AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999
FILE NO. 333-60149
FILE NO. 811-8108
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 1
[X]
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X]
AMENDMENT NO.12 [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)
(205) 879-9230
(DEPOSITOR'S TELEPHONE NUMBER, INCLUDING AREA CODE)
---------------
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 LLP
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, 1999 pursuant to paragraph (b) of Rule 485;
[ ] 60 days after filing pursuant to paragraph (a) of Rule 485;
[ ] on May 1, 1999 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.
TITLE OF SECURITIES BEING REGISTERED: INTERESTS IN A SEPARATE
ACCOUNT ISSUED THROUGH VARIABLE ANNUITY CONTRACTS.
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<PAGE>
PART A
INFORMATION REQUIRED TO BE IN THE PROSPECTUS
<PAGE>
[GRAPHIC]
ELEMENTS(SM)
A VARIABLE ANNUITY
PROTECTIVE LIFE INSURANCE COMPANY
PROTECTIVE VARIABLE ANNUITY
SEPARATE ACCOUNT
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
TELEPHONE: 1-800-866-3555
This Prospectus describes the Elements(SM) Contract, a group and individual
flexible premium deferred variable and fixed annuity contract offered by
Protective Life Insurance Company. The Contract is designed for 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 or
for use with certain qualified retirement plans.
You may allocate your Purchase Payments and associated Credits to one or
more of the Sub-Accounts of the Protective Variable Annuity Separate Account,
the Guaranteed Account, or both. The assets of each Sub-Account will be
invested solely in a corresponding Fund of Protective Investment Company,
MFS(R) Variable Insurance Trust(SM), Oppenheimer Variable Account Funds, Calvert
Variable Series, Inc., and Van Eck Worldwide Insurance Trust. The Funds are:
PROTECTIVE INVESTMENT COMPANY MFS(R) VARIABLE INSURANCE TRUST
INTERNATIONAL EQUITY FUND NEW DISCOVERY SERIES
SMALL CAP VALUE FUND EMERGING GROWTH SERIES
CAPITAL GROWTH FUND RESEARCH SERIES
CORE U.S. EQUITY FUND GROWTH WITH INCOME SERIES
GROWTH AND INCOME FUND UTILITIES SERIES
GLOBAL INCOME FUND TOTAL RETURN SERIES
OPPENHEIMER VARIABLE ACCOUNT FUNDS CALVERT VARIABLE SERIES, INC.
AGGRESSIVE GROWTH FUND/VA SOCIAL SMALL CAP GROWTH
GLOBAL SECURITIES FUND/ VA PORTFOLIO
CAPITAL APPRECIATION FUND/VA SOCIAL BALANCED PORTFOLIO
MAIN STREET GROWTH & VAN ECK WORLDWIDE INSURANCE
INCOME FUND/VA TRUST
HIGH INCOME FUND/VA WORLDWIDE HARD ASSETS FUND
MONEY FUND/VA WORLDWIDE REAL ESTATE FUND
STRATEGIC BOND FUND/VA
The value of your Contract, except amounts you allocate to the Guaranteed
Account, will vary according to the investment performance of the Funds in
which the selected Sub-Accounts are invested. You bear the investment risk on
amounts you allocate to the Sub-Accounts.
This Prospectus sets forth basic information about the Contract and the
Variable Account that a prospective investor should know before investing. The
Statement of Additional Information contains additional information about the
Contract and the Variable Account, 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 the last page 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. You may also obtain an electronic copy of the
Statement of Additional Information, as well as other material that we file
electronically and certain material incorporated by reference, at the SEC web
site (http://www.sec.gov).
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.
THE ELEMENTS(SM) CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED BY,
ANY BANK OR FINANCIAL INSTITUTION. IT IS NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY, AND IT IS SUBJECT TO
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
DEFINITIONS .................................................. 3
EXPENSE TABLES ............................................... 4
Examples ................................................... 6
SUMMARY ...................................................... 9
The Contract ............................................... 9
Federal Tax Status ......................................... 11
CONDENSED FINANCIAL INFORMATION .............................. 11
THE COMPANY, VARIABLE ACCOUNT AND
FUNDS ...................................................... 13
Protective Life Insurance Company .......................... 13
Protective Variable Annuity Separate Account ............... 13
Administration ............................................. 13
The Funds .................................................. 13
Protective Investment Company (PIC) ........................ 14
MFS(R) Variable Insurance Trust(SM) ........................ 14
Oppenheimer Variable Account Funds ......................... 15
Calvert Variable Series, Inc. .............................. 15
Van Eck Worldwide Insurance Trust .......................... 16
Other Investors in the Funds ............................... 16
Addition, Deletion or Substitution of Investments .......... 17
DESCRIPTION OF THE CONTRACT .................................. 17
The Contract ............................................... 17
Parties to the Contract .................................... 18
Issuance of a Contract ..................................... 19
Purchase Payments .......................................... 19
Right to Cancel ............................................ 20
Allocation of Purchase Payments ............................ 20
Variable Account Value ..................................... 20
Transfers .................................................. 22
Surrenders and Partial Surrenders .......................... 24
THE GUARANTEED ACCOUNT ....................................... 25
DEATH BENEFIT ................................................ 26
Standard Death Benefit ..................................... 27
Optional Benefit Packages .................................. 27
SUSPENSION OR DELAY IN PAYMENTS .............................. 28
CHARGES AND DEDUCTIONS ....................................... 28
Surrender Charge ............................................. 28
Mortality and Expense Risk Charge ............................ 30
Administration Charges ....................................... 30
Transfer Fee ................................................. 30
Contract Maintenance Fee ..................................... 31
Fund Expenses ................................................ 31
Premium Taxes ................................................ 31
Other Taxes .................................................. 31
ANNUITIZATION ................................................ 31
Annuity Commencement Date .................................. 31
Fixed Income Payments ...................................... 31
Variable Income Payments ................................... 31
Annuity Options ............................................ 32
Minimum Amounts ............................................ 33
Death of Annuitant or Owner After Annuity
Commencement Date ....................................... 33
</TABLE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
YIELDS AND TOTAL RETURNS ..................................... 33
Yields ..................................................... 33
Total Returns .............................................. 34
Standardized Average Annual Total Returns .................. 34
Non-Standard Average Annual Total Returns .................. 34
Performance Comparisons .................................... 34
Other Matters .............................................. 35
FEDERAL TAX MATTERS .......................................... 36
Introduction ............................................... 36
The Company's Tax Status ................................... 36
TAXATION OF ANNUITIES IN GENERAL ............................. 36
Tax Deferral During Accumulation Period .................... 36
Taxation of Partial and Full Surrenders .................... 37
Taxation of Annuity Payments ............................... 38
Taxation of Death Benefit Proceeds ......................... 38
Assignments, Pledges, and Gratuitous Transfers ............. 39
Penalty Tax on Premature Distributions ..................... 39
Aggregation of Contracts ................................... 39
Loss of Interest Deduction Where Contract Is Held
By or For the Benefit of Certain Nonnatural
Persons ................................................. 39
QUALIFIED RETIREMENT PLANS ................................... 40
In General ................................................. 40
Direct Rollovers ........................................... 42
FEDERAL INCOME TAX WITHHOLDING ............................... 43
GENERAL MATTERS .............................................. 43
The Contract ............................................... 43
Error in Age or Gender ..................................... 43
Incontestability ........................................... 43
Non-Participation .......................................... 43
Assignment ................................................. 44
Notice ..................................................... 44
Modification ............................................... 44
Reports .................................................... 44
Settlement ................................................. 44
Receipt of Payment ......................................... 44
Protection of Proceeds ..................................... 44
Minimum Values ............................................. 44
Application of Law ......................................... 44
No Default ................................................. 44
DISTRIBUTION OF THE CONTRACTS ................................ 45
Inquiries .................................................. 45
PREPARATION FOR YEAR 2000 .................................... 45
IMSA ......................................................... 46
LEGAL PROCEEDINGS ............................................ 46
VOTING RIGHTS ................................................ 46
FINANCIAL STATEMENTS ......................................... 47
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
APPENDIX A: Purchase Payment Credit examples ................. A-1
APPENDIX B: Death Benefit calculation examples ............... B-1
APPENDIX C: Surrender Charge calculation examples ............ C-1
APPENDIX D: Variable Annuitization calculation ............... D-1
</TABLE>
2
<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 measure used to calculate the value of a
Sub-Account prior to the Annuity Commencement Date.
ALLOCATION OPTION: Any account to which you may allocate Purchase Payments
or transfer Contract Value under this Contract.
ANNUITY COMMENCEMENT DATE: The date as of which the Contract Value, less
applicable premium tax, is applied to an Annuity Option.
ANNUITY OPTION: The payout option under which the Company makes annuity
income payments.
ANNUITY UNIT: A unit of measure used to calculate the amount of the
variable income payments.
ASSUMED INVESTMENT RETURN: The assumed annual rate of return used to
calculate the amount of the variable income payments.
CONTRACT: The Elements(SM) flexible premium deferred variable and fixed
annuity Contract.
CONTRACT ANNIVERSARY: The same month and day as the Effective Date in each
subsequent year of the Contract.
CONTRACT VALUE: Prior to the Annuity Commencement Date, the sum of the
Variable Account value and the Guaranteed Account value.
CONTRACT YEAR: Any period of 12 months commencing with the Effective Date
or any Contract Anniversary.
CREDIT: The amount we add to the Contract Value at the time we accept a
Purchase Payment.
DCA: Dollar cost averaging.
DCA FIXED ACCOUNTS: The DCA Fixed Accounts are part of the Company's
general account and are not part of or dependent upon the investment
performance of the Variable Account. These accounts are available for dollar
cost averaging only and may not be available in all states.
EFFECTIVE DATE: The date as of which we credit the initial Purchase
Payment to the Contract and the date the Contract takes effect.
FIXED ACCOUNT: The Fixed Account is part of the Company's general account
and is not part of or dependent upon the investment performance of the Variable
Account. This account may not be available in all states.
FUND: Any investment portfolio in which a corresponding Sub-Account
invests.
GUARANTEED ACCOUNT: The Fixed Account, DCA Fixed Accounts, and any other
Allocation Option we may offer with interest rate guarantees.
PURCHASE PAYMENT: The amount(s) paid by the Owner and accepted by the
Company as consideration for this Contract.
QUALIFIED CONTRACTS: Contracts issued in connection with retirement plans
that receive favorable tax treatment under Sections 401, 403, 408, 408A or 457
of the Internal Revenue Code.
QUALIFIED PLANS: Retirement plans that receive favorable tax treatment
under Sections 401, 403, 408, 408A or 457 of the Internal Revenue Code.
SUB-ACCOUNT: A separate division of the Variable Account.
VALUATION DAY: Each day on which the New York Stock Exchange is open for
business.
VALUATION PERIOD: The period which begins at the close of regular trading
on the New York Stock Exchange on any Valuation Day and ends at the close of
regular trading on the next Valuation Day.
VARIABLE ACCOUNT: The Protective Variable Annuity Separate Account, a
separate investment account of Protective Life.
WRITTEN NOTICE: A notice or request submitted in writing in a form
satisfactory to the Company that we receive at the administrative office.
3
<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 Purchase Payments ............................................... None
Maximum Surrender Charge Imposed on Amount Surrendered (contingent deferred sales charge
as a % of amount surrendered) ........................................................... 8.5%
Transfer Processing Fee ................................................................. None*
ANNUAL CONTRACT MAINTENANCE FEE .......................................................... $ 30**
</TABLE>
<TABLE>
<CAPTION>
WITH STANDARD WITH OPTIONAL
BENEFITS BENEFITS
--------------- --------------
<S> <C> <C>
ANNUAL ACCOUNT EXPENSES (as a percentage of average Variable Account value)
Mortality and Expense Risk Charge ........................................ 1.25% 1.40%
Administration Charge .................................................... 0.15% 0.15%
Total Account Expenses ................................................... 1.40% 1.55%
</TABLE>
ANNUAL FUND EXPENSES
(AFTER REIMBURSEMENT AND AS PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL ANNUAL
(ADVISORY) EXPENSES AFTER FUND EXPENSES
FEES REIMBURSEMENT (AFTER REIMBURSEMENTS)
------------ ---------------- -----------------------
<S> <C> <C> <C>
PROTECTIVE INVESTMENT COMPANY (PIC) (1)
International Equity Fund ................. 1.10% 0.00% 1.10%
Small Cap Value Fund ...................... 0.80% 0.00% 0.80%
Capital Growth Fund ....................... 0.80% 0.00% 0.80%
CORE U.S. Equity Fund ..................... 0.80% 0.00% 0.80%
Growth and Income Fund .................... 0.80% 0.00% 0.80%
Global Income Fund ........................ 1.10% 0.00% 1.10%
MFS(R) VARIABLE INSURANCE TRUST(SM) (2, 3)
New Discovery Series ...................... 0.90% 0.27% 1.17%
Emerging Growth Series .................... 0.75% 0.10% 0.85%
Research Series ........................... 0.75% 0.11% 0.86%
Growth With Income Series ................. 0.75% 0.13% 0.88%
Utilities Series .......................... 0.75% 0.26% 1.01%
Total Return Series ....................... 0.75% 0.16% 0.91%
OPPENHEIMER VARIABLE ACCOUNT FUNDS
Aggressive Growth Fund/VA ................. 0.69% 0.02% 0.71%
Global Securities Fund/VA ................. 0.68% 0.06% 0.74%
Capital Appreciation Fund/VA .............. 0.72% 0.03% 0.75%
Main Street Growth & Income Fund/VA ....... 0.74% 0.05% 0.79%
High Income Fund/VA ....................... 0.74% 0.04% 0.78%
Strategic Bond Fund/VA .................... 0.74% 0.06% 0.80%
Money Fund/VA ............................. 0.45% 0.05% 0.50%
CALVERT VARIABLE SERIES, INC.(4)
Social Small Cap Growth Portfolio ......... 1.00% 0.33% 1.33%
Social Balanced Portfolio ................. 0.70% 0.18% 0.88%
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Hard Assets Fund ................ 1.00% 0.16% 1.16%
Worldwide Real Estate Fund(5) ............. 0.00% 0.89% 0.89%
- -------------------------------------------- ---- ---- ----
</TABLE>
* Protective Life reserves the right to charge a Transfer Fee in the future.
(See "Charges and Deductions".)
** The contract maintenance fee may not apply. (See "Charges and Deductions".)
4
<PAGE>
(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, 1998 were:
CORE U.S. Equity Fund 0.85%, Small Cap Value Fund 0.89%, International
Equity Fund 1.39%, Growth and Income Fund 0.85%, Capital Growth Fund 0.86%,
and Global Income Fund 1.28%. 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) MFS has agreed to bear expenses for these series, subject to reimbursement
by these series, such that each series' "Other Expenses" shall not exceed
0.25% of the average daily net assets of these series during the current
fiscal year. The payments made by MFS on behalf of each series under this
arrangement are subject to reimbursement by the series to MFS, which will
be accomplished by the payment of an expense reimbursement fee by the
series to MFS computed and paid monthly at a percentage of the series'
average daily net assets for its then current fiscal year, with a
limitation that immediately after such payment the series' "Other Expenses"
will not exceed the percentage set forth above for that series. The
obligation of MFS to bear a series' "Other Expenses" pursuant to this
arrangement, and the series' obligation to pay the reimbursement fee to
MFS, terminates on the earlier of the date on which payments made by the
series equal the prior payment of such reimbursable expenses by MFS, or
December 31, 2004 (May 1, 2001 in the case of the New Discovery Series).
MFS may, in its discretion, terminate this arrangement at an earlier date,
provided that the arrangement will continue for each series until at least
May 1, 2000, unless terminated with the consent of the board of trustees
which oversees the series. Absent the reimbursements, total expenses for the
New Discovery Series for the period ended December 31, 1998 were 5.22%
(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. Each Series may enter
into other such arrangements and directed brokerage arrangements, which
would also have the effect of reducing the Series' expenses. Expenses do
not take into account these expense reductions and are therefore higher
than the actual expenses of the Series.
(4) The figures have been restated to reflect an increase in transfer agency
expenses (the addition of 0.01%) for the Calvert Social Balanced Portfolio
expected to be incurred in 1999. "Other Expenses" reflect an indirect fee.
Net fund operating expenses after reductions for fees paid indirectly
(again, restated for the Calvert Social Balanced Portfolio) would be 0.86%
for Calvert Social Balanced, and 1.12% for Calvert Social Small Cap Growth.
(5) Van Eck Associates Corporation (the "Adviser") earned fees for investment
management and advisory services. The fee is based on an annual rate of 1%
of the average daily net assets. The Adviser agreed to waive its management
fees and assume all expenses of the fund except interest, taxes, brokerage
commissions and extraordinary expenses for the period January 1, 1998 to
February 28, 1998. The Adviser also agreed to assume expenses exceeding 1%
of average daily net assets except interest, taxes, brokerage commissions
and extraordinary expenses for the period March 1, 1998 to December 31,
1998. For the year ended December 31, 1998, the Adviser assumed expenses in
the amount of $49,729. Certain of the officers and trustees of the Trust
are officers, directors or stockholders of the Adviser and Van Eck
Securities Corporation. As of December 31, 1998, the Adviser owned 39% of
the outstanding shares of beneficial interest of the Fund.
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,
1998 to December 31, 1998. 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 currently varying from 0 to 3.5% may be applicable in
certain states.
5
<PAGE>
EXAMPLES
STANDARD DEATH BENEFIT
At the end of the applicable time period, you would pay the following
expenses on a $1,000 investment, assuming selection of the standard death
benefit, a 5% annual return on assets and the addition of a 3% Purchase Payment
Credit added to the $1,000 investment for purposes of determining asset-based
expenses. These examples do not show the offsetting effect of the Credit on the
illustrated expenses. If the Credit was included as an offset to the
illustrated expenses, the illustrated expenses would be lower and, in some
cases, the Credit would exceed the amount of the illustrated expenses. In this
manner, higher Credit percentages would have the effect of further lowering the
illustrated expenses.
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 International Equity .................. $107 $166 $213 $300
PIC Small Cap Value ....................... 104 158 199 269
PIC Capital Growth ........................ 104 158 199 269
PIC CORE U. S. Equity ..................... 104 158 199 269
PIC Growth and Income ..................... 104 158 199 269
PIC Global Income ......................... 107 166 213 300
MFS New Discovery ......................... 107 168 217 307
MFS Emerging Growth ....................... 104 159 201 275
MFS Research .............................. 104 159 202 276
MFS Growth With Income .................... 104 160 203 278
MFS Utilities ............................. 106 164 209 291
MFS Total Return .......................... 105 161 204 281
Oppenheimer Aggressive Growth ............. 103 155 194 260
Oppenheimer Global Securities ............. 103 156 196 263
Oppenheimer Capital Appreciation .......... 103 156 196 264
Oppenheimer Main Street Growth & Income ... 104 157 198 268
Oppenheimer High Income ................... 103 157 198 267
Oppenheimer Strategic Bond ................ 104 158 199 269
Oppenheimer Money Fund .................... 101 149 184 238
Calvert Social Small Cap Growth ........... 109 173 224 323
Calvert Social Balanced ................... 104 160 203 278
Van Eck Worldwide Hard Assets ............. 107 168 216 306
Van Eck Worldwide Real Estate ............. 105 160 203 279
</TABLE>
2. If the Contract is not 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 International Equity .......... $ 27 $ 83 $ 141 $ 300
PIC Small Cap Value ............... 24 73 126 269
PIC Capital Growth ................ 24 73 126 269
PIC CORE U. S. Equity ............. 24 73 126 269
PIC Growth and Income ............. 24 73 126 269
PIC Global Income ................. 27 83 141 300
MFS New Discovery ................. 28 85 145 307
MFS Emerging Growth ............... 24 75 128 275
MFS Research ...................... 24 75 129 276
MFS Growth With Income ............ 25 76 130 278
MFS Utilities ..................... 26 80 137 291
MFS Total Return .................. 25 77 131 281
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
SUB-ACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------- -------- --------- --------- ----------
<S> <C> <C> <C> <C>
Oppenheimer Aggressive Growth ............. 23 71 121 260
Oppenheimer Global Securities ............. 23 72 123 263
Oppenheimer Capital Appreciation .......... 23 72 123 264
Oppenheimer Main Street Growth & Income ... 24 73 125 268
Oppenheimer High Income ................... 24 73 125 267
Oppenheimer Strategic Bond ................ 24 73 126 269
Oppenheimer Money Fund .................... 21 64 110 238
Calvert Social Small Cap Growth ........... 29 90 153 323
Calvert Social Balanced ................... 25 76 130 278
Van Eck Worldwide Hard Assets ............. 28 85 144 306
Van Eck Worldwide Real Estate ............. 25 76 130 279
</TABLE>
OPTIONAL BENEFIT PACKAGES
At the end of the applicable time period, you would pay the following
expenses on a $1,000 investment, assuming selection of an optional benefit
package, a 5% annual return on assets and a 3% Purchase Payment Credit added to
the $1,000 investment for purposes of determining asset-based expenses. These
examples do not show the offsetting effect of the Credit on the illustrated
expenses. If the Credit was included as an offset to the illustrated expenses,
the illustrated expenses would be lower and, in some cases, the Credit would
exceed the amount of the illustrated expenses. In this manner, higher Credit
percentages would have the effect of further lowering the illustrated expenses.
3. 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 International Equity .................. $108 $171 $221 $315
PIC Small Cap Value ....................... 105 162 206 285
PIC Capital Growth ........................ 105 162 206 285
PIC CORE U. S. Equity ..................... 105 162 206 285
PIC Growth and Income ..................... 105 162 206 285
PIC Global Income ......................... 108 171 221 315
MFS New Discovery ......................... 109 173 224 322
MFS Emerging Growth ....................... 106 163 209 290
MFS Research .............................. 106 164 209 291
MFS Growth With Income .................... 106 164 210 293
MFS Utilities ............................. 107 168 216 306
MFS Total Return .......................... 106 165 211 296
Oppenheimer Aggressive Growth ............. 104 159 202 276
Oppenheimer Global Securities ............. 105 160 203 279
Oppenheimer Capital Appreciation .......... 105 161 204 280
Oppenheimer Main Street Growth & Income ... 105 162 206 284
Oppenheimer High Income ................... 105 161 205 283
Oppenheimer Strategic Bond ................ 105 162 206 285
Oppenheimer Money Fund .................... 102 153 192 254
Calvert Social Small Cap Growth ........... 110 177 231 338
Calvert Social Balanced ................... 106 164 210 293
Van Eck Worldwide Hard Assets ............. 109 172 223 321
Van Eck Worldwide Real Estate ............. 106 165 211 294
</TABLE>
7
<PAGE>
4. If the Contract is not 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 International Equity .................. $28 $87 $149 $315
PIC Small Cap Value ....................... 25 78 133 285
PIC Capital Growth ........................ 25 78 133 285
PIC CORE U. S. Equity ..................... 25 78 133 285
PIC Growth and Income ..................... 25 78 133 285
PIC Global Income ......................... 28 87 149 315
MFS New Discovery ......................... 29 89 152 322
MFS Emerging Growth ....................... 26 80 136 290
MFS Research .............................. 26 80 137 291
MFS Growth With Income .................... 26 80 138 293
MFS Utilities ............................. 28 85 144 306
MFS Total Return .......................... 26 81 139 296
Oppenheimer Aggressive Growth ............. 24 75 129 276
Oppenheimer Global Securities ............. 25 76 130 279
Oppenheimer Capital Appreciation .......... 25 76 131 280
Oppenheimer Main Street Growth & Income ... 25 78 133 284
Oppenheimer High Income ................... 25 77 132 283
Oppenheimer Strategic Bond ................ 25 78 133 285
Oppenheimer Money Fund .................... 22 69 118 254
Calvert Social Small Cap Growth ........... 31 94 160 338
Calvert Social Balanced ................... 26 80 138 293
Van Eck Worldwide Hard Assets ............. 29 89 152 321
Van Eck Worldwide Real Estate ............. 26 81 138 294
</TABLE>
The examples assume that no transfer fee or premium taxes have been
assessed. The examples assume that the contract maintenance fee is $30. The
contract maintenance fee reflected in the above examples is based on an
anticipated average Contract value of $52,603.26 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
ASSUMED 5% ANNUAL RETURN 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.
8
<PAGE>
SUMMARY
THE CONTRACT
<TABLE>
<S> <C>
WHAT IS THE ELEMENTS(SM) CONTRACT? The Elements(SM) Contract is a flexible premium deferred variable and
fixed annuity contract issued by Protective Life. (See "The Contract".)
In certain states the Contract is offered as a group contract to eligible
persons.
HOW IS A CONTRACT ISSUED? Protective Life will issue the Contract when it receives and accepts your
complete application information and an initial Purchase Payment. (SEE
"Issuance of a Contract.")
WHAT ARE THE PURCHASE PAYMENTS? The minimum amount which Protective Life will accept as an initial
Purchase Payment is $10,000. Subsequent Purchase Payments may be
made at any time prior to the earlier of: (1) the oldest Owner's 80th
birthday; or (2) the Annuitant's 80th birthday. No Purchase Payment will
be accepted within 10 years of the Annuity Commencement Date then in
effect. The minimum subsequent Purchase Payment we will accept is
$100. The maximum aggregate Purchase Payment(s) we will accept
without prior administrative office approval is $1,000,000. We reserve
the right not to accept any Purchase Payment. (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, less Credits
applied, in states where permitted. This amount may be more or less
than the Purchase Payments. Where required, we will refund Purchase
Payments. (See "Right to Cancel".)
CAN I TRANSFER AMOUNTS IN THE CONTRACT? Prior to the Annuity Commencement Date, you may request transfers
from one Allocation Option to another. No transfers may be made into a
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 Written Notice before the Annuity Commencement Date, you may
surrender the Contract and receive its surrender value. (See "Surrenders
and Partial Surrenders".) Surrenders may have federal (and state)
income tax consequences. In addition, surrenders from Contracts issued
pursuant to Section 403(b) of the Internal Revenue Code may not be
allowed in certain circumstances. (See "Federal Tax Matters".)
IS THERE A DEATH BENEFIT? If any Owner dies prior to the Annuity Commencement Date and while
this Contract is in force, a death benefit, less any applicable premium
tax, will be payable to the Beneficiary. The death benefit is determined
as of the end of the Valuation Period during which we receive due proof
of the Owner's death. The standard death benefit will equal the greater
of: (1) the Contract Value less any Credits added to the Contract during
the 12 months prior to the date of death; or (2) aggregate Purchase
Payments less aggregate amounts surrendered, including surrender
charges. Only one death benefit is payable under this Contract, even
though the Contract may, in some circumstances, continue beyond the
time of an Owner's death. (See "Death Benefit".)
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
At the time of application the Owner may purchase an optional benefit
package that may provide a death benefit which is greater than the
standard death benefit provided under the contract. (See "Optional
Benefit Packages".)
ARE THERE CHARGES AND DEDUCTIONS FROM MY The following charges and deductions are made in connection with the
CONTRACT? Contract:
SURRENDER CHARGES. Full or partial surrenders are subject to a surrender charge. The
surrender charge is equal to a specified percentage (maximum 8.5%) of
the amount you surrender. The cumulative surrender charges assessed
will never exceed 8.5% of the total Purchase Payments we accept under
this Contract. (See "Surrender Charges.")
MORTALITY AND EXPENSE RISK CHARGE. We will deduct a mortality and expense risk charge to compensate us for
assuming certain mortality and expense risks. For Contracts issued with
the standard death benefit, the charge equals, on an annual basis, 1.25%
of the average daily net assets of the Variable Account value attributable
to the Contracts. For Contracts issued with an optional benefit package,
the charge equals 1.40% of such assets prior to the Annuity
Commencement Date. (See "Optional Benefit Packages".) On and after
the Annuity Commencement Date, the charge equals 1.25% of such
assets. (See "Mortality and Expense Risk Charge".)
ADMINISTRATION CHARGE. We will deduct an administration charge equal, on an annual basis, to
0.15% of the average daily net assets of the Variable Account value
supporting the Contracts. (See "Administration Charge".)
CONTRACT MAINTENANCE FEE. Prior to the Annuity Commencement Date a contract maintenance fee of
$30 is deducted from the Contract 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, we may waive this fee. (See "Contract Maintenance
Fee".)
TAXES. Some states impose premium taxes at rates currently ranging up to
3.5%. If premium taxes apply to your Contract, we will deduct them
from the Purchase Payment(s) when accepted or from the Contract
Value upon a full or partial surrender, death or annuitization. The
Company reserves the right to impose a charge for other taxes
attributable to the Variable Account. (See "Charges and Deductions".)
INVESTMENT MANAGEMENT FEES AND The net assets of each Sub-Account of the Variable Account will reflect
OTHER EXPENSES OF THE FUNDS. the investment management fee the corresponding Fund incurs as well
as the other operating expenses of that Fund. For each Fund, the
investment manager receives a daily fee for its investment management
services. The management fees are based on the average daily net assets
of the Fund. (See "Fund Expenses" and the Funds' prospectuses.)
WHAT ANNUITY OPTIONS ARE AVAILABLE? Currently, we apply the Contract Value, less any applicable premium
tax, to an Annuity Option on the Annuity Commencement Date, unless
you choose to receive the surrender value in a lump sum. Annuity
Options include: payments for a certain period, and life income with or
without payments for a certain period. Some Annuity Options are
available on either a fixed or variable payment basis. (See
"Annuitization".)
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
IS THE CONTRACT AVAILABLE FOR QUALIFIED We may issue the Contract for use with retirement plans that receive
RETIREMENT PLANS? special federal income tax treatment under the Internal Revenue Code
such as pension and profit sharing plans (including H.R. 10 plans), tax
sheltered annuities individual retirement accounts, and individual
retirement annuities. Contracts issued for these qualified retirement plans
are referred to as Qualified Contracts, and these types of plans are
referred to as Qualified Plans. (See "Federal Tax Matters".)
OTHER CONTRACTS. We offer other types of annuity contracts and insurance policies which
also invest in the same Funds in which your Contract invests. These
other types of contracts and policies may have different charges that
could affect the value of Sub-Accounts and may offer different benefits
than your Contract. To obtain more information about these contracts
and policies, you may contact our administrative office in writing or by
telephone.
</TABLE>
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".)
CONDENSED FINANCIAL INFORMATION
The date of inception of each of the sub-accounts is as follows:
<TABLE>
<S> <C>
March 14, 1994 -- PIC International Equity
PIC Small Cap Value
PIC CORE U.S. Equity
PIC Growth and Income
PIC Global Income
Oppenheimer Money Fund (formerly PIC Money Market)
June 13, 1995 -- PIC Capital Growth
July 1, 1997 -- MFS Emerging Growth
MFS Research
MFS Growth with Income
MFS Total Return
Oppenheimer Aggressive Growth
Oppenheimer Capital Appreciation
(formerly Oppenheimer Growth)
Oppenheimer Main Street Growth
& Income (formerly Oppenheimer
Growth & Income)
Oppenheimer Strategic Bond
Calvert Social Small Cap Growth
Calvert Social Balanced
November 5, 1998 -- MFS New Discovery
MFS Utilities
Oppenheimer Global Securities
Oppenheimer High Income
Van Eck Worldwide Hard Assets
Van Eck Worldwide Real Estate
</TABLE>
At December 31, 1994, 1995, 1996, 1997 and 1998, net assets of the
Variable Account were represented by the following Accumulation Unit values and
Accumulation Units. The Accumulation Unit values shown below are for a Contract
issued with the standard death benefit, which has a total mortality and expense
risk charge and administration charge of
11
<PAGE>
1.40%. For Contracts issued with an optional benefit package, the total
mortality and expense risk charge and administration charge is 1.55%, and the
Accumulation Unit values would be lower than those for Contracts with the
standard death benefit. You should read this information in conjunction with
the Variable Account's financial statements and related notes in the Statement
of Additional Information.
