.2, 7.3 and 7.4 of this Agreement shall continue in effect
only to the extent that terms and conditions substantially identical to
such Sections are contained in such Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
The Company agrees to indemnify and hold harmless the Trust, MFS,
any affiliates of MFS, and each of their respective directors/trustees,
officers and each person, if any, who controls the Trust or MFS within the
meaning of Section 15 of the 1933 Act, and any agents or employees of the
foregoing (each an "Indemnified Party," or collectively, the "Indemnified
Parties" for purposes of this Section 8.1) against any and all losses,
claims, damages, liabilities (including amounts paid in settlement with the
written consent of the Company) or expenses (including reasonable counsel
fees) to which any Indemnified Party may become subject under any statute,
regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Shares or the
Policies and:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the registration statement, prospectus or statement of
additional information for the Policies or contained in the
Policies or sales literature or other promotional material
for the Policies (or any amendment or supplement to any of
the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein not misleading PROVIDED that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged
statement or omission was made in reasonable reliance upon
and in conformity with information furnished to the Company
or its designee by or on behalf of the Trust or MFS or the
Underwriter for use in the registration statement,
prospectus or statement of additional information for the
Policies or in the Policies or sales literature or other
promotional material (or any amendment or supplement) or
otherwise for use in connection with the sale of the
Policies or Shares; or
(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus, statement of additional
information or sales literature or other promotional
material of the Trust not supplied by the Company or its
designee, or persons under its control and on which the
Company has reasonably relied) or wrongful conduct of the
Company or persons under its control, with respect to the
sale or distribution of the Policies or Shares; or
(c) arise out of any untrue statement or alleged untrue
statement of a material fact contained in the registration
statement, prospectus, statement of additional information,
or sales literature or other promotional literature of the
Trust, or any amendment thereof or
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<PAGE>
supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein
or necessary to make the statement or statements therein not
misleading, if such statement or omission was made in
reliance upon information furnished to the Trust by or on
behalf of the Company; or
(d) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company; or
(e) arise as a result of any failure by the Company to provide
the services and furnish the materials under the terms of
this Agreement;
as limited by and in accordance with the provisions of this Article VIII.
8.2. INDEMNIFICATION BY THE TRUST
The Trust agrees to indemnify and hold harmless the Company and each
of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act, and any agents or
employees of the foregoing (each an "Indemnified Party," or collectively,
the "Indemnified Parties" for purposes of this Section 8.2) against any and
all losses, claims, damages, liabilities (including amounts paid in
settlement with the written consent of the Trust) or expenses (including
reasonable counsel fees) to which any Indemnified Party may become subject
under any statute, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Shares or the
Policies and:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the registration statement, prospectus, statement of
additional information or sales literature or other
promotional material of the Trust (or any amendment or
supplement to any of the foregoing), or arise out of or are
based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statement therein not misleading,
PROVIDED that this agreement to indemnify shall not apply as
to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reasonable
reliance upon and in conformity with information furnished
to the Trust, MFS, the Underwriter or their respective
designees by or on behalf of the Company for use in the
registration statement, prospectus or statement of
additional information for the Trust or in sales literature
or other promotional material for the Trust (or any
amendment or supplement) or otherwise for use in connection
with the sale of the Policies or Shares; or
(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus, statement of additional
information or sales literature or other promotional
material for the Policies not supplied by the Trust, MFS,
the Underwriter or any of their respective designees or
persons under their respective control and on which any such
entity has reasonably relied) or wrongful conduct of the
Trust or persons under its control, with respect to the sale
or distribution of the Policies or Shares; or
(c) arise out of any untrue statement or alleged untrue
statement of a material fact contained in the registration
statement, prospectus, statement of additional information,
or sales literature or other promotional literature of the
Accounts or relating to the Policies, or any amendment
thereof or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statement or
- 10 -
<PAGE>
statements therein not misleading, if such statement or
omission was made in reliance upon information furnished to
the Company by or on behalf of the Trust, MFS or the
Underwriter; or
(d) arise out of or result from any material breach of any
representation and/or warranty made by the Trust in this
Agreement (including a failure, whether unintentional or in
good faith or otherwise, to comply with the diversification
requirements specified in Article VI of this Agreement) or
arise out of or result from any other material breach of
this Agreement by the Trust; or
(e) arise out of or result from the materially incorrect or
untimely calculation or reporting of the daily net asset
value per share or dividend or capital gain distribution
rate; or
(f) arise as a result of any failure by the Trust to provide the
services and furnish the materials under the terms of the
Agreement;
as limited by and in accordance with the provisions of this Article VIII.
8.3. In no event shall the Trust be liable under the indemnification
provisions contained in this Agreement to any individual or entity,
including without limitation, the Company, or any Participating Insurance
Company or any Policy holder, with respect to any losses, claims, damages,
liabilities or expenses that arise out of or result from (i) a breach of
any representation, warranty, and/or covenant made by the Company hereunder
or by any Participating Insurance Company under an agreement containing
substantially similar representations, warranties and covenants; (ii) the
failure by the Company or any Participating Insurance Company to maintain
its segregated asset account (which invests in any Portfolio) as a legally
and validly established segregated asset account under applicable state law
and as a duly registered unit investment trust under the provisions of the
1940 Act (unless exempt therefrom); or (iii) subject to the Trust's
compliance with the diversification requirements specified in Article VI,
the failure by the Company or any Participating Insurance Company to
maintain its variable annuity and/or variable life insurance contracts
(with respect to which any Portfolio serves as an underlying funding
vehicle) as life insurance, endowment or annuity contracts under applicable
provisions of the Code.
8.4. Neither the Company nor the Trust shall be liable under the
indemnification provisions contained in this Agreement with respect to any
losses, claims, damages, liabilities or expenses to which an Indemnified
Party would otherwise be subject by reason of such Indemnified Party's
willful misfeasance, willful misconduct, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations and duties under this
Agreement.
8.5. Promptly after receipt by an Indemnified Party under this Section
8.5. of notice of commencement of any action, such Indemnified Party will,
if a claim in respect thereof is to be made against the indemnifying party
under this section, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any Indemnified Party
otherwise than under this section. In case any such action is brought
against any Indemnified Party, and it notified the indemnifying party of
the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, assume the defense
thereof, with counsel satisfactory to such Indemnified Party. After notice
from the indemnifying party of its intention to assume the defense of an
action, the Indemnified Party shall bear the expenses of any additional
counsel obtained by it, and the indemnifying party shall not be liable to
such Indemnified Party under this section for any legal or other expenses
subsequently incurred by such Indemnified Party in connection with the
defense thereof other than reasonable costs of investigation.
8.6. Each of the parties agrees promptly to notify the other parties of
the commencement of any litigation or proceeding against it or any of its
respective officers, directors, trustees, employees or 1933 Act control
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<PAGE>
persons in connection with the Agreement, the issuance or sale of the
Policies, the operation of the Accounts, or the sale or acquisition of
Shares.
8.7. A successor by law of the parties to this Agreement shall be
entitled to the benefits of the indemnification contained in this Article
VIII. The indemnification provisions contained in this Article VIII shall
survive any termination of this Agreement.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
SEC may grant and the terms hereof shall be interpreted and construed in
accordance therewith.
ARTICLE X. NOTICE OF FORMAL PROCEEDINGS
The Trust, MFS, and the Company agree that each such party shall promptly
notify the other parties to this Agreement, in writing, of the institution of
any formal proceedings brought against such party or its designees by the NASD,
the SEC, or any insurance department or any other regulatory body regarding such
party's duties under this Agreement or related to the sale of the Policies, the
operation of the Accounts, or the purchase of the Shares.
