<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL , 1996
REGISTRATION FILE NOS. 33-55470/811-4460
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
POST-EFFECTIVE AMENDMENT NO. 6
FORM S-6
---------------------
PROVIDENT MUTUAL VARIABLE GROWTH SEPARATE ACCOUNT
PROVIDENT MUTUAL VARIABLE MONEY MARKET SEPARATE ACCOUNT
PROVIDENT MUTUAL VARIABLE BOND SEPARATE ACCOUNT
PROVIDENT MUTUAL VARIABLE MANAGED SEPARATE ACCOUNT
PROVIDENT MUTUAL VARIABLE ZERO COUPON BOND SEPARATE ACCOUNT
PROVIDENT MUTUAL VARIABLE AGGRESSIVE GROWTH SEPARATE ACCOUNT
PROVIDENT MUTUAL VARIABLE INTERNATIONAL SEPARATE ACCOUNT
PROVIDENT MUTUAL VARIABLE SEPARATE ACCOUNT
(EXACT NAME OF TRUST)
PROVIDENT MUTUAL LIFE INSURANCE COMPANY
(NAME OF DEPOSITOR)
LINDA E. SENKER, SENIOR ASSOCIATE GENERAL COUNSEL
PROVIDENT MUTUAL LIFE INSURANCE COMPANY
1050 WESTLAKES DRIVE
BERWYN, PA 19312
(NAME AND COMPLETE ADDRESS OF AGENT FOR SERVICE)
---------------------
COPIES TO:
STEPHEN E. ROTH, ESQ.
SUTHERLAND, ASBILL & BRENNAN
1275 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, DC 20004
It is proposed that this filing will become effective (check appropriate
box)
/ / immediately upon filing pursuant to paragraph (b)
/X/ on May 1, 1996 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)
/ / on (date) pursuant to paragraph (a) of rule 485
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF ITS SHARES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT
OF 1940. THE NOTICE REQUIRED BY SUCH RULE FOR THE REGISTRANT'S MOST RECENT YEAR
WAS FILED ON FEBRUARY 27, 1996.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
CROSS REFERENCE TO ITEMS REQUIRED BY FORM N-8B-2
<TABLE>
<CAPTION>
N-8B-2
ITEM CAPTION IN PROSPECTUS
- -------------------------- -------------------------------------------------------------------
<S> <C>
1 Cover Page
2 Cover Page
3 Not Applicable
4 Distribution of Policies
5 The Separate Accounts
6(a) The Separate Accounts
6(b) Not Applicable
9 Not Applicable
10(a) and (b) Not Applicable
10(c) and (d) Death Benefit; Transfers; Loan Privileges; Surrender Privilege;
Withdrawal of Net Cash Surrender Value; Free-Look Privileges;
Special Transfer and Conversion Rights
10(e) Payment and Allocation of Premiums
10(f), (g), and (h) Voting Rights, Changes in Applicable Law, Funding and Otherwise
10(i) Other Policy Provisions
11 Provident Mutual Life Insurance Company; The Separate Accounts; The
Funds; The Stripped ("Zero") U.S. Treasury Securities Fund,
Provident Mutual Series A
12 The Separate Accounts; The Funds; The Stripped ("Zero") U.S.
Treasury Securities Fund, Provident Mutual Series A; Distribution
of Policies
13(a), (b), and (c) Payment and Allocation of Premium; Charges and Deductions
13(d), (e), (f), and (g) Not Applicable
13(h) Charges Against the Separate Accounts
14 Payment and Allocation of Premiums; Distribution of Policies
15 Payment and Allocation of Premiums
16 The Separate Accounts; The Market Street Fund, Inc.; The Stripped
("Zero") U.S. Treasury Securities Fund, Provident Mutual Series A
17 See items 10(c), (d), and (e)
18(a), (b), and (c) The Separate Accounts; Death Benefit; Policy Account Value
18(d) Not Applicable
19 Policy Reports
20 Not Applicable
21(a) and (b) Loan Privileges
21(c) Not Applicable
22 Not Applicable
23 Officers and Directors of PMLIC
24 Not Applicable
25 PMLIC
26 See Item 13(a), (b), and (c)
27 Provident Mutual Life Insurance Company
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
N-8B-2
ITEM CAPTION IN PROSPECTUS
- -------------------------- -------------------------------------------------------------------
<S> <C>
28 Officers and Directors of PMLIC
29 Provident Mutual Life Insurance Company
30 Not Applicable
31 Not Applicable
32 Not Applicable
33(a) Not Applicable
33(b) Distribution of Policies
34 Not Applicable
35 Provident Mutual Life Insurance Company; State Regulation
36 Not Applicable
37 Not Applicable
38 Distribution of Policies
39 Distribution of Policies
40(a) Distribution of Policies
40(b) The Market Street Fund, Inc.; Distribution of Policies
41 Distribution of Policies
42 Not Applicable
43 Not Applicable
44(a) Death Benefit; Policy Account Value
44(b) and (c) Not Applicable
45 Not Applicable
46(a) Death Benefit; Policy Account Value
46(b) Not Applicable
47 Not Applicable
48 Not Applicable
49 Not Applicable
50 The Separate Accounts
51 Not Applicable
52(a), (b), and (c) Voting Rights, Changes in Applicable Law, Funding and Otherwise
52(d) Not Applicable
53(a) Federal Income Tax Considerations
53(b) Not Applicable
54 Not Applicable
55 Not Applicable
</TABLE>
<PAGE> 4
PROSPECTUS
FOR
FLEXIBLE PREMIUM
ADJUSTABLE SURVIVORSHIP VARIABLE
LIFE INSURANCE
ISSUED BY
PROVIDENT MUTUAL
LIFE INSURANCE COMPANY
SURVIVOR OPTIONSPLUS
15988 5.96
<PAGE> 5
[PROVIDENT MUTUAL LOGO]
PROSPECTUS
- --------------------------------------------------------------------------------
FLEXIBLE PREMIUM ADJUSTABLE SURVIVORSHIP VARIABLE LIFE INSURANCE POLICY
ISSUED BY
PROVIDENT MUTUAL LIFE INSURANCE COMPANY
1050 WESTLAKES DRIVE, BERWYN, PENNSYLVANIA 19312
TELEPHONE: (610) 407-1717
- --------------------------------------------------------------------------------
This Prospectus describes a flexible premium adjustable survivorship
variable life insurance policy (the "Policy") offered by Provident Mutual Life
Insurance Company ("PMLIC"). The primary intended purpose of the Policy is to
provide insurance coverage until the younger insured's Attained Age 100. It is
designed to provide considerable flexibility in connection with premium
payments, investment options, and death benefits. It does so by giving the
Policyowner (the "Owner") the right to vary the frequency and amount of premium
payments (after the initial premium), to allocate Net Premiums among investment
alternatives with different investment objectives and to decrease the Death
Benefit payable under the Policy.
After certain deductions are made, Net Premiums are allocated to one or more
of the Separate Accounts, or the Guaranteed Account or both. The eight Separate
Accounts presently available are: the Provident Mutual Variable Growth, Money
Market, Bond, Managed, Zero Coupon Bond, Aggressive Growth and International
Separate Accounts and the Provident Mutual Variable Separate Account
(collectively, the "Separate Accounts"). The Growth, Money Market, Bond,
Managed, Aggressive Growth and International Separate Accounts invest in shares
of a designated corresponding mutual fund portfolio which is a part of The
Market Street Fund, Inc. (the "MS Fund"). The Zero Coupon Bond Separate Account
has one Sub-Account, the assets of which are used to purchase units of a
corresponding series of The Stripped ("Zero") U.S. Treasury Securities Fund,
Provident Mutual Series A ("Zero Coupon Trust" or "Trust"). The Provident Mutual
Variable Separate Account has sixteen Subaccounts, the assets of which are used
to purchase shares of a designated corresponding mutual fund portfolio (each,
along with the portfolios of the MS Fund, a "Portfolio") that is part of one of
the following funds: The Alger American Fund; Neuberger & Berman Advisers
Management Trust; TCI Portfolios, Inc.; Variable Insurance Products Fund;
Variable Insurance Products Fund II; and Van Eck Investment Trust (together with
the MS Fund, the "Funds").