<TABLE>
<CAPTION>
(DECEMBER 31, (DECEMBER 31, (DECEMBER 31, (DECEMBER 31, (DECEMBER 31,
1994) 1995) 1996) 1997) 1998
--------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
PIC International Equity Sub-Account ............. 9.48 11.18 13.12 13.51 16.07
PIC Small Cap Value Sub-Account .................. 8.91 9.35 11.09 14.46 12.07
PIC Capital Growth Sub-Account ................... -- 10.36 12.48 16.56 22.00
PIC CORE U.S. Equity Sub-Account ................. 9.94 13.40 16.12 20.81 25.10
PIC Growth and Income Sub-Account ................ 9.71 12.66 15.83 20.27 19.40
PIC Global Income Sub-Account .................... 9.82 11.32 12.22 13.25 14.42
MFS New Discovery Sub-Account .................... -- -- -- -- 11.97
MFS Emerging Growth Sub-Account .................. -- -- -- 11.36 15.02
MFS Research Sub-Account ......................... -- -- -- 10.89 13.24
MFS Growth With Income Sub-Account ............... -- -- -- 11.40 13.75
MFS Utilities Sub-Account ........................ -- -- -- -- 10.65
MFS Total Return Sub-Account ..................... -- -- -- 11.10 12.29
Oppenheimer Aggressive Growth Sub-Account ........ -- -- -- 10.97 12.16
Oppenheimer Global Securities Sub-Account ........ -- -- -- -- 11.26
Oppenheimer Capital Appreciation Sub-Account ..... -- -- -- 11.22 13.72
Oppenheimer Main Street Growth & Income
Sub-Account .................................... -- -- -- 11.83 12.21
Oppenheimer High Income Sub-Account .............. -- -- -- -- 10.51
Oppenheimer Money Fund ........................... 1.02 1.05 1.09 1.13 1.17
Oppenheimer Strategic Bond Sub-Account ........... -- -- -- 10.33 10.47
Calvert Social Small Cap Growth Sub-Account ...... -- -- -- 11.04 10.22
Calvert Social Balanced Sub-Account .............. -- -- -- 11.14 12.77
Van Eck Worldwide Hard Assets Sub-Account ........ -- -- -- -- 9.50
Van Eck Worldwide Real Estate Sub-Account ........ -- -- -- -- 10.39
</TABLE>
The number of Accumulation Units shown below assume a Contract with the
standard benefit. No Accumulation Units were associated with Contracts with an
optional benefit package on or before December 31, 1998.
<TABLE>
<CAPTION>
(DECEMBER 31, (DECEMBER 31, (DECEMBER 31, (DECEMBER 31, (DECEMBER 31,
1994) 1995) 1996) 1997) 1998)
--------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
PIC International Equity Sub-Account ............. 2,588,605 4,954,564 7,363,767 9,722,696 10,798,391
PIC Small Cap Value Sub-Account .................. 2,347,968 4,579,808 5,797,119 7,429,530 8,201,197
PIC Capital Growth Sub-Account ................... -- 930,249 2,419,601 4,493,710 6,926,984
PIC CORE U.S. Equity Sub-Account ................. 1,682,927 4,128,798 6,300,382 8,495,067 10,415,387
PIC Growth and Income Sub-Account ................ 4,260,743 10,012,351 13,291,398 17,539,696 19,909,590
PIC Global Income Sub-Account .................... 1,457,712 2,438,238 3,081,317 3,677,919 4,330,727
MFS New Discovery Sub-Account .................... -- -- -- -- --
MFS Emerging Growth Sub-Account .................. -- -- -- 292,318 1,102,153
MFS Research Sub-Account ......................... -- -- -- 577,212 1,987,679
MFS Growth With Income Sub-Account ............... -- -- -- 234,240 1,409,735
MFS Utilities Sub-Account ........................ -- -- -- -- --
MFS Total Return Sub-Account ..................... -- -- -- 157,430 1,060,293
Oppenheimer Aggressive Growth Sub-Account ........ -- -- -- 238,172 931,993
Oppenheimer Global Securities Sub-Account ........ -- -- -- -- --
Oppenheimer Capital Appreciation Sub-Account ..... -- -- -- 321,669 1,167,782
Oppenheimer Main Street Growth & Income
Sub-Account .................................... -- -- -- 247,774 1,644,982
Oppenheimer High Income Sub-Account .............. -- -- -- -- --
Oppenheimer Money Fund ........................... 3,034,056 4,273,270 5,577,080 3,151,349 4,526,291
Oppenheimer Strategic Bond Sub-Account ........... -- -- -- 284,169 1,524,677
Calvert Social Small Cap Growth Sub-Account ...... -- -- -- 12,376 53,800
Calvert Social Balanced Sub-Account .............. -- -- -- 94,365 481,687
Van Eck Worldwide Hard Assets Sub-Account ........ -- -- -- -- --
Van Eck Worldwide Real Estate Sub-Account ........ -- -- -- -- --
</TABLE>
- ---------
* Accumulation unit values are rounded to the nearest whole cent.
** Accumulation units are rounded to the nearest unit.
12
<PAGE>
THE COMPANY, VARIABLE ACCOUNT AND FUNDS
PROTECTIVE LIFE INSURANCE COMPANY
The Contracts are issued by Protective Life. A Tennessee corporation
founded in 1907, Protective Life provides individual life insurance, annuities,
group dental 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, 1998, Protective Life had total assets
of approximately $11.6 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 $12.0 billion at December 31,
1998.
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.
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. The portion of the 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 which
exceed the reserves and other contract liabilities of the Variable Account.
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 and
losses, both realized and unrealized, from the assets of the Variable Account
are credited to or charged against the Variable Account without regard to any
other income, gains or losses of Protective Life. The obligations under the
Contracts are obligations of Protective Life.
Currently, twenty-three Sub-Accounts of the Variable Account are available
under this Contract: PIC International Equity; PIC Small Cap Value; PIC Capital
Growth; PIC CORE U.S. Equity; PIC Growth and Income; PIC Global Income; MFS New
Discovery; MFS Emerging Growth; MFS Research; MFS Growth With Income; MFS
Utilities; MFS Total Return; Oppenheimer Aggressive Growth; Oppenheimer Global
Securities; Oppenheimer Capital Appreciation; Oppenheimer Main Street Growth &
Income; Oppenheimer High Income; Oppenheimer Strategic Bond; Oppenheimer Money
Fund; Calvert Social Small Cap Growth; Calvert Social Balanced; Van Eck
Worldwide Hard Assets; and Van Eck Worldwide Real Estate. 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 that you select.
Other contracts Protective Life issues may offer some or all of the
Sub-Accounts of the Variable Account.
ADMINISTRATION
Protective Life Insurance Company performs the Contract administration at
its administrative office at 2801 Highway 280 South, Birmingham, Alabama 35223.
Contract administration includes processing applications for the Contracts and
subsequent Owner requests; processing Purchase Payments, transfers, surrenders
and death benefit claims as well as performing record maintenance and
disbursing annuity income payments.
THE FUNDS
Each Sub-Account invests in a corresponding Fund. Each Fund is an
investment portfolio of one of the following investment companies: Protective
Investment Company ("PIC Funds") managed by Protective Investment Advisors,
Inc. (formerly Investment Distributors Advisory Services, Inc.), and subadvised
by Goldman Sachs Asset Management or Goldman Sachs Asset Management
International; Oppenheimer Variable Account Funds managed by OppenheimerFunds,
Inc.; MFS(R) Variable Insurance Trust(SM) managed by MFS Investment Management;
Calvert Variable Series, Inc. managed by Calvert Asset Management Company,
Inc.; or Van Eck Worldwide Insurance Trust managed by Van Eck Associates
Corporation. Shares of these Funds are offered only to:
(1) the Variable Account,
(2) other separate accounts of Protective Life and its affiliates
supporting variable annuity contracts or variable life insurance policies,
13
<PAGE>
(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.
PROTECTIVE INVESTMENT COMPANY (PIC)
INTERNATIONAL EQUITY FUND.
This Fund seeks to provide long-term capital appreciation. This Fund will
pursue its objectives by investing substantially all, and at least 65%, of
total assets 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.
SMALL CAP VALUE FUND.
This Fund seeks long-term capital growth. This Fund will pursue its
objectives 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.
CAPITAL GROWTH FUND
This Fund seeks long-term capital growth. The Fund will pursue its
objective by investing, under normal circumstances, at least 90% of its total
assets in a diversified portfolio of equity securities having long-term capital
appreciation potential.
CORE U.S. EQUITY FUND.
This Fund seeks a total return consisting of capital appreciation plus
dividend income. This Fund will pursue its objectives 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 in seeking to maximize the Fund's expected return, while maintaining
risk, style, capitalization and industry characteristics similar to the S&P 500
Index.
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 that have favorable
prospects of capital appreciation and/or dividend paying ability.
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 primarily in high quality fixed-income
securities of U.S. and foreign issuers and through foreign currency
transactions.
MFS(R) VARIABLE INSURANCE TRUST(SM)
NEW DISCOVERY SERIES.
This Fund seeks to provide capital appreciation.
EMERGING GROWTH SERIES.
This Fund seeks to provide long-term growth of capital.
RESEARCH SERIES.
This Fund seeks to provide long-term growth of capital and future income.
14
<PAGE>
GROWTH WITH INCOME SERIES.
This Fund seeks reasonable current income and long-term growth of capital
and income.
UTILITIES SERIES.
This Fund seeks to provide capital growth and current income above that
available from a portfolio invested entirely in equity securities.
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.
OPPENHEIMER VARIABLE ACCOUNT FUNDS
AGGRESSIVE GROWTH FUND/VA.
This Fund seeks to achieve long-term capital appreciation by investing in
"growth-type" companies.
GLOBAL SECURITIES FUND/VA.
This Fund seeks long-term capital appreciation by investing in securities
of foreign issuers, "growth-type" companies and cyclical industries.
CAPITAL APPRECIATION FUND/VA.
This Fund seeks to achieve long-term capital appreciation by investing in
securities of well-known established companies.
MAIN STREET GROWTH & INCOME FUND/VA.
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.
HIGH INCOME FUND/VA.
This Fund seeks a high level of current income from investment in high
yield fixed-income securities.
STRATEGIC BOND FUND/VA.
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.
MONEY FUND/VA.
This Fund seeks maximum current income from investments in "money market"
securities consistent with low capital risk and the maintenance of liquidity.
AN INVESTMENT IN THE MONEY FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND
SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS
POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND.
CALVERT VARIABLE SERIES, INC.
SOCIAL SMALL CAP GROWTH PORTFOLIO.
This Fund seeks to provide long-term capital appreciation by investing in
equity securities of companies that have small market capitalizations.
SOCIAL 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 criteria established for the
Fund.
15
<PAGE>
VAN ECK WORLDWIDE INSURANCE TRUST
WORLDWIDE HARD ASSETS FUND.
This Fund seeks long-term capital appreciation by investing primarily in
"Hard Asset Securities". Hard Asset Securities are the stocks, bonds and other
securities of companies that derive at least 50% of gross revenue or profit
from the exploration, development, production or distribution of (together
"Hard Assets"):
(i) precious metals;
(ii) natural resources;
(iii) real estate; and
(iv) commodities.
WORLDWIDE REAL ESTATE FUND.
This Fund seeks a high total return by investing in equity securities of
companies that own significant real estate or that principally do business in
real estate.
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.
Certain Funds may have investment objectives and policies similar to other
mutual funds (sometimes having similar names) that are managed by the same
investment adviser or manager. The investment results of the Funds, however,
may be more or less favorable than the results of such other mutual funds.
Protective Life does not guarantee or make any representation that the
investment results of any Fund is, or will be, comparable to any other mutual
fund, even one with the same investment adviser or manager.
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 may not be able to purchase additional shares of that Fund. In that
event, Owners may 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 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 and its affiliates) in the Funds managed
by that manager or adviser. These fees are consideration for administrative
services provided to the Funds by Protective Life and its affiliates. Managers
or advisers paying fees under these agreements do not increase the fees or
expenses the Funds or their shareholders pay.
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, and to Protective Life
Annuity and Insurance Company (formerly American Foundation Life Insurance
Company) a Protective Life affiliate, as the underlying investment for variable
annuity contracts issued by Protective Life and Annuity Insurance Company. 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 policies. In addition,
upon obtaining regulatory approval, PIC may sell shares to certain retirement
plans qualifying under Section 401 of the Internal Revenue Code of 1986.
Protective Life currently does not foresee any disadvantages to Owners that
would arise from the possible sale of shares to support its variable annuity
and variable life insurance policies or those of its affiliates or from the
possible sale of shares
16
<PAGE>
to such retirement plans. However, the board of directors of PIC will monitor
events in order to identify any material irreconcilable conflicts that might
possibly arise if such shares were also offered to support variable annuity
policies other than the Contracts or variable life insurance policies 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 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 MFS(R) Variable Insurance Trust(SM), Oppenheimer Variable
Account Funds, Calvert Variable Series, Inc. and Van Eck Worldwide Insurance
Trust 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 boards of directors (or
trustees) of the MFS(R) Variable Insurance Trust(SM), Oppenheimer Variable
Account Funds, Calvert Variable Series, Inc. and Van Eck Worldwide Insurance
Trust monitor 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 Securities and
Exchange Commission 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. We may make any new
Sub-Accounts available to existing Owner(s) on a basis we determine.
If we make any of these substitutions or changes, 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 Owners
and Annuitants, and subject to any approvals that applicable law may require,
we may operate the Variable Account as a management company under the 1940 Act,
we may de-register it under that Act if registration is no longer required, or
we may combine it with other Protective Life separate accounts. Protective Life
reserves the right to make any changes to the Variable Account that the 1940
Act or other applicable law or regulation requires.
DESCRIPTION OF THE CONTRACT
The following sections describe the Contracts currently being offered.
THE CONTRACT
The Elements(SM) Contract is a flexible premium deferred variable and fixed
annuity contract issue by Protective Life. In certain states we offer the
Contract as a group contract to eligible persons who have established accounts
with certain broker-dealers that have entered into a distribution agreement
with Protective Life to offer the Contract. In those states may also offer the
Contract to members of other eligible groups. In all other states, we offer the
Contract as an individual contract. If you purchase an interest in a group
contract, you will receive a certificate evidencing your ownership interest in
the group contract. Otherwise, you will receive an individual Contract.
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You may purchase the Contract on a non-qualified basis. You may also
purchase it for use with certain qualified retirement plans that receive
special federal income tax treatment under the Internal Revenue Code, such as
pension and profit sharing plans (including H.R. 10 Plans), tax sheltered
annuity plans, individual retirement accounts, and individual retirement
annuities.
You may wish to consult a qualified tax and/or financial adviser regarding
the use of the Contract within a qualfiied plan or in connection with other
employee benefit plans or arrangements that receive favorable tax treatment,
since many such plans or arrangements provide the same type of tax deferral as
provided by the Contract. The Contract provides a number of extra benefits and
features not provided by employee benefit plans or arrangements alone, although
there are costs and expenses under the Contract related to these benefits and
features. You should carefully consider these benefits and features in relation
to their costs as they apply to your particular situation.
PARTIES TO THE CONTRACT
OWNER.
The Owner is the person or persons who own the Contract and are entitled
to exercise all rights and privileges provided in the Contract. In those states
where the Contract is issued as a group contract, the term "Owner" refers to
the holder of the certificate evidencing an interest in the group contract. Two
persons may own the Contract together; they are designated as the Owner and the
Joint Owner. In the case of Joint Owners, provisions relating to action by the
Owner means both Joint Owners acting together. Individuals as well as
nonnatural persons, such as corporations or trusts, may be Owners. The Company
will only issue a Contract prior to each Owner's 80th birthday.
The Owner of this Contract may be changed by Written Notice provided:
(1) each new Owner's 80th birthday is after the Effective Date; and
(2) each new Owner's 90th birthday is on or after the Annuity
Commencement Date.
For a period of 1 year after any change of ownership involving a natural
person, the death benefit will equal the Contract Value less any Credits added
during the 12 months prior to death. Changing the Owner may result in a tax
liability. (See "Taxation of Annuities in General: Assignments, Pledges, and
Gratuitous Transfers.")
BENEFICIARY.
The Beneficiary is the person or persons who may receive the benefits of
this Contract upon the death of any Owner.
PRIMARY -- The Primary Beneficiary is the surviving Joint Owner, if any.
If there is no surviving Joint Owner, the Primary Beneficiary is the
person or persons designated by the Owner and named in our records.
CONTINGENT -- The Contingent Beneficiary is the person or persons
designated by the Owner and named in our records to be Beneficiary if the
Primary Beneficiary is not living at the time of the Owner's death.
If no Beneficiary designation is in effect or if no Beneficiary is living
at the time of an Owner's death, the Beneficiary will be the estate of the
deceased Owner. If any Owner dies on or after the Annuity Commencement Date,
the Beneficiary will become the new Owner.
Unless designated irrevocably, the Owner may change the Beneficiary by
Written Notice prior to the death of any Owner. An irrevocable Beneficiary is
one whose written consent is needed before the Owner can change the Beneficiary
designation or exercise certain other rights. In the case of certain Qualified
Contracts, Treasury Department regulations prescribe certain limitations on the
designation of a Beneficiary.
ANNUITANT.
The Annuitant is the person on whose life annuity income payments may be
based. The Owner is the Annuitant unless the Owner designates another person as
the Annuitant. The Contract must be issued prior to the Annuitant's 80th
birthday. If the Annuitant is not an Owner and dies prior to the Annuity
Commencement Date, the Owner will become the new Annuitant unless the Owner
designates otherwise.
The Owner may change the Annuitant by Written Notice prior to the Annuity
Commencement Date. However, if any Owner is not an individual the Annuitant may
not be changed.
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PAYEE.
The Payee is the person or persons designated by the Owner to receive the
annuity income payments under the Contract. The Annuitant is the Payee unless
the Owner designates another party as the Payee. The Owner may change the Payee
at any time.
ISSUANCE OF A CONTRACT
To purchase a Contract, you must submit certain application information
and an initial Purchase Payment 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 $10,000. 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 Internal Revenue Code.
If the necessary application information for a Contract accompanies the
initial Purchase Payment, we will allocate the initial Purchase Payment (less
any applicable premium tax) to the Allocation Option as you direct in the
application within two business days of receiving such Purchase Payment at the
administrative office. If we do not receive the necessary application
information, 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 return the initial
Purchase Payment immediately unless the applicant specifically consents to
Protective Life retaining it until the information is complete. Once the
information is complete, we will allocate the initial Purchase Payment to the
appropriate Allocation Options within two business days.
You may transmit information necessary to complete an application to the
Company by telephone, facsimile, or electronic media.
PURCHASE PAYMENTS
The Company will only accept Purchase Payments prior to the earlier of the
oldest Owner's 80th birthday, or the Annuitant's 80th birthday. No Purchase
Payment will be accepted within 10 years of the Annuity Commencement Date then
in effect. The minimum subsequent Purchase Payment we will accept is $100. We
reserve the right not to accept any Purchase Payment.
Purchase Payments are payable at our administrative office. You may make
them by check payable to Protective Life Insurance Company or by any other
method we deem acceptable. Protective Life retains the right to limit the
maximum aggregate Purchase Payment that can be made without prior
administrative office approval. This amount is currently $1,000,000.
Under the current automatic purchase payment plan, you may select a
monthly or quarterly payment schedule pursuant to which Purchase Payments will
be automatically deducted from a bank account. We currently accept automatic
purchase payments on the 1st through the 28th day of each month. Each automatic
purchase payment must be at least $100. You may not allocate payments made
through the automatic purchase payment plan to any DCA Fixed Account. You may
not elect the automatic purchase payment plan and the partial automatic
withdrawal plan simultaneously. (See "Surrenders and Partial Surrenders".) Upon
notification of the death of any Owner the Company will terminate deductions
under the automatic purchase payment plan. (See "Allocation of Purchase
Payments".)
PURCHASE PAYMENT CREDITS
On the date we accept a Purchase Payment, we will add a Credit to your
Contract Value. We determine the Credit by multiplying the amount of the
Purchase Payment by the Credit percentage associated with the cumulative
Purchase Payments as shown below. During the first Contract Year, we aggregate
Purchase Payments to determine the applicable Credit percentage. Due to this
aggregation, it is possible that during the first Contract Year, part of the
Credit added to your Contract Value is based on prior Purchase Payments.
We apply Credits to the Allocation Options according to the allocation
percentages of the Purchase Payments with which they are associated. If you
return this Contract under the Right to Cancel provision, the amount we return
to you will not include any applied Credits. Whenever we deduct Credits from
the Contract Value, we will remove them from the Allocation Options on a
pro-rata basis using the ratio of each Allocation Option value to the total
Contract Value.
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CREDIT PERCENTAGES
<TABLE>
<CAPTION>
CREDIT
CUMULATIVE PURCHASE PAYMENTS PERCENTAGE
- ------------------------------------------------------ -----------
<S> <C>
Less than $100,000.............................. 3.00%
At least $100,000 but less than $250,000........ 3.50%
At least $250,000 but less than $500,000........ 4.00%
At least $500,000 but less than $1,000,000...... 4.50%
$1,000,000 or greater........................... 5.00%
</TABLE>
Refer to Appendix A for an example of how the Purchase Payment Credit is
applied.
RIGHT TO CANCEL
You have the right to return the Contract within a certain number of days
after you receive it by returning it to our administrative office or the sales
representative who sold it along with a written cancellation request. The
number of days, which is at least ten, is determined by state law in the state
where the Contract is delivered. Return of the Contract by mail is effective on
being post-marked, properly addressed and postage pre-paid. We will treat the
returned Contract as if it had never been issued. Where permitted, Protective
Life will refund the Contract Value plus any fees deducted from either Purchase
Payments or Contract Value less Credits applied. 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
The allocation of your Purchase Payment and associated Credits among the
Allocation Options you have selected will be at the next price determined after
we receive your Purchase Payment. Owners must indicate in the application how
their initial and subsequent Purchase Payments are to be allocated among the
Allocation Options. If such instructions are indicated by percentages, whole
percentages must be used. Subsequent Purchase Payments made through the
automatic purchase payment plan may not be allocated to any DCA Fixed Account.
The Fixed Account is not available in the states of Oregon, Maryland,
Massachusetts, or South Carolina. In the state of Oregon the DCA Fixed Accounts
are only available for initial Purchase Payments.
For Individual Retirement Annuities and Contracts issued in states where,
upon cancellation during the right-to-cancel period, we return at least your
Purchase Payments, we reserve the right to allocate your initial Purchase
Payment and associated Credits (and any subsequent Purchase Payment and
associated Credits made during the right-to-cancel period) to the Oppenheimer
Money Fund Sub-Account until the expiration of the number of days in the free
look period starting from the date we mail the Contract from our administrative
office. Thereafter, we will allocate all Purchase Payments according to your
allocation instructions then in effect.
Owners may change allocation instructions by Written Notice at any time.
Owners may also change instructions by telephone, facsimile transmission or
automated telephone system. For non-written instructions regarding allocations,
we will require a form of personal identification prior to acting on
instructions and we will record any telephone voice instructions. If we follow
these procedures, we will not be liable for any losses due to unauthorized or
fraudulent instructions. The Company reserves the right to limit or eliminate
any of these non-written communication methods for any Contract or class of
Contracts at any time for any reason.
VARIABLE ACCOUNT VALUE
SUB-ACCOUNT VALUE.
A Contract's Variable Account value at any time is the sum of the
Sub-Account values and therefore reflects the investment experience of the
Sub-Accounts to which it is allocated. There is no guaranteed minimum Variable
Account value. The Sub-Account value for any Sub-Account as of the Effective
Date is equal to the amount of the initial Purchase Payment allocated to that
Sub-Account. On subsequent Valuation Days prior to the Annuity Commencement
Date, the Sub-Account value is equal to that part of any Purchase Payment and
associated Credits allocated to the Sub-Account and any Contract Value
transferred to the Sub-Account, adjusted by income, dividends, net capital
gains or losses (realized or unrealized), decreased by partial surrenders
(including any applicable surrender charges and premium tax), Contract Value
transferred out of the Sub-Account and fees deducted from the Sub-Account. The
Sub-Account value for a Contract may
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be 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. (See "Determination of Accumulation Units"
and "Determination of Accumulation Unit Value.")
DETERMINATION OF ACCUMULATION UNITS.
Purchase Payments and associated Credits allocated and Contract Value
transferred to a Sub-Account are converted into Accumulation Units. An
Accumulation Unit is a unit of measure used to calculate the value of a
Sub-Account prior to the Annuity Commencement Date. We determine the number of
Accumulation Units by dividing the dollar amount directed to the Sub-Account by
the value of the Accumulation Unit for that Sub-Account for the Valuation Day
as of which the allocation or transfer occurs. Purchase Payments and associated
Credits allocated or amounts transferred to a Sub-Account under a Contract
increase the number of Accumulation Units of that Sub-Account credited to the
Contract. The Company executes such allocations and transfers as of the end of
the Valuation Period in which it receives a Purchase Payment or Written Notice
or other instruction requesting a transfer.
Certain events reduce the number of Accumulation Units of a Sub-Account
credited to a Contract. The following events result in the cancellation of the
appropriate number of Accumulation Units of a Sub-Account:
o surrenders and applicable surrender charges;
o partial surrenders and applicable surrender charges;
o deduction of Credits;
o partial automatic withdrawals;
o transfer from a Sub-Account;
o payment of a death benefit claim;
o application of the Contract Value to an Annuity Option; and
o deduction of the annual contract maintenance fee.
Accumulation Units are canceled as of the end of the Valuation Period in which
the Company receives Written Notice of or other instructions regarding the
event.
DETERMINATION OF ACCUMULATION UNIT VALUE.
The Accumulation Unit value for each Sub-Account 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. The Sub-Account value for a
Contract may be 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.
NET INVESTMENT FACTOR.
The net investment factor measures the investment performance of a
Sub-Account from one Valuation Period to the next. For each Sub-Account, the
net investment factor reflects the investment performance of the Fund in which
the Sub-Account invests and the charges assessed against that Sub-Account for a
Valuation Period. 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 the
Fund makes 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 the
Company determines to have resulted from the investment operations of
the Sub-Account.
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(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 factor representing the mortality and expense risk charge and the
administration charge for the number of days in the Valuation Period.
TRANSFERS
Prior to the Annuity Commencement Date, you may instruct us to transfer
Contract Value between and among the Allocation Options. When we receive your
transfer instructions, we will allocate the Contract Value you transfer at the
next price determined for the Allocation Options you indicate.
You must transfer at least $100, or if less, the entire amount in the
Allocation Option each time you make a transfer. If after the transfer, the
Contract Value remaining in any Allocation Option from which a transfer is made
would be less than $100, then we may transfer the entire Contract Value in that
Allocation Option instead of the requested amount. We reserve the right to
limit the number of transfers to no more than 12 per Contract Year. For each
additional transfer over 12 during each Contract Year, we reserve the right to
charge a Transfer Fee which will not exceed $25. The Transfer Fee, if any, will
be deducted from the amount being transferred. (See "Charges and Deductions --
Transfer Fee".)
Transfers involving a Guaranteed Account are subject to additional
restrictions. The maximum amount that may be transferred from the Fixed Account
during a Contract Year is the greater of:
(1) $2,500; or
(2) 25% of the Contract Value in the Fixed Account value.
Transfers into the DCA Fixed Account are not permitted.
Owners may request transfers by Written Notice at any time. Owners also
may request transfers by telephone, facsimile transmission, or automated
telephone system. From time to time and at our sole discretion, we may
introduce additional methods for requesting transfers or discontinue any method
for making non-written requests for such transfers. We will require a form of
personal identification prior to acting on non-written requests and we will
record telephone requests. We will send you a confirmation of all transfer
requests communicated to us. If we follow these procedures we will not be
liable for any losses due to unauthorized or fraudulent transfer requests.
After the Annuity Commencement Date, when Variable Income Payments are
selected, transfers are allowed between Sub-Accounts, but are limited to one
transfer per month. Dollar cost averaging and portfolio rebalancing are not
allowed. No transfers are allowed within the Guaranteed Account or between the
Guaranteed Account or any Sub-Account.
RESERVATION OF RIGHTS.
We reserve the right to limit amounts transferred into or out of any
account within the Guaranteed Account. We reserve the right to modify, limit,
suspend or eliminate the transfer privileges (including acceptance of
non-written instructions) without prior notice for any Contract or class of
Contracts at any time for any reason. We also 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 transfers during a single Valuation Period on
behalf of the Owners of two or more Contracts.
After the Annuity Commencement Date, when variable income payments are
selected additional restrictions apply. Transfers are allowed between
Sub-Accounts, but limited to one transfer per month. Dollar cost averaging and
portfolio rebalancing are not allowed. No transfers are allowed within the
Guaranteed Account or between the Guaranteed Account and any Sub-Account.
DOLLAR COST AVERAGING.
Prior to the Annuity Commencement Date, you may instruct us by Written
Notice to systematically and automatically transfer, on a monthly or quarterly
basis, amounts from a DCA Fixed Account (or any other Allocation Option) to any
Allocation Option, except that no transfers may be made into a DCA Fixed
Account. This is known as the "dollar-cost averaging" method of investment. By
transferring equal amounts of Contract Value on a regularly scheduled basis, as
opposed to allocating a larger amount at one particular time, an Owner may be
less susceptible to the impact of market fluctuations in the value of
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.
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You may make dollar cost averaging transfers on the 1st through the 28th
day of each month. In states where, upon cancellation during the
right-to-cancel period, we are required to return your Purchase Payment, we
reserve the right to delay commencement of dollar cost averaging transfers
until the expiration of the right-to-cancel period.
The DCA Fixed Accounts are available only for Purchase Payments designated
for dollar cost averaging. In the state of Oregon, the DCA Fixed Accounts are
only available for the initial Purchase Payment. Purchase Payments may not be
allocated into any DCA Fixed Account when that DCA Fixed Account value is
greater than $0, and all funds must be transferred from a DCA Fixed Account
prior to allocating a Purchase Payment to that DCA Fixed Account. Where we
agree, under current administrative procedures, to allocate a Purchase Payment
to any DCA Fixed Account in installments from more than one source, we will
credit each installment with the interest rate applied to the first installment
we receive. Any Purchase Payment allocated to a DCA Fixed Account must include
instructions regarding the number and frequency of the dollar cost averaging
transfers, and the Allocation Option(s) into which the transfers are to be
made. In states where the Fixed Account is not available, upon the termination
of transfers from a DCA Fixed Account we will transfer any amount remaining in
that DCA Fixed Account to the OppenheimerFunds Money Fund Sub-Account unless we
have your instructions to allocate the remaining amount differently.