ARTICLE XI. TERMINATION
11.1. This Agreement shall terminate with respect to the Accounts, or one,
some, or all Portfolios:
(a) at the option of any party upon six (6) months' advance
written notice to the other parties; or
(b) at the option of the Company to the extent that the Shares
of Portfolios are not reasonably available to meet the
requirements of the Policies or are not "appropriate funding
vehicles" for the Policies, as reasonably determined by the
Company. Without limiting the generality of the foregoing,
the Shares of a Portfolio would not be "appropriate funding
vehicles" if, for example, such Shares did not meet the
diversification or other requirements referred to in Article
VI hereof; or if the Company would be permitted to disregard
Policy owner voting instructions pursuant to Rule 6e-2 or
6e-3(T) under the 1940 Act. Prompt notice of the election
to terminate for such cause and an explanation of such cause
shall be furnished to the Trust by the Company; or
(c) at the option of the Trust or MFS upon institution of formal
proceedings against the Company by the NASD, the SEC, or any
insurance department or any other regulatory body regarding
the Company's duties under this Agreement or related to the
sale of the Policies, the operation of the Accounts, or the
purchase of the Shares; or
(d) at the option of the Company upon institution of formal
proceedings against the Trust by the NASD, the SEC, or any
state securities or insurance department or any other
regulatory body regarding the Trust's or MFS' duties under
this Agreement or related to the sale of the Shares; or
- 12 -
<PAGE>
(e) at the option of the Company, the Trust or MFS upon receipt
of any necessary regulatory approvals and/or the vote of the
Policy owners having an interest in the Accounts (or any
subaccounts) to substitute the shares of another investment
company for the corresponding Portfolio Shares in accordance
with the terms of the Policies for which those Portfolio
Shares had been selected to serve as the underlying
investment media. The Company will give thirty (30) days'
prior written notice to the Trust of the Date of any
proposed vote or other action taken to replace the Shares;
or
(f) termination by either the Trust or MFS by written notice to
the Company, if either one or both of the Trust or MFS
respectively, shall determine, in their sole judgment
exercised in good faith, that the Company has suffered a
material adverse change in its business, operations,
financial condition, or prospects since the date of this
Agreement or is the subject of material adverse publicity
that is likely to have a material adverse impact on the
business and operations of the Company; or
(g) termination by the Company by written notice to the Trust
and MFS, if the Company shall determine, in its sole
judgment exercised in good faith, that the Trust or MFS has
suffered a material adverse change in this business,
operations, financial condition or prospects since the date
of this Agreement or is the subject of material adverse
publicity that is likely to have a material adverse impact
on the business and operations of the Trust or MFS; or
(h) at the option of any party to this Agreement, upon another
party's failure to cure a material breach of any provision
of this Agreement within 30 days notice thereof; or
(i) upon assignment of this Agreement, unless made with the
written consent of the parties hereto.
11.2. The notice shall specify the Portfolio or Portfolios, Policies and,
if applicable, the Accounts as to which the Agreement is to be terminated.
11.3. It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 11.1(a) may be exercised for
cause or for no cause.
11.4. Except as necessary to implement Policy owner initiated
transactions, or as required by state insurance laws or regulations, the
Company shall not redeem the Shares attributable to the Policies (as
opposed to the Shares attributable to the Company's assets held in the
Accounts), and the Company shall not prevent Policy owners from allocating
payments to a Portfolio that was otherwise available under the Policies,
until thirty (30) days after the Company shall have notified the Trust of
its intention to do so.
11.5. Notwithstanding any termination of this Agreement, the Trust and MFS
shall, at the option of the Company, continue to make available additional
shares of the Portfolios pursuant to the terms and conditions of this
Agreement, for all Policies in effect on the effective date of termination
of this Agreement (the "Existing Policies"), except as otherwise provided
under Article VII of this Agreement. Specifically, without limitation, the
owners of the Existing Policies shall be permitted to transfer or
reallocate investment under the Policies, redeem investments in any
Portfolio and/or invest in the Trust upon the making of additional purchase
payments under the Existing Policies.
- 13 -
<PAGE>
ARTICLE XII. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail, overnight courier or facsimile to the other party at the address
of such party set forth below or at such other address as such party may from
time to time specify in writing to the other party.
If to the Trust:
MFS VARIABLE INSURANCE TRUST
500 Boylston Street
Boston, Massachusetts 02116
Facsimile No.: (617) 954-6624
Attn: Stephen E. Cavan, Secretary
If to the Company:
PROTECTIVE LIFE INSURANCE COMPANY
2801 Highway 280 South
Birmingham, Alabama 35223
Facsimile No.: (205) 868-3597
Attn: Steve M. Callaway, Senior Associate Counsel
If to MFS:
MASSACHUSETTS FINANCIAL SERVICES COMPANY
500 Boylston Street
Boston, Massachusetts 02116
Facsimile No.: (617) 954-6624
Attn: Stephen E. Cavan, General Counsel
ARTICLE XIII. MISCELLANEOUS
13.1. Subject to the requirement of legal process and regulatory
authority, each party hereto shall treat as confidential the names and
addresses of the owners of the Policies and all information reasonably
identified as confidential in writing by any other party hereto and, except
as permitted by this Agreement or as otherwise required by applicable law
or regulation, shall not disclose, disseminate or utilize such names and
addresses and other confidential information without the express written
consent of the affected party until such time as it may come into the
public domain.
13.2. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions
hereof or otherwise affect their construction or effect.
13.3. This Agreement may be executed simultaneously in one or more
counterparts, each of which taken together shall constitute one and the
same instrument.
13.4. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
13.5. The Schedule attached hereto, as modified from time to time, is
incorporated herein by reference and is part of this Agreement.
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<PAGE>
13.6. Each party hereto shall cooperate with each other party in
connection with inquiries by appropriate governmental authorities
(including without limitation the SEC, the NASD, and state insurance
regulators) relating to this Agreement or the transactions contemplated
hereby.
13.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to
under state and federal laws.
13.8. A copy of the Trust's Declaration of Trust is on file with the
Secretary of State of The Commonwealth of Massachusetts. The Company
acknowledges that the obligations of or arising out of this instrument are
not binding upon any of the Trust's trustees, officers, employees, agents
or shareholders individually, but are binding solely upon the assets and
property of the Trust in accordance with its proportionate interest
hereunder. The Company further acknowledges that the assets and
liabilities of each Portfolio are separate and distinct and that the
obligations of or arising out of this instrument are binding solely upon
the assets or property of the Portfolio on whose behalf the Trust has
executed this instrument. The Company also agrees that the obligations of
each Portfolio hereunder shall be several and not joint, in accordance with
its proportionate interest hereunder, and the Company agrees not to proceed
against any Portfolio for the obligations of another Portfolio.
13.9 Except as otherwise expressly provided in this Agreement, neither
the Trust nor MFS nor any affiliate thereof shall use any trademark, trade
name, service mark or logo of the Company or any of its affiliates, or any
variation of any such trademark, trade name, service mark or logo, without
the Company's prior written consent, the granting of which shall be at the
Company's sole option. Except as otherwise expressly provided in this
Agreement, neither the Company nor any affiliate thereof shall use any
trademark, trade name, service mark or logo of the Trust or of MFS, or any
variation of any such trademark, trade name, service mark or logo, without
the prior written consent of the Trust or MFS, as appropriate, the granting
of which shall be at the sole option of the Trust or of MFS, as applicable.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the date specified above.
PROTECTIVE LIFE INSURANCE COMPANY
By its authorized officer,
By: /s/ CAROLYN KING
--------------------------------------
Title: Senior Vice President
-----------------------------------
MFS VARIABLE INSURANCE TRUST, ON BEHALF OF
THE PORTFOLIOS
By its authorized officer,
By: /s/ A. KEITH BRODKIN
---------------------------------------
Title: Chairman
------------------------------------
MASSACHUSETTS FINANCIAL SERVICES COMPANY
By its authorized officer,
By: /s/ ARNOLD D. SCOTT
----------------------------------------
Title: Senior Executive Vice President
-------------------------------------
<PAGE>
As of April 28, 1997
SCHEDULE A
ACCOUNTS, POLICIES AND PORTFOLIOS
SUBJECT TO THE PARTICIPATION AGREEMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
NAME OF SEPARATE
ACCOUNT AND DATE POLICIES FUNDED PORTFOLIOS
ESTABLISHED BY BOARD OF DIRECTORS BY SEPARATE ACCOUNT APPLICABLE TO POLICIES
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Protective Variable Annuity Separate Individual flexible premium deferred MFS Emerging Growth Series
Account (December 23, 1993) variable annuity contract MFS Research Series
Protective Variable Life Separate Individual flexible premium variable MFS Growth with Income Series
Account (February 15, 1995) life insurance policy contract MFS Total Return Series
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PARTICIPATION AGREEMENT
AMONG
ACACIA CAPITAL CORPORATION
PROTECTIVE LIFE INSURANCE COMPANY
AND
CALVERT ASSET MANAGEMENT COMPANY, INC.