The portion of the Policy Account Value in the Separate Accounts will vary
with the investment experience of the corresponding Portfolios or series of the
Trust. The Owner bears the entire investment risk for all amounts allocated to
the Separate Accounts; there is no guaranteed minimum account value for the
Separate Accounts.
The accompanying Prospectuses for the Funds and for the Zero Coupon Trust
describe the investment objectives and the attendant risks of the Portfolios and
the Trust.
The Policy Account Value will reflect the Monthly Deductions and certain
other fees and charges such as the Mortality and Expense Risk Charge and, for
the Zero Coupon Bond Separate Account, the transaction charge. Also, a surrender
charge may be imposed if during the first 15 Policy Years the Policy lapses or
if the Owner effects a decrease in Face Amount. During the first two Policy
Years the Policy will remain in force as long as the Minimum Guarantee Premium
is paid or the Net Cash Surrender Value is sufficient to pay certain monthly
charges imposed in connection with the Policy. After the second Policy Year,
whether the Policy remains in force depends upon whether the Net Cash Surrender
Value is sufficient to pay the monthly charges under the Policy.
It may not be advantageous to purchase a Policy as a replacement for another
type of life insurance.
------------------------
THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY CURRENT PROSPECTUSES FOR THE
FUNDS LISTED ABOVE.
------------------------
PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
Prospectus dated May 1, 1996
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions........................................................................... 1
Summary Description of the Policy..................................................... 4
The Policy Offered............................................................... 4
Availability of Policy........................................................... 5
The Death Benefit................................................................ 5
Flexibility to Adjust Amount of Death Benefit.................................... 5
Policy Account Value............................................................. 5
Allocation of Net Premiums....................................................... 6
Transfers........................................................................ 6
Free-Look Privilege.............................................................. 6
Charges Assessed in Connection with the Policy................................... 7
Premium Expense Charge...................................................... 7
Monthly Deductions.......................................................... 7
Surrender Charge............................................................ 7
Transfer Charge............................................................. 7
Partial Withdrawal Charge................................................... 8
Daily Charges Against the Separate Accounts................................. 8
Policy Lapse and Reinstatement................................................... 8
Loan Privilege................................................................... 8
Partial Withdrawal of Net Cash Surrender Value................................... 8
Surrender of the Policy.......................................................... 9
Tax Treatment.................................................................... 9
Illustrations of Death Benefits, Policy Account Value and Net Cash Surrender
Value........................................................................... 9
Provident Mutual Life Insurance Company, The Separate Accounts, The Funds, and The
Stripped ("Zero") U.S. Treasury Securities Fund, Provident Mutual Series A.......... 9
Provident Mutual Life Insurance Company.......................................... 9
The Separate Accounts............................................................ 10
The Market Street Fund, Inc...................................................... 10
The Stripped ("Zero") U.S. Treasury Securities Fund, Provident Mutual Series A... 12
2006 Series................................................................. 12
The Alger American Fund.......................................................... 13
Variable Insurance Products Fund and Variable Insurance Products Fund II......... 13
VIP Fund.................................................................... 14
VIP Fund II................................................................. 14
Neuberger & Berman Advisers Management Trust..................................... 16
TCI Portfolios, Inc.............................................................. 17
Van Eck Investment Trust......................................................... 18
The Guaranteed Account........................................................... 20
Detailed Description of Policy Provisions............................................. 20
Death Benefit.................................................................... 20
General..................................................................... 20
Death Benefit Options....................................................... 20
Option A............................................................... 21
Option B............................................................... 21
Which Death Benefit Option to Choose........................................ 21
Change in Death Benefit Option.............................................. 22
How the Death Benefit May Vary.............................................. 22
Ability to Decrease Face Amount.................................................. 22
Changes Affecting the Death Benefit.............................................. 23
</TABLE>
i
<PAGE> 7
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
How the Duration of the Policy May Vary.......................................... 24
Policy Account Value............................................................. 24
Calculation of Policy Account Value......................................... 24
Determination of Number of Units for the Separate Accounts.................. 24
Determination of Unit Value................................................. 24
Net Investment Factor....................................................... 24
Payment and Allocation of Premiums............................................... 25
Issuance of a Policy........................................................ 25
Amount and Timing of Premiums............................................... 25
Premium Limitations......................................................... 26
Allocation of Net Premiums.................................................. 26
Transfers................................................................... 26
Policy Lapse................................................................ 27
Reinstatement............................................................... 27
Charges and Deductions................................................................ 27
Premium Expense Charge........................................................... 27
Premium Tax Charge.......................................................... 27
Percent of Premium Sales Charge............................................. 27
Federal Tax Charge.......................................................... 27
Surrender Charge................................................................. 28
Deferred Administrative Charge................................................... 28
Deferred Sales Charge....................................................... 28
Surrender Charge Upon Decrease in Face Amount............................... 28
Allocation of Surrender Charge.............................................. 29
Monthly Deductions............................................................... 29
Cost of Insurance........................................................... 29
Cost of Insurance Rate................................................. 29
Premium Class.......................................................... 29
Administrative Charges...................................................... 29
Initial Administrative Charge.......................................... 29
Monthly Administrative Charge.......................................... 30
Additional Benefit Charges.................................................. 30
Partial Withdrawal Charge........................................................ 30
Transfer Charge.................................................................. 30
Charges Against the Separate Accounts............................................ 30
Mortality and Expense Risk Charge........................................... 30
Asset Charge Against Zero Coupon Bond Separate Account...................... 30
Other Charges.................................................................... 31
Contract Rights....................................................................... 31
Loan Privileges.................................................................. 31
General..................................................................... 31
Interest Rate Charged....................................................... 31
Allocation of Loans and Collateral.......................................... 31
Interest Credited to Loan Account........................................... 31
Effect of Policy Loan....................................................... 31
Loan Repayments............................................................. 31
Lapse With Loans Outstanding................................................ 32
Tax Considerations.......................................................... 32
Surrender Privilege.............................................................. 32
Partial Withdrawal of Net Cash Surrender Value................................... 32
Free-Look Privilege.............................................................. 34
</TABLE>
ii
<PAGE> 8
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Free-Look for Policy........................................................ 34
Special Transfer and Conversion Rights........................................... 34
Transfer Right for Policy................................................... 34
Transfer Right for Change in Investment Policy of Separate Account or
Subaccount................................................................... 34
The Guaranteed Account................................................................ 34
Minimum Guaranteed and Current Interest Rates.................................... 34
Calculation of Guaranteed Account Value..................................... 35
Transfers from Guaranteed Account................................................ 35
Other Policy Provisions............................................................... 35
Amount Payable on Final Policy Date.............................................. 35
Payment of Policy Benefits....................................................... 35
The Contract..................................................................... 36
Ownership........................................................................ 36
Beneficiary...................................................................... 36
Change of Owner and Beneficiary.................................................. 36
Split Dollar Arrangements........................................................ 36
Assignments...................................................................... 36
Misstatement of Age and Sex...................................................... 37
Suicide.......................................................................... 37
Incontestability................................................................. 37
Dividends........................................................................ 37
Settlement Options............................................................... 37
Supplementary Benefits........................................................... 38
Disability Waiver Benefit................................................... 38
Policy Split Option......................................................... 38
Change of Insured........................................................... 38
Federal Income Tax Considerations..................................................... 38
Introduction..................................................................... 38
Tax Status of the Policy......................................................... 38
Tax Treatment of Policy Benefits................................................. 39
In General.................................................................. 39
Modified Endowment Contracts................................................ 40
Distributions from Policies Classified as Modified Endowment Contracts...... 40
Distributions from Policies Not Classified as Modified Endowment
Contracts.................................................................... 40
Policy Loan Interest........................................................ 41
Investment in the Policy.................................................... 41
Multiple Policies........................................................... 41
Taxation of Policy Split.................................................... 41
Other Tax Considerations.................................................... 41
Charge for PMLIC's Taxes......................................................... 42
Legal Developments Regarding Unisex Actuarial Tables.................................. 42
Voting Rights......................................................................... 42
Changes in Applicable Law, Funding and Otherwise...................................... 43
Officers and Directors of PMLIC....................................................... 44
Distribution of Policies.............................................................. 46
Policy Reports........................................................................ 47
</TABLE>
iii
<PAGE> 9
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
State Regulation...................................................................... 47
Experts............................................................................... 47
Legal Matters......................................................................... 47
Appendix A--Illustration of Death Benefits, Policy Account Values and Net Cash
Surrender Values.................................................................... A-1
Appendix B--Long Term Market Trends................................................... B-1
Financial Statements.................................................................. F-1
</TABLE>
THE POLICY MAY NOT BE AVAILABLE IN ALL JURISDICTIONS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS. IF GIVEN, SUCH INFORMATION OR REPRESENTATIONS SHOULD NOT BE
RELIED ON.