Currently, the maximum period for dollar cost averaging from DCA Fixed
Account 1 is six months and from DCA Fixed Account 2 is twelve months. From
time to time, we may offer different maximum periods for dollar cost averaging
amounts from a DCA Fixed Account.
The periodic amount transferred from a DCA Fixed Account will be equal to
the Purchase Payment and associated Credit allocated to the DCA Fixed Account
divided by the number of dollar cost averaging transfers to be made. Interest
credited will be transferred from the DCA Fixed Account after the last dollar
cost averaging transfer. We will process dollar cost averaging transfers until
the earlier of the following: (1) the designated number of transfers have been
completed, or (2) the Owner instructs us by Written Notice to cancel the
automatic transfers. If you terminate transfers from a DCA Fixed Account, we
will transfer any amount remaining in that DCA Fixed Account into the Fixed
Account unless you have otherwise instructed us how to allocate the remaining
amount. Upon the death of any Owner, dollar cost averaging transfers will
continue until canceled by the Beneficiary(s).
There is no charge for dollar cost averaging. Automatic transfers made to
facilitate dollar cost averaging will not count toward the 12 transfers
permitted each Contract Year if Protective Life elects to limit transfers, or
the designated number of free transfers in any Contract Year if the Company
elects to charge for transfers in excess of that number in any Contract Year.
We reserve the right to discontinue dollar cost averaging upon 30 days' written
notice to the Owner.
PORTFOLIO REBALANCING.
Prior to the Annuity Commencement Date, you may instruct Protective Life
by Written Notice to periodically transfer your Variable Account value among
specified Sub-Accounts to achieve a particular percentage allocation of
Variable Account value among such Sub-Accounts ("portfolio rebalancing"). The
portfolio rebalancing percentages must be in whole numbers and must allocate
amounts only among the Sub-Accounts. You may not transfer any Contract Value to
the Guaranteed Account as part of portfolio rebalancing. Unless you instruct
otherwise, portfolio rebalancing is based on your Purchase Payment allocation
instructions in effect at the time of each rebalancing transfer. We deem
portfolio rebalancing instructions from you that differ from your current
Purchase Payment allocation instructions to be a request to change your
Purchase Payment allocation.
You may elect portfolio rebalancing to occur on the 1st through 28th day
of a month on either a quarterly, semi-annual or annual basis. If you do not
select a day, transfers will occur on the same day of the month as your
Contract Anniversary, or on the 28th day of the month if your Contract
Anniversary occurs on the 29th, 30th or 31st day of the month. You may change
or terminate portfolio rebalancing by Written Notice, or by other non-written
communication methods acceptable for transfer requests. Upon the death of any
Owner portfolio rebalancing will continue until canceled by the Beneficiary(s).
There is no charge for portfolio rebalancing. Automatic transfers made to
facilitate portfolio rebalancing will not count toward the 12 transfers
permitted each Contract Year if Protective Life elects to limit transfers, or
the designated number of free transfers in any Contract Year if the Company
elects to charge for transfers in excess of that number in any Contract Year.
We reserve the right to discontinue portfolio rebalancing upon 30 days' written
notice to the Owner.
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SURRENDERS AND PARTIAL SURRENDERS
SURRENDER.
At any time before the Annuity Commencement Date, you may request a
surrender of your Contract for its surrender value. To surrender your Contract,
you must return the Contract to us and make your surrender request by Written
Notice. We will pay you the surrender value in a lump sum unless you request
payment under another payment option that we are making available at the time.
Partial and full surrenders from Contracts issued as tax sheltered annuities
are prohibited in certain circumstances. (See "Federal Tax Matters.") A
surrender may have federal income tax consequences. (See "Taxation of Partial
and Full Surrenders".) Under certain Annuity Options, a surrender value may be
available. (See "Annuitization".)
SURRENDER VALUE.
The surrender value of your Contract is equal to the Contract Value minus
any applicable surrender charge, contract maintenance fee and premium tax. We
will determine the surrender value as of the end of the Valuation Day on which
we receive your Written Notice requesting surrender and your Contract at our
administrative office.
PARTIAL SURRENDER.
At any time before the Annuity Commencement Date, you may request a
partial surrender of your Contract Value provided the Contract Value remaining
after the partial surrender is at least $10,000. You must request the partial
surrender by Written Notice. We will withdraw the amount requested from the
Contract Value as of the Valuation Period during which we receive Written
Notice requesting the partial surrender. The amount we will pay you upon a
partial surrender is equal to the Contract Value surrendered minus any
applicable surrender charge.
You may specify the amount of the partial surrender to be made from any
Allocation Option. If the you do 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 Allocation Option based on the proportion that
the value of each Allocation Option bears to the total Contract Value.
A partial surrender may have federal income tax consequences. (See
"Taxation of Partial and Full Surrenders".)
CANCELLATION OF ACCUMULATION UNITS.
Surrenders and partial surrenders, including any surrender charges, will
result in the cancellation of Accumulation Units from each applicable
Sub-Account(s) and/or in a reduction of the Guaranteed Account value.
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 Internal Revenue 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.
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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PARTIAL AUTOMATIC WITHDRAWALS.
Currently, the Company offers a partial automatic withdrawal plan. This
plan allows you to pre-authorize periodic partial surrenders prior to the
Annuity Commencement Date. You may elect to participate in this plan at the
time of application or at a later date by properly completing an election form.
In order to participate in the plan you must have:
(1) made an initial Purchase Payment of at least $20,000; or
(2) a Contract Value as of the previous Contract Anniversary equal to
$20,000.
The partial automatic withdrawal plan and the automatic purchase payment
plan may not be elected simultaneously. (See "Purchase Payments".) There are
federal income tax consequences to partial automatic withdrawals from the
Contract and the Owner should, therefore, consult with his or her tax advisor
before participating in any withdrawal program. (See "Taxation of Partial and
Full Surrenders".)
When you elect the partial automatic withdrawal plan, you will instruct
Protective Life to withdraw a level dollar amount from the Contract on a
monthly or quarterly basis. Partial automatic withdrawals may be made on the
1st through the 28th day of each month. The amount requested must be at least
$100 per withdrawal. We will process withdrawals for the designated amount
until you instruct us otherwise. If, during any Contract Year, the amount of
the withdrawals exceeds the "free withdrawal amount" described in the
"Surrender Charge" section of this prospectus, we will deduct a surrender
charge where applicable. (See "Surrender Charge.") Partial automatic
withdrawals will be taken pro-rata from the Allocation Options in proportion to
the value each Allocation Option bears to the total Contract Value and will be
made only by an electronic fund transfer. We will pay you the amount requested
each month or quarter as applicable and cancel the applicable Accumulation
Units.
If any partial automatic withdrawal transaction would result in a Contract
Value of less than $10,000 after the withdrawal, the transaction will not be
completed and the partial automatic withdrawal plan will terminate. The partial
automatic withdrawal plan will also terminate in the event that a non-automated
partial surrender is made from a Contract participating in the plan, except on
a partial surrender taken as a minimum required distribution from a Qualified
Plan. (See "Qualified Retirement Plans".) Upon notification of the death of any
Owner the Company will terminate the partial automatic withdrawal plan. The
partial automatic withdrawal plan may be discontinued by the Owner at any time
by Written Notice.
There is no charge for the partial automatic withdrawal plan. We reserve
the right to discontinue the partial automatic withdrawal plan upon written
notice to you.
THE GUARANTEED ACCOUNT
The Guaranteed Account has not been, and is 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 Guaranteed Account, the Company's
general account, nor any interests therein are generally subject to regulation
under the 1933 Act or the 1940 Act. The disclosures relating to the Guaranteed
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.
The Guaranteed Account currently includes the Fixed Account and two DCA
Fixed Accounts. The Fixed Account and the DCA Fixed Accounts 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 Accounts are part of the general account, Protective
Life assumes the risk of investment gain or loss on this amount.
Except for certain Contracts issued in certain states, you may allocate
some or all of your Purchase Payments and may transfer some or all of your
Contract Value to an account within the Guaranteed Account, except that
transfers may not be made into any DCA Fixed Account, and Purchase Payments may
not be allocated to any DCA Fixed Account when that DCA Fixed Account value is
greater than $0. All previously allocated funds must be transferred out of a
DCA Fixed Account prior to allocating a subsequent Purchase Payment to that DCA
Fixed Account. Amounts allocated or transferred to an account within the
Guaranteed Account earn interest from the date the funds are credited to the
account.
The interest rate we apply to Purchase Payments and transfers into the
Fixed Account is guaranteed for one year from the date the Purchase Payment or
transfer is credited to the account. When an interest rate guarantee expires,
we
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will set a new interest rate, which may not be the same as the interest rate
then in effect for Purchase Payments or transfers allocated to the Fixed
Account. The new interest rate is also guaranteed for one year.
DCA Fixed Accounts are designed to systematically transfer amounts to
other Allocation Options over a designated period. The interest rate we apply
to Purchase Payments allocated to a DCA Fixed Account is guaranteed for the
period over which transfers are allowed from that DCA Fixed Account.
From time to time and subject to regulatory approval, we may offer Fixed
Accounts or DCA Fixed Accounts with different interest guaranteed periods. We,
in our sole discretion, establish the interest rates for each account in the
Guaranteed Account. We will not declare a rate that is less than an annual
effective interest rate of 3.00%. Because these rates vary from time to time,
allocations made to the same account within the Guaranteed Account at different
times may earn interest at different rates.
GUARANTEED ACCOUNT VALUE.
Any time prior to the Annuity Commencement Date, the Guaranteed Account
value is equal to the sum of:
(1) Purchase Payments and associated Credits allocated to the Guaranteed
Account; plus
(2) amounts transferred into the Guaranteed Account; plus
(3) interest credited to the Guaranteed Account; minus
(4) amounts transferred out of the Guaranteed Account; minus
(5) the amount of any surrenders removed from the Guaranteed Account,
including any applicable premium tax and surrender charges; minus
(6) Credits and fees deducted from the Guaranteed Account.
For the purposes of interest crediting, amounts deducted, transferred or
withdrawn from accounts within the Guaranteed Account will be separately
accounted for on a "first-in, first-out" (FIFO) basis.
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, less any applicable
premium tax, to the Beneficiary. We will determine the death benefit as of the
end of the Valuation Period during which we receive due proof of death. Only
one death benefit is payable under this Contract, even though the Contract may,
in some circumstances, continue beyond the time of an Owner's death. If any
Owner is not a natural person, the death of the Annuitant is treated as the
death of an Owner. 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 may be taken in one sum immediately, in which event the
Contract will terminate. 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 during which we receive due proof of death and the
entire interest in the Contract must be distributed under one of the following
options:
(1) the entire interest must be distributed over the life of the
Beneficiary, or over a period not extending beyond the life expectancy
of the Beneficiary, with distribution beginning within one year of the
Owner's death; or,
(2) the entire interest must be distributed within 5 years of the Owner's
death.
If the Beneficiary is the deceased Owner's spouse, the surviving spouse
may elect, in lieu of receiving a death benefit, to continue the Contract and
become the new Owner, provided the deceased Owner's spouse's 80th birthday is
after the Effective Date and the 90th birthday is after the Annuity
Commencement Date then in effect. The surviving spouse may select a new
Beneficiary. Upon this spouse's death, the death benefit may be taken in one
sum immediately and the Contract will terminate. 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 during which we receive due proof
of death and must be distributed to the new Beneficiary according to paragraph
(1) or (2), above.
If there is more than one Beneficiary, the foregoing provisions apply to
each Beneficiary individually.
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For a period of one year after any change of ownership involving a natural
person, the death benefit will equal the Contract Value less any Credits added
during the 12 months prior to death regardless of whether the standard or
optional death benefit was selected.
The death benefit provisions of this Contract shall be interpreted to
comply with the requirements of ss.72(s) of the Internal Revenue Code. We
reserve the right to endorse this Contract, as necessary, to conform with
regulatory requirements. We will send you a copy of any endorsement containing
such Contract modifications.
STANDARD DEATH BENEFIT
The standard death benefit will equal the greater of:
(1) the Contract Value less any Credits added to the Contract during the
12 months prior to the date of death; or
(2) aggregate Purchase Payments less aggregate amounts surrendered,
including associated surrender charges.
OPTIONAL BENEFIT PACKAGES
At the time of application, the Owner may purchase an optional benefit
package that may provide a death benefit which is greater than the standard
death benefit provided under the Contract. A death benefit available under an
optional benefit package must be distributed according to the rules in the
"Death Benefit" section above.
Currently, two optional benefit packages are available. If the Owner
purchases one of these packages, the mortality and expense risk expense charge
will increase by 0.15% to 1.40%, for total mortality and expense risk and
administration charges of 1.55%. (See "Charges and Deductions".) Once you
select an optional benefit package, you may not cancel or change the option. If
any Owner is not a natural person, we will treat references to the Owner's
birthday as references to the Annuitant's birthday.
Refer to Appendix B for an example of the calculation of each death
benefit.
ANNUAL RESET DEATH BENEFIT PACKAGE.
We will determine an annual reset anniversary value on each Contract
Anniversary occurring before the earlier of the deceased Owner's 80th birthday
or the deceased Owner's date of death. Each annual reset anniversary value is
equal to the sum of:
o the Contract Value on that Contract Anniversary; plus
o all Purchase Payments and Credits since that Contract Anniversary;
o minus all amounts surrendered including associated surrender charges
since that Contract Anniversary.
The death benefit will equal the greatest of:
(1) the Contract Value less any Credits added during the 12 months prior
to death; or
(2) aggregate Purchase Payments less aggregate surrenders including
associated surrender charges; or
(3) the greatest annual reset anniversary value attained less any Credits
added during the 12 months prior to death.
COMPOUND AND 3-YEAR RESET DEATH BENEFIT PACKAGE (NOT AVAILABLE IN THE STATE OF
WASHINGTON).
We will determine a compound anniversary value on the most recent Contract
Anniversary before the earlier of the deceased Owner's 80th birthday or the
deceased Owner's date of death.
The compound anniversary value is equal to the sum of:
(a) the accumulation to the Contract Anniversary of all Purchase Payments
and Credits prior to that Contract Anniversary, minus the accumulation
of amounts surrendered including associated surrender charges prior to
that Contract Anniversary; plus,
(b) any Purchase Payments and Credits on or since that Contract
Anniversary, minus any amounts surrendered including associated
surrender charges on or since that Contract Anniversary.
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If the Effective Date is before the deceased Owner's 71st birthday, the
amounts in (a) will accumulate at an annual effective interest rate of 4.00%.
If the Effective Date is on or after the deceased Owner's 71st birthday, the
amounts in (a) will accumulate at an annual effective interest rate of 3.00%.
We will determine a 3-year reset anniversary value every 3rd Contract
Anniversary occurring before the earlier of the deceased Owner's 80th birthday
or the deceased Owner's date of death. Each 3-year reset anniversary value is
equal the sum of:
o the Contract Value on that Contract Anniversary;
o plus all Purchase Payments and Credits since that Contract Anniversary;
o minus all amounts surrendered including associated surrender charges
since that Contract Anniversary.
The death benefit will equal the greatest of:
(1) the Contract Value less any Credits added during the 12 months prior
to death; or
(2) aggregate Purchase Payments less aggregate surrenders including
associated surrender charges; or
(3) the compound anniversary value less any Credits added during the 12
months prior to death; or
(4) the greatest 3-year reset anniversary value attained less any Credits
added during the 12 months prior to death.
Refer to Appendix B for an example of the calculation of each death benefit.
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
where permitted by the state of issue:
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 practical; or (b) it is not reasonably practical to
determine fairly the value of the net assets of the Variable Account);
or
4) when the SEC, by order, so permits for the protection of security
holders.
The Company may delay payment of a partial or full surrender from the
Guaranteed Account for up to six months where permitted.
CHARGES AND DEDUCTIONS
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE)
GENERAL
We do not deduct any charge for sales expenses from Purchase Payments at
the time you make them. However, within certain time limits described below, we
deduct a surrender charge (contingent deferred sales charge) from the Contract
Value if you make a full or partial surrender before the Annuity Commencement
Date. We do not apply the surrender charge to the payment of a death benefit.
In the event surrender charges are not sufficient to cover sales expenses,
we will bear the loss; conversely, if the amount of such charges provides more
than enough to cover such expenses, we will retain the excess. Protective Life
does not currently believe that the surrender charges imposed will cover the
expected costs of distributing the Contracts. Any shortfall will be made up
from Protective Life's general assets which may include amounts derived from
the mortality and expense risk charge.
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FREE WITHDRAWAL AMOUNT
Each Contract Year you may withdraw a specified amount, called the "free
withdrawal amount", from your Contract without incurring a surrender charge.
During the first Contract Year the free withdrawal amount is equal to 10% of
your initial Purchase Payment(s) and is available only through the partial
automatic withdrawal plan. After the first Contract Year the free withdrawal
amount is equal to 10% of the Contract Value on the prior Contract Anniversary
and is available through either the partial automatic withdrawal plan or
through partial surrenders. No free withdrawal amount is available upon a full
surrender. Amounts surrendered during a Contract Year in excess of the free
withdrawal amount, and full surrenders, are subject to the surrender charge.
Withdrawals, including withdrawals of the free withdrawal amount, may be
subject to income taxation and, in some cases, may be subject to a 10% penalty
tax. (See "Taxation of Annuities in General, Taxation of Partial and Full
Surrenders.")
DETERMINING THE SURRENDER CHARGE.
Except in the State of Oregon, we calculate the surrender charge by first
allocating surrendered Contract Value in excess of any free withdrawal amount
to Purchase Payments or portions of Purchase Payments not previously assessed
with a surrender charge on a "first-in, first-out" (FIFO) basis. We then
allocate any remaining surrendered Contract Value pro-rata to these Purchase
Payments. The surrender charge is the total of each of the allocated amounts of
surrendered Contract Value multiplied by its applicable surrender charge
percentage, as shown below. If the surrendered Contract Value exceeds any free
withdrawal amount and if no surrendered Contract Value was allocated to
Purchase Payments, we determine the surrender charge on the surrendered
Contract Value by applying the surrender charge percentage associated with the
most recent Purchase Payment we accepted.
In the State of Oregon, we calculate the surrender charge by first
allocating surrendered Contract Value in excess of any free withdrawal amount
to Purchase Payments not previously assessed with a surrender charge using a
"first-in, first-out" (FIFO) basis. We then allocate any remaining surrendered
Contract Value to the initial Purchase Payment. The surrender charge is the
total of each of the allocated amounts of surrendered Contract Value multiplied
by its applicable surrender charge percentage, as shown below.
<TABLE>
<CAPTION>
SURRENDER
CHARGE AS
NUMBER OF FULL YEARS ELAPSED BETWEEN PERCENTAGE
THE DATE PURCHASE PAYMENT WAS ACCEPTED OF AMOUNT
AND THE DATE OF SURRENDER SURRENDERED
- ---------------------------------------- ------------
<S> <C>
0 ................................ 8.5%
1 ................................ 8.5%
2 ................................ 8.5%
3 ................................ 8.0%
4 ................................ 7.0%
5 ................................ 6.0%
6 ................................ 5.0%
7 ................................ 3.0%
8 ................................ 1.0%
9+ ............................... 0%
</TABLE>
The cumulative surrender charges assessed will never exceed 8.5% of the
total Purchase Payments we have accepted under this Contract. Refer to Appendix
C for an example of how the surrender charge is calculated in all states except
Oregon.
REDUCTION OR ELIMINATION OF SURRENDER CHARGE.
We may decrease or waive surrender charges 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 savings of sales expenses. We will
determine the entitlement to such a reduction in surrender charge.
We may also waive surrender charges on partial surrenders taken as a
minimum distribution required under federal or state tax laws. (See "Qualified
Retirement Plans".) During any Contract Year, the total amount of such partial
surrenders will reduce the free withdrawal amount available on any subsequent
partial surrender.
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WAIVER OF SURRENDER CHARGES.
If you select an optional benefit package we will waive any applicable
surrender charge if, at any time after the first Contract Year:
(1) you are first diagnosed as having a terminal illness by a physician
that is not related to you or the Annuitant; or,
(2) you enter, for a period of at least ninety (90) days, a facility which
is both
(a) licensed by the state; and
(b) qualified as a skilled nursing home facility under Medicare or
Medicaid.
For Contracts purchased in the State of Texas, we will also waive
surrender charges on these conditions during the first Contract Year.
The term "terminal illness" means that you are diagnosed as having a
non-correctable medical condition that, with a reasonable degree of medical
certainty, will result in your death in less than 12 months. You must submit
written proof of a terminal illness satisfactory to the Company. The Company
reserves the right to require an examination by a physician of its choice.
Once we have granted the waiver of surrender charges, no surrender charges
will apply to the Contract in the future and we will accept no additional
Purchase Payments. We will deduct the amount of any Credits added to the
Contract Value during the 12 months prior to the date we first waive surrender
charges. When we deduct Credits from this Contract, they are removed pro-rata
from among the current Allocation Options.
If any Owner is not an individual, the Waiver of Surrender Charge
provisions will apply to the Annuitant.
SUSPENSION OF BENEFITS.
For a period of one year after any change of ownership involving a natural
person, we will not waive the surrender charges under the provision above.
MORTALITY AND EXPENSE RISK CHARGE
To compensate Protective Life for assuming mortality and expense risks, we
deduct a daily mortality and expense risk charge. Prior to the Annuity
Commencement Date, for Contracts issued with the standard death benefit the
charge is equal, on an annual basis, to 1.25% of the average daily net assets
of the Variable Account attributable to such Contracts. If you select one of
the optional benefit packages, the mortality and expense risk expense charge
will increase by 0.15% for a total mortality and expense risk charge of 1.40%
of the average annual daily net assets of the Variable Account attributable to
your Contract. (See "Optional Benefit Packages".) On, and after the Annuity
Commencement Date, the mortality and expense risk charge is equal to 1.25% of
the average annual daily net assets of the Variable Account attributable to a
Contract. We deduct the mortality and expense charge only from the Variable
Account.
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. It is possible that the mortality and expense risk
charge (or a portion of it) could be treated as an amount received through a
partial surrender for tax purposes. (See "Federal Tax Matters.")
ADMINISTRATION CHARGES
We will deduct an administration charge equal, on an annual basis, to
0.15% of the daily net asset value of the Variable Account attributable to such
Contracts. We make this deduction to reimburse Protective Life for expenses
incurred in the administration of the Contract and the Variable Account. We
deduct the administration charge 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, we would consider each
request to
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be one transfer, regardless of the number of Allocation Options affected by the
transfer in one day. We would deduct the fee from the amount being transferred.
CONTRACT MAINTENANCE FEE
Prior to the Annuity Commencement Date, we deduct a contract maintenance
fee of $30 from the Contract Value on each Contract Anniversary, and on any day
that you surrender the Contract other than the Contract Anniversary. We will
deduct the contract maintenance fee from the Allocation Options in the same
proportion as their values are to the Contract Value. We will waive the
contract maintenance fee in the event the Contract Value or the aggregate
Purchase Payments reduced by surrenders and associated surrender charges equals
or exceeds $50,000 on the date we are to deduct the contract maintenance fee.
FUND EXPENSES
The net assets of each Sub-Account of the Variable Account will reflect
the investment management fees and other operating expenses the Funds incur.
For each Fund, an investment manager receives a daily fee for its services.
(See the prospectuses for the Funds, which accompany this Prospectus.)
PREMIUM TAXES
Some states impose premium taxes at rates currently ranging up to 3.5%. If
premium taxes apply to your Contract, we will deduct them from the Purchase
Payment(s) when accepted or from the Contract Value upon a full or partial
surrender, death or annuitization.
OTHER TAXES
Currently, no charge will be made against the Variable Account for
federal, state or local taxes other than premium taxes. We reserve the right,
however, to deduct a charge for taxes attributable to the operation of the
Variable Account.
ANNUITIZATION
ANNUITY COMMENCEMENT DATE
On the Effective Date, the Annuity Commencement Date is the earlier of any
Owner's 90th birthday or the Annuitant's 90th birthday. The Owner may change
the Annuity Commencement Date by Written Notice. The proposed Annuity
Commencement Date must be at least 30 days after the date the written request
is received by the Company, and at least 10 years after the most recent
Purchase Payment. The new Annuity Commencement Date may be any date before or
on the Owner's or Annuitant's 90th birthday and may not be later than that date
unless approved by Protective Life. Annuity Commencement Dates that occur or
are scheduled to occur at an advanced age for the Annuitant (E.G., past age
85), may in certain circumstances have adverse income tax consequences. (See
"Federal Income Tax Matters".) Distributions from Qualified Contracts may be
required before the Annuity Commencement Date.
On the Annuity Commencement Date, we will apply your Contract Value, less
any applicable charges and premium tax, to the Annuity Option you have selected
to determine an annuity income payment. You may elect to receive a fixed income
payment, a variable income payment, or a combination of both using the same
Annuity Option and certain period.
FIXED INCOME PAYMENTS
Fixed income payments are periodic payments from the Company to the
designated Payee, the amount of which is fixed and guaranteed by the Company.
Fixed income payments are not in any way dependent upon the investment
experience of the Variable Account. Once fixed income payments have begun, they
may not be surrendered.
VARIABLE INCOME PAYMENTS
Variable income payments are periodic payments from the Company to the
designated Payee, the amount of which varies from one payment to the next as a
reflection of the net investment experience of the Sub-Account(s) you select to
support the payments.
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ANNUITY UNITS.
On the Annuity Commencement Date, we will apply the Contract Value you
have allocated to variable income payments (less applicable charges and premium
taxes) to the variable Annuity Option you have selected. Using an interest
assumption of 5%, we will determine the dollar amount that would equal a
variable income payment if a payment were made on that date. (No payment is
actually made on that date.) We will then allocate that dollar amount among the
Sub-Accounts you selected to support your variable income payments, and we will
determine the number of Annuity Units in each of those Sub-Accounts that is
credited to your Contract. We will make this determination based on the Annuity
Unit values established at the close of regular trading on the New York Stock
Exchange on the Annuity Commencement Date. If the Annuity Commencement Date is
a day on which the New York Stock Exchange is closed, we will determine the
number of Annuity Units on the next day the New York Stock Exchange is open.
The number of Annuity Units attributable to each Sub-Account under a Contract
remains constant unless there is an exchange of Annuity Units between
Sub-Accounts.
VARIABLE INCOME PAYMENTS.
We will determine the amount of your variable income payment no earlier
than five Valuation Days before the date on which a payment is due, using
values established at the close of regular trading on the New York Stock
Exchange that day.
We determine the dollar amount of each variable income payment
attributable to each Sub-Account by multiplying the number of Annuity Units of
that Sub-Account credited to your Contract by the Annuity Unit value (described
below) for that Sub-Account on the Valuation Period during which the payment is
determined. The dollar value of each variable income payment is the sum of the
variable income payments attributable to each Sub-Account.
The Annuity Unit value of each Sub-Account for any Valuation Period is
equal to (a) multiplied by (b) divided by (c) where:
(a) is the net investment factor for the Valuation Period for which the
Annuity Unit value is being calculated;
(b) is the Annuity Unit value for the preceding Valuation Period; and
(c) is a daily Assumed Investment Return (AIR) factor adjusted for the
number of days in the Valuation Period.
The AIR is equal to 5%, and the AIR factor is equal to one plus the AIR,
or 1.05.
IF THE NET INVESTMENT RETURN OF THE SUB-ACCOUNT FOR A VARIABLE INCOME
PAYMENT PERIOD IS EQUAL TO THE AIR DURING THAT PERIOD, THE VARIABLE INCOME
PAYMENT ATTRIBUTABLE TO THAT SUB-ACCOUNT FOR THAT PERIOD WILL EQUAL THE PAYMENT
FOR THE PRIOR PERIOD. TO THE EXTENT THAT SUCH NET INVESTMENT RETURN EXCEEDS THE
AIR FOR THAT PERIOD, THE PAYMENT FOR THAT PERIOD WILL BE GREATER THAN THE
PAYMENT FOR THE PRIOR PERIOD; TO THE EXTENT THAT SUCH NET INVESTMENT RETURN
FALLS SHORT OF THE AIR FOR THAT PERIOD, THE PAYMENT FOR THAT PERIOD WILL BE
LESS THAN THE PAYMENT FOR THE PRIOR PERIOD.
Refer to Appendix D for an explanation of the variable annuitization
calculation.
EXCHANGE OF ANNUITY UNITS.
After the Annuity Commencement Date, you may exchange the dollar amount of
a designated number of Annuity Units of a particular Sub-Account for an
equivalent dollar amount of Annuity Units of another Sub-Account. On the date
of the exchange, the dollar amount of a variable income payment generated from
the Annuity Units of either Sub-Account would be the same. We allow only one
exchange between Sub-Accounts in any calendar month, and allow no exchanges
between the Guaranteed Account and the Variable Account.
ANNUITY OPTIONS.
You may select an Annuity Option, or change your selection by Written
Notice the Company receives no later than 30 days before the Annuity
Commencement Date. You may not change your selection of Annuity Option less
than 30 days before the Annuity Commencement Date. If you have not selected an
Annuity Option within 30 days of the Annuity Commencement Date, we will apply
your Contract Value to Option B -- Life Income with Payments for a 10 Year
Certain Period, with the Variable Account value used to purchase variable
income payments and the Guaranteed Account value used to purchase fixed income
payments.
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You may select from among the following Annuity Options:
OPTION A -- PAYMENTS FOR A CERTAIN PERIOD:
We will make payments for the period you select. No certain period may be
longer than 30 years. Payments under this Annuity Option do not depend on
the life of an Annuitant. The Contract may be surrendered for its commuted
value while variable income payments under Option A are being made but
fixed income payments under this option may not be surrendered.
OPTION B -- LIFE INCOME WITH OR WITHOUT A CERTAIN PERIOD:
Payments are based on the life of an Annuitant. If you elect to include a
certain period, we will make payments for the lifetime of the Annuitant(s),
with payments guaranteed for the certain period you select. No certain
period may be longer than 30 years. Payments stop at the end of the
selected certain period or when the Annuitant(s) dies, whichever is later.
We reserve the right to demand proof that the Annuitant(s) is living prior
to making any payment after completion of the certain period. IF NO CERTAIN
PERIOD IS SELECTED, PAYMENTS WILL STOP UPON THE DEATH OF THE ANNUITANT(S),
NO MATTER HOW FEW OR HOW MANY PAYMENTS HAVE BEEN MADE. The Contract may not
be surrendered while variable income payments under Option B are being made
regardless of whether fixed or variable income payments are selected.
ADDITIONAL OPTION:
You may use the Contract Value, less applicable premium tax, to purchase
any annuity contract that we offer on the date you elect this option.
MINIMUM AMOUNTS
If your Contract Value is less than $5,000 on the Annuity Commencement
Date, we reserve the right to pay the Contract Value in one lump sum. If at any
time your annuity income payments are less than the minimum payment amount
according to the Company's rules then in effect, we reserve the right to change
the frequency to an interval that will result in a payment at least equal to
the minimum.