THIS AGREEMENT, made and entered into this 29th day of April 1997, by and
among ACACIA CAPITAL CORPORATION, a management investment company organized
under the laws of the State of Maryland ("ACC"), Protective Life Insurance
Company, a Tennessee corporation (the "Company") on its own behalf and on behalf
of each of the segregated asset accounts of the Company set forth in Schedule A
hereto, as may be amended from time to time (the "Accounts", and CALVERT ASSET
MANAGEMENT COMPANY, INC. ("CAMCO"), a Delaware corporation.
WHEREAS, ACC is registered as an open-end management investment company
under the Investment Company Act of 1940, as amended (the "1940 Act"), and its
shares are registered or will be registered under the Securities Act of 1933, as
amended (the "1933 Act");
WHEREAS, shares of beneficial interest of ACC are divided into several
series of shares, each representing the interests in a particular managed pool
of securities and other assets;
WHEREAS, the series of shares of ACC offered by ACC to the Company and the
Accounts are set forth on Schedule A attached hereto (each, a "Portfolio," and.
collectively, the "Portfolios");
WHEREAS, CAMCO is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state securities
law, and is the ACC's investment adviser;
WHEREAS, the Company will issue certain variable annuity and/or variable
life insurance contracts (individually, the "Policy" or, collectively, the
"Policies') which, if required by applicable law will be registered under the
1933 Act;
WHEREAS, the Accounts are duly organized, validly existing segregated asset
accounts, established by resolution of the Board of Directors of the Company, to
set aside and invest assets attributable to the aforesaid variable annuity
and/or variable life insurance contracts that are allocated to the Accounts (the
Policies and the Accounts covered by this Agreement, and each corresponding
Portfolio covered by this Agreement in which the Accounts invest, is specified
in Schedule A attached hereto as may be modified from time to time);
WHEREAS, the Company has registered or will register the Accounts as unit
investment trusts under the 1940 Act (unless exempt therefrom);
WHEREAS, CALVERT DISTRIBUTORS, (the "Underwriter") is registered as a
broker-dealer with the Securities and Exchange Commission (the "SEC") under the
Securities Exchange Act of 1934, as amended (hereinafter the "1934 Act"), and is
a member in good standing of the National Association of Securities Dealers.
Inc. (the"NASD");
WHEREAS, INVESTMENT DISTRIBUTORS, INC., the underwriter for the individual
variable annuity and the variable life policies, is registered as a broker-
dealer with the SEC under the 1934 Act and is a member in good standing of the
NASD; and
1
<PAGE>
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in one or more of the
Portfolios specified in Schedule A attached hereto (the "Shares") on behalf of
the Accounts to fund the Policies, and ACC intends to sell such Shares to the
Accounts at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, ACC, CAMCO, and
the Company agree as follows:
ARTICLE I. SALE OF TRUST SHARES
1.1 ACC agrees to sell to the Company those Shares that the Accounts
order (based on orders placed by Policy holders on that Business Day, as
defined below) and that are available for purchase by such Accounts,
executing such orders on a daily basis at the net asset value next computed
after receipt by ACC or its designee of the order for the Shares. For
purposes of this Section 1.1, the Company shall be the designee of ACC for
receipt of such orders from Policy owners and receipt by such designee
shall constitute receipt by ACC; PROVIDED that ACC receives written or
facsimile notice of such orders by 10:30 a.m. Eastern time on the next
following Business Day. "Business Day" shall mean any day on which the New
York Stock Exchange, Inc. (the "NYSE") is open for trading and on which ACC
calculates its net asset value pursuant to the rules of the SEC. ACC shall
furnish to the Company same day written or facsimile confirmation of each
order under this paragraph 1.1. Written or facsimile notices under Article
I of this agreement shall be delivered to the address or facsimile number
designated from time to time by ACC, CAMCO and the Company.
1.2. ACC agrees to make the Shares available indefinitely for purchase at
the applicable net asset value per share by the Company and the Accounts on
those days on which ACC calculates its net asset value pursuant to rules of
the SEC and ACC shall calculate such net asset value on each day which the
NYSE is open for trading. Notwithstanding the foregoing, the Board of
Directors of ACC (the "Board") may refuse to sell any Shares to the Company
and the Accounts, or suspend or terminate the offering of the Shares if
such action is required by law or by regulatory authorities having
jurisdiction or is, in the sole discretion of the Board acting in good
faith and in light of its fiduciary duties under federal and any applicable
state laws, necessary in the best interest of the Shareholders of such
Portfolio.
1.3. ACC and CAMCO agree that (1) the Shares will be sold only to
insurance companies that have entered into participation agreements with
ACC and CAMCO (the "Participating Insurance Companies") and their separate
accounts, qualified pension and retirement plans and CAMCO or its
affiliates; and (2) all such sales will comply with applicable federal and
state securities laws and with ACC's Exemptive Order regarding Shared
Funding. The Company will not resell the Shares except to ACC or its
agents.
1.4. ACC agrees to redeem for cash, on the Company's request, any full or
fractional Shares held by the Accounts (based on orders placed by Policy
owners on that Business Day), executing such requests on a daily basis at
the net asset value next computed after receipt by ACC or its designee of
the request for redemption. For purposes of this Section 1.4. the Company
shall be the designee of ACC for receipt of requests for redemption from
Policy owners and receipt by such designee shall constitute receipt by ACC;
provided that ACC receives written or facsimile notice of such request for
redemption by 10:30 a.m. Eastern time on the next following Business Day.
ACC shall furnish to the Company same day written or facsimile confirmation
of each request for redemption under this paragraph 1.4. Written or
facsimile notice under Article I of this agreement shall be delivered to
the address or facsimile number designated from time to time by ACC, CAMCO
and the Company.
1.5. Each purchase, redemption and exchange order placed by the Company
shall be placed separately for each Portfolio and shall not be netted with
respect to any Portfolio. However, with respect to payment of the purchase
price by the Company and of redemption proceeds by ACC, the Company and ACC
shall net purchase and redemption orders with respect to each Portfolio and
shall transmit one net payment for all of the Portfolios in accordance with
Section 1.6 hereof.
2
<PAGE>
1.6. In the event of net purchases, the Company shall pay for the Shares
on the next Business Day after an order to purchase the Shares is made in
accordance with the provisions of Section 1.1. hereof. In the event of net
redemptions, ACC shall pay the redemption proceeds on the next Business Day
after an order to redeem the shares is made in accordance with the
provisions of Section 1.4. hereof. All such payments shall be in federal
funds transmitted by wire.
1.7. Issuance and transfer of the Shares will be by book entry only.
Stock certificates will not be issued to the Company or the Accounts. The
Shares ordered from ACC will be recorded in an appropriate title for the
Accounts or the appropriate subaccounts of the Accounts.
1.8. ACC shall furnish same day notice (by wire or telephone followed by
written confirmation) to the Company of any dividends or capital gain
distributions payable on the Shares. The Company hereby elects to receive
all such dividends and distributions as are payable on a Portfolio's Shares
in additional Shares of that Portfolio. ACC shall notify the Company of
the number of Shares so issued as payment of such dividends and
distributions.