THE PRIMARY PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE
INSURANCE PROTECTION. NO CLAIM IS MADE THAT THE POLICY IS IN ANY WAY SIMILAR OR
COMPARABLE TO AN INVESTMENT IN A MUTUAL FUND.
iv
<PAGE> 10
DEFINITIONS
ATTAINED AGE............... For each Insured, such Insured's Issue Age plus
the number of full Policy Years since the Policy
Date.
BENEFICIARY................ The person(s) or entity(ies) designated to receive
all or some of the Insurance Proceeds when the
last surviving Insured dies. The Beneficiary is
designated in the application or if subsequently
changed, as shown in the latest change filed with
PMLIC. If no Beneficiary survives and unless
otherwise provided, the estate of the last
surviving Insured will be the Beneficiary.
CASH SURRENDER VALUE....... The Policy Account Value minus any applicable
Surrender Charge.
DEATH BENEFIT.............. Under Option A, the greater of the Face Amount or
a percentage of the Policy Account Value on the
date of death; under Option B, the greater of the
Face Amount plus the Policy Account Value on the
date of death, or a percentage of the Policy
Account Value on the date of death. The Death
Benefit Option is selected at time of application
but may be later changed.
DURATION................... The number of full years the insurance has been in
force, measured from the Policy Date.
FACE AMOUNT................ The Face Amount is shown in the Policy Schedule.
It is equal to the Initial Face Amount minus any
subsequent decreases in such amount (including any
decreases due to changes from Death Benefit Option
B to Option A). The Face Amount is used to
determine the Death Benefit.
FINAL POLICY DATE.......... The Policy Anniversary nearest the younger
Insured's Attained Age 100 at which time the
Policy Account Value, if any, (less any
outstanding Policy loan and accrued interest) will
be paid to the Owner if either Insured is living.
The Policy will end on the Final Policy Date.
GRACE PERIOD............... The 61-day period allowed for payment of a premium
following the date PMLIC mails notice of the
amount required to keep the Policy in force.
HOME OFFICE................ PMLIC's Home Office at 1050 Westlakes Drive,
Berwyn, PA 19312.
INITIAL FACE AMOUNT........ The Face Amount shown in the Policy Schedule for
the Policy on the Policy Issue Date. The Initial
Face Amount may be decreased after issue.
INSURANCE PROCEEDS......... The net amount to be paid to the Beneficiary when
the last surviving Insured dies.
INSUREDS................... The persons upon whose lives the Policy is issued.
ISSUE AGES................. The age of each Insured at his or her birthday
nearest the Policy Date. The Issue Ages are stated
in the Policy.
JOINT EQUAL AGE............ An age assigned to the two Insureds which is
actuarially determined by PMLIC based solely on
the Issue Age of each Insured.
LOAN ACCOUNT............... The account to which the collateral for the amount
of any Policy loan is transferred from the
Separate Accounts and/or the Guaranteed Account.
MINIMUM ANNUAL PREMIUM..... The annual amount which is used to determine the
Minimum Guarantee Premium. This amount is stated
in each Policy.
1
<PAGE> 11
MINIMUM FACE AMOUNT........ The Minimum Face Amount is $200,000 ($225,000 in
New York State) or such amount which PMLIC would
issue under its then current rules.
MINIMUM GUARANTEE
PREMIUM.................... The Minimum Annual Premium multiplied by the
number of months since the Policy Date (including
the current month) divided by 12.
MINIMUM INITIAL PREMIUM.... Equal to the Minimum Annual Premium multiplied by
the following factor for the specified premium
payment mode at issue. Annual -- 1.0;
Semiannual -- 0.50 Quarterly -- 0.25;
Monthly -- 0.167.
MONTHLY DEDUCTIONS......... The amount deducted from the Policy Account Value
on each Policy Processing Day. It includes the
Monthly Administrative Charge, the Monthly Cost of
Insurance Charge, and the monthly cost of any
benefits provided by riders. The Monthly Deduction
on the first 12 Policy Processing Days also
includes an Initial Administrative Charge.
NET AMOUNT AT RISK......... The amount by which the Death Benefit exceeds the
Policy Account Value.
NET CASH SURRENDER VALUE... The Policy Account Value minus any applicable
contingent surrender charges, minus any
outstanding Policy loans and accrued interest.
NET PREMIUM................ The remainder of a premium after the deduction of
the Premium Expense Charge.
OWNER...................... The person(s) or entity(ies) entitled to exercise
the rights granted in the Policy.
PLANNED PERIODIC PREMIUM... The premium amount which the Owner plans to pay at
the frequency selected. The Owner is entitled to
receive a reminder notice and change the amount of
the Planned Periodic Premium. The Owner is not
required to pay the designated amount.
POLICY ACCOUNT VALUE....... The sum of the Policy's values in the Separate
Accounts, the Guaranteed Account, and the Loan
Account.
POLICY ANNIVERSARY......... The same day and month as the Policy Date in each
later year.
POLICY DATE................ The date set forth in the Policy that is used to
determine Policy Years and Policy Processing Days.
The Policy Date is generally the same as the Issue
Date but may be another date mutually agreed upon
by PMLIC and the proposed Insureds.
POLICY ISSUE DATE.......... The date on which the Policy is issued. It is used
to measure suicide and contestable periods.
POLICY PROCESSING DAY...... The day in each calendar month which is the same
day of the month as the Policy Date. The first
Policy Processing Day is the Policy Date.
POLICY YEAR................ A year that starts on the Policy Date or on a
Policy Anniversary.
PREMIUM CLASS.............. The classification of each Insured for cost of
insurance purposes. The classes are: standard;
nonsmoker; preferred; with extra rating; and
nonsmoker with extra rating.
PREMIUM EXPENSE CHARGE..... The amount deducted from a premium payment which
consists of the Premium Tax Charge and a Percent
of Premium Sales Charge and the Federal Tax
Charge.