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
benefits under the Annuity Option you selected, we will pay any remaining
portion of such benefits at least as fast as under the Annuity Option in effect
when the Owner or Annuitant died. After the death of the Annuitant, any
remaining payments shall be payable to the Beneficiary unless you specified
otherwise before the Annuitant's death.
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. More detailed information about the calculation of
performance information 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.)
YIELDS
The yield of the Oppenheimer Money Fund 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 Oppenheimer Money Fund 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
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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.
TOTAL RETURNS
The cumulative 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 total return
refers to total return quotations that are annualized based on an average
return over various periods of time.
Certain Funds have been in existence prior to the investment by the
Sub-Accounts in such Funds. Protective Life 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 investments by the
Sub-Accounts is calculated as if the Sub-Account had invested in those Funds
during those periods, using current charges and expenses associated with the
Contract.
STANDARDIZED AVERAGE ANNUAL TOTAL RETURNS
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 charges
that would apply if you terminated the Contract at the end of each indicated
period, but excluding any deductions for premium taxes).
When a Sub-Account has been in operation prior to the commencement of the
offering of the Contract described in this prospectus. Protective Life may
advertise the performance of the Sub-Accounts for these prior periods. The Sub-
Account performance information of any period prior to the commencement of the
offering of the Contract is calculated as if the Contract had been offered
during those periods, using current charges and expenses.
Until a Sub-Account (other than the Oppenheimer Money Fund 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
that Sub-Account began operations. When a Sub-Account (other than the
Oppenheimer Money Fund 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.
NON-STANDARD AVERAGE ANNUAL TOTAL RETURNS
In addition to the standard version of average annual total return
described above, total return performance information computed on 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 charges nor the
contract maintenance fee and Credits associated with Purchase Payments may or
may not be reflected. 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 periods described in "Standardized Average Annual
Total Returns," above, is also disclosed. For additional information regarding
the calculation of other performance data, please refer to the Statement of
Additional Information.
PERFORMANCE COMPARISONS
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. 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
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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, 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.
OTHER MATTERS
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.
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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 you should always consult a qualified tax
adviser regarding the application of law to individual circumstances. This
discussion is based on the Internal Revenue Code of 1986, as amended (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.
THE COMPANY'S TAX STATUS
Protective Life is taxed as a life insurance company under the Internal
Revenue 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 Internal Revenue
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 Internal Revenue 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 Internal Revenue 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 Internal Revenue 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 includable 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
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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 the IRS
would issue guidance 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, the IRS has not issued any such
guidance.
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, 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.
NONNATURAL OWNER.
As a general rule, Contracts held by "nonnatural 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 nonnatural 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.
DELAYED ANNUITY COMMENCEMENT DATES.
If the Contract's Annuity Commencement Date occurs (or is scheduled to
occur) at a time when the Annuitant has reached an advanced age (E.G., past age
85), it is possible that the Contract would not be treated as an annuity for
federal income tax purposes. In that event, the income and gains under the
Contract could be currently includable in the Owner's income.
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 you receive are generally
includable in income to the extent your Contract Value before the surrender
exceeds your "investment in the contract." Amounts received under a partial
automatic withdrawal plan are treated as partial surrenders. In the case of a
full surrender, amounts received are includable 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. In this regard, the Credit
provided under the Contract is not treated as a Purchase Payment and thus does
not increase the investment in the Contract. Partial and full surrenders may be
subject to a 10% penalty tax. (See "Penalty Tax on Premature Distributions.")
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Partial and full surrenders may also 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 Contracts,
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
we distribute may not be subject to Surrender Charges if you have a terminal
illness or enter, for a period of at leaast 90 days, certain nursing home
facilities. However, such distributions will be treated as surrenders for
federal income tax purposes.
The Contract provides a death benefit that in certain circumstances may
exceed the greater of the Purchase Payments or 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 income payment taxable as ordinary
income equals the excess of the payment over the exclusion amount. In the case
of variable income payments, the exclusion amount is the "investment in the
Contract" (defined above) you allocate to the variable Annuity Option, adjusted
for any period certain or refund feature, when payments begin divided by the
number of payments expected (as determined by Treasury Department regulations
which take into account the annuitant's life expectancy and the form of annuity
benefit selected). In the case of fixed income payments, the exclusion amount
is determined by multiplying (1) the payment by (2) the ratio of the investment
in the contract you allocate to the fixed Annuity Option, adjusted for any
period certain or refund feature, to the total expected amount of annuity
income payments for the term of the Contract (determined under Treasury
Department regulations).
Once the total amount of the investment in the Contract is excluded using
the above formulas, annuity income payments will be fully taxable. If annuity
income 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. You should consult a tax advisor in those situations.
Annuity income payments may be subject to federal income tax withholding
requirements. (See "Federal Income Tax Income Withholding".) In addition, in
the case of annuity income payments from certain Qualified Plans, mandatory
withholding requirements may apply, unless a "direct rollover" of such annuity
payments is made. (See "Direct Rollovers".)
TAXATION OF DEATH BENEFIT PROCEEDS
Prior to the Annuity Commencement Date, we may distribute amounts from a
Contract because of the death of an Owner or, in certain circumstances, the
death of the Annuitant. Such death benefit proceeds are includable 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 income 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 we make to the Beneficiary for the remainder of that period are
includable 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
income payments thereafter are fully includable 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 Contracts, mandatory withholding
requirements may apply, unless a "direct rollover" of such proceeds is made.
(See "Direct Rollovers".)
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ASSIGNMENTS, PLEDGES, AND GRATUITOUS TRANSFERS
Other than in the case of Qualified Contracts (which generally cannot be
assigned or pledged), any assignment or pledge of (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 includable 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 increase to reflect the increase in the transferor's income.
PENALTY TAX ON PREMATURE DISTRIBUTIONS
Where we have not issued the Contract 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
Owner or the joint lives (or joint life expectancies) of the Owner 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 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 Qualified
Contracts.)
AGGREGATION OF CONTRACTS
In certain circumstances, the IRS may determine the amount of an annuity
income payment or a surrender from a Contract that is includable in income by
combining some or all of the annuity contracts a person owns that were 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 that was not received as an
annuity (including surrenders prior to the Annuity Commencement Date) is
includable in income. The effects of such aggregation are not clear; however,
it could affect the amount of a surrender or an annuity payment that is taxable
and the amount which might be subject to the 10% penalty tax described above.
LOSS OF INTEREST DEDUCTION WHERE CONTRACT IS HELD BY OR FOR THE BENEFIT OF
CERTAIN NONNATURAL PERSONS
In the case of Contracts issued after June 8, 1997 to a nonnatural
taxpayer (such as a corporation or a trust), or held for the benefit of such an
entity, recent changes in the tax law may result in a portion of otherwise
deductible interest no longer being deductible by the entity, regardless of
whether the interest relates to debt used to purchase or carry the Contract.
However, this interest deduction disallowance does not affect Contracts where
the income on such Contracts is treated as ordinary income that the Owner
received or accrued during the taxable year. Entities that are considering
purchasing the Contract, or entities that will be Beneficiaries under a
Contract, should consult a tax adviser.
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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 Internal
Revenue Code. Numerous special tax rules apply to the participants in Qualified
Plans and to Contracts used in connection with Qualified Plans. Therefore, we
make no attempt 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 you may make, and the tax deduction or
exclusion that you may claim for such contribution, are limited under Qualified
Plans and vary with the type of plan. Also, for full surrenders, partial
automatic withdrawals, partial surrenders, and annuity income payments under
Qualified Contracts, there may 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.) Both the amount of the contribution that you
and/or your employer may make, and the tax deduction or exclusion that you
and/or your employer may claim for such contribution, are limited under
Qualified Plans. Those who are considering the purchase of a Contract in
connection with a Qualified Plan should consider, in evaluating the suitability
of the Contract, that the Contract requires a minimum initial Purchase Payment
of $10,000.
If you use this Contract in connection with a Qualified Plan, the Owner
and Annuitant must be the same individual. Additionally, for Contracts issued
in connection with Qualified Plans subject to the Employee Retirement Income
Security ACT ("ERISA"), the spouse or former spouse of the Owner will have
rights in the Contract. In such a case, the Owner may need the consent of the
spouse or former spouse to change annuity options, to elect a partial automatic
withdrawal option, or to make a partial or full surrender of the Contract. 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 Internal Revenue 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 may be 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 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). In addition, the penalty tax does not apply to certain
distributions from IRAs taken after December 31, 1997 which are used for
qualified first time home purchases or for higher education expenses. You must
meet special conditions to be eligible for these two exceptions to the penalty
tax. Those wishing to take a distribution from an IRA for these purposes should
consult their tax advisor.
When issued in connection with a Qualified Plan, we will amend a Contract
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
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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 Internal Revenue 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 and deducted, 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), you may "roll over" distributions from certain Qualified Plans on a
tax-deferred basis into an IRA.
However, you may not use the Contract in connection with an "Education
IRA" under Section 530 of the Internal Revenue Code, a "Simplified Employee
Pension" under Section 408(k) of the Internal Revenue Code, or a "Simple IRA"
under Section 408(p) of the Internal Revenue Code.
IRAs generally may not invest in life insurance contracts, but an annuity
contract 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
Owners of the Contract may purchase an optional benefit package which 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.
ROTH IRAS.
Section 408A of the Internal Revenue Code permits eligible individuals to
contribute to a type of IRA known as a "Roth IRA." Roth IRAs are generally
subject to the same rules as non-Roth IRAs, but differ in several respects.
Among the differences is that, although contributions to a Roth IRA are not
deductible, "qualified distributions" from a Roth IRA will be excludable from
income.
A qualifed distribution is a distribution that satisfies two requirements.
First, the distribution must be made in a taxable year that is at least five
years after the first taxable year for which a contribution to any Roth IRA
established for the Owner was made. Second, the distribution must be either (1)
made after the Owner attains the age of 59 1/2; (2) made after the Owner's
death; (3) attributable to the Owner being disabled; (4) a qualified first-time
homebuyer distribution within the meaning of Section 72(t)(2)(F) of the
Internal Revenue Code. In addition, distributions from Roth IRAs need not
commence when the Owner attains age 70 1/2. A Roth IRA may accept a "qualified
rollover contribution" from a non-Roth IRA, but a Roth IRA may not accept
rollover contributions from other qualified plans. The state tax treatment of a
Roth IRA may differ from federal tax treatment of a Roth IRA.
As described above (see "Individual Retirement Annuities"), there is some
uncertainty regarding the proper characterization of the Contract's optional
death benefit for purposes of the tax rules governing IRAs (which include Roth
IRAs). Persons intending to use the Contract in connection with a Roth IRA
should seek competent advice.
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. If the Owner of the Contract purchases an
optional death benefit package, the death benefit that in certain circumstances
may exceed the greater of the Purchase Payments and the Contract Value. It is
possible the IRS could characterize such a death benefit 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. In
addition, corporate and self-employed pension and profit sharing plans are
subject to nondiscrimination rules. The nondiscrimination rules generally
require that benefits, rights or features of the plan not discriminate in favor
of highly compensated employees. In evaluating whether the Contract is suitable
for
41
<PAGE>
purchase in connection with such a plan, the effect of the Credit on the plan's
compliance with applicable nondiscrimination requirements should be considered.
Violation of these rules can cause loss of the plan's tax favored status under
the Internal Revenue Code. Employers intending to use the Contract in
connection with such plans should seek competent advice.
SECTION 403(B) POLICIES.
Section 403(b) of the Internal Revenue Code permits public school
employees and employees of certain types of charitable, educational and
scientific organizations specified in Section 501(c)(3) of Internal Revenue 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 optional benefit packages under the Contract provide a death
benefit that in certain circumstances may exceed the greater of the Purchase
Payments and the Contract Value. It is possible the IRS could characterize the
death benefit 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 IRS characterized
the death benefit under the Contract as an incidental death benefit, the death
benefit 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.)
Section 403(b) plans are subject to nondiscrimination rules. The
nondiscrimination rules generally require that benefits, rights or features of
the plan not discriminate in favor of highly compensated employees. In
evaluating whether the Contract is suitable for purchase in connection with a
tax sheltered annuity plan, the effect of the Credit on the plan's compliance
with the applicable nondiscrimination requirements should be considered.
Violation of these nondiscrimination rules can cause loss of the plan's tax
favored status under the Internal Revenue Code. Employers intending to use the
Contract in connection with such plans should seek competent advice.
DEFERRED COMPENSATION PLANS OF STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT
ORGANIZATIONS.
Section 457 of the Internal Revenue 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. The Contract will be
issued in connection with a Section 457 deferred compensation plan sponsored by
a state or local government only if the plan has established a trust to hold
plan assets, including the Contract. 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
42
<PAGE>
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 Internal Revenue 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 Internal Revenue Code, distributions which are
part of a "series of substantially equal periodic payments" made for life or a
specified period of 10 years or more, or hardship distributions as defined in
the tax law).
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.
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, a 10% withholding rate
applies to the taxable portion of non-periodic payments (including surrenders
prior to the Annuity Commencement Date) and conversions of, or rollovers from,
non-Roth IRAs to Roth IRAs. 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%.
GENERAL MATTERS
THE CONTRACT
The Contract and its attachments, including the copy of your application
and any endorsements, riders and amendments, constitute the entire agreement
between you and us. All statements in the application shall be considered
representations and not warranties. The terms and provisions of this Contract
are to be interpreted in accordance with the Internal Revenue Code and
applicable regulations.
ERROR IN AGE OR GENDER
When a benefit of the Contract is contingent upon any person's age or
gender, we may require proof of such. We may suspend payments until we receive
proof. When we receive satisfactory proof, we will make the payments which were
due during the period of suspension. Where the use of unisex mortality rates is
required, we will not determine or adjust benefits based upon gender.
If after we receive proof of age and gender (where applicable), we
determine that the information you furnished was not correct, we will adjust
any benefit under this Contract to that which would be payable based upon the
correct information. If we have underpaid a benefit because of the error, we
will make up the underpayment in a lump sum. If the error resulted in an
overpayment, we will deduct the amount of the overpayment from any current or
future payment due under the Contract. We will deduct up to the full amount of
any current or future payment until the overpayment has been fully repaid.
Underpayments and overpayments will bear interest at an annual effective
interest rate of 3% when permitted by the state of issue.
INCONTESTABILITY
We will not contest the Contract.
NON-PARTICIPATION
The Contract is not eligible for dividends and will not participate in
Protective Life's surplus or profits.
43
<PAGE>
ASSIGNMENT
You have the right to assign the Contract if it is a non-qualified
contract. We do not assume responsibility for the assignment. Any claim made
under an assignment is subject to proof of the nature and extent of the
assignee's interest prior to payment by us. Assignments have federal income tax
consequences. (See "Assignments, Pledges and Gratuitous Transfers" in the
prospectus.)
NOTICE
All instructions and requests to change or assign the Contract must be in
writing in a form acceptable to us, signed by the Owner(s), and received at our
administrative office. The instruction, change or assignment will relate back
to and take effect on the date it was signed, except we will not be responsible
for following any instruction or making any change or assignment before we
receive it.
MODIFICATION
No one is authorized to modify or waive any term or provision of this
Contract unless we agree to the modification or waiver in writing and it is
signed by our President, Vice-President or Secretary. We reserve the right to
change or modify the provisions of this Contract to conform to any applicable
laws, rules or regulations issued by a government agency, or to assure
continued qualification of the Contract as an annuity contract under the
Internal Revenue Code. We will send you a copy of the endorsement that modifies
the Contract, and where required we will obtain all necessary approvals,
including that of the Owner(s).
REPORTS
At least annually prior to the Annuity Commencement Date, we will send to
you at the address contained in our records a report showing the current
Contract Value and any other information required by law.
SETTLEMENT
Benefits due under this Contract are payable from our administrative
office. You may apply the settlement proceeds to any payout option we offer for
such payments at the time you make the election. Unless directed otherwise in
writing, we will make payments according to the Owner's instructions as
contained in our records at the time we make the payment. We shall be
discharged from all liability for payment to the extent of any payments we
make.
RECEIPT OF PAYMENT
If any Owner, Annuitant, Beneficiary or Payee is incapable of giving a
valid receipt for any payment, we may make such payment to whomever has legally
assumed his or her care and principal support. Any such payment shall fully
discharge us to the extent of that payment.
PROTECTION OF PROCEEDS
To the extent permitted by law and except as provided by an assignment, no
benefits payable under this Contract will be subject to the claims of
creditors.
MINIMUM VALUES
The values available under the Contract are at least equal to the minimum
values required in the state where the Contract is delivered.
APPLICATION OF LAW
The provisions of the Contract are to be interpreted in accordance with
the laws of the state where the Contract is delivered, with the Internal
Revenue Code and with applicable regulations.
NO DEFAULT
The Contract will not be in default if subsequent Purchase Payments are
not made.
44
<PAGE>
DISTRIBUTION OF THE CONTRACTS
We will offer the Contracts 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
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 6% of the
Purchase Payments for the sale of a Contract, not including subsequent
asset-based commissions.
INQUIRIES
You may make inquiries regarding a Contract by writing to Protective Life
at its administrative office.
PREPARATION FOR YEAR 2000
Computer hardware and software often denote the year using two digits
rather than four; for example, the year 1998 often is denoted by such hardware
and software as "98." It is probable that such hardware and software will
malfunction when calculations involving the year 2000 are attempted because the
hardware and/or software will interpret "00" as representing the year 1900
rather than the year 2000. This "Year 2000" issue potentially affects all
individuals and companies (including the Company, its customers, business
partners, suppliers, banks, custodians and administrators). The problem is most
prevalent in older mainframe systems, but personal computers and equipment
containing computer chips could also be affected.
The Company began work on the Year 2000 problem in 1995. At that time, the
Company identified and assessed the Company's critical mainframe systems, and
prioritized the remediation efforts that were to follow. During 1998 all other
hardware and software, including non-information technology (non-IT) related
hardware and software, were included in the process. The Company's Year 2000
plan includes all subsidiaries.
The Company estimates that Year 2000 remediation is complete for most of
its insurance administration and general administration systems. Of the general
administration systems that are not yet remediated, the majority are new
systems that were implemented during 1998 and are scheduled to be upgraded to
the current release of the system during the second quarter of 1999. All
remediated systems are currently in production. Personal computer network
hardware and software have been reviewed, with upgrades implemented where
necessary. A review of personal computer desktop software is in progress, but
not complete. All Year 2000 personal computer preparations are expected to be
completed by June 30, 1999. With respect to non-IT equipment and processes, the
assessment and remediation is progressing on schedule and all known issues are
expected to be remediated before December 31, 1999.
Two insurance administration systems identified as mission critical are
not yet fully remediated. A personal computer database system that processes
member information for one subsidiary is currently being remediated. This
effort is on schedule and targeted to be complete by June 30, 1999. Also,
another personal computer application, which processes policy information for
one line of business, is being re-written and is currently in test. This system
is targeted to be in production by April 30, 1999.
Future date tests are used to verify a system's ability to process
transactions dated up to and beyond January 1, 2000. Future date tests are
complete or in-progress for the majority of the Company's mission-critical
systems. A large portion of the testing is conducted by a contract programming
staff dedicated full time to year 2000 preparations. These resources have been
part of the Company's year 2000 project since 1995.
Integrated tests involve multiple system testing and are used to verify
the Year 2000 readiness of interfaces and connectivity across multiple systems.
The Company is using its mainframe computer to simulate a Year 2000 production
environment and to facilitate integrated testing. Integrated testing will
continue throughout 1999.
Business partners and suppliers that provide products or services critical
to the Company's operations are being reviewed and in some cases their Year
2000 preparations are being monitored by the Company. To date, no partners or
45
<PAGE>
suppliers have reported that they expect to be unable to continue supplying
products and services after January 1, 2000. Initial reviews are targeted to be
completed in the first quarter of 1999. Monitoring and testing of critical
partners and suppliers will continue throughout 1999. Formal contingency
planning will begin in March 1999 and continue throughout the year. These plans
will augment the Company's existing disaster recovery plans.
The Company cannot specifically identify all of the costs to develop and
implement its Year 2000 plan. The cost of new systems to replace non-compliant
systems have been capitalized in the ordinary course of business. Other costs
have been expensed as incurred. Through December 31, 1998, costs that have been
specifically identified as relating to the Year 2000 problem total $3.9
million, with an additional $1.3 million estimated to be required to support
continued testing activity. The Company's Year 2000 efforts have not adversely
affected its normal procurement and development of information technology.
Although the Company believes that a process is in place to successfully
address Year 2000 issues, there can be no assurances that the Company's efforts
will be successful, that interactions with other service providers with Year
2000 issues will not impair the Company's operations, or that the Year 2000
issue will not otherwise adversely affect the Company.
Should some of the Company's systems not be available due to Year 2000
problems, in a reasonably likely worst case scenario, the Company may
experience significant delays in its ability to perform certain functions, but
does not expect to be unable to perform critical functions or to otherwise
conduct business.
IMSA
Protective Life Insurance Company is a member of the Insurance Marketplace
Standards Association ("IMSA"), and as such may include the IMSA logo and
information about IMSA membership in its advertisements. Companies that belong
to IMSA subscribe to a set of ethical standards covering the various aspects of
sales and service for individually sold life insurance and annuities.
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 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 that Owner has allocated
Accumulation Units or Annuity Units. Before the Annuity Commencement Date, the
Owner's percentage interest, if any, will be percentage of the dollar value of
Accumulation Units allocated for his or her Contract to the total dollar value
of that Sub-Account. On or after the Annuity Commencement Date, the Owner's
percentage interest, if any, will be percentage of the dollar value of the
liability for future variable income payments to be paid from the Sub-Account
to the total dollar value of that Sub-Account. The liability for future
payments is calculated on the basis of the mortality assumptions, (if any), the
Assumed Investment Return and the Annuity Unit Value of that Sub-Account.
Generally, as variable income payments are made to the payee, the liability for
future payments decreases as does the number of votes.
46
<PAGE>
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 as of December 31, 1998 and 1997 and the related
statements of operations and changes in net assets for the years ended December
31, 1998, 1997 and 1996 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, 1998 and 1997 and the related consolidated statements of income,
stockholder's equity, and cash flows for the three years in the period ended
December 31, 1998 and the related financial statement schedules as well as the
Report of Independent Accountants are contained in the Statement of Additional
Information.
47
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CALCULATION OF YIELDS AND TOTAL RETURNS .............................. 3
Oppenheimer Money Fund Sub-Account Yield ............................ 3
Other Sub-Account Yields ............................................ 4
Total Returns ....................................................... 4
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 ................................................. 6
</TABLE>
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
APPENDIX A
EXAMPLE OF CREDIT CALCULATION
Credits are added to the Contract Value with each Purchase Payment. Credit
percentages are based on cumulative Purchase Payments, as shown in the table
below. During the first Contract Year, Purchase Payments are aggregated to
determine the Credit percentage.
<TABLE>
<CAPTION>
CUMULATIVE PURCHASE PAYMENTS CREDIT PERCENTAGE
- ------------------------------------------------------- ------------------
<S> <C>
Less than $100,000 ............................... 3.00%
At least $100,000 but less than $250,000 ......... 3.50%
At least $250,000 but less than $500,000 ......... 4.00%
At least $500,000 but less than $1,000,000 ....... 4.50%
$1,000,000 or greater ............................ 5.00%
</TABLE>
Assume an initial Purchase Payment of $50,000 is made on the Effective
Date, followed 6 months later by an additional Purchase Payment of $100,000.
Then, assume an additional Purchase Payment of $200,000 is made 2 years after
the Effective Date.
On the Effective Date, the $50,000 Purchase Payment will be multiplied by
a Credit percentage of 3.00%, and a Credit of $1,500 will be added to the
Contract Value.
When the additional $100,000 Purchase Payment is made, aggregate first
Contract Year Credits are determined by multiplying aggregate first Contract
Year Purchase Payments of $150,000 by the applicable Credit percentage of
3.50%, then subtracting Credits previously added to the Contract Value. So,
$150,000 times 3.50% less $1,500 equals $3,750 is added to Contract Value.
After the first Contract Year, Purchase Payments are no longer aggregated
for purposes of determining the Credits, but are still viewed cumulatively in
order to determine the applicable Credit percentage. When the $200,000 Purchase
Payment is made, cumulative Purchase Payments are $350,000, and the applicable
Credit percentage is 4.00%. The current Credit equals $200,000 times 4.00%, and
$8,000 is added to Contract Value.
A-1
<PAGE>
APPENDIX B
EXAMPLE OF DEATH BENEFIT CALCULATIONS
Assume an Owner is 55 on the Effective Date, 1/1/yy. The following
transactions occur prior to the Owner's death on 7/1(yy+5) when the Contract
Value is $185,000. For purposes of this example, also assume that proof of
death was provided immediately, and no premium tax is applicable.
<TABLE>
<CAPTION>
DATE TRANSACTION AMOUNT
- --------------------- ------------------- -----------
<S> <C> <C>
1/1/yy Purchase Payment $100,000
1/1/yy Credit $ 3,500
4/1/(yy+2) Partial Surrender $ 25,000
10/1(yy+4) Purchase Payment $ 80,000
10/1/yy Credit $ 2,800
</TABLE>
The Contract Values on each Contract Anniversary are shown below. These
Contract Values are hypothetical and are solely for the purpose of illustrating
death benefit calculations. The Contract Values presented are net of all
expenses and charges (except any charge for premium taxes), including Fund
expenses and Variable Account expenses and charges. This illustration does not
reflect historical investment results, nor does it predict or guarantee future
investment results. Actual results may be higher or lower.
<TABLE>
<CAPTION>
ANNIVERSARY DATE CONTRACT VALUE
- -------------------- ---------------
<S> <C>
1/1(yy+1) $120,000
1/1(yy+2) $130,000
1/1(yy+3) $105,000
1/1(yy+4) $110,000
1/1(yy+5) $180,000
</TABLE>
STANDARD DEATH BENEFIT
Under the Standard Death Benefit, the death benefit payable is the greater
of:
(1) Contract Value less any Credits added during the 12 months prior to
death, or $185,000 less $2,800 equals $182,200; and
(2) aggregate Purchase Payments less aggregate surrenders, or $180,000
less $25,000 equals $155,000.
The death benefit payable is then $182,200.
ANNUAL RESET DEATH BENEFIT OPTION
The Annual Reset Death Benefit is equal to the greatest annual reset
anniversary value attained, where an annual reset anniversary value equals the
Contract Value on the Contract Anniversary plus all subsequent Purchase
Payments and Credits minus all subsequent amounts surrendered, as shown below.
ANNIVERSARY
<TABLE>
<CAPTION>
ANNIVERSARY
DATE ANNIVERSARY VALUE
- --------------------- ------------------------------------------------------------------
<S> <C>
1/1/(yy+1) $120,000 minus $25,000 plus $80,000 plus $2,800 equals $177,800
1/1/(yy+2) $130,000 minus $25,000 plus $80,000 plus $2,800 equals $187,800
1/1/(yy+3) $105,000 plus $80,000 plus $2,800 equals $187,800
1/1/(yy+4) $110,000 plus $80,000 plus $2,800 equals $192,800
1/1/(yy+5) $180,000
</TABLE>
The Annual Reset Death Benefit is the greatest annual reset anniversary
value attained, or $192,800.
Under the Annual Reset Death Benefit option, the death benefit payable is
the greater of:
(1) the Standard Death Benefit of $182,200; and
(2) the Annual Reset Death Benefit, less any Credits added during the 12
months prior to death, or $192,800 less $2,800 equals $190,000.
The death benefit payable is then $190,000.
B-1
<PAGE>
COMPOUND AND 3-YEAR RESET DEATH BENEFIT OPTION
The Compound Death Benefit is equal to the accumulation to the most recent
Contract Anniversary of all prior Purchase Payments and Credits less all prior
amounts surrendered, using an annual effective interest rate of 4%, plus all
Purchase Payments and Credits on or since that Contract Anniversary less all
amounts surrendered since that Contract Anniversary.
An accumulation interest rate of 3% would have been applicable if the
Effective Date of the Contract had been on or after the deceased Owner's 71st
birthday.
For ease of understanding, this example assumes an equal number of days in
each quarterly period. In practice, the actual number of days in each period
will be taken into account.
The Compound Death Benefit is:
Purchase Payment of $100,000 times (1.045) equals $121,665.29; plus
Credit of $3,500 times (1.045) equals $4,258.29; minus
Surrender of $25,000 times (1.042.75) equals $27,847.21; plus
Purchase Payment of $80,000 times (1.040.25) equals $80,788.27; plus
Credit of $2,800 times (1.040.25) equals $2,827.59,
equals $181,692.23.
The 3-Year Reset Death Benefit is equal to the greatest 3-year reset
anniversary value attained, where a 3-year reset anniversary value equals the
Contract Value on that Contract Anniversary plus all subsequent Purchase
Payments and Credits minus all subsequent amounts surrendered, as shown below.
The only 3-year reset anniversary was on 1/1/(yy+3), where the anniversary
value was $105,000 plus $80,000 plus $2,800 equals $187,800.
The 3-Year Reset Death Benefit is the greatest 3-year reset anniversary
value attained, or $187,800.
Under the Compound and 3-Year Reset Death Benefit option, the death
benefit payable is the greatest of:
(1) the standard Death Benefit of $182,200; and
(2) the Compound Death Benefit, less any Credits added during the 12 months
prior to death, or $181,692.23 less $2,800 equals $178,892.20; and
(3) the 3-Year Reset Death Benefit, less any Credits added during the 12
months prior to death, or $187,800 less $2,800 equals $185,000.
The death benefit payable is then $185,000.
B-2
<PAGE>
APPENDIX C
EXAMPLE OF SURRENDER CHARGE CALCULATION
Surrender charges are applied to Contract Value surrendered according to
the table below:
<TABLE>
<CAPTION>
NUMBER OF FULL YEARS ELAPSED BETWEEN SURRENDER
THE DATE PURCHASE PAYMENT WAS ACCEPTED CHARGE
AND THE DATE OF SURRENDER PERCENTAGE
- ---------------------------------------- -----------
<S> <C>
0 .................................... 8.5%
1 .................................... 8.5%
2 .................................... 8.5%
3 .................................... 8.0%
4 .................................... 7.0%
5 .................................... 6.0%
6 .................................... 5.0%
7 .................................... 3.0%
8 .................................... 1.0%
9+ ................................... 0.0%
</TABLE>
Assume an initial Purchase Payment of $100,000 is made on the Effective
Date, followed 5 years later by a subsequent Purchase Payment of $50,000. On
the sixth Contract Anniversary, assume the Contract Value is $300,000.
During the seventh Contract Year, when the Contract Value has increased to
$325,000, a partial surrender of $50,000 is requested. During the eighth
Contract Year, when the Contract Value is $290,000, a full surrender is
requested.
When the partial surrender is requested, 10% of $300,000 equals $30,000 is
available free of surrender charges. The remaining surrendered amount of
$50,000 less $30,000 equals $20,00 is allocated to the initial Purchase Payment
of $100,000. Since 6 full years have elapsed since the initial Purchase
Payment, a 5.0% surrender charge percentage will apply and the surrender charge
is $20,000 times 5.0% equals $1,000.