1.9. ACC or its custodian shall make the net asset value per share for
each Portfolio available to the Company on each Business Day as soon as
reasonably practical after the net asset value per share is calculated and
shall use its best efforts to make such net asset value per share available
by 6:30 p.m. Eastern time. If ACC provides materially incorrect share net
asset value information, ACC shall make an adjustment to the number of
shares purchased or redeemed for the Accounts to reflect the correct net
asset value per share. Any material error in the calculation or reporting
of net asset value per share, dividend or capital gains information shall
be reported promptly upon discovery to the Company.
ARTICLE II, CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS
2.1. The Company represents and warrants that the Policies are or will be
registered under the 1933 Act or are exempt from or not subject to
registration thereunder, and that the Policies will be issued, sold, and
distributed in compliance in all material respects with all applicable
state and federal laws, including without limitation the 1933 Act, the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and the 1940
Act. The Company further represents and warrants that it is an insurance
company duly organized and in good standing under applicable law and that
it has legally and validly established the Accounts as segregated asset
accounts under applicable law and has registered or, prior to any issuance
or sale of the Policies, will register the Accounts as unit investment
trusts in accordance with the provisions of the 1940 Act (unless exempt
therefrom) to serve as segregated investment accounts for the Policies, and
that it will maintain such registration for so long as any Policies are
outstanding. The Company shall amend the registration statements under the
1933 Act for the Policies and the registration statements under the 1940
Act for the Accounts from time to time as required in order to effect the
continuous offering of the Policies or as may otherwise be required by
applicable law. The Company shall register and qualify the Policies for
sales in accordance with the securities laws of the various states only if
and to the extent deemed necessary by the Company.
2.2. Subject to Article VI hereof, the Company represents and warrants
that the Policies are currently and at the time of issuance will be treated
as life insurance, endowment or annuity contracts under applicable
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
that it will maintain such treatment and that it will notify ACC or CAMCO
immediately upon having a reasonable basis for believing that the Policies
have ceased to be so treated or that they might not be so treated in the
future.
2.3. The Company represents and warrants that Investment Distributors,
Inc., the underwriter for the individual variable annuity and the variable
life policies, is a member in good standing of the NASD and is a registered
broker-dealer with the SEC. The Company represents and warrants that the
Company and Investment Distributors, Inc. will sell and distribute such
policies in accordance in all material respects with all applicable state
and federal securities laws including without limitation the 1933 Act, the
1934 Act and the 1940 Act.
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2.4. ACC and CAMCO represent and warrant that the Shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the State of Maryland and
all applicable federal and state securities laws and that ACC is and shall
remain registered under the 1940 Act. ACC shall amend the registration
statement for its Shares under the 1933 Act and the 1940 Act from time to
time as required in order to effect the continuous offering of its Shares.
ACC shall register and qualify the Shares for sale in accordance with the
laws of the various states only if and to the extent deemed necessary by
ACC.
2.5. CAMCO represents and warrants that the Underwriter is a member in
good standing of the NASD and is registered as a broker-dealer with the
SEC. ACC and CAMCO represent that ACC and the Underwriter will sell and
distribute the Shares in accordance in all material respects with all
applicable state and federal securities laws, including without limitation
the 1933 Act, the 1934 Act, and the 1940 Act.
2.6. ACC represents that it is lawfully organized and validly existing
under the laws of the State of Maryland and that it does and will comply in
all material respects with the 1940 Act and any applicable regulations
thereunder and Subchapter M of the Code.
2.7. CAMCO represents and warrants that it is and shall remain duly
registered under all applicable federal securities laws and that it shall
perform its obligations for ACC in compliance in all material respects with
any applicable federal and state securities laws.
2.8. No less frequently than annually, the Company shall submit to the
Board such reports, material or data as the Board may reasonably request so
that it may carry out fully the obligations imposed upon it by the
conditions contained in the exemptive application pursuant to which the SEC
has granted exemptive relief to permit mixed and shared funding (the "Mixed
and Shared Funding Exemptive Order").
2.9. ACC and CAMCO represent that ACC's investment policies, fees and
expenses are and shall at all times remain in compliance with applicable
state securities laws, if any, and with the insurance laws of the State of
Tennessee and any other states as may be identified by the Company from
time to time. ACC and CAMCO represent that their respective operations are
and shall at all times remain in material compliance with applicable state
securities laws and with the insurance laws of the State of Tennessee and
any other state as may be identified by the Company from time to time to
the extent required to perform this Agreement.
ARTICLE III. PROSPECTUS AND PROXY STATEMENTS; VOTING
3.1. At least annually, ACC or its designee shall provide the Company,
free of charge, with as many copies of the current prospectus (describing
only the Portfolios listed in Schedule A hereto) for the Shares as the
Company may reasonably request for distribution to existing Policy owners
whose Policies are funded by such Shares. ACC or its designee shall
provide the Company, at the Company's expense, with as many copies of the
current prospectus for the Shares as the Company may reasonably request for
distribution to prospective purchasers of Policies. If requested by the
Company in lieu thereof, ACC or its designee shall provide such
documentation (including a "camera ready" copy of the new prospectus as set
in type or, at the request of the Company, as a diskette in the form sent
to the financial printer) and other assistance as is reasonably necessary
in order for the parties hereto once each year (or more frequently if the
prospectus for the Shares is supplemented or amended) to have the
prospectus for the Policies and the prospectus for the Shares printed
together in one document; the expenses of such printing to be apportioned
between (a) the Company and (b) ACC or its designee in proportion to the
number of pages of the Policy and Shares' prospectuses taking account of
other relevant factors affecting the expense of printing, such as covers,
columns, graphs and charts; ACC or its designee to bear the cost of
printing the Shares' prospectus portion of such document for distribution
to owners of existing Policies funded by Shares and the Company to bear the
expenses of printing the portion of such document relating to the Accounts;
PROVIDED, however, that the Company shall bear all printing expenses of
such combined documents where used for distribution to prospective
purchasers. In the event that the Company requests that ACC or its
designee provides ACC's prospectus in a "camera ready" or diskette format,
ACC shall be responsible for providing the prospectus in the format in
which it or CAMCO is accustomed to formatting prospectuses and shall bear
the expense of providing the prospectus in such format (E.G., typesetting
expenses), and the Company shall bear the expense of adjusting or changing
the format to conform with any of its prospectuses.
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3.2. The prospectus for the Shares shall state that the statement of
additional information for the Shares is available from ACC or its
designee. ACC or its designee, at its expense, shall print and provide
such statement of additional information to the Company (or a master of
such statement suitable for duplication by the Company) for distribution to
any owner of a Policy. ACC or its designee, at the Company's expense,
shall print and provide such statement to the Company (or a master of such
statement suitable for duplication by the Company) for distribution to a
prospective purchaser who requests such statement.
3.3. ACC or its designee shall provide the Company free of charge copies,
if and to the extent applicable to the Shares, of ACC's proxy materials,
reports to Shareholders and other communications to Shareholders in such
quantity as the Company shall reasonably require for distribution to Policy
owners.
3.4. Notwithstanding the provisions of Sections 3.1, 3.2, and 3.3 above,
or of Article V below, ACC shall not pay the expense of printing or
providing documents to the extent such cost is considered a distribution
expense.
3.5. ACC hereby notifies the Company that it may be appropriate to
include in the prospectus pursuant to which a Policy is offered disclosure
regarding the potential risks of mixed and shared funding.
3.6. If and to the extent required by law, the Company shall:
(a) solicit voting instructions from Policy owners;
(b) vote the Shares in accordance with instructions received
from Policy owners; and
(c) vote the Shares for which no instructions have been received
in the same proportion as the Shares of such Portfolio for
which instructions have been received from Policy owners;
so long as and to the extent that the SEC continues to interpret the 1940
Act to require pass through voting privileges for variable contract owners.
Subject to applicable law, the Company will in no way recommend action in
connection with or oppose or interfere with the solicitation of proxies for
the Shares held for such Policy owners. The Company reserves the right to
vote shares held in any segregated asset account in its own right, to the
extent permitted by law. Participating Insurance Companies shall be
responsible for assuring that each of their separate accounts holding
Shares calculates voting privileges in the manner required by the Mixed and
Shared Funding Exemptive Order. ACC and CAMCO will notify the Company of
any changes of interpretations or amendments to the Mixed and Shared
Funding Exemptive Order.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to ACC or
its designee, each piece of sales literature or other promotional material
in which ACC, CAMCO, any other investment adviser to ACC, or any affiliate
of CAMCO are named, at least three (3) Business Days prior to its use. No
such material shall be used if ACC, CAMCO or their respective designees
reasonably objects to such use within three (3) Business Days after receipt
of such material.