2
<PAGE> 12
SURRENDER CHARGE........... The amount deducted from the Policy Account Value
upon lapse or surrender of the Policy during the
first 15 Policy Years (For New York Policies, the
first 12 Policy Years). A pro-rata Surrender
Charge will be deducted upon a decrease in the
Face Amount during the first 15 Policy Years (the
first 12 Policy Years for New York). The Maximum
Surrender Charge is shown in the Policy.
SURRENDER CHARGE
TARGET PREMIUM.......... An amount based on the Initial Face Amount and
Joint Equal Age of the Insureds used solely for
the purpose of calculating the Deferred Sales
Charge.
VALUATION DAY.............. Each day that the New York Stock Exchange is open
for business and any other day on which there is a
sufficient degree of trading with respect to a
Separate Account's portfolio of securities to
materially affect the value of that Separate
Account.
VALUATION PERIOD........... The time between two successive Valuation Days.
Each Valuation Period includes a Valuation Day and
any non-Valuation Day or consecutive non-Valuation
Days immediately preceding it.
3
<PAGE> 13
SUMMARY DESCRIPTION OF THE POLICY
The following summary of the Policy provisions should be read in
conjunction with the detailed information appearing elsewhere in this
Prospectus.
THE POLICY OFFERED
The Flexible Premium Survivorship Adjustable Variable Life Insurance Policy
(the "Policy") offered by this Prospectus is issued by Provident Mutual Life
Insurance Company ("PMLIC"). The Policy allows the Owner, subject to certain
limitations, to make premium payments in any amount and at any frequency. As
long as the Policy remains in force, it will provide for:
(1) Life insurance coverage on the named Insureds up to Attained Age 100 of
the younger Insured;
(2) A Cash Surrender Value;
(3) Surrender and withdrawal rights and Policy loan privileges; and
(4) A variety of additional insurance benefits.
The Policy described in this Prospectus is designed to provide insurance
coverage to help lessen the economic loss resulting from the deaths of the
Insureds. It is not primarily offered as an investment. Life insurance is not a
short-term investment. Prospective Owners should consider their need for
insurance coverage and the Policy's long-term investment potential. The Death
Benefit is not payable, in whole or in part, at the time of death of the first
of the Insureds to die; it is only payable at the time of death of the last
surviving Insured. There are no changes made to the Policy as a result of the
death of the first Insured to die.
The Policy is called "flexible premium" because there is no fixed schedule
for premium payments, even though the Owner may establish a schedule of Planned
Periodic Premiums. The Policy is described as "adjustable" because the Owner
may, within limits, decrease the Face Amount and may change the Death Benefit
Option. The Policy is called "variable" because, unlike a fixed benefit whole
life insurance policy, the Death Benefit under the Policy may, and its Account
Value will, vary to reflect the investment performance of the chosen Separate
Accounts, and the crediting of interest to the Guaranteed Account, as well as
other factors.
The failure to pay Planned Periodic Premiums will not itself cause the
Policy to lapse. Conversely, the payment of premiums in any amount or frequency
will not necessarily guarantee that the Policy will remain in force. In general,
the Policy will lapse if the Net Cash Surrender Value is insufficient to pay the
Monthly Deduction for cost of insurance and administrative charges. During the
first two Policy Years the Policy will not lapse if the Minimum Guarantee
Premium has been paid, even if the Net Cash Surrender Value is insufficient.
After deduction of the Premium Expense Charge, Net Premiums are allocated
to one or more of the Separate Accounts and/or the Guaranteed Account as
selected by the Owner. The Guaranteed Account is part of PMLIC's General
Account.
The assets of the Growth, Money Market, Bond, Managed, Aggressive Growth
and International Separate Accounts are invested in a corresponding portfolio of
The Market Street Fund, Inc. ("MS Fund"), a series mutual fund with six separate
investment portfolios, each intended to meet different investment objectives.
Provident Mutual Variable Separate Account consists of sixteen Subaccounts, the
assets of which are used to purchase shares of a designated corresponding mutual
fund portfolio (each, along with the portfolios of the MS Fund, a "Portfolio")
that is part of one of the following funds: The Alger American Fund; Neuberger &
Berman Advisers Management Trust; TCI Portfolios, Inc.; Variable Insurance
Products Fund; Variable Insurance Products Fund II; and Van Eck Investment Trust
(together with the MS Fund, the "Funds", each, a "Fund"). The Sub-Account of the
Zero Coupon Bond Separate Account invests in units of a corresponding series of
The Stripped ("Zero") U.S. Treasury Securities Fund, Provident Mutual Series A
(Zero Coupon Trust or Trust). There is no assurance that the investment
objectives of a particular Portfolio or Trust will be met. The Owner bears the
entire investment risk of amounts allocated to the Separate Accounts.
4
<PAGE> 14
A prospective Owner who already has life insurance coverage should consider
whether or not changing or adding to existing coverage would be advantageous.
Generally, it is not advisable to purchase another policy as a replacement for
an existing policy.
AVAILABILITY OF POLICY
This Policy can be issued for two Insureds each between ages 21 and 85 and
with a Joint Equal Age between 25 and 80. The Minimum Face Amount is $200,000.
(For a Policy issued in New York State the minimum Face Amount at issue is
$225,000.) Before issuing a Policy, PMLIC will require that the proposed
Insureds meet certain underwriting standards satisfactory to PMLIC. The premium
classes available for each Insured are Standard, Nonsmoker, with Extra Rating
and Nonsmoker with Extra Rating. (See "Issuance of a Policy," Page 25.)
THE DEATH BENEFIT
As long as the Policy remains in force, PMLIC will pay the Insurance
Proceeds to the Beneficiary upon receipt of due proof of the death of both
Insureds. The Insurance Proceeds will consist of the Policy's Death Benefit,
plus any dividends payable, plus any relevant additional benefits provided by a
supplementary benefit rider, less any outstanding Policy loan and accrued
interest, less any unpaid Monthly Deductions.
There are two Death Benefit Options available. Death Benefit Option A
provides for the greater of (a) the Face Amount and (b) the applicable
percentage of the Policy Account Value. Death Benefit Option B provides for the
greater of (a) the Face Amount plus the Policy Account Value and (b) the
applicable percentage of the Policy Account Value. (See "Death Benefit Options,"
Page 20.)
FLEXIBILITY TO ADJUST AMOUNT OF DEATH BENEFIT
After the second Policy Year, the Owner has flexibility to adjust the Death
Benefit by changing the Death Benefit Option or by decreasing the Face Amount of
the Policy. (See "Change in Death Benefit Option," Page 22, and "Ability to
Decrease Face Amount," Page 22.) Any decrease in Face Amount must be for at
least $25,000 (or such lesser amount required in a particular state) and cannot
result in a Face Amount less than the Minimum Face Amount available at that
time. PMLIC reserves the right to establish different Minimum Face Amounts for
Policies issued in the future. (Decreases are not permitted for Policies issued
in Virginia.)
Any change in Death Benefit Options or in the Face Amount may affect the
charges under the Policy. For any decrease in Face Amount, that part of the
surrender charges attributable to the decrease will reduce the Policy Account
Value, and the surrender charges will be reduced by this amount. A decrease in
Face Amount may also lower the cost of insurance charges. (See "Cost of
Insurance," Page 29.)
To the extent that a requested decrease in Face Amount would result in
cumulative premiums exceeding the maximum premium limitations applicable under
the Internal Revenue Code for life insurance, PMLIC will not effect the
decrease.