When any full surrender is requested, no Contract Value is available free
of surrender charges. From the $290,000 surrendered, $80,000 is allocated to
the initial Purchase Payment ($20,000 has previously been allocated) and
$50,000 is allocated to the additional Purchase Payment of $50,000. The
remaining $290,000 less $130,000 equals $160,000 is pro-rated to surrendered
Purchase Payments as follows:
The amount allocated to the surrendered initial Purchase Payment equals
$160,000 times $80,000 divided by $130,000 equals $98,461.54.
The amount allocated to the surrendered subsequent Purchase Payment equals
$160,000 times $50,000 divided by $130,000 equals $61,538.46.
Since 7 full years have elapsed since the initial Purchase Payment, a 3.0%
surrender charge percentage will apply to $80,000 plus $98,461.54 of
surrendered Contract Value, for a surrender charge of $5,353.85.
Since 2 full years have elapsed since the subsequent Purchase Payment, an
8.5% surrender charge percentage will apply to $50,000 plus $61,538.46 of
surrendered Contract Value, for a surrender charge of $9,480.77.
The total surrender charge upon the full surrender is $5,353.85 plus
$9,480.77 equals $14,834.62. However, as cumulative surrender charges as a
percent of cumulative Purchase Payments is $15,834.62 divided by $150,000
exceeds 8.5%, the current surrender charge is reduced so as not to exceed 8.5%.
The current surrender charge will equal cumulative Purchase Payments times 8.5%
less previously assessed surrender charges equals $150,000 times 8.5% less
$1,000 equals $11,750.
C-1
<PAGE>
APPENDIX D
EXPLANATION OF THE VARIABLE ANNUITIZATION CALCULATION
Assuming a Contract Value (less applicable charges and premium taxes) of
$100,000 on the Annuity Commencement Date and annual variable income payments
selected under Option A with a 5 year certain period, the dollar amount of the
payment determined, but not paid, on the Annuity Commencement Date is
calculated using an interest assumption of 5%, as shown below.
There are 5 annual payments scheduled. Assuming an interest rate of 5%,
the applied Contract Value is then assumed to have a balance of $0 after the
last payment is made at the end of the 5th year. The amount of the payment
determined on the Annuity Commencement Date is the amount necessary to force
this balance to $0.
<TABLE>
<CAPTION>
INTEREST CONTRACT CONTRACT
EARNED VALUE VALUE
DURING YEAR BEFORE PAYMENT AFTER
DATE AT 5% PAYMENT MADE PAYMENT
- ------------------------------- ------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Annuity Commencement Date $ 100,000.00 $ 0.00 $ 100,000.00
End of 1st year ............. $ 5,000.00 $ 105,000.00 $ 23,097.48 $ 81,902.52
End of 2nd year ............. $ 4,095.13 $ 85,997.65 $ 23,097.48 $ 62,900.17
End of 3rd year ............. $ 3,145.01 $ 66,045.17 $ 23,097.48 $ 42,947.69
End of 4th year ............. $ 2,147.38 $ 45,095.08 $ 23,097.48 $ 21,997.60
End of 5th year ............. $ 1,099.88 $ 23,097.48 $ 23,097.48 $ 0.00
</TABLE>
Assuming an interest rate of 5%, a payment of $23,097.48 is determined,
but not paid, on the Annuity Commencement Date.
The actual variable income payment made at the end of the 1st year will
equal $23,097.48 only if the net investment return during the 1st year equals
5%. If the net investment return exceeds 5%, then the 1st payment will exceed
$23,097.48. If the net investment return is less than 5%, then the 1st payment
will be less than $23,097.48.
Subsequent variable payments will vary based on the net investment return
during the year in which the payment is scheduled to be made. A payment will
equal the payment made at the end of the prior year only if the net investment
return equals 5%. If the net investment return exceeds 5%, then the payment
will exceed the prior payment. If the net investment return is less than 5%,
then the payment will be less than the prior payment.
D-1
<PAGE>
PLEASE TEAR OFF, COMPLETE AND RETURN THIS FORM TO ORDER A FREE STATEMENT
OF ADDITIONAL INFORMATION FOR THE CONTRACTS OFFERED UNDER THE PROSPECTUS.
ADDRESS THE FORM TO PROTECTIVE LIFE'S INVESTMENT PRODUCTS DIVISION, CUSTOMER
SERVICE CENTER AT THE ADDRESS SHOWN ON THE COVER.
PLEASE SEND ME A FREE COPY OF THE STATEMENT OF ADDITIONAL INFORMATION FOR
THE ELEMENTS(SM) VARIABLE ANNUITY.
- --------------------------------------------------------------------------------
Name Social Security No.
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
City, State, Zip
- --------------------------------------------------------------------------------
Daytime Telephone Number
<PAGE>
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: 1-800-866-3555
STATEMENT OF ADDITIONAL INFORMATION
PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
ELEMENTS(SM) VARIABLE ANNUITY
A 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 Elements(SM) Variable
Annuity, a group and 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, 1999.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CALCULATION OF YIELDS AND TOTAL RETURNS .............................. 3
Oppenheimer Money Fund Sub-Account Yield ............................ 3
Other Sub-Account Yields ............................................ 4
Total Returns ....................................................... 4
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 ................................................. 6
</TABLE>
<PAGE>
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.
OPPENHEIMER MONEY FUND SUB-ACCOUNT YIELD
From time to time, advertisements and sales literature may quote the
current annualized yield of the Oppenheimer Money Fund 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 Oppenheimer Variable
Account Funds Money 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 Oppenheimer Money Fund 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 Oppenheimer Variable Account
Funds Money 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 Expense Risk Charge. For purposes of calculating
current yields for a Contract, an average per unit Contract Maintenance Fee is
used based on the $30 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)
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 as of the end of the last day of the prior
seven-day period.
The effective yield of the Oppenheimer Variable Account Funds Money Fund
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
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 as of the end of the last day of the prior
seven-day period.
Because of the charges and deductions imposed under the Contract, the
current and effective yields for the Oppenheimer Money Fund Sub-Account will be
lower than such yields for the Oppenheimer Variable Account Funds Money Fund.
3
<PAGE>
The current and effective yields on amounts held in the Oppenheimer Money
Fund 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 Oppenheimer Money Fund
Sub-Account's actual yield is affected by changes in interest rates on money
market securities, average portfolio maturity of the Oppenheimer Variable
Account Funds Money Fund, the types of quality of portfolio securities held by
the Oppenheimer Variable Account Funds Money Fund and the Oppenheimer Variable
Account Funds Money Fund's operating expenses. Yields on amounts held in the
Oppenheimer Money Fund 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
Oppenheimer Money Fund 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 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
a Contract Maintenance Fee of $30 per year per Contract deducted at the end of
each Contract Year. For purposes of calculating the 31-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]
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 as of the end of the last day in the 30 day or
one month period.
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 1% to 8.5% of premiums paid during the nine years prior to
the surrender (including the year in which the surrender is made) on amounts
surrendered under the Contract nor the Credits associated with Purchase
Payments.
TOTAL RETURNS
From time to time, sales literature or advertisements may also quote 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 that Sub-Account began operations. When a
Sub-Account has been in operation for 1, 5, and 10 years, respectively, the
standard average 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.
4
<PAGE>
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.
All 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 standard average annual total return calculation assumes that the
contract maintenance fee is $30 per year per contract, expressed as a
percentage of the average Contract Value. For any period less than ten years,
the standard average annual total return will also reflect the deduction of a
Surrender Charge. The standard average annual total return will be calculated
according to the following formula:
TR = (ERV/P)(1/N) - 1
Where:
TR = the average annual total return net of Sub-Account recurring charges.
ERV = the ending redeemable value (net of any applicable charges) 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.
In addition to standard average annual total returns, sales literature or
advertisements may from time to time also quote nonstandard average annual
total returns that do not reflect the surrender charge or the Contract
maintenance fee. In certain cases, the Credits associated with Purchase
Payments may be included using any or all of the Credit percentage described in
the prospectus. These nonstandard average annual total returns 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 the surrender charge or the Contract maintenance fee, and in
certain cases may include Credits associated with Purchase Payments.
Protective Life may also disclose cumulative total returns in conjunction
with the formats described above. The cumulative total returns will be
calculated using the following formula:
CTR = (EV/P) - 1
Where:
CTR = The cumulative total return net of Sub-Account recurring charges for the
period.
EV = The ending value of the hypothetical investment at the end of the period
that does not take into account the surrender charge or the Contract
maintenance fee, and in certain cases may include Credits associated
with Purchase Payments.
P = A hypothetical single Purchase Payment of $1,000.
EFFECT OF THE CONTRACT MAINTENANCE FEE ON PERFORMANCE DATA
The Contract provides for a $30 annual contract maintenance Fee to be
deducted at the end of each Contract Year from the Allocation Options based on
the proportion that the value of each Allocation Option bears to the total
Contract 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 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 $20 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 LLP 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 as of December 31, 1998 and 1997 and the related statements of
operations and changes in net assets for the years ended December 31, 1997 and
1996 and the consolidated balance sheets of Protective Life as of December 31,
1998 and 1997 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, 1998 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 of PricewaterhouseCoopers LLP
(formerly Coopers & Lybrand LLP) of Birmingham, AL, 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, D.C. 20549.
FINANCIAL STATEMENTS
The audited statement of assets and liabilities of The Protective Variable
Annuity Separate Account as of December 31, 1998 and 1997 and the related
statements of operations and changes in net assets for the years ended December
31, 1998 and 1997 as well as the Report of Independent Accountants are contained
herein.
The audited consolidated balance sheets for Protective Life as of December
31, 1998, 1997 and 1996 and the related consolidated statements of income,
stockholder's equity, and cash flows for the years ended December 31, 1998,
1997, 1996 and 1995 as well as the Report of Independent Accountants are
contained herein.
Financial Statements follow this page.
6
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
Report of Independent Accountants ........................................................ F-1
Statement of Assets and Liabilities as of December 31, 1998 .............................. F-2
Statement of Assets and Liabilities as of December 31, 1997 .............................. F-4
Statement of Operations for the year ended December 31, 1998 ............................. F-6
Statement of Operations for the year ended December 31, 1997 ............................. F-8
Statement of Changes in Net Assets for the year ended December 31, 1998 .................. F-10
Statement of Changes in Net Assets for the period ended December 31, 1997 ................ F-12
Notes to Financial Statements ............................................................ F-14
PROTECTIVE LIFE INSURANCE COMPANY
Report of Independent Accountants ........................................................ F-19
Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 ... F-20
Consolidated Balance Sheets as of December 31, 1998 and 1997 ............................. F-21
Consolidated Statements of Share-Owner's Equity for the years ended December 31, 1998, F-23
1997, and 1996
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and F-24
1996
Notes to Consolidated Financial Statements ............................................... F-26
Financial Statement Schedules:
Schedule III -- Supplementary Insurance Information ...................................... S-1
Schedule IV -- Reinsurance ............................................................... S-2
</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.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Contract Owners and Board of Directors
of Protective Life Insurance Company
In our opinion, the accompanying statements of assets and liabilities and
the related statements of operations and changes in assets of the Protective
Variable Annuity Separate Account (the "Separate Account") listed in the index
on page F-1 of this Form N-4 present fairly, in all material respects, the
financial position of the Separate Account at December 31, 1998 and 1997, and
the results of its operations and its cash flows for each of the two years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Separate Account's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
March 17, 1999
Birmingham, Alabama
F-1
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PIC PIC PIC PIC
MONEY GROWTH AND INTERNATIONAL GLOBAL
MARKET INCOME EQUITY INCOME
------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Investment in sub-accounts
at market value ............ $5,304,962 $386,296,900 $173,532,636 $62,451,103
Receivable from Protective
Life Insurance
Company .................... 1 0 0 0
---------- ------------ ------------ -----------
Total Assets .............. 5,304,963 386,296,900 173,532,636 62,451,103
---------- ------------ ------------ -----------
LIABILITIES
Payable to Protective Life
Insurance Company .......... 0 0 0 0
---------- ------------ ------------ -----------
NET ASSETS .................. $5,304,963 $386,296,900 $173,532,636 $62,451,103
========== ============ ============ ===========
<CAPTION>
CALVERT
SOCIAL
PIC PIC PIC SMALL CALVERT
SMALL CAP CORE US CAPITAL CAP SOCIAL
VALUE EQUITY GROWTH GROWTH BALANCED
-------------- --------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in sub-accounts
at market value ............ $99,008,326 $261,457,421 $152,416,381 $549,826 $6,149,990
Receivable from Protective
Life Insurance
Company .................... 0 0 0 0 0
----------- ------------ ------------ -------- ----------
Total Assets .............. 99,008,326 261,457,421 152,416,381 549,826 6,149,990
----------- ------------ ------------ -------- ----------
LIABILITIES
Payable to Protective Life
Insurance Company .......... 0 0 0 0 0
----------- ------------ ------------ -------- ----------
NET ASSETS .................. $99,008,326 $261,457,421 $152,416,381 $549,826 $6,149,990
=========== ============ ============ ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MFS
MFS GROWTH MFS
EMERGING MFS WITH TOTAL
GROWTH RESEARCH INCOME RETURN
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Investment in sub-accounts
at market value .......... $16,563,501 $26,334,396 $19,391,258 $13,034,687
Receivable from Protective
Life Insurance
Company ................... 0 0 0 0
----------- ----------- ----------- -----------
Total Assets ............. 16,563,501 26,334,396 19,391,258 13,034,687
----------- ----------- ----------- -----------
LIABILITIES
Payable to Protective Life
Insurance Company ......... 0 0 0 0
----------- ----------- ----------- -----------
NET ASSETS ................. $16,563,501 $26,334,396 $19,391,258 $13,034,687
=========== =========== =========== ===========
<CAPTION>
OPPENHEIMER OPPENHEIMER OPPENHEIMER
AGGRESSIVE OPPENHEIMER GROWTH AND STRATEGIC
GROWTH GROWTH INCOME BOND TOTAL
------------- ------------- ------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in sub-accounts
at market value .......... $11,330,154 $16,022,393 $20,092,152 $15,978,991 $1,285,915,077
Receivable from Protective
Life Insurance
Company ................... 0 0 0 0 1
----------- ----------- ----------- ----------- --------------
Total Assets ............. 11,330,154 16,022,393 20,092,152 15,978,991 1,285,915,078
----------- ----------- ----------- ----------- --------------
LIABILITIES
Payable to Protective Life
Insurance Company ......... 0 0 0 0 0
----------- ----------- ----------- ----------- --------------
NET ASSETS ................. $11,330,154 $16,022,393 $20,092,152 $15,978,991 $1,285,915,078
=========== =========== =========== =========== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PIC PIC PIC PIC
MONEY GROWTH AND INTERNATIONAL GLOBAL
MARKET INCOME EQUITY INCOME
------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Investment in sub-accounts
at market value ............ $3,571,053 $355,505,039 $131,344,810 $48,720,463
Receivable from Protective
Life Insurance
Company .................... 17,327 49,074 479 0
---------- ------------ ------------ -----------
Total Assets .............. 3,588,380 355,554,113 131,345,289 48,720,463
---------- ------------ ------------ -----------
LIABILITIES
Payable to Protective Life
Insurance Company .......... 0 0 0 14
---------- ------------ ------------ -----------
NET ASSETS .................. $3,588,380 $355,554,113 $131,345,289 $48,720,449
========== ============ ============ ===========
<CAPTION>
CALVERT
SOCIAL
PIC PIC PIC SMALL CALVERT
SMALL CAP CORE CAPITAL CAP SOCIAL
VALUE US EQUITY GROWTH GROWTH BALANCED
--------------- --------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in sub-accounts
at market value ............ $107,421,163 $176,791,623 $74,411,193 $136,679 $1,050,736
Receivable from Protective
Life Insurance
Company .................... 6,003 0 0 0 155
------------ ------------ ----------- -------- ----------
Total Assets .............. 107,427,166 176,791,623 74,411,193 136,679 1,050,891
------------ ------------ ----------- -------- ----------
LIABILITIES
Payable to Protective Life
Insurance Company .......... 0 2,581 12 0 0
------------ ------------ ----------- -------- ----------
NET ASSETS .................. $107,427,166 $176,789,042 $74,411,181 $136,679 $1,050,891
============ ============ =========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MFS
MFS GROWTH MFS
EMERGING MFS WITH TOTAL
GROWTH RESEARCH INCOME RETURN
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Investment in
sub-accounts at
market value .............. $3,320,856 $6,285,782 $2,671,278 $1,747,276
Receivable from
Protective Life
Insurance Company ......... 0 0 0 0
---------- ---------- ---------- ----------
Total Assets ............. 3,320,856 6,285,782 2,671,278 1,747,276
---------- ---------- ---------- ----------
LIABILITIES
Payable to Protective
Life Insurance
Company ................... 0 0 1 0
---------- ---------- ---------- ----------
NET ASSETS ................. $3,320,856 $6,285,782 $2,671,277 $1,747,276
========== ========== ========== ==========
<CAPTION>
OPPENHEIMER OPPENHEIMER OPPENHEIMER
AGGRESSIVE OPPENHEIMER GROWTH AND STRATEGIC
GROWTH GROWTH INCOME BOND TOTAL
------------- ------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in
sub-accounts at
market value .............. $2,613,453 $3,609,636 $2,931,384 $2,935,255 $925,067,679
Receivable from
Protective Life
Insurance Company ......... 0 0 728 0 73,766
---------- ---------- ---------- ---------- ------------
Total Assets ............. 2,613,453 3,609,636 2,932,112 2,935,255 925,141,445
---------- ---------- ---------- ---------- ------------
LIABILITIES
Payable to Protective
Life Insurance
Company ................... 0 1,092 0 14,633 18,333
---------- ---------- ---------- ---------- ------------
NET ASSETS ................. $2,613,453 $3,608,544 $2,932,112 $2,920,622 $925,123,112
========== ========== ========== ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PIC PIC PIC PIC
MONEY GROWTH & INTERNAT'L GLOBAL
MARKET INCOME EQUITY INCOME
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
------------- ---------------- --------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends ........................ $248,570 $ 4,636,458 $ 73,813 $1,425,072
EXPENSE
Mortality and expense
risk and adminis-
trative charges ................. 73,185 5,531,483 2,192,885 781,443
-------- ------------ ----------- ----------
Net investment income
(loss) .......................... 175,385 (895,025) (2,119,072) 643,629
-------- ------------ ----------- ----------
NET REALIZED AND
UNREALIZED GAINS ON
INVESTMENTS
Net realized gain (loss)
from redemption of
investment shares ................ 1 (17,561) (17,289) 4,026
Capital gain distribution ......... 0 26,646,014 8,165,714 1,574,397
-------- ------------ ----------- ----------
Net realized gain on
investments ...................... 1 26,628,453 8,148,425 1,578,423
Net unrealized appreciation
(depreciation) on
investments during the
period ........................... 1 (45,438,848) 19,472,762 2,463,139
-------- ------------ ----------- ----------
Net realized and unrealized
gain (loss) on
investments ...................... 2 (18,810,395) 27,621,187 4,041,562
-------- ------------ ----------- ----------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS .................. $175,387 $(19,705,420) $25,502,115 $4,685,191
======== ============ =========== ==========
<CAPTION>
PIC PIC PIC CALVERT
SMALL CAP CORE US CAPITAL SMALL CAP CALVERT
EQUITY EQUITY GROWTH GROWTH BALANCED
SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT SUB-ACCOUNT
----------------- --------------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends ........................ $ 506,364 $ 1,545,019 $ 578,012 $ 487 $137,208
EXPENSE
Mortality and expense
risk and adminis-
trative charges ................. 1,543,516 3,060,032 1,509,515 4,471 43,385
------------- ----------- ----------- --------- --------
Net investment income
(loss) .......................... (1,037,152) (1,515,013) (931,503) (3,984) 93,823
------------- ----------- ----------- --------- --------
NET REALIZED AND
UNREALIZED GAINS ON
INVESTMENTS
Net realized gain (loss)
from redemption of
investment shares ................ (80,834) (1,687) (15,882) 543 (4,185)
Capital gain distribution ......... 11,785,637 2,694,185 2,671,568 6,748 307,711
------------- ----------- ----------- --------- --------
Net realized gain on
investments ...................... 11,704,803 2,692,498 2,655,686 7,291 303,526
Net unrealized appreciation
(depreciation) on
investments during the
period ........................... (30,578,648) 39,309,978 29,948,200 (21,221) 118,408
------------- ----------- ----------- --------- --------
Net realized and unrealized
gain (loss) on
investments ...................... (18,873,845) 42,002,476 32,603,886 (13,930) 421,934
------------- ----------- ----------- --------- --------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS .................. $ (19,910,997) $40,487,463 $31,672,383 $ (17,914) $515,757
============= =========== =========== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MFS
MFS GROWTH MFS
EMERGING MFS WITH TOTAL
GROWTH RESEARCH INCOME RETURN
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends ........................ $ 0 $ 18,216 $ 0 $ 61,776
EXPENSE
Mortality and expense
risk and adminis-
trative charges ................ 121,117 208,964 127,398 91,976
---------- ---------- ---------- --------
Net investment income
(loss) ......................... (121,117) (190,748) (127,398) (30,200)
---------- ---------- ---------- --------
NET REALIZED AND
UNREALIZED GAINS ON
INVESTMENTS
Net realized gain (loss)
from redemption of
investment shares ................ (150) (2,028) 2,288 (149)
Capital gain distribution ......... 54,636 238,877 0 72,636
---------- ---------- ---------- --------
Net realized gain on
investments ...................... 54,486 236,849 2,288 72,487
Net unrealized
appreciation
(depreciation) on
investments during the
period ........................... 2,954,000 3,073,695 2,041,489 695,548
---------- ---------- ---------- --------
Net realized and
unrealized gain (loss)
on investments ................... 3,008,486 3,310,544 2,043,777 768,035
---------- ---------- ---------- --------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS .................. $2,887,369 $3,119,796 $1,916,379 $737,835
========== ========== ========== ========
<CAPTION>
OPPENHEIMER OPPENHEIMER OPPENHEIMER
AGGRESSIVE OPPENHEIMER GROWTH AND STRATEGIC
GROWTH GROWTH INCOME BOND TOTAL
------------- ------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends ........................ $ 10,204 $ 38,507 $ 11,591 $89,250 $ 9,380,547
EXPENSE
Mortality and expense
risk and adminis-
trative charges ................ 90,619 121,481 136,131 128,836 15,766,437
--------- ---------- -------- ------- -----------
Net investment income
(loss) ......................... (80,415) (82,974) (124,540) (39,586) (6,385,890)
--------- ---------- -------- ------- -----------
NET REALIZED AND
UNREALIZED GAINS ON
INVESTMENTS
Net realized gain (loss)
from redemption of
investment shares ................ (8,467) 1,617 430 1,758 (137,569)
Capital gain distribution ......... 104,789 464,612 255,235 57,517 55,100,276
--------- ---------- -------- ------- -----------
Net realized gain on
investments ...................... 96,322 466,229 255,665 59,275 54,962,707
Net unrealized
appreciation
(depreciation) on
investments during the
period ........................... 898,627 1,756,712 344,809 47,763 27,086,414
--------- ---------- -------- ------- -----------
Net realized and
unrealized gain (loss)
on investments ................... 994,949 2,222,941 600,474 107,038 82,049,121
--------- ---------- -------- ------- -----------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS .................. $ 914,534 $2,139,967 $475,934 $67,452 $75,663,231
========= ========== ======== ======= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PIC PIC PIC PIC
MONEY GROWTH AND INTERNATIONAL GLOBAL
MARKET INCOME EQUITY INCOME
----------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends ........................... $216,131 $ 2,530,403 $ 2,328,793 $3,987,063
EXPENSE
Mortality and expense risk and
administrative charges ............. 62,875 4,093,470 1,668,076 601,492
-------- ------------ ------------- ----------
Net investment income (loss) ........ 153,256 (1,563,067) 660,717 3,385,571
-------- ------------ ------------- ----------
NET REALIZED AND UNREALIZED
GAINS ON INVESTMENTS
Net realized gain (loss) from
redemption of investment shares ..... 0 3,109 5,500 1,401
Capital gain distribution ............ 0 47,260,910 7,212,859 603,653
-------- ------------ ------------- ----------
Net realized gain on investments ..... 0 47,264,019 7,218,359 605,054
Net unrealized appreciation
(depreciation) on investments
during the period ................... 1 19,421,926 (5,637,373) (450,116)
-------- ------------ ------------- ----------
Net realized and unrealized gain
(loss) on investments ............... 1 66,685,945 1,580,986 154,938
-------- ------------ ------------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS .......................... $153,257 $ 65,122,878 $ 2,241,703 $3,540,509
======== ============ ============= ==========
<CAPTION>
CALVERT
SOCIAL
PIC PIC PIC SMALL CALVERT
SMALL CAP CORE US CAPITAL CAP SOCIAL
VALUE EQUITY GROWTH GROWTH BALANCED
--------------- --------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends ........................... $ 311,079 $ 1,442,006 $ 451,531 $ 0 $ 23,016
EXPENSE
Mortality and expense risk and
administrative charges ............. 1,213,746 1,983,808 711,311 408 2,454
----------- ----------- ----------- ---------- ----------
Net investment income (loss) ........ (902,667) (541,802) (259,780) (408) 20,562
----------- ----------- ----------- ---------- ----------
NET REALIZED AND UNREALIZED
GAINS ON INVESTMENTS
Net realized gain (loss) from
redemption of investment shares ..... 17,568 553 (554) (12) 76
Capital gain distribution ............ 11,826,478 13,990,186 4,665,040 12,282 49,926
----------- ----------- ----------- ---------- ----------
Net realized gain on investments ..... 11,844,046 13,990,739 4,664,486 12,270 50,002
Net unrealized appreciation
(depreciation) on investments
during the period ................... 10,752,598 20,604,003 8,959,175 (12,845) (53,486)
----------- ----------- ----------- ---------- ----------
Net realized and unrealized gain
(loss) on investments ............... 22,596,644 34,594,742 13,623,661 (575) (3,484)
----------- ----------- ----------- ---------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS .......................... $21,693,977 $34,052,940 $13,363,881 $ (983) $ 17,078
=========== =========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
MFS
MFS GROWTH MFS
EMERGING MFS WITH TOTAL
GROWTH RESEARCH INCOME RETURN
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends ........................ $ 0 $ 0 $10,479 $ 0
EXPENSE
Mortality and expense risk
and administrative
charges ......................... 11,765 19,515 7,836 4,785
--------- --------- ------- --------
Net investment income
(loss) .......................... (11,765) (19,515) 2,643 (4,785)
--------- --------- ------- --------
NET REALIZED AND
UNREALIZED GAINS ON
INVESTMENTS
Net realized gain (loss) from
redemption of investment
shares ........................... 2,267 7 92 202
Capital gain distribution ......... 0 0 49,017 0
--------- --------- ------- --------
Net realized gain on
investments ...................... 2,267 7 49,109 202
Net unrealized appreciation
(depreciation) on
investments during the
period ........................... 2,208 13,033 41,478 48,443
--------- --------- ------- --------
Net realized and unrealized
gain (loss) on investments ....... 4,475 13,040 90,587 48,645
--------- --------- ------- --------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS ....................... $ (7,290) $ (6,475) $93,230 $ 43,860
========= ========= ======= ========
<CAPTION>
OPPENHEIMER OPPENHEIMER OPPENHEIMER
AGGRESSIVE OPPENHEIMER GROWTH AND STRATEGIC
GROWTH GROWTH INCOME BOND TOTAL
------------- ------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends ........................ $ 0 $ 0 $ 8,008 $ 73,276 11,381,785
EXPENSE
Mortality and expense risk
and administrative
charges ......................... 7,974 11,176 8,503 9,293 10,418,487
--------- --------- -------- ---------- ----------
Net investment income
(loss) .......................... (7,974) (11,176) (495) 63,983 963,298
--------- --------- -------- ---------- ----------
NET REALIZED AND
UNREALIZED GAINS ON
INVESTMENTS
Net realized gain (loss) from
redemption of investment
shares ........................... 11 19 118 21 30,378
Capital gain distribution ......... 0 0 0 0 85,670,351
--------- --------- -------- ---------- ----------
Net realized gain on
investments ...................... 11 19 118 21 85,700,729
Net unrealized appreciation
(depreciation) on
investments during the
period ........................... (56,978) (9,267) 109,900 (22,462) 53,710,238
--------- --------- -------- ---------- ----------
Net realized and unrealized
gain (loss) on investments ....... (56,967) (9,248) 110,018 (22,441) 139,410,967
--------- --------- -------- ---------- -----------
NET INCREASE (DECREASE) IN
NET ASSETS RESULTING FROM
OPERATIONS ....................... $ (64,941) $ (20,424) $109,523 $ 41,542 $140,374,265
========= ========= ======== ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PIC PIC PIC PIC
MONEY GROWTH AND INTERNATIONAL GLOBAL
MARKET INCOME EQUITY INCOME
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income
(loss) ...................... $ 175,385 $ (895,025) $ (2,119,072) $ 643,629
Net realized gain on
investments ................. 1 26,628,453 8,148,425 1,578,423
Net unrealized
appreciation
(depreciation) of
investments during
the period .................. 1 (45,438,848) 19,472,762 2,463,139
------------- ------------- ------------ ------------
Net increase (decrease)
in net assets resulting
from operations ............. 175,387 (19,705,420) 25,502,115 4,685,191
------------- ------------- ------------ ------------
FROM VARIABLE ANNUITY
CONTRACT
TRANSACTIONS
Contract owners' net
payments .................... 2,963,346 44,661,113 12,821,323 6,767,675
Contract maintenance
fees ........................ (2,344) (155,734) (66,464) (17,859)
Surrenders ................... (3,373,648) (15,673,534) (4,971,778) (2,847,710)
Death benefits ............... (36,443) (2,354,085) (1,135,800) (491,719)
Transfer (to) from other
portfolios .................. 1,990,285 23,970,447 10,037,951 5,635,076
------------- ------------- ------------ ------------
Net increase in net assets
resulting from
variable annuity
contract transactions ....... 1,541,196 50,448,207 16,685,232 9,045,463
------------- ------------- ------------ ------------
Total increase (decrease)
in net assets ............... 1,716,583 30,742,787 42,187,347 13,730,654
NET ASSETS
Beginning of Year ............ 3,588,380 355,554,113 131,345,289 48,720,449
------------- ------------- ------------ ------------
End of Year .................. $ 5,304,963 $ 386,296,900 $173,532,636 $ 62,451,103
============= ============= ============ ============
<CAPTION>
CALVERT
SOCIAL
PIC PIC PIC SMALL CALVERT
SMALL CAP CORE US CAPITAL CAP SOCIAL
VALUE EQUITY GROWTH GROWTH BALANCED
---------------- ---------------- ---------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income
(loss) ...................... $ (1,037,152) $ (1,515,013) $ (931,503) $ (3,984) $ 93,823
Net realized gain on
investments ................. 11,704,803 2,692,498 2,655,686 7,291 303,526
Net unrealized
appreciation
(depreciation) of
investments during
the period .................. (30,578,648) 39,309,978 29,948,200 (21,221) 118,408
------------- ------------ ------------ --------- ----------
Net increase (decrease)
in net assets resulting
from operations ............. (19,910,997) 40,487,463 31,672,383 (17,914) 515,757
------------- ------------ ------------ --------- ----------
FROM VARIABLE ANNUITY
CONTRACT
TRANSACTIONS
Contract owners' net
payments .................... 10,541,589 28,759,864 23,614,776 231,937 2,395,475
Contract maintenance
fees ........................ (47,353) (79,195) (40,182) (260) (692)
Surrenders ................... (3,549,612) (7,435,839) (2,924,880) (824) (95,901)
Death benefits ............... (712,842) (1,430,656) (710,672) 0 (30,452)
Transfer (to) from other
portfolios .................. 5,260,375 24,366,742 26,393,775 200,208 2,314,912
------------- ------------ ------------ --------- ----------
Net increase in net assets
resulting from
variable annuity
contract transactions ....... 11,492,157 44,180,916 46,332,817 431,061 4,583,342