4.2. The Company shall not give any information or make any
representations or statement on behalf of ACC, CAMCO, any other investment
adviser to ACC, or any affiliate of CAMCO or concerning ACC or any other
such entity in connection with the sale of the Policies other than the
information or representations contained in the registration statement,
prospectus or statement of additional information for the Shares, as such
registration statement, prospectus and statement of additional information
may be amended or supplemented from time to time, or in reports or proxy
statements for ACC, or in sales literature or other promotional material
approved by ACC, CAMCO or their respective designees, except with the
permission of ACC, CAMCO or their respective designees. ACC, CAMCO or their
respective designees each agrees to respond to any request for approval on
a prompt and timely basis. The Company shall adopt and implement procedures
reasonably designed to ensure that information concerning ACC, CAMCO or any
of their affiliates which is intended for use only by brokers or agents
selling the Policies (i.e., information that is not intended for
distribution to Policy owners or prospective Policy owners) is so used, and
neither ACC, CAMCO nor any of their affiliates shall be liable for any
losses, damages or expenses
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relating to the improper use of such broker-only materials. The parties
hereto agree that this Section 4.2 is not intended to designate or
otherwise imply that the Company is an underwriter of ACC's shares.
4.3. ACC or its designee shall furnish, or shall cause to be furnished,
to the Company or its designee, each piece of sales literature or other
promotional material in which the Company and/or the Accounts is named at
least three (3) Business Days prior to its use. No such material shall be
used if the Company or its designee reasonably objects to such use within
three (3) Business Days after receipt of such material.
4.4. ACC and CAMCO shall not give, and agree that the Underwriter shall
not give, any information or make any representations on behalf of the
Company or concerning the Company, the Accounts, or the Policies in
connection with the sale of the Policies other than the information or
representations contained in a registration statement, prospectus, or
statement of additional information for the Policies, as such registration
statement, prospectus and statement of additional information may be
amended or supplemented from time to time, or in reports for the Accounts,
or in sales literature or other promotional material approved by the
Company or its designee, except with the permission of the Company. The
Company or its designee agrees to respond to any request for approval on a
prompt and timely basis. ACC and CAMCO shall adopt and implement
procedures reasonably designed to ensure that information concerning the
Company or any of its affiliates and the Accounts that is intended for use
only by brokers or agents (I.E. information that is not intended for
distribution to owners of the Shares or prospective owners of the Share) is
so used, and neither the Company, its affiliates nor the Accounts shall be
liable for any losses, damages or expenses relating to the improper use of
such broker only materials. The parties hereto agree that this Section
4.4. is neither intended to designate nor otherwise imply that CAMCO is an
underwriter or distributor of the Policies.
4.5. The Company and ACC (or its designee in lieu of the Company or ACC,
as appropriate) will each provide to the other at least one complete copy
of all registration statements, prospectuses, statements of additional
information, reports, proxy statements, sales literature and other
promotional materials, applications for exemptions, requests for no-action
letters, and all amendments to any of the above, that relate to the
Policies, or to ACC or its Shares, prior to or contemporaneously with the
filing of such document with the SEC or other regulatory authorities. The
Company and ACC shall also each promptly inform the other of the results of
any examination by the SEC (or other regulatory authorities) that relates
to the Policies, ACC or its Shares, and the party that was the subject of
the examination shall provide the other party with a copy of relevant
portions of any "deficiency letter" or other correspondence or written
report regarding any such examination.
4.6. ACC and CAMCO will provide the Company with as much notice as is
reasonably practicable of any proxy solicitation for any Portfolio, and of
any material change in ACC's registration statement, particularly any
change resulting in change to the registration statement or prospectus or
statement of additional information for any Account. ACC and CAMCO will
cooperate with the Company so as to enable the Company to solicit proxies
from Policy owners or to make changes to its prospectus, statement of
additional information or registration statement in an orderly manner. ACC
and CAMCO will make reasonable efforts to attempt to have changes affecting
Policy prospectuses become effective simultaneously with the annual updates
for such prospectuses.
4.7. For purpose of this Article IV and Article VIII, the phrase "sales
literature or other promotional material" includes but is not limited to
advertisements (such as material published, or designed for use in, a
newspaper, magazine, or other periodical, radio, television, telephone or
tape recording, videotape display, signs or billboards, motion pictures, or
other public media), and sales literature (such as brochures, circulars,
reprints or excerpts or any other advertisement, sales literature, or
published articles), distributed or made generally available to customers
or the public, educational or training materials or communications
distributed or made generally available to some or all agents or employees.
ARTICLE V. FEES AND EXPENSES
5.1. ACC shall pay no fee or other compensation to the Company under this
Agreement, and the Company shall pay no fee or other compensation to ACC,
except that if ACC or any Portfolio adopts and implements a plan pursuant
to Rule 12b-1 under the 1940 Act to finance distribution and Shareholder
servicing expenses, then, subject to obtaining any required exemptive
orders or regulatory approvals, ACC may make payments to the
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Company or to the underwriter for the Policies if and in amounts agreed to
by ACC in writing. Each party, however, shall, in accordance with the
allocation of expenses specified in Articles III and V hereof, reimburse
other parties for expenses initially paid by one party but allocated to
another party. In addition, nothing herein shall prevent the parties hereto
from otherwise agreeing to perform, and arranging for appropriate
compensation for, other services relating to ACC and/or to the Accounts.
5.2. ACC or its designee shall bear the expenses for the cost of
registration and qualification of the Shares under all applicable federal
and state laws, including preparation and filing of ACC's registration
statement, and payment of filing fees and registration fees; preparation
and filing of ACC's proxy materials and reports to Shareholders; setting in
type and printing its prospectus and statement of additional information
(to the extent provided by and as determined in accordance with Article III
above); setting in type and printing the proxy materials and reports to
Shareholders (to the extent provided by and as determined in accordance
with Article III above); the preparation of all statements and notices
required of ACC by any federal or state law with respect to its Shares; all
taxes on the issuance or transfer of the Shares; and the costs of
distributing ACC's prospectuses and proxy materials to owners of Policies
funded by the Shares and any expenses permitted to be paid or assumed by
ACC pursuant to a plan, if any, under Rule 12b-1 under the 1940 Act. ACC
shall not bear any expenses of marketing the Policies.
5.3. The Company shall bear the expenses of distributing the Shares
prospectus or prospectuses in connection with new sales of the Policies and
of distributing ACC's Shareholder reports to Policy owners. The Company
shall bear all expenses associated with the registration, qualification,
and filing of the Policies under applicable federal securities and state
insurance laws; the cost of preparing, printing and distributing the Policy
prospectus and statement of additional information; and the cost of
preparing, printing and distributing annual individual account statements
for Policy owners as required by state insurance laws.
ARTICLE VI. DIVERSIFICATION AND RELATED LIMITATIONS
6.1. ACC and CAMCO represent and warrant that each Portfolio of ACC will
meet the diversification requirements of Section 817 (h) (1) of the Code
and Treas. Reg. 1.817-5, relating to the diversification requirements for
variable annuity, endowment, or life insurance contracts, as they may be
amended from time to time (and any revenue rulings, revenue procedures,
notices, and other published announcements of the Internal Revenue Service
interpreting these sections), as if those requirements applied directly to
each such Portfolio. In the event that any Portfolio is not so diversified
at the end of any applicable quarter, ACC and CAMCO will make every effort
to: (a) adequately diversify the Portfolio so as to achieve compliance
within the grace period afforded by Treas. Reg. 1.817.5, and (b) notify the
Company.