POLICY ACCOUNT VALUE
The Policy Account Value is the total amount of value held under the Policy
at any time. It equals the sum of the amounts held in the Separate Accounts, the
Guaranteed Account and the Loan Account. (See "Calculation of Policy Account
Value," Page 24.)
The Policy Account Value in the Separate Accounts will reflect the
investment performance of the chosen Separate Accounts, any Net Premiums paid,
any transfers, any partial withdrawals, any loans, any loan repayments, any loan
interest paid or credited and any charges assessed in connection with the
Policy. The Owner bears the entire investment risk for amounts allocated to the
Separate Accounts. There is no guaranteed minimum for the portion of the Policy
Account Value in the Separate Accounts.
5
<PAGE> 15
The Guaranteed Account earns interest at rates PMLIC declares in advance
for specific periods. The rates are guaranteed to equal or exceed 4%. The
principal, after deductions, is also guaranteed. The value of the Guaranteed
Account will reflect any amounts allocated or transferred to it plus interest
credited to it, less amounts deducted, transferred or withdrawn from it. (See
"The Guaranteed Account," Page 34.)
The Loan Account will reflect any amounts transferred from the Separate
Accounts and/or Guaranteed Account as collateral for Policy loans plus interest
of at least 4% credited to such amount. (See "Loan Privileges," Page 31.)
The Policy Account Value is relevant to the computation of the Death
Benefit and cost of insurance charges.
ALLOCATION OF NET PREMIUMS
Except as described below, Net Premiums will generally be allocated to the
Separate Accounts and the Guaranteed Account in accordance with the allocation
percentages which are in effect for such premium when received at PMLIC's Home
Office. These percentages will be those specified in the application or as
subsequently changed by the Owner or as specified for a particular premium
payment.
Where state law requires a return of gross premiums paid when a Policy is
returned under the Free-Look provision (see "Free-Look for Policy," Page 34) any
portion of the Initial Net Premium and any Net Premiums received before the
expiration of a 15-day period beginning on the later of the Policy Issue Date or
the date PMLIC receives the Minimum Initial Premium, which are to be allocated
to the Separate Accounts will be allocated to the Money Market Separate Account.
At the end of the 15-day period, the amount in the Money Market Separate Account
(including investment experience) will be allocated to each of the chosen
Separate Accounts based on the proportion that the allocation percentage for
such Separate Account bears to the sum of the Separate Account premium
allocation percentages. (See "Allocation of Net Premiums," Page 26.)
TRANSFERS
The Owner may make transfers of the amounts in the Separate Accounts and
Guaranteed Account between and among such accounts and between and among
Subaccounts of a Separate Account. Transfers between and among the Separate
Accounts (and/or Subaccounts) or into the Guaranteed Account will be made on the
date we receive the request. The minimum amount for each transfer is $1,000,
unless a lesser minimum amount is required in a particular jurisdiction.
Transfers out of the Guaranteed Account may only be made within 30 days of a
Policy Anniversary and are limited in amount. If the Owner makes more than four
transfers in a Policy Year, a Transfer Charge of $25 will be deducted from the
amount being transferred. (See "Transfers," Page 26.)
FREE-LOOK PRIVILEGE
The Policy provides for an initial Free-Look period. The Owner may cancel
the Policy before the latest of: (a) 45 days after Part I of the Application for
the Policy is signed; (b) 10 days after the Owner receives the Policy; and (c)
10 days after PMLIC mails or personally delivers a Notice of Withdrawal Right to
the Owner. Upon returning the Policy to PMLIC or to an agent of PMLIC within
such time with a written request for cancellation, the Policy will be cancelled.
PMLIC will promptly pay to the Owner a refund equal to the sum of: (i) the
Policy Account Value as of the date PMLIC receives the returned Policy; plus
(ii) the amount deducted for premium taxes; plus (iii) any Monthly Deductions
charged against the Policy Account Value; plus (iv) an amount reflecting other
charges directly or indirectly deducted under the Policy. Where state law
requires a minimum refund equal to gross premiums paid, the refund will instead
equal the gross premium paid on the Policy and will not reflect the investment
experience of the Separate Accounts. (See "Free-Look Privilege," Page 34.)
6
<PAGE> 16
CHARGES ASSESSED IN CONNECTION WITH THE POLICY
Premium Expense Charge. A Premium Expense Charge will be deducted from
each premium payment. This charge consists of:
(i) Premium Tax Charge for state and local premium taxes based on the
rate for the Insureds' residence at the time the premium is paid. PMLIC
reserves the right to change the amount of the charge deducted from future
premiums if the Insureds' residence changes or the applicable law is
changed;
(ii) Percent of Premium Sales Charge which is equal to 5% of the
amount of the premium payment in Policy Years 1 through 10. At the present
time PMLIC does not intend to apply this charge after Policy Year 10, but
reserves the right to do so.
(iii) Federal Tax Charge equal to 1.25% of the amount of the premium
payment. PMLIC reserves the right to change the amount of this charge if
the applicable Federal tax law changes PMLIC's tax burden. (See "Premium
Expense Charge," Page 27).
Monthly Deductions. On the Policy Date and on each Policy Processing Day
thereafter, the Policy Account Value will be reduced by a Monthly Deduction
equal to the sum of the monthly Cost of Insurance Charge, Monthly Administrative
Charge, a charge for additional benefits added by rider and, on the first 12
Policy Processing Days, the Initial Administrative Charge. The monthly Cost of
Insurance Charge will be determined by multiplying the Net Amount at Risk (that
is the Death Benefit less Policy Account Value) by the applicable cost of
insurance rate(s), which will depend upon the Issue Age, Sex, Premium Class of
each Insured and Duration and on PMLIC's expectations as to future mortality and
expense experience, but which will not exceed the guaranteed maximum cost of
insurance rates set forth in the Policy based on the Issue Age, Sex, Premium
Class of each Insured, the Duration and the "1980 Commissioners Standard
Ordinary Smoker and Nonsmoker Mortality Table." (See "Cost of Insurance," Page
29.) The Monthly Administrative Charge is currently $7.50 plus $.01 per $1,000
of Face Amount; the maximum permissible Monthly Administrative Charge is $12
plus $.03 per $1,000 of Face Amount. (See "Monthly Administrative Charge," Page
30.) The Initial Administrative Charge is $17.50 plus $.11 per $1,000 of Initial
Face Amount, payable on the first 12 Policy Processing Days. (See "Initial
Administrative Charge," Page 29.)
Surrender Charge. A Surrender Charge is imposed if the Policy is
surrendered or lapses at any time before the fifteenth Policy Year (twelfth
Policy Year for New York Policies). The Surrender Charge consists of a Deferred
Administrative Charge and a Deferred Sales Charge. A portion of this Surrender
Charge will be deducted if the Owner decreases the Face Amount before the end of
the fifteenth Policy Year. (See "Surrender Charge," Page 28.)
The Deferred Administrative Charge is equal to $1.50 per $1,000 of Initial
Face Amount in Policy Years 1 to 11 declining by 20% of the original amount each
year in Policy Years 12 to 15 until it is zero in Policy Year 16. (For policies
sold to residents of New York State, this charge is $1.50 per $1,000 of Initial
Face Amount in Policy Years 1 to 8 declining by 20% of the original amount each
year in Policy Years 9 to 12 until it is zero in Policy Year 13.)