------------- ------------ ------------ --------- ----------
Total increase (decrease)
in net assets ............... (8,418,840) 84,668,379 78,005,200 413,147 5,099,099
NET ASSETS
Beginning of Year ............ 107,427,166 176,789,042 74,411,181 136,679 1,050,891
------------- ------------ ------------ --------- ----------
End of Year .................. $ 99,008,326 $261,457,421 $152,416,381 $ 549,826 $6,149,990
============= ============ ============ ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MFS
MFS GROWTH MFS
EMERGING MFS WITH TOTAL
GROWTH RESEARCH INCOME RETURN
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income
(loss) ..................... $ (121,117) $ (190,748) $ (127,398) $ (30,200)
Net realized gain on
investments ................ 54,486 236,849 2,288 72,487
Net unrealized appreciation
(depreciation) of
investments during the
period ..................... 2,954,000 3,073,695 2,041,489 695,548
----------- ----------- ----------- -----------
Net increase (decrease) in
net assets resulting from
operations ................. 2,887,369 3,119,796 1,916,379 737,835
----------- ----------- ----------- -----------
FROM VARIABLE ANNUITY
CONTRACT TRANSACTIONS
Contract owners' net
payments ................... 5,571,115 9,051,964 7,664,341 3,749,787
Contract maintenance fees..... (2,956) (3,930) (1,930) (1,409)
Surrenders ................... (177,307) (303,372) (326,160) (135,376)
Death benefits ............... (102,914) (122,413) (56,738) (44,941)
Transfer (to) from other
portfolios ................. 5,067,338 8,306,569 7,524,089 6,981,515
----------- ----------- ----------- -----------
Net increase in net assets
resulting from variable
annuity contract
transactions ............... 10,355,276 16,928,818 14,803,602 10,549,576
----------- ----------- ----------- -----------
Total increase (decrease) in
net assets ................. 13,242,645 20,048,614 16,719,981 11,287,411
NET ASSETS
Beginning of Year ............ 3,320,856 6,285,782 2,671,277 1,747,276
----------- ----------- ----------- -----------
End of Year .................. $16,563,501 $26,334,396 $19,391,258 $13,034,687
=========== =========== =========== ===========
<CAPTION>
OPPENHEIMER OPPENHEIMER OPPENHEIMER
AGGRESSIVE OPPENHEIMER GROWTH AND STRATEGIC
GROWTH GROWTH INCOME BOND TOTAL
--------------- --------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income
(loss) ..................... $ (80,415) $ (82,974) $ (124,540) $ (39,586) $ (6,385,890)
Net realized gain on
investments ................ 96,322 466,229 255,665 59,275 54,962,707
Net unrealized appreciation
(depreciation) of
investments during the
period ..................... 898,627 1,756,712 344,809 47,763 27,086,414
----------- ----------- ----------- ----------- --------------
Net increase (decrease) in
net assets resulting from
operations ................. 914,534 2,139,967 475,934 67,452 75,663,231
----------- ----------- ----------- ----------- --------------
FROM VARIABLE ANNUITY
CONTRACT TRANSACTIONS
Contract owners' net
payments ................... 4,311,786 5,905,789 8,994,192 5,763,714 183,769,786
Contract maintenance fees..... (2,142) (2,350) (2,233) (2,055) (429,088)
Surrenders ................... (89,091) (123,371) (246,266) (340,560) (42,615,229)
Death benefits ............... (50,848) (52,012) (164,009) (49,270) (7,545,814)
Transfer (to) from other
portfolios ................. 3,632,462 4,545,826 8,102,422 7,619,088 151,949,080
----------- ----------- ----------- ----------- --------------
Net increase in net assets
resulting from variable
annuity contract
transactions ............... 7,802,167 10,273,882 16,684,106 12,990,917 285,128,735
----------- ----------- ----------- ----------- --------------
Total increase (decrease) in
net assets ................. 8,716,701 12,413,849 17,160,040 13,058,369 360,791,966
NET ASSETS
Beginning of Year ............ 2,613,453 3,608,544 2,932,112 2,920,622 925,123,112
----------- ----------- ----------- ----------- --------------
End of Year .................. $11,330,154 $16,022,393 $20,092,152 $15,978,991 $1,285,915,078
=========== =========== =========== =========== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PIC PIC PIC PIC
MONEY GROWTH AND INTERNATIONAL GLOBAL
MARKET INCOME EQUITY INCOME
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ 153,256 $ (1,563,067) $ 660,717 $ 3,385,571
Net realized gain on
investments ...................... 0 47,264,019 7,218,359 605,054
Net unrealized appreciation
(depreciation) of
investments during the
period ........................... 1 19,421,926 (5,637,373) (450,116)
------------- ------------ ------------ -----------
Net increase (decrease) in
net assets resulting from
operations ....................... 153,257 65,122,878 2,241,703 3,540,509
------------- ------------ ------------ -----------
FROM VARIABLE ANNUITY
CONTRACT TRANSACTIONS
Contract owners' net
payments ......................... 4,550,506 70,285,404 27,497,729 8,832,118
Contract maintenance fees ......... (1,861) (119,996) (53,643) (15,577)
Surrenders ........................ (2,124,233) (10,448,724) (4,248,152) (1,859,370)
Death benefits .................... (90,244) (2,020,758) (806,371) (432,617)
Transfer (to) from other
portfolios ....................... (5,005,559) 22,297,846 10,100,492 1,001,821
------------- ------------ ------------ -----------
Net increase in net assets
resulting from variable
annuity contract
transactions ..................... (2,671,391) 79,993,772 32,490,055 7,526,375
------------- ------------ ------------ -----------
Total increase (decrease) in
net assets ....................... (2,518,134) 145,116,650 34,731,758 11,066,884
NET ASSETS
Beginning of Year ................. 6,106,514 210,437,463 96,613,531 37,653,565
------------- ------------ ------------ -----------
End of Year ....................... $ 3,588,380 $355,554,113 $131,345,289 $48,720,449
============= ============ ============ ===========
<CAPTION>
CALVERT
PIC PIC PIC SOCIAL CALVERT
SMALL CAP CORE US CAPITAL SMALL SOCIAL
VALUE EQUITY GROWTH CAP GROWTH BALANCED
---------------- ---------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss) $ (902,667) $ (541,802) $ (259,780) $ (408) $ 20,562
Net realized gain on
investments ...................... 11,844,046 13,990,739 4,664,486 12,270 50,002
Net unrealized appreciation
(depreciation) of
investments during the
period ........................... 10,752,598 20,604,003 8,959,175 (12,845) (53,486)
------------ ------------ ----------- --------- ----------
Net increase (decrease) in
net assets resulting from
operations ....................... 21,693,977 34,052,940 13,363,881 (983) 17,078
------------ ------------ ----------- --------- ----------
FROM VARIABLE ANNUITY
CONTRACT TRANSACTIONS
Contract owners' net
payments ......................... 17,115,594 33,348,489 23,501,411 107,775 954,698
Contract maintenance fees ......... (40,747) (57,679) (19,980) 7 (21)
Surrenders ........................ (3,563,235) (5,804,052) (1,542,873) (544) (9,883)
Death benefits .................... (383,402) (952,669) (290,376) 0 0
Transfer (to) from other
portfolios ....................... 8,302,698 14,654,534 9,204,993 30,424 89,019
------------ ------------ ----------- --------- ----------
Net increase in net assets
resulting from variable
annuity contract
transactions ..................... 21,430,908 41,188,623 30,853,175 137,662 1,033,813
------------ ------------ ----------- --------- ----------
Total increase (decrease) in
net assets ....................... 43,124,885 75,241,563 44,217,056 136,679 1,050,891
NET ASSETS
Beginning of Year ................. 64,302,281 101,547,479 30,194,125 0 0
------------ ------------ ----------- --------- ----------
End of Year ....................... $107,427,166 $176,789,042 $74,411,181 $ 136,679 $1,050,891
============ ============ =========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
MFS
MFS GROWTH MFS
EMERGING MFS WITH TOTAL
GROWTH RESEARCH INCOME RETURN
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income
(loss) ........................ $ (11,765) $ (19,515) $ 2,643 $ (4,785)
Net realized gain on
investments ................... 2,267 7 49,109 202
Net unrealized appreciation
(depreciation) of
investments during the
period ........................ 2,208 13,033 41,478 48,443
---------- ---------- ---------- ----------
Net increase (decrease) in
net assets resulting from
operations .................... (7,290) (6,475) 93,230 43,860
---------- ---------- ---------- ----------
FROM VARIABLE ANNUITY
CONTRACT TRANSACTIONS
Contract owners' net
payments ...................... 2,503,454 4,920,127 2,051,786 1,145,999
Contract maintenance fees ...... 307 (56) 40 (55)
Surrenders ..................... (8,914) (32,833) (7,709) (3,032)
Death benefits ................. 0 0 (4,375) 0
Transfer (to) from other
portfolios .................... 833,299 1,405,019 538,305 560,504
---------- ---------- ---------- ----------
Net increase in net assets
resulting from variable
annuity contract
transactions .................. 3,328,146 6,292,257 2,578,047 1,703,416
---------- ---------- ---------- ----------
Total increase (decrease) in
net assets .................... 3,320,856 6,285,782 2,671,277 1,747,276
NET ASSETS
Beginning of Year .............. 0 0 0 0
---------- ---------- ---------- ----------
End of Year .................... $3,320,856 $6,285,782 $2,671,277 $1,747,276
========== ========== ========== ==========
<CAPTION>
OPPENHEIMER OPPENHEIMER OPPENHEIMER
AGGRESSIVE OPPENHEIMER GROWTH AND STRATEGIC
GROWTH GROWTH INCOME BOND TOTAL
------------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income
(loss) ........................ $ (7,974) $ (11,176) $ (495) $ 63,983 $ 963,298
Net realized gain on
investments ................... 11 19 118 21 85,700,729
Net unrealized appreciation
(depreciation) of
investments during the
period ........................ (56,978) (9,267) 109,900 (22,462) 53,710,238
---------- ---------- ---------- ---------- -------------
Net increase (decrease) in
net assets resulting from
operations .................... (64,941) (20,424) 109,523 41,542 140,374,265
---------- ---------- ---------- ---------- -------------
FROM VARIABLE ANNUITY
CONTRACT TRANSACTIONS
Contract owners' net
payments ...................... 2,107,943 2,994,586 2,158,105 1,948,790 206,024,514
Contract maintenance fees ...... (370) (22) (21) 429 (309,245)
Surrenders ..................... (19,335) (7,756) (13,263) (13,822) (29,707,730)
Death benefits ................. 0 (4,472) 0 0 (4,985,284)
Transfer (to) from other
portfolios .................... 590,156 646,632 677,768 943,683 66,871,634
---------- ---------- ---------- ---------- -------------
Net increase in net assets
resulting from variable
annuity contract
transactions .................. 2,678,394 3,628,968 2,822,589 2,879,080 237,893,889
---------- ---------- ---------- ---------- -------------
Total increase (decrease) in
net assets .................... 2,613,453 3,608,544 2,932,112 2,920,622 378,268,154
NET ASSETS
Beginning of Year .............. 0 0 0 0 546,854,958
---------- ---------- ---------- ---------- -------------
End of Year .................... $2,613,453 $3,608,544 $2,932,112 $2,920,622 $ 925,123,112
========== ========== ========== ========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO 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 seven proprietary sub-accounts and ten independent sub-accounts.
The seven proprietary sub-accounts are the Money Market, Growth and Income,
International Equity, Global Income, Small Cap Value, Core U.S. Equity, and
Capital Growth sub-accounts. Funds are transferred to Protective Investment
Company (the Fund) in exchange for shares of the corresponding portfolio of the
Fund.
The ten independent sub-accounts are the Calvert Social Small Cap Growth,
Calvert Social Balanced, MFS Emerging Growth, MFS Research, MFS Growth with
Income, MFS Total Return, Oppenheimer Aggressive Growth, Oppenheimer Growth,
Oppenheimer Growth & Income, and Oppenheimer Strategic Bond sub-accounts. The
ten independent sub-accounts were added July 1, 1997, with sales beginning July
1, 1997. The Fund invests contract holder's funds in exchange for shares in the
independent funds. The Fund then holds the shares for the contract owners.
Gross premiums from the Contracts are allocated to the sub-accounts in
accordance with contract owner 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.
Contract owners may allocate some or all of gross premiums or transfer
some or all of the contract value to the Guaranteed 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. The Guaranteed
Account balance for the years ended December 31, 1998 and 1997 was $268,282,860
and $227,706,042, respectively.
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 Guaranteed 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.
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.
F-14
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENTS
At December 31, 1998, the investments by the respective sub-accounts were
as follows:
<TABLE>
<CAPTION>
SHARES COST MARKET VALUE
------------ ----------------- -----------------
<S> <C> <C> <C>
PIC Money Market ......................... 5,304,961 $ 5,304,961 $ 5,304,961
PIC Growth and Income .................... 27,458,284 373,386,033 386,296,900
PIC International Equity ................. 12,131,396 143,492,563 173,532,636
PIC Global Income ........................ 5,864,080 59,677,628 62,451,103
PIC Small Cap Value ...................... 11,436,929 117,079,682 99,008,326
PIC Core US Equity ....................... 11,800,174 181,268,517 261,457,421
PIC Capital Growth ....................... 7,305,467 109,839,206 152,416,381
Calvert Social Small Cap Growth .......... 49,445 583,893 549,826
Calvert Social Balanced .................. 2,877,861 6,085,066 6,149,990
MFS Emerging Growth ...................... 771,472 13,607,295 16,563,501
MFS Research ............................. 1,382,383 23,247,669 26,334,396
MFS Growth With Income ................... 964,237 17,307,844 19,391,258
MFS Total Return ......................... 719,354 12,290,697 13,034,687
Oppenheimer Aggressive Growth ............ 252,736 10,488,505 11,330,154
Oppenheimer Growth ....................... 436,935 14,274,948 16,022,393
Oppenheimer Growth and Income ............ 981,040 19,636,990 20,092,152
Oppenheimer Strategic Bond ............... 3,120,780 15,953,092 15,978,992
-------------- --------------
$1,123,524,589 $1,285,915,077
============== ==============
</TABLE>
At December 31, 1997, the investments by the respective sub-accounts were
as follows:
<TABLE>
<CAPTION>
SHARES COST MARKET VALUE
------------ --------------- ---------------
<S> <C> <C> <C>
PIC Money Market ......................... 3,571,053 $ 3,571,053 $ 3,571,053
PIC Growth and Income .................... 22,555,045 297,181,881 355,505,039
PIC International Equity ................. 10,548,201 120,773,576 131,344,810
PIC Global Income ........................ 4,807,861 48,410,709 48,720,463
PIC Small Cap Value ...................... 9,161,219 94,914,942 107,421,163
PIC Core US Equity ....................... 9,603,792 135,912,917 176,791,623
PIC Capital Growth ....................... 4,703,701 61,781,865 74,411,193
Calvert Social Small Cap Growth .......... 11,380 149,524 136,679
Calvert Social Balanced .................. 530,139 1,104,222 1,050,736
MFS Emerging Growth ...................... 205,753 3,318,647 3,320,856
MFS Research ............................. 398,086 6,272,749 6,285,782
MFS Growth With Income ................... 162,486 2,629,799 2,671,278
MFS Total Return ......................... 105,068 1,698,832 1,747,276
Oppenheimer Aggressive Growth ............ 63,805 2,670,431 2,613,453
Oppenheimer Growth ....................... 111,271 3,618,902 3,609,636
Oppenheimer Growth and Income ............ 142,438 2,821,485 2,931,384
Oppenheimer Strategic Bond ............... 573,292 2,957,717 2,935,255
------------ ------------
$789,789,251 $925,067,679
============ ============
</TABLE>
F-15
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENTS -- (Continued)
During the year ended December 31, 1998, transactions in shares were as
follows:
<TABLE>
<CAPTION>
PIC PIC PIC
MONEY GROWTH & INTERNATIONAL
MARKET INCOME EQUITY
---------------- ---------------- ---------------
<S> <C> <C> <C>
Shares purchased .......................... 11,715,106 3,331,957 1,290,753
Shares received from reinvestment of
dividends ................................ 248,570 2,218,535 579,579
---------- --------- ---------
Total shares acquired ..................... 11,963,676 5,550,492 1,870,332
Shares redeemed ........................... (10,229,768) (647,253) (287,137)
----------- --------- ---------
Net increase in shares owned .............. 1,733,908 4,903,239 1,583,195
Shares owned, beginning of the period ..... 3,571,053 22,555,045 10,548,201
----------- ---------- ----------
Shares owned, end of the period ........... 5,304,961 27,458,284 12,131,396
=========== ========== ==========
Cost of shares acquired ................... $ 11,963,675 $ 86,017,562 $ 26,560,785
============= ============ ============
Cost of shares redeemed ................... $ (10,229,767) $ (9,813,410) $ (3,841,798)
============= ============ ============
<CAPTION>
PIC PIC PIC PIC
GLOBAL SMALL CAP CORE US CAPITAL
INCOME VALUE EQUITY GROWTH
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Shares purchased .......................... 971,363 1,225,909 2,111,671 2,491,965
Shares received from reinvestment of
dividends ................................ 281,841 1,466,219 189,588 155,774
------- --------- --------- ---------
Total shares acquired ..................... 1,253,204 2,692,128 2,301,259 2,647,739
Shares redeemed ........................... (196,985) (416,418) (104,877) (45,973)
--------- --------- --------- ---------
Net increase in shares owned .............. 1,056,219 2,275,710 2,196,382 2,601,766
Shares owned, beginning of the period ..... 4,807,861 9,161,219 9,603,792 4,703,701
--------- --------- --------- ---------
Shares owned, end of the period ........... 5,864,080 11,436,929 11,800,174 7,305,467
========= ========== ========== =========
Cost of shares acquired ................... $ 13,373,841 $ 26,470,659 $ 47,416,639 $48,833,246
============ ============ ============ ===========
Cost of shares redeemed ................... $ (2,106,922) $ (4,305,919) $ (2,061,039) $ (775,905)
============ ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
CALVERT SOCIAL MFS
SMALL CAP CALVERT SOCIAL EMERGING
GROWTH BALANCED GROWTH
---------------- ---------------- ---------------
<S> <C> <C> <C>
Shares purchased ....................... 39,534 2,236,805 568,571
Shares received from reinvestment of
dividends ............................. 665 209,275 2,945
------ --------- -------
Total shares acquired .................. 40,199 2,446,080 571,516
Shares redeemed ........................ (2,134) (98,358) (5,797)
------ --------- -------
Net increase in shares owned ........... 38,065 2,347,722 565,719
Shares owned, beginning of the
period ................................ 11,380 530,139 205,753
------ --------- -------
Shares owned, end of the period ........ 49,445 2,877,861 771,472
====== ========= =======
Cost of shares acquired ................ $ 458,138 $5,183,395 $10,389,644
========= ========== ===========
Cost of shares redeemed ................ $ (23,769) $ (202,551) $ (100,996)
========= ========== ===========
<CAPTION>
MFS OPPENHEIMER
MFS GROWTH WITH MFS TOTAL AGGRESSIVE
RESEARCH INCOME RETURN GROWTH
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Shares purchased ....................... 981,678 807,870 610,804 191,902
Shares received from reinvestment of
dividends ............................. 14,624 0 7,874 2,611
------- ------- ------- -------
Total shares acquired .................. 996,302 807,870 618,678 194,513
Shares redeemed ........................ (12,005) (6,119) (4,392) (5,582)
------- ------- ------- -------
Net increase in shares owned ........... 984,297 801,751 614,286 188,931
Shares owned, beginning of the
period ................................ 398,086 162,486 105,068 63,805
------- ------- ------- -------
Shares owned, end of the period ........ 1,382,383 964,237 719,354 252,736
========= ======= ======= =======
Cost of shares acquired ................ $17,169,721 $14,790,927 $10,667,082 $8,020,170
=========== =========== =========== ==========
Cost of shares redeemed ................ $ (194,801) $ (112,882) $ (75,217) $ (202,096)
=========== =========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
OPPENHEIMER OPPENHEIMER
OPPENHEIMER GROWTH & STRATEGIC
GROWTH INCOME BOND
--------------- --------------- ---------------
<S> <C> <C> <C>
Shares purchased ................................... 319,277 835,284 2,654,705
Shares received from reinvestment of dividends ..... 15,302 12,085 28,721
------- ------- ---------
Total shares acquired .............................. 334,579 847,369 2,683,426
Shares redeemed .................................... (8,915) (8,767) (135,938)
------- ------- ---------
Net increase in shares owned ....................... 325,664 838,602 2,547,488
Shares owned, beginning of the period .............. 111,271 142,438 573,292
------- ------- ---------
Shares owned, end of the period .................... 436,935 981,040 3,120,780
======= ======= =========
Cost of shares acquired ............................ $10,947,912 $16,995,327 $13,679,843
=========== =========== ===========
Cost of shares redeemed ............................ $ (291,866) $ (179,822) $ (684,468)
=========== =========== ===========
</TABLE>
F-16
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENTS -- (Continued)
During the year ended December 31, 1997, transactions in shares were as
follows:
<TABLE>
<CAPTION>
PIC PIC PIC
MONEY GROWTH & INTERNATIONAL
MARKET INCOME EQUITY
---------------- ---------------- ---------------
<S> <C> <C> <C>
Shares purchased ......................... 7,384,222 4,568,466 2,382,529
Shares received from reinvestment of
dividends ............................... 216,131 3,243,711 771,149
--------- --------- ---------
Total shares acquired .................... 7,600,353 7,812,177 3,153,678
Shares redeemed .......................... (10,135,816) (94,476) (115,268)
----------- --------- ---------
Net increase in shares owned ............. (2,535,463) 7,717,701 3,038,410
Shares owned, beginning of the period..... 6,106,516 14,837,344 7,509,791
----------- ---------- ---------
Shares owned, end of the period .......... 3,571,053 22,555,045 10,548,201
=========== ========== ==========
Cost of shares acquired .................. $ 7,600,353 $127,303,311 $ 41,961,893
============= ============ ============
Cost of shares redeemed .................. $ (10,135,816) $ (1,631,128) $ (1,593,224)
============= ============ ============
<CAPTION>
PIC PIC PIC PIC
GLOBAL SMALL CAP CORE US CAPITAL
INCOME VALUE EQUITY GROWTH
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares purchased ......................... 880,418 1,889,641 2,256,497 1,994,733
Shares received from reinvestment of
dividends ............................... 452,653 1,052,027 856,997 330,376
------- --------- --------- ---------
Total shares acquired .................... 1,333,071 2,941,668 3,113,494 2,325,109
Shares redeemed .......................... (225,101) (196,875) (87,885) (8,939)
--------- --------- --------- ---------
Net increase in shares owned ............. 1,107,970 2,744,793 3,025,609 2,316,170
Shares owned, beginning of the period..... 3,699,891 6,416,426 6,578,183 2,387,531
--------- --------- --------- ---------
Shares owned, end of the period .......... 4,807,861 9,161,219 9,603,792 4,703,701
========= ========= ========= =========
Cost of shares acquired .................. $ 13,885,758 $ 34,688,924 $ 56,301,000 $35,386,576
============ ============ ============ ===========
Cost of shares redeemed .................. $ (2,368,748) $ (2,321,547) $ (1,660,892) $ (128,687)
============ ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
CALVERT SOCIAL CALVERT MFS
SMALL CAP SOCIAL EMERGING
GROWTH BALANCED GROWTH
---------------- -------------- --------------
<S> <C> <C> <C>
Shares Purchased ......................... 10,417 496,705 212,328
Shares received from reinvestment of
dividends ............................... 1,023 36,802 0
------ ------- -------
Total shares acquired .................... 11,440 533,507 212,328
Shares redeemed .......................... (60) (3,368) (6,575)
------ ------- -------
Net increase in shares owned ............. 11,380 530,139 205,753
Shares owned, beginning of the period..... 0 0 0
------ ------- -------
Shares owned, end of the period .......... 11,380 530,139 205,753
====== ======= =======
Cost of shares acquired .................. $150,314 $1,111,207 $3,422,009
======== ========== ==========
Cost of shares redeemed .................. $ (790) $ (6,985) $ (103,362)
======== ========== ==========
<CAPTION>
MFS MFS OPPENHEIMER
MFS GROWTH WITH TOTAL AGGRESSIVE
RESEARCH INCOME RETURN GROWTH
---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Shares Purchased ......................... 398,087 160,174 107,942 63,852
Shares received from reinvestment of
dividends ............................... 0 3,695 0 0
-------- ------- ------- ------
Total shares acquired .................... 398,087 163,869 107,942 63,852
Shares redeemed .......................... (1) (1,383) (2,874) (47)
---------- ------- ------- ------
Net increase in shares owned ............. 398,086 162,486 105,068 63,805
Shares owned, beginning of the period..... 0 0 0 0
--------- ------- ------- ------
Shares owned, end of the period .......... 398,086 162,486 105,068 63,805
========= ======= ======= ======
Cost of shares acquired .................. $6,272,771 $2,652,475 $1,745,363 $2,672,447
=========== ========== ========== ==========
Cost of shares redeemed .................. $ (22) $ (22,676) $ (46,531) $ (2,016)
=========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
OPPENHEIMER OPPENHEIMER
OPPENHEIMER GROWTH & STRATEGIC
GROWTH INCOME BOND
-------------- -------------- --------------
<S> <C> <C> <C>
Shares purchased ............................... 111,304 142,996 599,683
Shares received from reinvestment of dividends . 0 405 14,325
------- ------- -------
Total shares acquired .......................... 111,304 143,401 614,008
Shares redeemed ................................ (33) (963) (40,716)
------- ------- -------
Net increase in shares owned ................... 111,271 142,438 573,292
Shares owned, beginning of the period .......... 0 0 0
------- ------- -------
Shares owned, end of the period ................ 111,271 142,438 573,292
======= ======= =======
Cost of shares acquired ........................ $3,619,878 $2,840,522 $3,167,524
========== ========== ==========
Cost of shares redeemed ........................ $ (976) $ (19,037) $ (209,807)
========== ========== ==========
</TABLE>
4. RELATED PARTY TRANSACTIONS
Contract owners' net payments represent premiums received from
policyholders less certain deductions made by Protective Life in accordance
with the contract terms. These deductions include, where appropriate, tax,
surrender, mortality risk and expense and administrative charges. These
deductions are made to the individual contracts in accordance with the terms
governing each contract as set forth in the contract.
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 contract owners. Contract
owners 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 $423,000 and $395,000 at December 31, 1998 and 1997, respectively.
F-17
<PAGE>
THE PROTECTIVE VARIABLE ANNUITY SEPARATE ACCOUNT
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. SUBSEQUENT EVENTS
In November 1998, six additional sub-accounts were added to the Separate
Account. These sub-accounts are MFS New Discovery, MFS Utilities, Oppenheimer
Global Securities, Oppenheimer High Income, Van Eck Worldwide Hard Assets, and
Van Eck Worldwide Real Estate. Sales will begin in the sub-accounts in 1999.
Protective Life has also announced plans to liquidate the PIC Money Market
account and replace it with the Oppenheimer Money Fund in 1999.
In 1999, the Oppenheimer Growth Fund and the Oppenheimer Growth and Income
Fund names will be changed to Oppenheimer Capital Appreciation and Oppenheimer
Main Street Growth and Income, respectively.
F-18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Share Owner
Protective Life Insurance Company
Birmingham, Alabama
In our opinion, the consolidated financial statements of Protective Life
Insurance Company and Subsidiaries (the "Company") listed in the index on page
F-1 of this Form N-4 present fairly, in all material respects, the consolidated
financial position of the Company at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules listed in the index on page F-1 of this Form N-4 present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. 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 of these statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
February 11, 1999
Birmingham, Alabama
F-19
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES
Premiums and policy fees ...................................... $1,027,340 $ 814,420 $ 770,224
Reinsurance ceded ............................................. (459,215) (334,214) (308,174)
---------- ---------- ----------
Net of reinsurance ceded .................................... 568,125 480,206 462,050
Net investment income ......................................... 603,795 557,488 498,781
Realized investment gains ..................................... 2,136 1,824 5,510
Other income .................................................. 20,201 6,149 5,010
---------- ---------- ----------
1,194,257 1,045,667 971,351
---------- ---------- ----------
BENEFITS AND EXPENSES
Benefits and settlement expenses (net of reinsurance ceded:
1998-$330,494; 1997-$180,605; 1996-$215,424) ................ 730,496 658,872 626,893
Amortization of deferred policy acquisition costs ............. 111,188 107,175 91,001
Other operating expenses (net of reinsurance ceded:
1998-$166,375; 1997-$90,045; 1996-$81,839) .................. 172,228 129,870 128,148
---------- ---------- ----------
1,013,912 895,917 846,042
---------- ---------- ----------
INCOME BEFORE INCOME TAX ....................................... 180,345 149,750 125,309
INCOME TAX EXPENSE (BENEFIT)
Current ....................................................... 48,237 66,283 44,908
Deferred ...................................................... 14,925 (13,981) (2,142)
---------- ---------- ----------
63,162 52,302 42,766
---------- ---------- ----------
NET INCOME ..................................................... $ 117,183 $ 97,448 $ 82,543
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1998 1997
--------------- -------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, at market (amortized cost: 1998-$6,307,274;
1997-$6,221,871) ............................................................ $ 6,400,262 $ 6,348,252
Equity securities, at market (cost: 1998-$15,151; 1997-$24,983) .............. 12,258 15,006
Mortgage loans on real estate ................................................ 1,623,603 1,313,478
Investment real estate, net of accumulated depreciation (1998-$782;
1997-$671) .................................................................. 14,868 13,469
Policy loans ................................................................. 232,670 194,109
Other long-term investments .................................................. 70,078 54,704
Short-term investments ....................................................... 159,655 54,337
----------- -----------
Total investments ........................................................... 8,513,394 7,993,355
Cash ........................................................................... 39,197
Accrued investment income ...................................................... 100,395 94,095
Accounts and premiums receivable, net of allowance for uncollectible amounts
(1998-$4,304; 1997-$5,292) ................................................... 31,265 42,255
Reinsurance receivables ........................................................ 756,370 591,457
Deferred policy acquisition costs .............................................. 841,425 632,605
Property and equipment, net .................................................... 42,374 36,407
Other assets ................................................................... 34,632 14,445
Assets related to separate accounts
Variable Annuity ............................................................. 1,285,952 924,406
Variable Universal Life ...................................................... 13,606 3,634
Other ........................................................................ 3,482 3,425
----------- -----------
$11,622,895 $10,375,281
=========== ===========
LIABILITIES
Policy liabilities and accruals:
Future policy benefits and claims ............................................ $ 4,140,003 $ 3,324,294
Unearned premiums ............................................................ 389,294 396,696
----------- -----------
4,529,297 3,720,990
Guaranteed investment contract deposits ........................................ 2,691,697 2,684,676
Annuity deposits ............................................................... 1,519,820 1,511,553
Other policyholders' funds ..................................................... 219,356 183,324
Other liabilities .............................................................. 226,310 246,081
Accrued income taxes ........................................................... (10,992) 941
Deferred income taxes .......................................................... 51,735 49,417
Note payable ................................................................... 2,363
Indebtedness to related parties ................................................ 20,898 28,055
Liabilities related to separate accounts
Variable Annuity ............................................................. 1,285,952 924,406
Variable Universal Life ...................................................... 13,606 3,634
Other ........................................................................ 3,482 3,425
----------- -----------
Total liabilities ........................................................... 10,553,524 9,356,502
----------- -----------
</TABLE>
F-21
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
COMMITMENTS AND CONTINGENT LIABILITIES--NOTE G
SHARE-OWNER'S EQUITY
Preferred Stock, $1.00 par value, shares authorized and issued: 2,000,
liquidation preference $2,000........................................ 2 2
Common Stock, $1.00 par value.......................................... 5,000 5,000
Shares authorized and issued: 5,000,000
Additional paid-in capital ............................................ 327,992 327,992
Note receivable from PLC Employee Stock Ownership Plan ................ (5,199) (5,378)
Retained earnings ..................................................... 686,519 629,436
Accumulated other comprehensive income
Net unrealized gains on investments (net of income tax: 1998-$29,646;
1997-$33,238)....................................................... 55,057 61,727
------- -------
Total share-owner's equity ......................................... 1,069,371 1,018,779
--------- ---------
$11,622,895 $10,375,281
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-22
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF SHARE-OWNER'S EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN
STOCK STOCK CAPITAL
----------- -------- ------------
<S> <C> <C> <C>
Balance, December 31, 1995 ................... $5,000 $144,494
Net income for 1996 .........................