6.2. ACC and CAMCO represent that each Portfolio will elect to be
qualified as a Regulated Investment Company under Subchapter M of the Code
and that they will maintain such qualification (under Subchapter M or any
successor or similar provision).
ARTICLE VII. POTENTIAL MATERIAL CONFLICTS
7.1. ACC agrees that the Board, constituted with a majority of
disinterested directors, will monitor each Portfolio of ACC for the
existence of any material irreconcilable conflict between the interests of
the variable annuity contract owners and the variable life insurance policy
owners of the Company and/or affiliated companies ("contract owners")
investing in ACC. The Board shall have the sole authority to determine if a
material irreconcilable conflict exists, and such determination shall be
binding on the Company only if approved in the form of a resolution by a
majority of the Board, or a majority of the disinterested directors of the
Board. The Board will give prompt notice of any such determination to the
Company.
7.2. The Company agrees that it will be responsible for assisting the
Board in carrying out its responsibilities under the conditions set forth
in ACC's exemptive application pursuant to which the SEC has granted the
Mixed and Shared Funding Exemptive Order by providing the Board, as it may
reasonably request, with all information necessary for the Board to
consider any issues raised and agrees that it will be responsible for
promptly reporting
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any potential or existing conflicts of which it is aware to the Board
including, but not limited to, an obligation by the Company to inform the
Board whenever contract owner voting instructions are disregarded. The
Company also agrees that, if a material irreconcilable conflict arises, it
will at its own cost remedy such conflict up to and including (a)
withdrawing the assets allocable to some or all of the Accounts from ACC or
any Portfolio and reinvesting such assets in a different investment medium,
including (but not limited to) another Portfolio of ACC, or submitting to a
vote of all affected contract owners whether to withdraw assets from ACC or
any Portfolio and reinvesting such assets in a different investment medium
and, as appropriate, segregating the assets attributable to any appropriate
group of contract owners that votes in favor of such segregation, or
offering to any of the affected contract owners the option of segregating
the assets attributable to their contracts or policies, and (b)
establishing a new registered management investment company and segregating
the assets underlying the Policies, unless a majority of Policy owners
materially adversely affected by the conflict have voted to decline the
offer to establish a new registered management investment company.
7.3. A majority of the disinterested directors of the Board shall
determine whether any proposed action by the Company adequately remedies
any material irreconcilable conflict. In the event that the Board
determines that any proposed action does not adequately remedy any material
irreconcilable conflict, the Company will withdraw from investment in ACC
each of the Accounts designated by the disinterested directors and
terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination; PROVIDED, HOWEVER, that
such withdrawal and termination shall be limited to the extent required to
remedy any such material irreconcilable conflict as determined by a
majority of the disinterested directors of the Board.
7.4. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
1940 Act or the rules promulgated thereunder with respect to mixed or
shared funding (as defined in the Mixed and Shared Funding Exemptive Order)
on terms and conditions materially different from those contained in the
Mixed and Shared Funding Exemptive Order, then (a) ACC and/or the
Participating Insurance Companies, as appropriate, shall take such steps as
may be necessary to comply with Rule 6e-2 and 6e-3(T), as amended, and Rule
6e-3, as adopted, to the extent such rules are applicable; and (b) Sections
3.5, 3.6, 7.1, 7.2, 7.3 and 7.4 of this Agreement shall continue in effect
only to the extent that terms and conditions substantially identical to
such Sections are contained in such Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
The Company agrees to indemnify and hold harmless ACC, CAMCO, any
affiliates of CAMCO, and each of their respective directors/trustees,
officers and each person, if any, who controls ACC or CAMCO within the
meaning of Section 15 of the 1933 Act, and any agents or employees of the
foregoing (each an "Indemnified Party," or collectively, the "Indemnified
Parties" for purposes of this Section 8.1) against any and all losses,
claims, damages, liabilities (including amounts paid in settlement with the
written consent of the Company) or expenses (including reasonable counsel
fees) to which any Indemnified Party may become subject under any statute,
regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Shares or the
Policies and:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the registration statement, prospectus or statement of
additional information for the Policies or contained in or
sales literature or other promotional material for the
Policies (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission
or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading PROVIDED that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged
statement or omission was made in reasonable reliance upon
and in conformity with information furnished to the Company
or its designee by or on behalf of ACC or CAMCO or the
Underwriter for use in the registration statement,
prospectus or statement of additional information for the
Policies or in the Policies or sales literature or other
promotional material (or any amendment or supplement) or
otherwise for use in connection with the sale of the
Policies or Shares; or
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(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus, statement of additional
information or sales literature or other promotional
material of ACC not supplied by the Company or its designee,
or persons under its control and on which the Company has
reasonably relied) or wrongful conduct of the Company or
persons under its control, with respect to the sale or
distribution of the Policies or Shares; or
(c) arise out of any untrue statement or alleged untrue
statement of a material fact contained in the registration
statement, prospectus, statement of additional information
or sales literature or other promotional literature of ACC,
or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statement or statements therein not misleading, if such
statement or omission was made in reliance upon information
furnished to ACC by or on behalf of the Company; or
(d) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company; or
(e) arise as a result of any failure by the Company to provide
the services and furnish the materials under the terms of
this Agreement;
as limited by and in accordance with the provisions of this Article
VIII.
8.2. INDEMNIFICATION BY CAMCO
CAMCO agrees to indemnify and hold harmless the Company and each of
its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act, and any agents or
employees of the foregoing (each an "Indemnified Party," or collectively,
the "Indemnified Parties" for purposes of this Section 8.2) against any and
all losses, claims, damages, liabilities (including, but not limited to,
amounts paid in settlement with the written consent of CAMCO) or expenses
(including, but not limited to, reasonable counsel fees) to which any
Indemnified Party may become subject under any statute, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) or settlements are related to the
sale or acquisition of the Shares or the Policies and:
(a) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in
the registration statement, prospectus, statement of
additional information or sales literature or other
promotional material of ACC (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon
the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statement therein not misleading, PROVIDED that
this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such
alleged statement or omission was made in reasonable
reliance upon and in conformity with information furnished
to ACC, CAMCO, the Underwriter or their respective designees
by or on behalf of the Company for use in the registration
statement, prospectus or statement of additional information
for ACC or in sales literature or other promotional material
for ACC (or any amendment or supplement) or otherwise for
use in connection with the sale of the Policies or Shares;
or
(b) arise out of or as a result of statements or representations
(other than statements or representations contained in the
registration statement, prospectus, statement of additional
information or sales literature or other promotional
material for the Policies not supplied by ACC, CAMCO, the
Underwriter or any of their respective designees or persons
under their respective control and on which any such entity
has reasonably relied) or wrongful conduct of ACC or persons
under its control, with respect to the sale or distribution
of the Policies or Shares; or
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(c) arise out of any untrue statement or alleged untrue
statement of a material fact contained in the registration
statement, prospectus, statement of additional information,
or sales literature or other promotional literature of the
Accounts or relating to the Policies, or any amendment
thereof or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statement or
statements therein not misleading, if such statement or
omission was made in reliance upon information furnished to
the Company by or on behalf of ACC, CAMCO or the
Underwriter; or
(d) arise out of or result from any material breach of any
representation and/or warranty made by ACC in this Agreement
(including a failure, whether unintentional or in good faith
or otherwise, to comply with the diversification
requirements specified in Article VI of this Agreement) or
arise out of or result from any other material breach of
this Agreement by ACC; or
(e) arise out of or result from the materially incorrect or
untimely calculation or reporting of the daily net asset
value per share or dividend or capital gain distribution
rate; or
(f) arise as a result of any failure by ACC to provide the
services and furnish the materials under the terms of the
Agreement;
as limited by and in accordance with the provisions of this Article VIII.