The Deferred Sales Charge is equal to 25% of the premiums received during
the first Policy Year up to one Surrender Charge Target Premium plus 4% of all
other premiums received to the date of surrender, lapse or decrease. The
Deferred Sales Charge, however, will not exceed the Maximum Deferred Sales
Charge. For Joint Equal Ages 25 to 71, the Maximum Deferred Sales Charge equals
50% of the Surrender Charge Target Premium, 40% of the relevant Surrender Charge
Target Premium for Joint Equal Ages 72 to 75, and 30% for Joint Equal Ages 76 to
80. The amount of the Maximum Deferred Sales Charge remains level for Policy
Years 1 through 11 (Policy Years 1 through 8 for New York Policies) and declines
by 20% of the original amount each year in Policy Years 12 through 15 (Policy
Years 9 through 12 for New York Policies).
Transfer Charge. After the fourth transfer between accounts in a Policy
Year, a $25 charge for each additional transfer will be deducted from the amount
transferred to compensate PMLIC for administrative costs in handling such
transfers. (See "Transfer Charge," Page 30.)
7
<PAGE> 17
Partial Withdrawal Charge. A charge equal to $25 will be deducted by PMLIC
from the Policy Account Value to compensate it for its costs. (See "Partial
Withdrawal Charge," Page 30.)
Daily Charges Against the Separate Accounts. A daily charge for PMLIC's
assumption of certain mortality and expense risks incurred in connection with
the Policy will be imposed at an annual rate which is currently 0.60% of the
average daily net assets of the Separate Accounts. This charge may be increased
in the future but in no event will it exceed an annual rate of 0.90%. (See
"Charges Against the Separate Accounts," Page 30.)
With regard to the Zero Coupon Bond Separate Account, a deduction currently
equivalent to an annual rate of 0.25% of the average daily net assets of each
Sub-Account will be made for transaction charges associated with the purchase of
units of the Zero Coupon Trust. This charge may be increased in the future but
in no event will it exceed an annual rate of 0.50%. (See "Asset Charge Against
Zero Coupon Bond Separate Account," Page 30.)
Shares of the Portfolios are purchased by the Separate Accounts at net
asset value which reflects management fees and expenses deducted from the assets
of the Portfolios.
POLICY LAPSE AND REINSTATEMENT
During the first two Policy Years, the Policy will lapse if the Minimum
Guarantee Premium has not been paid and if the Net Cash Surrender Value is
insufficient to cover the Monthly Deductions and a 61-day Grace Period expires
without a sufficient premium payment. After the second Policy Year the Policy
will lapse if the Net Cash Surrender Value is insufficient and the Grace Period
lapses without a sufficient premium payment. The failure to pay a Planned
Periodic Premium will not itself cause a Policy to lapse. (See "Policy Lapse,"
Page 27.)
Subject to certain conditions, including evidence of insurability
satisfactory to PMLIC and the payment of a sufficient premium, a Policy may be
reinstated at any time within three years (or such longer period as may be
required in a particular state) after the expiration of the Grace Period and
before the Final Policy Date. (See "Reinstatement," Page 27.)
LOAN PRIVILEGE
The Owner may obtain Policy loans in a minimum amount of $500 (or such
lesser minimum as may be required in a particular state) but not exceeding, in
the aggregate, the Net Cash Surrender Value.
Policy loans will bear interest at a fixed rate of 6% per year, payable at
the end of each Policy Year. If interest is not paid when due, it will be added
to the outstanding loan balance. Policy loans may be repaid at any time and in
any amount prior to the Final Policy Date.
Policy loans are allocated to the Separate Accounts and the Guaranteed
Account based on the proportion that each account's value bears to the total
unloaned Policy Account Value. Based on this allocation, the collateral for the
loan is deducted from each account and transferred to the Loan Account. This
amount in the Loan Account will earn interest at an effective annual rate PMLIC
will determine prior to each calendar year. This rate will not be less than 4%.
(See "Loan Privileges," Page 31.)
Depending upon the investment performance of Net Cash Surrender Value and
the amount of any Policy loan, such loans may cause a Policy to lapse. If a
Policy is not a Modified Endowment Contract, lapse of the Policy with Policy
loans outstanding may result in adverse tax consequences. (See "Tax Treatment of
Policy Benefits," Page 39.)
PARTIAL WITHDRAWAL OF NET CASH SURRENDER VALUE
After the first Policy Year, the Owner may, subject to certain
restrictions, request a partial withdrawal of Net Cash Surrender Value. The
minimum amount for such withdrawal is $1,500. An expense charge of $25 will be
deducted from the Policy Account Value for each withdrawal. The withdrawal
amount and expense charge will be allocated to the Separate Accounts and the
Guaranteed Account based on the proportion that
8
<PAGE> 18
the value in each account bears to the total unloaned Policy Account Value. If
Death Benefit Option A is in effect, PMLIC will reduce the Face Amount by the
amount of the withdrawal. (See "Partial Withdrawal of Net Cash Surrender Value,"
Page 32.)
SURRENDER OF THE POLICY
The Owner may at any time fully surrender the Policy and receive the Net
Cash Surrender Value, if any. The Net Cash Surrender Value will equal the Policy
Account Value less any Policy loan, accrued interest and any applicable
surrender charges. (See "Surrender Privilege," Page 32.)
TAX TREATMENT
Under current federal tax law, life insurance contracts receive tax-favored
treatment. The death benefit is generally excludable from the beneficiary's
gross income for federal income tax purposes, according to Section 101(a)(1) of
the Internal Revenue Code. Owners of a life insurance contract are not taxed on
any increase in the cash value while the contract remains in force.
If a life insurance contract is a modified endowment contract under federal
tax law, certain distributions made during either insured's lifetime, such as
loans and partial withdrawals from, and collateral assignments of, the contract
are includable in gross income on an income-first basis. A 10% penalty tax may
also be imposed on distributions made before the contract owner attains age
59 1/2. Life insurance contracts that are not modified endowment contracts under
federal tax law receive preferential tax treatment with respect to certain
distributions.
For a discussion of the tax issues associated with this Policy, see
"Federal Income Tax Considerations" on page 38.
ILLUSTRATIONS OF DEATH BENEFITS, POLICY ACCOUNT VALUE AND NET CASH SURRENDER
VALUE
Illustrations of how investment performance of the Separate Accounts may
cause Death Benefits, the Policy Account Value and the Net Cash Surrender Value
to vary are included in Appendix A commencing on page A-1.
These projections of hypothetical values may be helpful in understanding
the long-term effects of different levels of investment performance, of charges
and deductions, of electing one or the other death benefit option, and generally
comparing and contrasting this Policy to other life insurance policies.
Nonetheless, the illustrations are based on hypothetical investment rates of
return and are not guaranteed. Illustrations are illustrative only and are not a
representation of past or future performance. Actual rates of return may be more
or less than those reflected in the illustrations and, therefore, actual values
will be different from those illustrated.
PROVIDENT MUTUAL LIFE INSURANCE COMPANY, THE SEPARATE ACCOUNTS,
THE FUNDS, AND THE STRIPPED ("ZERO") U.S. TREASURY SECURITIES FUND,
PROVIDENT MUTUAL SERIES A.
PROVIDENT MUTUAL LIFE INSURANCE COMPANY
PMLIC, a mutual life insurance company chartered in 1865 under Pennsylvania
law, is authorized to transact life insurance and annuity business in
Pennsylvania and in 50 other jurisdictions. PMLIC assumes all insurance risks
under the Policy and its assets support the Policy's benefits. On December 31,
1995, PMLIC's assets were over $4.9 billion. (See "Financial Statements," Page
F-1.)
THE SEPARATE ACCOUNTS
The Growth, Money Market, Bond, Managed, and Zero Coupon Bond Separate
Accounts were established by PMLIC on October 21, 1985 under the provisions of
the Pennsylvania Insurance Law; the
9
<PAGE> 19
Aggressive Growth Separate Account was established on February 21, 1989, the
International Separate Account on July 15, 1991 and the Variable Separate
Account on June 3, 1993. Each is a separate investment account to which assets
are allocated to support the benefits payable under the Policies as well as
other variable life insurance policies PMLIC may issue.