Decrease in net unrealized gains on
investments (net of income tax:
$(25,627)) ................................
Reclassification adjustment for amounts
included in net income (net of income
tax: $(1,928)) ............................
Comprehensive income for 1996 ...............
Redemption feature of preferred stock
removed-Note I ............................ $ 2 1,998
Preferred dividends ($50 per share) .........
Capital contribution from PLC ............... 91,500
Decrease in note receivable from PLC
ESOP ......................................
--- ------ --------
Balance, December 31, 1996 ................... 2 5,000 237,992
Net income for 1997 .........................
Increase in net unrealized gains on
investments (net of income
tax-$30,275) ..............................
Reclassification adjustment for amounts
included in net income (net of income
tax: $(638)) ..............................
Comprehensive income for 1997 ...............
Preferred dividends ($50 per share) .........
Capital contribution from PLC ............... 90,000
Decrease in note receivable from PLC
ESOP ......................................
--- ------ --------
Balance, December 31, 1997 ................... 2 5,000 327,992
Net income for 1998 .........................
Decrease in net unrealized gains on
investments (net of income
tax-($2,844)) .............................
Reclassification adjustment for amounts
included in net income (net of income
tax: $(747)) ..............................
Comprehensive income for 1998 ...............
Common dividends ($12 per share) ............
Preferred dividends ($50 per share) .........
Decrease in note receivable from PLC
ESOP ......................................
--- ------ --------
Balance, December 31, 1998 ................... $ 2 $5,000 $327,992
=== ====== ========
<CAPTION>
NOTE
RECEIVABLE NET
FROM UNREALIZED TOTAL
PLC RETAINED GAINS (LOSSES) SHARE-OWNER'S
ESOP EARNINGS ON INVESTMENTS EQUITY
------------ ------------ ---------------- --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 ................... $ (5,765) $ 449,645 $ 57,863 $ 651,237
----------
Net income for 1996 ......................... 82,543 82,543
Decrease in net unrealized gains on
investments (net of income tax:
$(25,627)) ................................ (47,593) (47,593)
Reclassification adjustment for amounts
included in net income (net of income
tax: $(1,928)) ............................ (3,582) (3,582)
----------
Comprehensive income for 1996 ............... 31,368
----------
Redemption feature of preferred stock
removed-Note I ............................ 2,000
Preferred dividends ($50 per share) ......... (100) (100)
Capital contribution from PLC ............... 91,500
Decrease in note receivable from PLC
ESOP ...................................... 186 186
-------- --------- ----------
Balance, December 31, 1996 ................... (5,579) 532,088 6,688 776,191
----------
Net income for 1997 ......................... 97,448 97,448
Increase in net unrealized gains on
investments (net of income
tax-$30,275) .............................. 56,225 56,225
Reclassification adjustment for amounts
included in net income (net of income
tax: $(638)) .............................. (1,186) (1,186)
----------
Comprehensive income for 1997 ............... 152,487
Preferred dividends ($50 per share) ......... (100) (100)
Capital contribution from PLC ............... 90,000
Decrease in note receivable from PLC
ESOP ...................................... 201 201
-------- --------- --------- ----------
Balance, December 31, 1997 ................... (5,378) 629,436 61,727 1,018,779
Net income for 1998 ......................... 117,183 117,183
Decrease in net unrealized gains on
investments (net of income
tax-($2,844)) ............................. (5,281) (5,281)
Reclassification adjustment for amounts
included in net income (net of income
tax: $(747)) .............................. (1,389) (1,389)
----------
Comprehensive income for 1998 ............... 110,513
----------
Common dividends ($12 per share) ............ (60,000) (60,000)
Preferred dividends ($50 per share) ......... (100) (100)
Decrease in note receivable from PLC
ESOP ...................................... 179 179
-------- --------- --------- ----------
Balance, December 31, 1998 ................... $ (5,199) $ 686,519 $ 55,057 $1,069,371
======== ========= ========= ==========
</TABLE>
See notes to consolidated financial statements.
F-23
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------
1998 1997 1996
---------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................ $ 117,183 $ 97,448 $ 82,543
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of deferred policy acquisition costs ................. 111,188 107,175 91,001
Capitalization of deferred policy acquisition costs ............... (192,838) (135,211) (77,078)
Depreciation expense .............................................. 7,110 5,124 5,333
Deferred income taxes ............................................. 14,925 (17,918) (2,442)
Accrued income taxes .............................................. (11,933) (5,558) 893
Interest credited to universal life and investment products ....... 352,721 299,004 280,377
Policy fees assessed on universal life and investment products (139,689) (131,582) (116,401)
Change in accrued investment income and other receivables ......... (159,362) (158,798) (70,987)
Change in policy liabilities and other policyholder funds of
traditional life and health products ............................ 322,464 279,522 133,621
Change in other liabilities ....................................... (19,771) 65,393 7,209
Other (net) ....................................................... (22,634) (1,133) (4,281)
------------- ------------ ------------
Net cash provided by operating activities .......................... 379,364 403,466 329,788
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities and principal reduction of investments:
Investments available for sale .................................. 10,445,407 6,462,663 1,327,323
Other ........................................................... 198,559 324,242 168,898
Sale of investments:
Investment available for sale ................................... 1,080,265 1,108,058 1,569,119
Other ........................................................... 155,906 695,270 568,218
Cost of investments acquired:
Investments available for sale .................................. (11,507,234) (8,428,804) (3,798,631)
Other ........................................................... (662,350) (718,335) (400,322)
Acquisitions and bulk reinsurance assumptions ..................... (169,124) 264,126
Purchase of property and equipment ................................ (13,077) (6,087) (6,899)
Sale of property and equipment .................................... 2,681 288
------------ ------------
Net cash used in investing activities .............................. (302,524) (729,436) (307,880)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line of credit arrangements and long-term
debt ............................................................ 1,975,800 1,159,538 941,438
Capital contribution from PLC ..................................... 90,000 91,500
Principal payments on line of credit arrangements and
long-term debt .................................................. (1,973,437) (1,159,538) (941,438)
Principal payment on surplus note to PLC .......................... (2,000) (4,693) (10,000)
Dividends to share-owner .......................................... (60,100) (100) (100)
Investment product deposits and change in universal life
deposits ........................................................ 981,124 910,659 949,122
Investment product withdrawals .................................... (1,037,424) (745,083) (944,244)
------------- ------------ ------------
Net cash provided by (used in) financing activities ................ (116,037) 250,783 86,278
------------- ------------ ------------
INCREASE (DECREASE) IN CASH ........................................ (39,197) (75,187) 108,186
CASH AT BEGINNING OF YEAR .......................................... 39,197 114,384 6,198
------------- ------------ ------------
CASH AT END OF YEAR ................................................ $ 0 $ 39,197 $ 114,384
============= ============ ============
</TABLE>
F-24
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------
1998 1997 1996
--------------- ------------- --------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year:
Interest on debt .......................... $ 8,338 $ 4,343 $ 4,633
Income taxes .............................. $ 57,429 $ 70,133 $ 43,478
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Reduction of principal on note from ESOP .... $ 179 $ 201 $ 186
Acquisitions and bulk reinsurance assumptions
Assets acquired ........................... $ 247,894 $1,114,832 $ 296,935
Liabilities assumed ....................... (380,405) (902,267) (364,862)
----------- ---------- ----------
Net ....................................... $ (132,511) $ 212,565 $ (67,927)
=========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-25
<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. Protective is a wholly-owned subsidiary of
Protective Life Corporation ("PLC"), an insurance holding company.
NATURE OF OPERATIONS
Protective provides financial services through the production,
distribution, and administration of insurance and investment products.
Protective markets individual life insurance, dental insurance and managed care
services, credit life and disability insurance, guaranteed investment
contracts, guaranteed funding agreements, and fixed and variable annuities
throughout the United States. Protective also maintains a separate division
devoted exclusively to the acquisition of insurance policies from other
companies.
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 1997 Protective adopted Statement of Financial Accounting Standards
("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities;" SFAS No. 130, "Reporting Comprehensive
Income;" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information."
In 1998 PLC adopted SFAS No. 132, "Employers' Disclosures About Pensions
and Other Postretirement Benefits."
The adoption of these accounting standards did not have a material effect
on PLC's or 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:
o Fixed maturities (bonds, bank loan participations, and redeemable
preferred stocks) -- at current market value.
o Equity securities (common and nonredeemable preferred stocks) -- at
current market value.
o Mortgage loans on real estate -- at unpaid balances, adjusted for loan
origination costs, net of fees, and amortization of premium or discount.
o 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.
F-26
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
o Policy loans -- at unpaid balances.
o Other long-term investments -- at a variety of methods similar to those
listed above, as deemed appropriate for the specific investment.
o 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 $0.9 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 share-owner'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
share-owner's equity will fluctuate significantly as interest rates change.
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>
1998 1997
-------------- --------------
<S> <C> <C>
Total investments ................. $ 8,412,167 $ 7,876,952
Deferred policy acquisition costs . 857,949 654,043
All other assets .................. 2,268,076 1,749,321
----------- -----------
$11,538,192 $10,280,316
=========== ===========
Deferred income taxes ............. $ 22,089 $ 16,179
All other liabilities ............. 10,501,789 9,307,085
----------- -----------
10,523,878 9,323,264
Share-owner's equity .............. 1,014,314 957,052
----------- -----------
$11,538,192 $10,280,316
=========== ===========
</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 swaps, 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. No realized investment gains or losses were deferred in 1998.
Net realized gains of $1.5 million were deferred in 1997. At December 31, 1998
and 1997, options and open futures contracts with notional amounts of $975.0
million and $925.0 million, respectively, had net unrealized losses of $0.5
million and $0.4 million respectively.
Protective uses interest rate swap contracts to convert certain
investments and liabilities from a variable to a fixed rate of interest and
from a fixed rate to variable rate of interest. At December 31, 1998, related
open interest rate swap contracts with a notional amount of $55.3 million were
in a $0.2 million net unrealized loss position. At December 31, 1997, related
open interest rate swap contracts with a notional amount of $95.3 million were
in a $0.1 million net unrealized loss position.
CASH
Cash includes all demand deposits reduced by the amount of outstanding
checks and drafts.
F-27
<PAGE>
</////////////////////////////////////////////////////////
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
PROPERTY AND EQUIPMENT
Property and equipment are reported at cost. Protective primarily uses the
straight-line method 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 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>
1998 1997
---------- ----------
<S> <C> <C>
Home office building ................................ $37,959 $37,459
Other, principally furniture and equipment .......... 58,958 46,937
------- -------
96,917 84,396
Accumulated depreciation ............................ 54,543 47,989
------- -------
$42,374 $36,407
======= =======
</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
contract holder. 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 AND BENEFITS EXPENSE
o 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 and term-like 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-28
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Activity in the liability for unpaid claims is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance beginning of year ......... $ 106,121 $ 108,159 $ 73,642
Less reinsurance ................. 18,673 6,423 3,330
--------- --------- --------
Net balance beginning of year ..... 87,448 101,736 70,312
--------- --------- --------
Incurred related to:
Current year ...................... 288,015 258,322 275,524
Prior year ........................ (10,198) (14,540) (2,417)
--------- --------- --------
Total incurred ................... 277,817 243,782 273,107
--------- --------- --------
Paid related to:
Current year ...................... 236,001 203,381 197,163
Prior year ........................ 58,951 58,104 57,812
--------- --------- --------
Total paid ....................... 294,952 261,485 254,975
--------- --------- --------
Other changes:
Acquisitions and reserve transfers 0 3,415 13,292
--------- --------- --------
Net balance end of year ........... 70,313 87,448 101,736
Plus reinsurance ................. 20,019 18,673 6,423
--------- --------- --------
Balance end of year ............... $ 90,332 $ 106,121 $108,159
========= ========= ========
</TABLE>
o 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 3.4% to 9.4%
in 1998.
Protective's accounting policies with respect to variable universal life
and variable annuities are identical except that policy account balances
(excluding account balances that earn a fixed rate) are valued at market
and reported as components of assets and liabilities related to separate
accounts.
DEFERRED 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
before amortization. Under SFAS No. 97, "Accounting and 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 that assumed. 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.
F-29
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
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. Protective amortizes the present value of future
profits over the premium payment period including accrued interest of up to
approximately 8%. The unamortized present value of future profits for all
acquisitions was approximately $370.3 million and $274.9 million at December
31, 1998 and 1997, respectively. During 1998 $132.5 million of present value of
future profits on acquisitions made during the year was capitalized and $37.1
million was amortized. During 1997 $136.2 million of present value of future
profits on acquisitions made during the year was capitalized, and $28.9 million
was amortized.
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 share-owner's equity.
NOTE B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES
Financial statements prepared in conformity with generally accepted
accounting principals ("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 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 stock-owner'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.
F-30
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- RECONCILIATION WITH STATUTORY REPORTING PRACTICES -- (Continued)
The reconciliations of net income and share-owner'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 SHARE-OWNER'S EQUITY
----------------------------------- -------------------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
In conformity with statutory
reporting practices:(1) .......... $ 147,077 $ 134,417 $ 102,337 $ 531,956 $ 579,111 $ 456,320
Additions (deductions) by
adjustment:
Deferred policy acquisition
costs, net of amortization .... 68,155 10,310 (2,830) 841,425 632,605 488,201
Deferred income tax ............ (14,925) 13,981 2,142 (51,735) (49,417) (37,722)
Asset Valuation Reserve ........ 66,922 67,369 64,233
Interest Maintenance
Reserve ....................... (1,355) (1,434) (2,142) 15,507 9,809 17,682
Nonadmitted items .............. 42,835 30,500 21,610
Other timing and valuation
adjustments ................... (76,214) (54,494) (11,210) (282,480) (215,448) (197,227)
Noninsurance affiliates ........ 18,171 17,530 11,104 (4) 4
Consolidation elimination ...... (23,726) (22,862) (16,858) (95,059) (35,746) (36,910)
--------- --------- --------- ---------- ----------- ----------
In conformity with generally
accepted accounting principles $ 117,183 $ 97,448 $ 82,543 $1,069,371 $1,018,779 $ 776,191
========= ========= ========= ========== =========== ==========
</TABLE>
(1) Consolidated
NOTE C -- INVESTMENT OPERATIONS
Major categories of net investment income for the years ended December 31
are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Fixed maturities ................................... $463,416 $396,255 $310,353
Equity securities .................................. 905 1,186 2,124
Mortgage loans on real estate ...................... 158,461 161,604 153,463
Investment real estate ............................. 1,224 2,004 1,875
Policy loans ....................................... 12,346 11,370 10,378
Other, principally short-term investments .......... 16,536 21,876 51,637
-------- -------- --------
652,888 594,295 529,830
Investment expenses ................................ 49,093 36,807 31,049
-------- -------- --------
$603,795 $557,488 $498,781
======== ======== ========
</TABLE>
Realized investment gains (losses) for the years ended December 31 are
summarized as follows:
<TABLE>
<S> <C> <C> <C>
Fixed maturities ............................. $ 4,374 $ (8,355) $ (7,101)
Equity securities ............................ (4,465) 5,975 1,733
Mortgage loans and other investments ......... 2,227 4,204 10,878
-------- --------- ---------
$ 2,136 $ 1,824 $ 5,510
======== ========= =========
</TABLE>
Protective recognizes permanent impairments through changes to an
allowance for uncollectible amounts on investments. The allowance totaled $24.1
million at December 31, 1998 and $23.0 million at December 31, 1997. Additions
F-31
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- INVESTMENT OPERATIONS -- (Continued)
and reductions to the allowance are included in realized investment gains
(losses). Without such additions/reductions, Protective had net realized
investment gains of $3.2 million in 1998, net realized investment losses of
$6.1 million in 1997, and net realized investment gains of $3.7 million in
1996.
In 1998, gross gains on the sale of investments available for sale (fixed
maturities, equity securities and short-term investments) were $32.3 million
and gross losses were $32.5 million. In 1997, gross gains were $21.3 million
and gross losses were $23.5 million. In 1996, gross gains were $6.9 million and
gross losses were $11.8 million.
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
1998 COST GAINS LOSSES VALUES
- ----------------------------------------------------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Fixed maturities:
Bonds:
Mortgage-backed .................................. $2,581,561 $ 41,626 $33,939 $2,589,248
United States Government and authorities ......... 72,697 2,812 75,509
States, municipalities, and political
subdivisions .................................... 29,521 1,131 30,652
Public utilities ................................. 533,082 15,066 548,148
Convertibles and bonds with warrants ............. 694 179 515
All other corporate bonds ........................ 3,083,782 98,992 32,629 3,150,145
Redeemable preferred stocks ........................ 5,937 108 6,045
---------- -------- ----------
6,307,274 159,735 66,747 6,400,262
Equity securities ................................... 15,151 456 3,349 12,258
Short-term investments .............................. 159,655 159,655
---------- ----------
$6,482,080 $160,191 $70,096 $6,572,175
========== ======== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
1997 COST GAINS LOSSES VALUES
- ----------------------------------------------------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Fixed maturities:
Bonds:
Mortgage-backed .................................. $2,982,266 $ 54,103 $16,577 $3,019,792
United States Government and authorities ......... 160,484 1,366 0 161,850
States, municipalities, and political
subdivisions .................................... 31,621 532 0 32,153
Public utilities ................................. 481,679 7,241 0 488,920
Convertibles and bonds with warrants ............. 694 0 168 526
All other corporate bonds ........................ 2,559,186 80,903 1,019 2,639,070
Redeemable preferred stocks ........................ 5,941 0 0 5,941
---------- -------- ------- ----------
6,221,871 144,145 17,764 6,348,252
Equity securities ................................... 24,983 300 10,277 15,006
Short-term investments .............................. 54,337 0 0 54,337
---------- -------- ------- ----------
$6,301,190 $144,445 $28,041 $6,417,595
========== ======== ======= ==========
</TABLE>
F-32
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1998
- --------------
Due in one year or less .......................... $ 705,859 $ 709,686
Due after one year through five years ............ 3,255,973 3,325,078
Due after five years through ten years ........... 1,655,055 1,690,581
Due after ten years .............................. 690,387 674,917
---------- ----------
$6,307,274 $6,400,262
========== ==========
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUES
------------- ------------
<S> <C> <C>
1997
- --------------
Due in one year or less .......................... $ 456,248 $ 460,994
Due after one year through five years ............ 2,774,769 2,815,553
Due after five years through ten years ........... 2,377,989 2,440,193
Due after ten years .............................. 612,865 631,512
---------- ----------
$6,221,871 $6,348,252
========== ==========
</TABLE>
The approximate percentage distribution of Protective's fixed maturity
investments by quality rating at December 31 is as follows:
<TABLE>
<CAPTION>
RATING 1998 1997
- ------------------------------------------------ ---------- ----------
<S> <C> <C>
AAA .................................. 34.3% 41.1%
AA ................................... 6.2 4.8
A .................................... 29.4 29.1
BBB .................................. 26.5 21.9
BB or less ........................... 3.5 3.0
Redeemable preferred stocks .......... 0.1 0.1
----- -----
100.0% 100.0%
===== =====
</TABLE>
At December 31, 1998 and 1997, Protective had bonds which were rated less
than investment grade of $222.9 million and $195.2 million, respectively,
having an amortized cost of $252.0 million and $193.6 million, respectively. At
December 31, 1998, approximately $83.5 million of the bonds rates less than
investment grade were securities issued in company-sponsored commercial
mortgage loan securitizations. Approximately $817.9 million of bonds are not
publicly traded.
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>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Fixed maturities ................... $ (21,705) $ 72,741 $ (56,898)
Equity securities .................. $ 4,605 $ (8,813) $ 207
</TABLE>
At December 31, 1998, all of Protective's mortgage loans were commercial
loans of which 75% were retail, 10% were apartments, 8% were warehouses, and 6%
were office buildings. 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
F-33
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- INVESTMENT OPERATIONS -- (Continued)
and cities. No single tenant's leased space represents more than 5% of mortgage
loans. Approximately 82% of the mortgage loans are on properties located in the
following states listed in decreasing order of significance: Georgia, Florida,
Texas, North Carolina, Tennessee, Virginia, Alabama, South Carolina, Kentucky,
Ohio, Maryland, California, Mississippi, and Washington.
Many of the mortgage loans have call provisions after three to ten years.
Assuming the loans are called at their next call dates, approximately $48.1
million would become due in 1999, $348.9 million in 2000 to 2003, and $209.1
million in 2004 to 2008.
At December 31, 1998, the average mortgage loan was approximately $2.0
million, and the weighted average interest rate was 8.3%. The largest single
mortgage loan was $12.8 million.
At December 31, 1998 and 1997, Protective's problem mortgage loans and
foreclosed properties totaled $11.7 million and $17.7 million, respectively.
Since 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
$10.6 million were nonincome producing for the twelve months ended December 31,
1998.
Policy loan interest rates generally range from 4.5% to 8.0%.
NOTE D -- FEDERAL INCOME TAXES
Protective's effective income tax rate varied from the maximum federal
income tax rate as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<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 .................. (0.1) (0.2) (0.4)
Low-income housing credit ............................................. (0.5) (0.6) (0.6)
Tax benefits arising from prior acquisitions and other adjustments .... 0.1 0.7 0.1
State income taxes .................................................... 0.5
----
Effective income tax rate ............................................. 35.0% 34.9% 34.1%
==== ==== ====
</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>
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Deferred policy acquisition costs ................... $ 60,746 $ 7,054 $ 15,542
Benefit and other policy liability changes .......... (41,268) (23,564) (16,321)
Temporary differences of investment income .......... (3,491) 2,516 (1,163)
Other items ......................................... (1,062) 13 (200)
--------- --------- ---------
$ 14,925 $ (13,981) $ (2,142)
========= ========= =========
</TABLE>
F-34
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- FEDERAL INCOME TAXES -- (Continued)
The components of Protective's net deferred income tax liability as of
December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred income tax assets:
Policy and policyholder liability reserves ......... $190,328 $138,701
Other .............................................. 2,091 1,029
-------- --------
192,419 139,730
-------- --------
Deferred income tax liabilities:
Deferred policy acquisition costs .................. 211,641 150,895
Unrealized gain on investments ..................... 32,513 38,252
-------- --------
244,154 189,147
-------- --------
Net deferred income tax liability .................. $ 51,735 $ 49,417
======== ========
</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, 1998 was approximately $70.5 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 $769 million, such excess would be subject to federal
income taxes at rates then effective. Deferred income taxes have not been
provided on amounts designated as Policyholders' Surplus. Under current income
tax laws, 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, 1998, PLC had borrowed $18.5 million at a rate of 5.8%.
PLC had also borrowed $30.0 million at a rate of 5.4% 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, 1998 and 1997. Also,
Protective has a mortgage note on investment real estate amounting to
approximately $2.4 million that matures in 2003.
Included in indebtedness to related parties is a surplus debenture issued
by Protective to PLC. At December 31, 1998, the balance of the surplus
debenture was $18.0 million. The debenture matures in 2003.
Indebtedness to related parties also consists of payables to affiliates
under control of PLC in the amount of $2.9 million at December 31, 1998.
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.
Interest expense on borrowed money totaled $8.3 million, $4.3 million, and
$4.6 million, in 1998, 1997, and 1996, respectively.
NOTE F -- RECENT ACQUISITIONS
In June 1997, Protective acquired West Coast Life Insurance Company ("West
Coast"). In September 1997, Protective acquired the Western Diversified Group.
In October 1997, Protective coinsured a block of credit policies.
F-35
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- RECENT ACQUISITIONS -- (Continued)
In October 1998 Protective coinsured a block of life insurance policies
from Lincoln National Corporation. The policies represent the payroll deduction
business originally marketed and underwritten by Aetna.
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 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
actual damages, including material amounts of punitive damages. In addition, in
some class action and other lawsuits involving insurers' sales practices,
insurers have made material settlement payments. In some states (including
Alabama), 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 insurers, in
the ordinary course of business, are involved in such litigation or
alternatively in arbitration. Although the outcome of any litigation or
arbitration 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, results of
operations, or liquidity of Protective.
NOTE H -- SHARE-OWNER'S EQUITY AND RESTRICTIONS
At December 31, 1998, approximately $608.6 million of consolidated
share-owner'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 1999 is estimated to be $138.9
million. Dividends of $60.0 million were paid to PLC in 1998.
NOTE I -- PREFERRED STOCK
PLC owns all of the 2,000 shares of preferred stock issued by Protective's
subsidiary, Protective Life and Annuity Insurance Company ("PL&A"). During
1996, PL&A's articles of incorporation were amended such that the preferred
stock is redeemable solely at the discretion of PL&A. Prior to November 1998,
the stock paid, when and if declared, annual minimum cumulative dividends of
$50 per share, and noncumulative participating dividends to the extent PL&A's
statutory earnings for the immediately preceding fiscal year exceeded $1
million. Dividends of $0.1 million were paid to PLC in 1998, 1997, and 1996.
Effective November 3, 1998, PL&A's articles of incorporation were amended such
that the provision for an annual minimum cumulative dividend was removed.
NOTE J -- RELATED PARTY MATTERS
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, $5.2 million at
December 31, 1998, is accounted
F-36
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- RELATED PARTY MATTERS -- (Continued)
for as a reduction to share-owner'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.
Protective leases furnished office space and computers to affiliates.
Lease revenues were $3.0 million in 1998, $3.1 million in 1997, and $3.7
million in 1996. Protective purchases data processing, legal, investment and
management services from affiliates. The costs of such services were $56.2
million, $51.6 million, and $50.4 million in 1998, 1997, and 1996,
respectively. Commissions paid to affiliated marketing organizations of $8.4
million, $5.2 million, and $7.4 million in 1998, 1997, and 1996, respectively,
were included in deferred policy acquisition costs.
Certain corporations with which PLC's directors were affiliated paid
Protective premiums, policy fees, or deposits for various types of insurance
and investment products. Such premiums, policy fees, and deposits amounted to
$28.6 million, $21.4 million and $31.2 million in 1998, 1997, and 1996,
respectively. Protective and/or PLC paid commissions, interest on debt and
investment products, and fees to these same corporations totaling $7.3 million,
$5.4 million and $5.0 million in 1998, 1997, and 1996, respectively.
For a discussion of indebtedness to related parties, see Note E.
NOTE K -- OPERATING SEGMENTS
Protective operates seven divisions whose principal strategic focuses can
be grouped into three general categories: Life Insurance, Specialty Insurance
Products, and Retirement Savings and Investment Products. Each division has a
senior officer of Protective responsible for its operations. A division is
generally distinguished by products and/or channels of distribution. A brief
description of each division follows.
LIFE INSURANCE
INDIVIDUAL LIFE DIVISION. The Individual Life Division markets universal
life, variable universal life, and level premium term and term-like insurance
products on a national basis through a network of independent insurance agents.
WEST COAST DIVISION. The West Coast Division sells universal life and
level premium term-like insurance products in the life insurance brokerage
market and in the "bank owned life insurance" market.
ACQUISITIONS DIVISION. The Acquisitions Division focuses solely on
acquiring, converting, and servicing policies acquired from other companies.
These acquisitions may be accomplished through acquisitions of companies or
through the assumption or reinsurance of life insurance and related policies.
SPECIALTY INSURANCE PRODUCTS
DENTAL AND CONSUMER BENEFITS DIVISION. The Division's primary focus is on
indemnity and prepaid dental products. In 1997, the Division exited from the
traditional group major medical business, fulfilling the Division's strategy to
focus primarily on dental and related products.
FINANCIAL INSTITUTIONS DIVISION. The Financial Institutions Division
specializes in marketing credit life and disability insurance products through
banks, consumer finance companies and automobile dealers. The Division also
includes a small property casualty insurer that sells automobile service
contracts.
GUARANTEED INVESTMENT CONTRACTS DIVISION. The Guaranteed Investment
Contracts ("GIC") Division markets GICs to 401(k) and other qualified
retirement savings plans. The Division also offers related products, including
fixed and floating rate funding agreements offered to the trustees of municipal
bond proceeds, bank trust departments, and money market funds, and long-term
annuity contracts offered to fund certain state obligations.
INVESTMENT PRODUCTS DIVISION. The Investment Products Division
manufactures, sells, and supports fixed and variable annuity products. These
products are primarily sold through stockbrokers, but are also sold through
financial institutions and the Individual Life Division's sales force.
F-37
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- OPERATING SEGMENTS -- (Continued)
CORPORATE AND OTHER
Protective has an additional business segment herein referred to as
Corporate and Other. The Corporate and Other segment primarily consists of net
investment income and expenses not attributable to the Divisions above
(including net investment income on capital and interest on substantially all
debt).