8.3. In no event shall CAMCO be liable under the indemnification
provisions contained in this Agreement to any individual or entity,
including without limitation, the Company, or any Participating Insurance
Company or any Policy holder, with respect to any losses, claims, damages,
liabilities or expenses that arise out of or result from (i) a breach of
any representation, warranty, and/or covenant made by the Company hereunder
or by any Participating Insurance Company under an agreement containing
substantially similar representations, warranties and covenants; (ii) the
failure by the Company or any Participating Insurance Company to maintain
its segregated asset account (which invests in any Portfolio) as a legally
and validly established segregated asset account under applicable state law
and as a duly registered unit investment trust under the provisions of the
1940 Act (unless exempt therefrom); or (iii) subject to ACC's compliance
with the diversification requirements specified in Article VI, the failure
by the Company or any Participating Insurance Company to maintain its
variable annuity and/or variable life insurance contracts (with respect to
which any Portfolio serves as an underlying funding vehicle) as life
insurance, endowment or annuity contracts under applicable provisions of
the Code.
8.4. Neither the Company nor CAMCO shall be liable under the
indemnification provisions contained in this Agreement with respect to any
losses, claims, damages, liabilities or expenses to which an Indemnified
Party would otherwise be subject by reason of such Indemnified Party's
willful misfeasance, willful misconduct, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations and duties under this
Agreement.
8.5. Promptly after receipt by an Indemnified Party under this Section
8.5. of notice of commencement of any action, such Indemnified Party will,
if a claim in respect thereof is to be made against the indemnifying party
under this section, notify the indemnifying party of the commencement
thereof, but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any Indemnified Party
otherwise than under this section. In case any such action is brought
against any Indemnified Party, and it notified the indemnifying party of
the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, assume the defense
thereof, with counsel satisfactory to such Indemnified Party. After
notice from the indemnifying party of its intention to assume the defense
of an action, the Indemnified Party shall bear the expenses of any
additional counsel obtained by it, and the indemnifying party shall not be
liable to such Indemnified Party under this section for any legal or other
expenses subsequently incurred by such Indemnified Party in connection with
the defense thereof other than reasonable costs of investigation.
8.6. Each of the parties agrees promptly to notify the other parties of
the commencement of any litigation or proceeding against it or any of its
respective officers, directors, trustees, employees or 1933 Act control
persons in connection with the Agreement, the issuance or sale of the
Policies, the operation of the Accounts, or the sale or acquisition of
Shares.
10
<PAGE>
8.7. A successor by law of the parties to this Agreement shall be
entitled to the benefits of the indemnification contained in this Article
VIII. The indemnification provisions contained in this Article VIII shall
survive any termination of this Agreement.
ARTICLE IX:. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of Maryland.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
SEC may grant and the terms hereof shall be interpreted and construed in
accordance therewith.
ARTICLE X. NOTICE OF FORMAL PROCEEDINGS
ACC, CAMCO, and the Company agree that each such party shall promptly
notify the other parties to this Agreement, in writing, of the institution of
any formal proceedings brought against such party or its designees by the NASD,
the SEC, or any insurance department or any other regulatory body regarding such
party's duties under this Agreement or related to the sale of the Policies, the
operation of the Accounts, or the sale or purchase of the Shares.
ARTICLE XI. TERMINATION
11.1 This Agreement shall terminate with respect to the Accounts, or one,
some, or all Portfolios:
(a) at the option of any party upon six (6) months' advance
written notice to the other parties; or
(b) at the option of the Company to the extent that the Shares
of Portfolios are not reasonably available to meet the
requirements of the Policies or are not "appropriate funding
vehicles" for the Policies, as reasonably determined by the
Company. Without limiting the generality of the foregoing,
the Shares of a Portfolio would not be "appropriate funding
vehicles" if, for example, such Shares did not meet the
diversification or other requirements referred to in Article
VI hereof; or if the Company would be permitted to disregard
Policy owner voting instructions pursuant to Rule 6e-2 or
6e-3(T) under the 1940 Act. Prompt notice of the election to
terminate for such cause and an explanation of such cause
shall be furnished to ACC by the Company; or
(c) at the option of ACC or CAMCO upon institution of formal
proceedings against the Company by the NASD, the SEC, or any
insurance department or any other regulatory body regarding
the Company's duties under this Agreement or related to the
sale of the Policies, the operation of the Accounts, or the
purchase of the Shares; or
(d) at the option of the Company upon institution of formal
proceedings against ACC by the NASD, the SEC, or any state
securities or insurance department or any other regulatory
body regarding ACC's or CAMCO' duties under this Agreement
or related to the sale of the Shares; or
(e) at the option of the Company, ACC or CAMCO upon receipt of
any necessary regulatory approvals and/or the vote of the
Policy owners having an interest in the Accounts (or any
subaccounts) to substitute the shares of another investment
company for the corresponding Portfolio Shares in accordance
with the terms of the Policies for which those Portfolio
Shares had been selected to serve as the underlying
investment medium. The Company will give thirty (30) days
prior written notice to ACC of the Date of any proposed vote
or other action taken to replace the Shares; or
11
<PAGE>
(f) termination by either ACC or CAMCO by written notice to the
Company, if either one or both of ACC or CAMCO respectively,
shall determine, in their sole judgment exercised in good
faith, that the Company has suffered a material adverse
change in its business, operations, financial condition, or
prospects since the date of this Agreement or is the subject
of material adverse publicity; or
(g) termination by the Company by written notice to ACC and
CAMCO, if the Company shall determine, in its sole judgment
exercised in good faith, that ACC or CAMCO has suffered a
material adverse change in this business, operations,
financial condition or prospects since the date of this
Agreement or is the subject of material adverse publicity;
or
(h) at the option of any party to this Agreement, upon another
party's material breach of any provision of this Agreement;
or
(i) upon assignment of this Agreement, unless made with the
written consent of the parties hereto.
11.2. The notice shall specify the Portfolio or Portfolios, Policies and,
if applicable, the Accounts as to which the Agreement is to be terminated.
11.3. It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 11.1(a) may be exercised for
cause or for no cause.
11.4. Except as necessary to implement Policy owner initiated
transactions, or as required by state insurance laws or regulations, the
Company shall not redeem the Shares attributable to the Policies (as
opposed to the Shares attributable to the Company's assets held in the
Accounts), and the Company shall not prevent Policy owners from allocating
payments to a Portfolio that was otherwise available under the Policies,
until thirty (30) days after the Company shall have notified ACC of its
intention to do so.
11.5. Notwithstanding any termination of this Agreement, so long as the
Company shall have a balance of at least $1 million invested in any
Portfolio of ACC, then ACC and CAMCO shall, at the option of the Company,
continue to make available additional shares of that Portfolio pursuant to
the terms and conditions of this Agreement, for all Policies in effect on
the effective date of termination of this Agreement (the "Existing
Policies"), except as otherwise provided under Article VII of this
Agreement. Specifically, without limitation, the owners of the Existing
Policies shall be permitted to transfer or reallocate investment under the
Policies, redeem investments in any Portfolio and/or invest in ACC upon the
making of additional purchase payments under the Existing Policies.
ARTICLE XII. NOTICES
Any notice shall be sufficiently given when sent by registered or certified
mail, overnight courier or facsimile to the other party at the address of such
party set forth below or at such other address as such party may from time to
time specify in writing to the other party.
If to ACC:
Acacia Capital Corporation
c/o Calvert Group Legal Department
4550 Montgomery Avenue, 10th Floor
Bethesda, MD 20814
Facsimile No.: (301)
Attn: William M. Tartikoff, Vice President
12
<PAGE>
If to the Company:
Protective Life Insurance Company
2801 Highway 280 South
Birmingham, AL 35223
Facsimile No.: (205)868-3597
Attn: Legal Dept., Steve M. Callaway, Sr. Associate Counsel
If to CAMCO:
Calvert Asset Management Company, Inc.
c/o Calvert Group Legal Department
4550 Montgomery Avenue, 10th Floor
Bethesda, MD 20814
Facsimile No.: (301)
Attn: William M. Tartikoff, Vice President
ARTICLE XIII. MISCELLANEOUS
13.1. Subject to the requirement of legal process and regulatory
authority, each party hereto shall treat as confidential the names and
addresses of the owners of the Policies and all information reasonably
identified as confidential in writing by any other party hereto and, except
as permitted by this Agreement or as otherwise required by applicable law
or regulation, shall not disclose, disseminate or utilize such names and
addresses and other confidential information without the express written
consent of the affected party until such time as it may come into the
public domain.