Each Separate Account's assets are the property of PMLIC. Each Policy
provides that the portion of the Separate Account's assets equal to the reserves
and other liabilities under the Policies (and other policies) supported by the
Separate Account will not be chargeable with liabilities arising out of any
other business that PMLIC may conduct. In addition to the net assets and other
liabilities for the Policies, the Separate Account's net assets include amounts
held to support other variable life insurance policies issued by PMLIC and
amounts derived from expenses charged to the accounts by PMLIC which it
currently holds in the Separate Accounts. From time to time these additional
amounts will be transferred in cash by PMLIC to its General Account. Before
making any such transfer, PMLIC will consider any possible adverse impact the
transfer might have on an account.
The Separate Accounts are collectively registered with the Securities and
Exchange Commission (SEC) under the Investment Company Act of 1940 (1940 Act) as
a unit investment trust type of investment company. Such registration does not
involve any supervision of the management or investment practices or policies of
the Separate Accounts by the SEC. Each Separate Account meets the definition of
a "Separate Account" under Federal securities laws.
THE MARKET STREET FUND, INC.
The Growth, Money Market, Bond, Managed, Aggressive Growth and
International Separate Accounts invest in shares of The Market Street Fund,
Inc., a "series" type of mutual fund which is registered with the SEC under the
1940 Act as a diversified open-end management investment company. The MS Fund
currently issues six "series" or classes of shares, each of which represents an
interest in a separate portfolio within the MS Fund: the Growth Portfolio, the
Money Market Portfolio, the Bond Portfolio, the Managed Portfolio, the
Aggressive Growth Portfolio and the International Portfolio. Shares of each
portfolio currently are purchased and redeemed by the corresponding Separate
Account. The Fund sells and redeems its shares at net asset value without a
sales charge.
The MS Fund presently serves as an investment medium for other variable
life policies issued by PMLIC and for variable annuity contracts issued by
Providentmutual Life and Annuity Company of America, a wholly-owned subsidiary
of PMLIC. At some later date the MS Fund may serve as an investment medium for
other variable life policies and variable annuity contracts issued by PMLIC and
may be made available as an investment medium for variable contracts issued by
other insurance companies, including affiliated and unaffiliated companies of
PMLIC. PMLIC currently does not foresee any disadvantages to Owners arising out
of the fact that the MS Fund will offer its shares to fund products other than
PMLIC's policies. However, the MS Fund's Board of Directors will monitor events
in order to identify any material irreconcilable conflicts that possibly may
arise and to determine what action, if any, should be taken in response to those
events or conflicts.
The investment objectives of the MS Fund's portfolios are set forth below.
The investment experience of each of the Separate Accounts depends on the
investment performance of the corresponding portfolio. There is no assurance
that any portfolio will achieve its stated objective.
The Growth Portfolio. This portfolio seeks intermediate and long-term
growth of capital by investing in common stocks of companies believed to offer
above-average growth potential over both the intermediate and the long-term.
Current income is a secondary consideration.
The Money Market Portfolio. The Money Market Portfolio seeks to provide
maximum current income consistent with capital preservation and liquidity by
investing in high-quality money market instruments.
The Bond Portfolio. The Bond Portfolio seeks to generate a high level of
current income consistent with prudent investment risk by investing in a
diversified portfolio of marketable debt securities.
10
<PAGE> 20
The Managed Portfolio. The Managed Portfolio seeks to realize as high a
level of long-term total rate of return as is consistent with prudent investment
risk by investing in stocks, bonds, money market instruments or a combination
thereof.
The Aggressive Growth Portfolio. The Aggressive Growth Portfolio seeks to
achieve a high level of long-term capital appreciation by investing in
securities of a diverse group of smaller emerging companies.
The International Portfolio. The International Portfolio seeks long-term
growth of capital principally through investments in a diversified portfolio of
marketable equity securities of established non-United States companies.
With respect to the Growth Portfolio, the MS Fund is advised by Newbold's
Asset Management, Inc. (NAM) which is registered with the SEC as an investment
adviser under the Investment Advisers Act of 1940. As compensation for its
services, NAM receives monthly compensation at an effective annual rate of 0.50%
of the first $20 million of the average daily net assets of the Growth
Portfolio, 0.40% of the next $20 million of the average daily net assets of the
portfolio, and 0.30% of the average daily net assets in excess of $40 million.
With respect to the Money Market Portfolio, the MS Fund is advised by
Providentmutual Investment Management Company (PIMC), which is registered with
the SEC as an investment adviser under the Investment Advisers Act of 1940. As
compensation for its services, PIMC receives monthly compensation at an
effective annual rate of 0.25% of the average daily net assets of the portfolio.
With respect to the Bond, Managed and Aggressive Growth Portfolios, the MS
Fund is advised by Sentinel Advisors Company (SAC), which is registered with the
SEC as an investment adviser under the Investment Advisers Act of 1940. As
compensation for its services, SAC receives monthly compensation as follows:
Bond Portfolio -- 0.35% of the first $100 million of the average daily
net assets of the portfolio and 0.30% of the average daily net assets in
excess of $100 million.
Managed Portfolio -- 0.40% of the first $100 million of the average
daily net assets of the portfolio and 0.35% of the average daily net assets
in excess of $100 million.
Aggressive Growth Portfolio -- 0.50% of the first $20 million of the
average daily net assets of the portfolio, 0.40% of the next $20 million of
the average daily net assets of the portfolio and 0.30% of the average
daily net assets in excess of $40 million.
With respect to the International Portfolio, the MS Fund is advised by PIMC
which receives monthly compensation at an effective annual rate of 0.75% of the
first $500 million of the average daily net assets of the portfolio and 0.60% of
the average daily net assets in excess of $500 million. PIMC has employed The
Boston Company Asset Management, Inc. (TBC) to provide investment advisory
services in connection with the portfolio. As compensation for the investment
advisory services rendered, PIMC pays TBC a monthly fee at an effective annual
rate of 0.375% of the first $500 million of the average daily net assets of the
portfolio and 0.30% of the average daily net assets in excess of $500 million,
with a minimum of $20,000 per year.
In addition to the fee for the investment advisory services, the MS Fund
pays its own expenses generally, including brokerage costs, administrative
costs, custodian costs, and legal, accounting and printing costs. However, PMLIC
has entered into an agreement with the MS Fund whereby it will reimburse the MS
Fund for all ordinary operating expenses, excluding advisory fees, in excess of
an annual rate of 0.40% of the average daily net assets of each portfolio except
the International Portfolio, and 0.75% for the International Portfolio. It is
anticipated that this agreement will continue; if it is terminated, MS Fund
expenses may increase.
A more extensive description of the MS Fund, its investment objectives and
policies, its risks, expenses, and all other aspects of its operation is
contained in the Prospectus for the MS Fund, which accompanies this Prospectus.
11
<PAGE> 21
THE STRIPPED ("ZERO") U.S. TREASURY SECURITIES FUND, PROVIDENT MUTUAL SERIES A
The Zero Coupon Bond Separate Account invests in units of The Stripped
("Zero") U.S. Treasury Securities Fund, Provident Mutual Series A, a unit
investment trust registered with the SEC as such under the 1940 Act. The Zero
Coupon Trust consists of one series with a maturity date of February 15, 2006.