Protective uses the same accounting policies and procedures to measure
operating segment income and assets as it uses to measure its consolidated net
income and assets. Operating segment income is generally income before income
tax. Premiums and policy fees, other income, benefits and settlement expenses,
and amortization of deferred policy acquisition costs are attributed directly
to each operating segment. Net investment income is allocated based on directly
related assets required for transacting the business of that segment. Realized
investment gains (losses) and other operating 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.
There are no significant intersegment transactions.
F-38
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- OPERATING SEGMENTS -- (Continued)
Operating segment income and assets for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
LIFE INSURANCE
------------------------------------------
INDIVIDUAL
OPERATING SEGMENT INCOME LIFE WEST COAST ACQUISITIONS
- ---------------------------------------------------------- ------------- -------------- -------------
<S> <C> <C> <C>
1998
Premiums and policy fees .............................. $ 228,701 $ 75,757 $ 125,329
Reinsurance ceded ..................................... (102,533) (53,377) (28,594)
---------- ---------- ----------
Net of reinsurance ceded ............................. 126,168 22,380 96,735
Net investment income ................................. 55,779 63,492 112,154
Realized investment gains (losses) ....................
Other income .......................................... 70 6 1,713
---------- ---------- ----------
Total revenues ....................................... 182,017 85,878 210,602
---------- ---------- ----------
Benefits and settlement expenses ...................... 106,308 54.617 112,051
Amortization of deferred policy acquisition costs ..... 30,543 4,924 18,894
Other operating expenses .............................. 14,983 5,354 26,717
---------- ----------- ----------
Total benefits and expenses ........................... 151,834 64,895 157,662
---------- ----------- ----------
Income before income tax .............................. 30,183 20,983 52,940
Income tax expense ....................................
Net income ............................................
1997
Premiums and policy fees .............................. $ 182,746 $ 41,290 $ 120,504
Reinsurance ceded ..................................... (55,266) (27,168) (17,869)
---------- ----------- ----------
Net of reinsurance ceded ............................ 127,480 14,122 102,635
Net investment income ................................. 54,593 30,194 110,155
Realized investment gains (losses) ....................
Other income .......................................... 617 10
---------- ----------
Total revenues ........................................ 182,690 44,316 212,800
---------- ----------- ----------
Benefits and settlement expenses ...................... 114,678 28,304 116,506
Amortization of deferred policy acquisition costs ..... 27,354 961 16,606
Other operating expenses .............................. 18,178 6,849 23,016
---------- ----------- ----------
Total benefits and expenses ........................... 160,210 36,114 156,128
---------- ----------- ----------
Income before income tax .............................. 22,480 8,202 56,672
Income tax expense ....................................
Net income ............................................
1996
Premiums and policy fees .............................. $ 154,295 $ 125,798
Reinsurance ceded ..................................... (37,585) (19,255)
---------- ----------
Net of reinsurance ceded ............................. 116,710 106,543
Net investment income ................................. 48,442 106,015
Realized investment gains (losses) .................... 3,098
Other income .......................................... 1,056 641
---------- ----------
Total revenues ........................................ 169,306 213,199
---------- ----------
Benefits and settlement expenses ...................... 96,404 118,181
Amortization of deferred policy acquisition costs ..... 28,393 17,162
Other operating expenses .............................. 28,611 24,292
---------- ----------
Total benefits and expenses ........................... 153,408 159,635
---------- ----------
Income before income tax .............................. 15,898 53,564
Income tax expense ....................................
Net income ............................................
OPERATING SEGMENT ASSETS
- ----------------------------------------------------------
1998
Investments and other assets .......................... $1,076,202 $1,149,642 $1,600,123
Deferred policy acquisition costs ..................... 301,941 144,455 255,347
---------- ----------- ----------
Total assets .......................................... $1,378,143 $1,294,097 $1,855,470
---------- ----------- ----------
1997
Investments and other assets .......................... $ 960,316 $ 910,030 $1,401,294
Deferred policy acquisition costs ..................... 252,321 108,126 138,052
---------- ----------- ----------
Total assets .......................................... $1,212,637 $1,018,156 $1,539,346
---------- ----------- ----------
1996
Investments and other assets .......................... $ 814,728 $1,423,081
Deferred policy acquisition costs ..................... 220,232 156,172
---------- ----------
Total assets .......................................... $1,034,960 $1,579,253
---------- ----------
</TABLE>
(1) Adjustments represent the inclusion of unallocated realized investment
gains (losses) and the recognition of income tax expense. There are no
asset adjustments.
F-39
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- OPERATING SEGMENTS -- (Continued)
<TABLE>
<CAPTION>
RETIREMENT SAVINGS AND
SPECIALTY INSURANCE PRODUCTS INVESTMENT PRODUCTS
- ------------------------------ -------------------------------
DENTAL AND GUARANTEED CORPORATE
CONSUMER FINANCIAL INVESTMENT INVESTMENT AND TOTAL
BENEFITS INSTITUTIONS CONTRACTS PRODUCTS OTHER ADJUSTMENTS (1) CONSOLIDATED
- ------------- -------------- -------------- -------------- ------------ ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$ 277,316 $ 301,230 $ 18,809 $ 198 $ 1,027,340
(85,753) (188,958) (459,215)
---------- ---------- -----------
191,563 112,272 18,809 198 568,125
15,245 25,068 $ 213,136 105,827 13,094 603,795
1,609 1,318 $ (791) 2,136
4,295 10,302 1,799 2,016 20,201
---------- ---------- ---------- -------- -----------
211,103 147,642 214,745 127,753 15,308 1,194,257
---------- ---------- ---------- ---------- -------- -----------
140,632 52,629 178,745 85,045 469 730,496
10,352 28,526 735 17,213 1 111,188
49,913 48,837 2,876 14,428 9,120 172,228
---------- ---------- ---------- ---------- -------- -----------
200,897 129,992 182,356 116,686 9,590 1,013,912
---------- ---------- ---------- ---------- -------- -----------
10,206 17,650 32,389 11,067 5,718 180,345
63,162 63,162
------- -----------
$ 117,183
-----------
$ 260,590 $ 196,694 $ 12,367 $ 229 $ 814,420
(109,480) (124,431) (334,214)
---------- ---------- -----------
151,110 72,263 12,367 229 480,206
23,810 16,341 $ 211,915 105,196 5,284 557,488
(3,180) 589 $ 4,415 1,824
1,278 3,033 (192) 1,403 6,149
---------- ---------- ---------- -------- -----------
176,198 91,637 208,735 117,960 6,916 1,045,667
---------- ---------- ---------- ---------- -------- -----------
110,148 27,643 179,235 82,019 339 658,872
15,711 30,812 618 15,110 3 107,175
38,572 20,165 3,945 12,312 6,833 129,870
---------- ---------- ---------- ---------- -------- -----------
164,431 78,620 183,798 109,441 7,175 895,917
---------- ---------- ---------- ---------- -------- -----------
11,767 13,017 24,937 8,519 (259) 149,750
52,302 52,302
------- -----------
$ 97,448
-----------
$ 288,050 $ 193,236 $ 8,189 $ 656 $ 770,224
(131,520) (119,814) (308,174)
---------- ---------- -----------
156,530 73,422 8,189 656 462,050
16,249 13,898 $ 214,369 98,719 1,089 498,781
(7,963) 3,858 $ 6,517 5,510
2,193 56 1,064 5,010
---------- ---------- -------- -----------
174,972 87,320 206,406 110,822 2,809 971,351
---------- ---------- ---------- ---------- -------- -----------
125,797 42,781 169,927 73,093 710 626,893
5,326 24,900 509 14,710 1 91,001
43,028 10,673 3,840 13,196 4,508 128,148
---------- ---------- ---------- ---------- -------- -----------
174,151 78,354 174,276 100,999 5,219 846,042
---------- ---------- ---------- ---------- -------- -----------
821 8,966 32,130 9,823 (2,410) 125,309
42,766 42,766
------- -----------
$ 82,543
-----------
$ 197,337 $ 645,909 $2,869,304 $2,542,536 $700,417 $10,781,470
23,836 39,212 1,448 75,177 9 841,425
---------- ---------- ---------- ---------- -------- -----------
$ 221,173 $ 685,121 $2,870,752 $2,617,713 $700,426 $11,622,895
---------- ---------- ---------- ---------- -------- -----------
$ 208,071 $ 536,058 $2,887,732 $2,313,279 $525,896 $ 9,742,676
22,459 52,836 1,785 56,074 952 632,605
---------- ---------- ---------- ---------- -------- -----------
$ 230,530 $ 588,894 $2,889,517 $2,369,353 $526,848 $10,375,281
---------- ---------- ---------- ---------- -------- -----------
$ 205,696 $ 312,826 $2,606,873 $1,821,250 $490,688 $ 7,675,142
27,944 32,040 1,164 50,637 12 488,201
---------- ---------- ---------- ---------- -------- -----------
$ 233,640 $ 344,866 $2,608,037 $1,871,887 $490,700 $ 8,163,343
---------- ---------- ---------- ---------- -------- -----------
</TABLE>
F-40
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 81% 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>
1998 1997
------------- ------------
<S> <C> <C>
Projected benefit obligation, beginning of the year .................................. $ 30,612 $ 25,196
Service cost -- benefits earned during the year ...................................... 2,585 2,112
Interest cost -- on projected benefit obligation ..................................... 2,203 2,036
Actuarial gain ....................................................................... 2,115 3,421
Plan amendment ....................................................................... 160
Benefits paid ........................................................................ (1,128) (2,153)
--------- --------
Projected benefit obligation, end of the year ........................................ 36,547 30,612
--------- --------
Fair value of plan assets beginning of the year ...................................... 21,763 19,779
Actual return on plan assets ......................................................... 1,689 1,625
Employer contribution ................................................................ 2,823 2,512
Benefits paid ........................................................................ (1,128) (2,153)
--------- --------
Fair value of plan assets end of the year ............................................ 25,147 21,763
--------- --------
Plan assets less than the projected benefit obligation ............................... (11,400) (8,849)
Unrecognized net actuarial loss from past experience different from that assumed ..... 9,069 6,997
Unrecognized prior service cost ...................................................... 652 605
Unrecognized net transition asset .................................................... (34) (51)
--------- --------
Net pension liability recognized in balance sheet .................................... $ (1,713) $ (1,298)
========= ========
</TABLE>
Net pension cost of the defined benefit pension plan includes the
following components for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Service cost .................... $ 2,585 $ 2,112 $ 1,908
Interest cost ................... 2,203 2,036 1,793
Expected return on plan assets .. (1,950) (1,793) (1,593)
Amortization of prior service cost 112 100 100
Amortization of transition asset (17) (17) (17)
Recognized net actuarial loss ... 305 152 210
-------- -------- --------
Net pension cost ................ $ 3,238 $ 2,590 $ 2,401
======== ======== ========
</TABLE>
Protective's share of the net pension cost was $2.6 million, $1.8 million,
and $1.5 million, in 1998, 1997, and 1996, respectively.
Assumptions used to determine the benefit obligations as of December 31
were as follows:
F-41
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE L -- EMPLOYEE BENEFIT PLANS -- (Continued)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average discount rate ....... 6.75% 7.25% 7.75%
Rates of increase in compensation level 4.75% 5.25% 5.75%
Expected long-term rate of return on assets8.50% 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 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, 1998 and 1997, the projected
benefit obligation of this plan totaled $11.7 million and $10.0 million,
respectively, of which $7.8 million and $6.6 million, respectively, have been
recognized in PLC's financial statements.
Net pension cost of the excess benefits plan includes the following
components for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Service cost ........................... $ 611 $ 544 $ 424
Interest cost .......................... 722 651 505
Plan amendment ......................... 351
Amortization of prior service cost ..... 112 112 112
Amortization of transition asset ....... 37 37 37
Recognized net actuarial loss .......... 173 180 155
------ ------ ------
Net pension cost ....................... $1,655 $1,875 $1,233
====== ====== ======
</TABLE>
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, 1998 and 1997, the liability for
such benefits totaled $1.2 million and $1.3 million, respectively. The expense
recorded by PLC was $0.1 million in 1998, 1997 and 1996. 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 up to a maximum of $75,000. 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 ("ESOP") to match voluntary 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, 1998, PLC
had committed up to 101,124 shares to be released to fund employee benefits.
The expense recorded by PLC for these employee benefits was less than $0.1
million in 1998 and 1997, and $1.0 million in 1996.
NOTE M -- STOCK BASED COMPENSATION
Certain Protective employees participate in PLC's Long-Term Incentive Plan
(previously known as the 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 or total return 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
F-42
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- STOCK BASED COMPENSATION -- (Continued)
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
share-owners in 1992 and 1997, up to 6,400,000 shares may be issued in payment
of awards. The number of shares granted in 1998, 1997, and 1996 were 71,340,
98,780 and 104,580 shares, respectively, having an approximate market value on
the grant date of $2.3 million, $2.0 million, and $1.8 million, respectively.
At December 31, 1998, outstanding awards measured at target and maximum payouts
were 474,695 and 638,090 shares, respectively. The expense recorded by PLC for
the Performance Share Plan was $2.7 million, $2.7 million, and $3.0 million in
1998, 1997, and 1996, respectively.
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, 1998 was
675,000. The SARs have a base price of $17.4375 per share of PLC Common Stock
(the market price on the grant date was $17.50 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
$0.6 million in 1998 and 1997.
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.
Protective has reinsured approximately $64.8 billion, $34.1 billion, and
$18.8 billion in face amount of life insurance risks with other insurers
representing $294.4 million, $147.2 million, and $113.5 million of premium
income for 1998, 1997, and 1996, respectively. Protective has also reinsured
accident and health risks representing $164.8 million, $187.7 million, and
$194.7 million of premium income for 1998, 1997, and 1996, respectively. In
1998 and 1997, policy and claim reserves relating to insurance ceded of $658.7
million and $485.8 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, 1998 and 1997, Protective had paid $22.8 million
and $25.6 million, respectively, of ceded benefits which are recoverable from
reinsurers. In addition, at December 31, 1998, Protective had receivables of
$75.0 million related to insurance assumed.
A substantial portion of Protective's new life insurance and credit
insurance sales are being reinsured.
F-43
<PAGE>
PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1998 1997
--------------------------- ---------------------------
ESTIMATED ESTIMATED
CARRYING MARKET CARRYING MARKET
AMOUNT VALUES AMOUNT VALUES
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Assets (see Notes A and C):
Investments:
Fixed maturities ............................ $6,400,262 $6,400,262 $6,348,252 $6,348,252
Equity securities ........................... 12,258 12,258 15,006 15,006
Mortgage loans on real estate ............... 1,623,603 1,774,379 1,313,478 1,405,474
Short-term investments ...................... 159,655 159,655 54,337 54,337
Cash ......................................... 39,197 39,197
Liabilities (see Notes A and E):
Guaranteed investment contract deposits ..... 2,691,697 2,751,007 2,684,676 2,687,331
Annuity deposits ............................ 1,519,820 1,513,148 1,511,553 1,494,600
Notes payable ............................... 2,363 2,363
Other (see Note A):
Derivative Financial Instruments ............ (734) (545)
</TABLE>
Except as noted below, fair values were estimated using quoted market
prices. Protective estimates the fair value of its mortgage loans using
discounted cash flows from the next call date. Protective believes the fair
value of its short-term investments and notes payable approximate book value
due to either being short-term or having a variable rate of interest.
Protective estimates the fair value of its guaranteed investment contracts and
annuities using discounted cash flows and surrender values, respectively.
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.
F-44
<PAGE>
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- -------------------------------------- ------------- ------------- ---------- ----------------
GIC AND
ANNUITY
DEFERRED FUTURE DEPOSITS
POLICY POLICY AND OTHER
ACQUISITION BENEFITS UNEARNED POLICYHOLDERS'
SEGMENT COSTS AND COSTS PREMIUMS FUNDS
- -------------------------------------- ------------- ------------- ---------- ----------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998:
Life Insurance
Individual Life .................. $301,941 $1,054,253 $ 355 $ 10,802
West Coast ....................... 144,455 1,006,280 0 77,254
Acquisitions ..................... 255,347 1,383,759 553 233,846
Specialty Insurance Products
Dental and Consumer Benefits ..... 23,836 111,916 3,341 78,224
Financial Institutions ........... 39,212 215,451 385,006 105,434
Retirement Savings and
Investment Products
Guaranteed Investment
Contracts ....................... 1,448 172,674 0 2,691,697
Investment Products .............. 75,177 194,726 0 1,233,528
Corporate and Other ............... 9 944 39 88
-------- ---------- -------- ----------
TOTAL ........................... $841,425 $4,140,003 $389,294 $4,430,873
======== ========== ======== ==========
Year Ended December 31, 1997:
Life Insurance
Individual Life .................. 252,321 920,924 356 16,334
West Coast ....................... 108,126 739,463 0 95,495
Acquisitions ..................... $138,052 $1,025,340 $ 1,437 $ 311,150
Specialty Insurance Products
Dental and Consumer Benefits ..... 22,459 120,925 2,536 80,654
Financial Institutions ........... 52,836 159,422 391,085 6,791
Retirement Savings and Investment
Products
Guaranteed Investment
Contracts ....................... 1,785 180,690 0 2,684,676
Investment Products .............. 56,074 177,150 0 1,184,268
Corporate and Other ............... 952 380 1,282 185
Unallocated Realized Investment
Gains (Losses) ................... 0 0 0 0
-------- ---------- -------- ----------
TOTAL ........................... $632,605 $3,324,294 $396,696 $4,379,553
======== ========== ======== ==========
Year Ended December 31, 1996:
Life Insurance
Individual Life .................. 220,232 793,370 685 15,577
Acquisitions ..................... $156,172 $1,117,159 $ 1,087 $ 251,450
Specialty Insurance Products
Dental and Consumer Benefits ..... 27,944 119,010 2,572 83,632
Financial Institutions ........... 32,040 119,242 253,154 1,880
Retirement Savings and Investment
Products
Guaranteed Investment
Contracts ....................... 1,164 149,755 0 2,474,728
Investment Products .............. 50,637 149,743 0 1,120,557
Corporate and Other ............... 12 170 55 192
Unallocated Realized Investment
Gains (Losses) ................... 0 0 0 0
-------- ---------- -------- ----------
TOTAL ........................... $488,201 $2,448,449 $257,553 $3,948,016
======== ========== ======== ==========
<CAPTION>
COL. A COL. F COL. G COL. H COL. I COL. J
- -------------------------------------- ---------- ------------ ------------ ------------- -------------
AMORTIZATION
PREMIUMS BENEFITS OF DEFERRED
AND NET AND POLICY OTHER
POLICY INVESTMENT SETTLEMENT ACQUISITION OPERATING
SEGMENT FEES INCOME (1) EXPENSES COSTS EXPENSES (1)
- -------------------------------------- ---------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998:
Life Insurance
Individual Life .................. $126,168 $ 55,779 $106,308 $ 30,543 $ 14,983
West Coast ....................... 22,380 63,492 54,617 4,924 5,354
Acquisitions ..................... 96,735 112,154 112,051 18,894 26,717
Specialty Insurance Products
Dental and Consumer Benefits ..... 191,563 15,245 140,632 10,352 49,913
Financial Institutions ........... 112,272 25,068 52,629 28,526 48,837
Retirement Savings and
Investment Products
Guaranteed Investment
Contracts ....................... 213,136 178,745 735 2,876
Investment Products .............. 18,809 105,827 85,045 17,213 14,428
Corporate and Other ............... 198 13,094 469 1 9,120
-------- -------- -------- -------- --------
TOTAL ........................... $568,125 $603,795 $730,496 $111,188 $172,228
======== ======== ======== ======== ========
Year Ended December 31, 1997:
Life Insurance
Individual Life .................. 127,480 54,593 114,678 27,354 18,178
West Coast ....................... 14,122 30,194 28,304 961 6,849
Acquisitions ..................... $102,635 $110,155 $116,506 $ 16,606 $ 23,016
Specialty Insurance Products
Dental and Consumer Benefits ..... 151,110 23,810 110,148 15,711 38,572
Financial Institutions ........... 72,263 16,341 27,643 30,812 20,165
Retirement Savings and Investment
Products
Guaranteed Investment
Contracts ....................... 0 211,915 179,235 618 3,945
Investment Products .............. 12,367 105,196 82,019 15,110 12,312
Corporate and Other ............... 229 5,284 339 3 6,833
Unallocated Realized Investment
Gains (Losses) ................... 0 0 0 0 0
-------- -------- -------- -------- --------
TOTAL ........................... $480,206 $557,488 $658,872 $107,175 $129,870
======== ======== ======== ======== ========
Year Ended December 31, 1996:
Life Insurance
Individual Life .................. 116,710 48,442 96,404 28,393 28,611
Acquisitions ..................... $106,543 $106,015 $118,181 $ 17,162 $ 24,292
Specialty Insurance Products
Dental and Consumer Benefits ..... 156,530 16,249 125,797 5,326 43,027
Financial Institutions ........... 73,422 13,898 42,781 24,900 10,673
Retirement Savings and Investment
Products
Guaranteed Investment
Contracts ....................... 0 214,369 169,927 509 3,840
Investment Products .............. 8,189 98,719 73,093 14,710 13,197
Corporate and Other ............... 656 1,089 710 1 4,508
Unallocated Realized Investment
Gains (Losses) ................... 0 0 0 0 0
-------- -------- -------- -------- --------
TOTAL ........................... $462,050 $498,781 $626,893 $ 91,001 $128,148
======== ======== ======== ======== ========
</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.
S-1
<PAGE>
SCHEDULE IV -- REINSURANCE
PROTECTIVE LIFE INSURANCE COMPANY AND SUBSIDIARIES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E COL. F
- --------------------------------------- -------------- -------------- -------------- -------------- -----------
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, 1998:
Life insurance in force ............ $91,980,657 $64,846,246 $18,010,434 $45,144,845 39.9%
=========== =========== =========== =========== ====
Premiums and policy fees:
Life insurance ..................... $ 537,002 $ 294,363 $ 87,964 $ 330,603 26.6%
Accident and health insurance ...... 361,705 164,852 14,279 211,132 6.8%
Property and liability insurance ... 26,389 26,289 0.0%
----------- -----------
TOTAL .............................. $ 925,096 $ 459,215 $ 102,243 $ 568,024
=========== =========== =========== ===========
Year Ended December 31, 1997:
Life insurance in force ............ $78,240,282 $34,139,554 $11,013,202 $55,113,930 20.0%
=========== =========== =========== =========== ====
Premiums and policy fees:
Life insurance ..................... $ 387,108 $ 147,184 $ 74,738 $ 314,662 23.8%
Accident and health insurance ...... 336,575 187,539 10,510 159,546 6.6%
Property and liability insurance ... 6,139 176 35 5,998 0.6%
----------- ----------- ----------- -----------
TOTAL .............................. $ 729,822 $ 334,899 $ 85,283 $ 480,206
=========== =========== =========== ===========
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
=========== =========== =========== ===========
</TABLE>
S-2
<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:
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) Annual Reset Death Benefit Rider****
(c) Compound Death Benefit Rider****
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 (Protective Investment
Company)**
(b) Participation Agreement (Oppenheimer Variable Account Funds)***
(c) Participation Agreement (MFS Variable Insurance Trust)***
(d) Participation Agreement (Acacia Capital Corporation)***
(e) Participation Agreement (Van Eck Worldwide Insurance Trust)++
9. Opinion and Consent of Steve M. Callaway, Esq.
10. (a) Consent of Sutherland, Asbill & Brennan, L.L.P.
(b) Consent of PricewaterhouseCoopers LLP
11. No financial statements will be omitted from Item 23
12. Not applicable
13. Not applicable
14. Powers of Attorney
- ---------
* 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. 5 to the
Form N-4 Registration Statement, (File No. 33-70984) filed with the
Commission on April 30, 1997.
**** Incorporated herein by reference to the initial filing of the Form N-4
Registration Statement (File No. 333-68551) filed with the Commission on
December 8, 1998.
++ Incorporated herein by reference to Pre-Effective Amendment Number 1 to the
Form N-4 Registration Statement, (File No. 333-60149) filed with the
Commission on October 26, 1998.
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, and Director
John D. Johns President, and Director
R. Stephen Briggs Executive Vice President, Director
Carolyn King Senior Vice President, Investment Products, 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
T. Davis Keyes Senior Vice President, Information Services
J. Russell Bailey, Jr. Vice President, Dental and Consumer Benefits
Michael B. Ballard Vice President, Individual Life Marketing
Harvey S. Benjamin Vice President, Investment Products Operations
Danny L. Bentley Senior Vice President, Dental and Consumer Benefits, and Director
Richard J. Bielen Senior Vice President, Investments, and Director
Larry Adams Vice President, PPGA Sales
Linda C. Cleveland Vice President, Acquisition Administration
Chris T. Calos Vice President, Marketing, Dental and Consumer Benefits
Tim W. Carney Vice President, MGMD Dental Sales
Jerry W. DeFoor Vice President and Controller and Chief Accounting Officer
John B. Deremo Vice President, Individual Life Sales
Brent E. Fritz Vice President, Individual Life Product Development
Bruce W. Gordon Vice President, Marketing, Individual Life
James T. Helton III Vice President and Actuary, Dental and Consumer Benefits
Charles (T.O.) McDowell Vice President, PPGA Sales
William L. McMullen, Jr. Vice President, Customer Service, Financial Institutions
Lawrence G. Merrill Vice President, Investment Products Marketing
Charles Misasi Vice President, Network Plans
Edmund P. Perry Vice President, Individual Life Sales
Carl E. Price Vice President, Direct Marketing, Dental and Consumer Benefits
Charles M. Prior Vice President, Investments
T. Michael Presley Vice President and Actuary, Financial Institutions
John Sawyer Vice President, Equity Marketing, Individual Life
David C. Stevens Vice President, Operations, Dental and Consumer Benefits
James M. Styne Vice President, Financial Institutions
Carl S. Thigpen Vice President, Investments and Assistant Secretary
Alan E. Watson Vice President, Individual Life Sales
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 their controlling persons (where applicable), are
set forth in Item 10 of Form 10-K of Protective Life Corporation for the fiscal
year ended December 31, 1998 (File No. 1-12332) filed with the Commission on
March 25, 1999.
ITEM 27. NUMBER OF CONTRACTOWNERS.
As of the date of this filing, there were 36 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-3
<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
BUSINESS ADDRESS* POSITION AND OFFICES POSITION AND OFFICES WITH REGISTRANT
- -------------------------- ---------------------- -------------------------------------
<S> <C> <C>
Briggs, Robert Stephen President, Chief Executive Vice President,
Executive Officer Director
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,
Compliance Officer Investment Products
Callaway, Steve M. Director None
Janet Summey Assistant Secretary Assistant Vice President,
Investment Products
Bonnie Miller Assistant Secretary Assistant Vice President,
Investment Products
</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 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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets the
requirement of Securities Act Rule 485(b) for effectiveness of this
registration statement and has duly caused the amendment to 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 30, 1999.
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
As required by the Securities Act of 1933, the amendment to this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------- --------------------------------- ---------------
<S> <C> <C>
* Chairman of the Board April 30, 1999
------------------------------------
DRAYTON NABERS, JR. (Principal Executive Officer)
/s/ JOHN D. JOHNS President April 30, 1999
------------------------------------
JOHN D. JOHNS (Principal Financial Officer)
* Vice President, Controller, and April 30, 1999
------------------------------------
JERRY W. DEFOOR Chief Accounting Officer
(Principal Accounting Officer)
* Director April 30, 1999
------------------------------------
DRAYTON NABERS, JR.
/s/ JOHN D. JOHNS Director April 30, 1999
------------------------------------
JOHN D. JOHNS
* Director April 30, 1999
------------------------------------
R. STEPHEN BRIGGS
* Director April 30, 1999
------------------------------------
JIM E. MASSENGALE
* Director April 30, 1999
------------------------------------
WAYNE E. STUENKEL
* Director April 30, 1999
------------------------------------
A.S. WILLIAMS III
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------- ---------- ---------------
<S> <C> <C>
* Director April 30, 1999
------------------------------------
STEVEN A. SCHULTZ
* Director April 30, 1999
------------------------------------
DEBORAH J. LONG
* Director April 30, 1999
------------------------------------
CAROLYN KING
* Director April 30, 1999
------------------------------------
RICHARD J. BIELEN
* Director April 30, 1999
------------------------------------
DANNY L. BENTLEY
*By: /s/ STEVE CALLAWAY
------------------------------------
STEVE CALLAWAY
ATTORNEY-IN-FACT
</TABLE>
C-6
[LETTERHEAD GOES HERE] [LOGO]
PROTECTIVE LIFE CORPORATION
Post Office Box 2606
Birmingham, Alabama 35202
205-878-9230
- ---------------------------
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 30, 1999
Protective Life Insurance Company
2801 Highway 280 South
Birmingham, Alabama 35223
Gentlemen:
With respect to the Post-Effective Amendment No. 1 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, individual flexible premium deferred
variable and fixed annuity contracts marketed under the name "Elements(SM) (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,
Steve M. Callaway
Senior Associate Counsel
PROTECTIVE LIFE INSURANCE COMPANY/PROTECTIVE LIFE AND ANNUITY INSURANCE COMPANY
EMPIRE GENERAL LIFE ASSURANCE CORPORATION/WISCONSIN NATIONAL LIFE INSURANCE
COMPANY
[LETTERHEAD GOES HERE]
SUTHERLAND 1275 PENNSYLVANIA AVENUE, NW
ASBILL & WASHINGTON, DC 20004-2475
BRENNAN LLP 202.383.0100
ATTORNEYS AT LAW FAX 202.637.3583
STEPHEN E. ROTH ????????????????
DIRECT LINE: (202) 383-0158
INTERNET: ?????????????????
April 27, 1999
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 1 (file number 333-60149) to the Registration
Statement on Form N-4 filed by Protective Life Insurance Company and Protective
Variable Annuity Separate 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 LLP
By: /s/ STEPHEN E. ROTH
-------------------
Stephen E. Roth
[LETTERHEAD GOES HERE]
PRICEWATERHOUSECOOPERS
PRICEWATERHOUSECOOPERS LLP
1901 6TH AVENUE, NORTH
SUITE 1600
BIRMINGHAM, AL 35203-2690
TELEPHONE (205) 252 8400
FACSIMILE (205) 252 7776
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form N-4 of our
report dated February 11, 1999, on our audits of the consolidated financial
statements and financial statement schedules of Protective Life Insurance
Company and Subsidiaries. We also consent to the inclusion of our report dated
March 17, 1999 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."
PricewaterhouseCoopers LLP
Birmingham, Alabama
April 29, 1999
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 the Elements(SM) Variable
Annuity, a group and individual flexible premium deferred variable and fixed
annuity product, with the Securities and Exchange Commission, pursuant to the
provisions of the Securities Exchange Act of 1933 and the Invvestment 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 30th day of April, 1999.
WITNESS TO ALL SIGNATURES:
/s/ DEBORAH J. LONG /s/ JACKIE ANDERSON
- ----------------------- --------------------------------------
Deborah J. Long Witness to Deborah J. Long's signature
/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/ DEBORAH J. LONG /s/ JIM E. MASSENGALE
- ----------------------- --------------------------------------
Deborah J. Long 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