13.2. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions
hereof or otherwise affect their construction or effect.
13.3. This Agreement may be executed simultaneously in one or more
counterparts, each of which taken together shall constitute one and the
same instrument.
13.4. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
13.5. The Schedule attached hereto, as modified from time to time, is
incorporated herein by reference and is part of this Agreement.
13.6. Each party hereto shall cooperate with each other party in
connection with inquiries by appropriate governmental authorities
(including without limitation the SEC, the NASD, and state insurance
regulators) relating to this Agreement or the transactions contemplated
hereby.
13.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to
under state and federal laws.
13.8. Except as otherwise expressly provided in this Agreement, neither
ACC nor CAMCO nor any affiliate thereof shall use any trademark, trade
name, service mark or logo of the Company or any of its affiliates, or any
variation of any such trademark, trade name, service mark or logo, without
the Company's prior written consent, the granting of which shall be at the
Company's sole discretion. Except as otherwise expressly provided in this
Agreement, neither the Company nor any affiliate thereof shall use any
trademark, trade name, service mark or logo of ACC or of CAMCO, or any
variation of any such trademark, trade name, service mark or logo, without
the prior written consent of ACC or of CAMCO, as appropriate, the granting
of which shall be at the sole discretion of ACC or of CAMCO, as applicable.
13
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized representative
as of the date specified above.
PROTECTIVE LIFE INSURANCE COMPANY
By its authorized officer,
By: /s/ CAROLYN KING
-------------------------------------
Carolyn King, Senior Vice President
ACACIA CAPITAL CORPORATION
By its authorized officer,
By: /s/ WILLIAM M. TARTIKOFF
--------------------------------------
William M. Tartikoff, Vice President
CALVERT ASSET MANAGEMENT COMPANY, INC.
By its authorized officer,
By: /s/ WILLIAM M. TARTIKOFF
--------------------------------------
William M. Tartikoff, Vice President
14
<PAGE>
SCHEDULE A
Protective Life Insurance Company segregated asset accounts:
Protective Variable Annuity Separate Account
Protective Variable Life Separate Account
Acacia Capital Corporation Portfolios:
CRI Strategic Growth Portfolio
CRI Balanced Portfolio
15
<PAGE>
EXHIBIT 9
PROTECTIVE LIFE CORPORATION PROTECTIVE
Post Office Box 2606
Birmingham, Alabama 35202
205-879-9230
- ------------------------------------
STEVE M. CALLAWAY
Senior Associate Counsel
Writer's Direct Number: (205)868-3804
Facsimile Number: (205)868-3597
Toll-Free Number: (800)627-0220
April 28, 1997
Protective Life Insurance Company
2801 Highway 280 South
Birmingham, Alabama 35223
Gentlemen:
With respect to the Post-Effective Amendment No. 5 to the Form N-4
Registration Statement to be filed by Protective Life Insurance Company (the
"Company") and Protective Variable Annuity Separate Account (the "Account") with
the Securities and Exchange Commission for the purpose of registering under the
Securities Act of 1933, as amended, deferred variable annuity contracts (the
"Contracts"), I have examined such documents and such law as I considered
necessary and appropriate, and on the basis of such examination, it is my
opinion that:
1. The Company is a corporation duly organized and validly existing as a
stock life insurance company under the laws of the State of Tennessee and
is duly authorized by the Department of Commerce and Insurance of the
State of Tennessee to issue the Contracts.
2. The Account is a duly authorized and existing separate account
established pursuant to the provisions of Section 53-3-501 of the
Tennessee Code.
3. To the extent so provided under the Contracts, that portion of the
assets of the account equal to the reserves and other contract
liabilities with respect to the Account will not be chargeable with
liabilities arising out of any other business that the Company may
conduct.
4. The Contracts, when issued as contemplated by the Form N-4 registration
statement, will constitute legal, validly issued and binding obligations
of the Company.
I hereby consent to the filing of this opinion as an exhibit to the Form N-4
registration statement for the Contracts and the Account.
Very truly yours,
/s/ STEVE M. CALLAWAY
------------------------------------------------------------------------------
Steve M. Callaway
Senior Associate Counsel
PROTECTIVE LIFE INSURANCE COMPANY/AMERICAN FOUNDATION LIFE INSURANCE COMPANY
EMPIRE GENERAL LIFE ASSURANCE CORPORATION/WISCONSIN NATIONAL LIFE INSURANCE
COMPANY
<PAGE>
EXHIBIT 10(A)
Sutherland, Asbill & Brennan, L.L.P.
ATLANTA - AUSTIN - NEW YORK - WASHINGTON
1275 PENNSYLVANIA AVENUE, N.W. TEL: (202) 383-0100
WASHINGTON, D.C. 20004-2404 FAX: (202) 637-3593
April 21, 1997
Board of Directors
Protective Life Insurance Company
2801 Highway 201 South
Birmingham, Alabama 35223
Directors:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the statement of additional information filed as part of
post-effective amendment number 5 to the Registration Statement on Form N-4
filed by Protective Life Insurance Company and Protective Variable Annuity
Account with the Securities and Exchange Commission. In giving this consent, we
do not admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN, L.L.P.
By: /s/ STEPHEN E. ROTH
-----------------------------------
Stephen E. Roth
<PAGE>
EXHIBIT 10(B)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion, in this Post-Effective Amendment No. 5 (File
No. 33-70984) to the Registration Statement under the Investment Company Act of
1940, as amended, filed on Form N-4 of our report dated February 11, 1997, on
our audits of the financial statements and financial statement schedules of
Protective Life Insurance Company and Subsidiaries. We also consent to the
inclusion of our report dated March 14, 1997 on our audit of the financial
statements of the Protective Variable Annuity Separate Account. We also consent
to the reference to our Firm under the caption "Experts".
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
April 25, 1997
<PAGE>
EXHIBIT 14
DIRECTORS'
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned Directors of
Protective Life Insurance Company, a Tennessee corporation, ("Company") by his
execution hereof or upon an identical counterpart hereof, does hereby constitute
and appoint John D. Johns, Steve M. Callaway or Jerry W. DeFoor, and each or any
of them, his true and lawful attorney-in-fact and agent, for him and in his
name, place and stead, to execute and sign the Registration Statement on Form
N-4 to be filed by the Company with respect to variable annuity products with
the Securities and Exchange Commission, pursuant to the provisions of the
Securities Exchange Act of 1933 and the Investment Company Act of 1940 and,
further, to execute and sign any and all pre-effective and post-effective
amendments to such Registration Statement, and to file same, with all exhibits
and schedules thereto and all other documents in connection therewith, with the
Securities and Exchange Commission and with such state securities authorities as
may be appropriate, granting unto said attorney-in-fact and agent, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes of the undersigned might or could do in person, hereby
ratifying and confirming all the acts of said attorney-in-fact and agent or any
of them which they may lawfully do in the premises or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, each of the undersigned has hereunto set his hand and
seal this 24th day of April, 1997.
WITNESS TO ALL SIGNATURES:
<TABLE>
<S> <C>
/s/ DEBORAH J. LONG
Deborah J. Long
/s/ DRAYTON NABERS, JR. /s/ DANNY L. BENTLEY
Drayton Nabers, Jr. Danny L. Bentley
/s/ JOHN D. JOHNS /s/ RICHARD J. BIELEN
John D. Johns Richard J. Bielen
/s/ R. STEPHEN BRIGGS /s/ CAROLYN KING
R. Stephen Briggs Carolyn King
/s/ ORMOND L. BENTLEY /s/ JIM E. MASSENGALE
Ormond L. Bentley Jim E. Massengale
/s/ STEVEN A. SCHULTZ /s/ WAYNE E. STUENKEL
Steven A. Schultz Wayne E. Stuenkel
/s/ A. S. WILLIAMS III
A. S. Williams III
</TABLE>