The objective of the Trust is to provide safety of capital and a high yield to
maturity through investment in the fixed series consisting primarily of debt
obligations issued by the United States of America that have been stripped of
their unmatured interest coupons, coupons stripped from debt obligations of the
United States, and receipts and certificates for such stripped debt obligations
and coupons. Since the U.S. Treasury securities have been stripped of their
unmatured interest coupons, they are purchased at a deep discount. The
securities purchased by the Trust are listed below.
Since the U.S. Treasury securities have been stripped of their unmatured
interest coupons, they are purchased at a deep discount. If held to maturity,
the amounts invested by the Zero Coupon Trust would grow to the face value of
the U.S. Treasury securities and therefore, a compound rate of growth to
maturity could be determined for the Trust units at the time of purchase. The
units, however, are held in Sub-Accounts of the Zero Coupon Bond Separate
Account, and certain charges described under "Charges Against the Separate
Accounts" on Page 30, specifically the charge for mortality and expense risks
and the transaction charge against the Zero Coupon Bond Separate Account, must
be reflected in the determination of a net return. The net rate of return to
maturity calculated below thus depends on the compound rate of growth in the
units and these underlying charges, and on the units being held to maturity. It
does not, however, reflect the applicable Monthly Deductions from Policy Account
Value (see "Monthly Deductions," Page 29) or the Premium Tax Charge (see
"Premium Tax Charge," Page 27) or any Surrender Charges (see "Surrender
Charges," Page 28), which would affect the actual yield to an Owner. Since the
value of the Trust's units will vary daily to reflect the market value of the
underlying securities, the compound rate of growth to maturity and, hence, the
net rate of return to maturity will correspondingly vary on a daily basis. The
rate of return to maturity may differ for each Net Premium allocated to the Zero
Coupon Bond Separate Account, depending upon the rate in effect when the premium
is received.
2006 Series. This portfolio contains stripped U.S. Treasury securities
maturing on February 15, 2006.
The fluctuation in the value of units of the Zero Coupon Trust prior to
maturity is more volatile than that of units of a unit investment trust
containing unstripped U.S. Treasury securities of comparable maturities, and
because the value of units of the Zero Coupon Trust will affect the Death
Benefit and Policy Account Value, the Policy Account Value and Death Benefit
will fluctuate accordingly.
Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPFS) serves as
Sponsor for the Zero Coupon Trust. Because the series invests in a fixed
portfolio, there is no investment manager. As Sponsor, MLPFS sells units of the
Zero Coupon Trust to the Zero Coupon Bond Separate Account. The price of these
units includes a transaction charge which is not paid by the Zero Coupon Bond
Separate Account upon acquisition. Rather, the transaction charge is paid
directly by PMLIC to MLPFS out of PMLIC's General Account assets. The amount of
the transaction charge paid is limited by agreement between PMLIC and MLPFS and
will not be greater than that ordinarily paid by a dealer for similar
securities. PMLIC is reimbursed for the transaction charge paid through a daily
asset charge which is made against the assets of the Sub-Accounts. (See "Asset
Charge Against Zero Coupon Bond Separate Account," Page 30.)
Units of the Zero Coupon Trust are disposed of to the extent necessary for
PMLIC to provide benefits and make reallocations under the Policies. MLPFS
intends, but is not contractually obligated, to maintain a secondary market in
Trust units. As long as a secondary market exists, PMLIC will sell such units to
MLPFS at the Sponsor's repurchase price. Otherwise, units will be redeemed at
the Trust's redemption price, which is typically a lower amount.
Thirty days prior to the maturity date of the securities contained in a
series of the Trust, an Owner who has allocated Net Premiums to the Sub-Account
of the Zero Coupon Bond Separate Account investing in that series will be
notified and given the opportunity to select the account or Sub-Account into
which the Policy Account Value attributable thereto should be reallocated. If no
instructions are received from the Owner by
12
<PAGE> 22
PMLIC within the 30-day period, the amount in the Sub-Account will be
transferred to the Money Market Separate Account.
More detailed information may be found in the current Prospectus for The
Stripped ("Zero") U.S. Treasury Securities Fund, Provident Mutual Series A which
accompanies this Prospectus.
THE ALGER AMERICAN FUND
The Variable Account has sixteen Subaccounts, one of which invests
exclusively in shares of a Portfolio of The Alger American Fund ("Alger
American"). Alger American is a "series" type mutual fund registered with the
SEC as a diversified open-end management investment company issuing a number of
series or classes of shares, each of which represents an interest in a Portfolio
of Alger American.
The Alger American Small Capitalization Subaccount of the Variable Account
invests in shares of the Alger American Small Capitalization Portfolio of Alger
American. (Alger American has other investment portfolios that are not offered
to the Variable Account or under the Policies.) Shares of the Alger American
Small Capitalization Portfolio are purchased and redeemed by the Variable
Account at net asset value without a sales charge. The Variable Account
purchases shares of Alger American Small Capitalization Portfolio from Alger
American in accordance with a participation agreement between Alger American and
PMLIC. The termination provisions of this participation agreement is described
below.
Alger American Small Capitalization Portfolio seeks long-term capital
appreciation by focusing on small, fast-growing companies that offer innovative
products, services or technologies to a rapidly expanding marketplace.
The investment adviser for the Alger American Small Capitalization
Portfolio is Fred Alger Management, Inc. ("Alger Management"), which is
registered with the SEC as an investment adviser under the Investment Advisors
Act of 1940. As compensation for its services, Alger Management receives a fee
at the end of each month at an annual rate of .85% of the average net assets of
the Alger American Small Capitalization Portfolio.
A more extensive description of Alger American and the Alger American Small
Capitalization Portfolio, including the Portfolio's investment objectives and
policies, risks, expenses and other aspects of its operations are contained in
the Prospectus for Alger American which accompanies this Prospectus.
VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND II
Provident Mutual Variable Separate Account (the "Variable Account") has
sixteen Subaccounts, eight of which invest exclusively in shares of Portfolios
of the Variable Insurance Products Fund (the "VIP Fund") or of the Variable
Insurance Products Fund II (the "VIP Fund II"). Like the MS Fund, the VIP Fund
and the VIP Fund II are each "series" type mutual funds registered with the SEC
as diversified open-end management investment companies issuing a number of
series or classes of shares, each of which represents an interest in a Portfolio
of the Fund.
The Fidelity Equity-Income Subaccount, Fidelity Growth Subaccount, Fidelity
High Income Subaccount and Fidelity Overseas Subaccount of the Variable Account
invest in shares of the Equity-Income Portfolio, Growth Portfolio, High Income
Portfolio and Overseas Portfolio, respectively, of the VIP Fund. The Fidelity
Asset Manager Subaccount, Fidelity Contrafund Subaccount, Fidelity Index 500
Subaccount and Fidelity Investment Grade Bond Subaccount of the Variable Account
invest in shares of the Asset Manager Portfolio, Contrafund Subaccount, the
Index 500 Portfolio and the Investment Grade Bond Portfolio, respectively, of
the VIP Fund II. (The VIP Fund and VIP Fund II have other investment portfolios
that are not offered to the Variable Account or under the Policies.) Shares of
these Portfolios are purchased and redeemed by the Variable Account at net asset
value without a sales charge. The Variable Account purchases shares of the
Portfolios from the VIP Fund and the VIP Fund II in accordance with a
participation agreement between each Fund and PMLIC. The termination provisions
of these participation agreements are described below.
13
<PAGE> 23
The investment objectives of the Portfolios of the VIP Fund and the VIP
Fund II in which the Subaccounts invest are set forth below. The investment
experience of each Subaccount depends upon the investment performance of the
corresponding Portfolio. There is no assurance that any Portfolio will achieve
its stated objective.
VIP Fund
Equity-Income Portfolio. This Portfolio seeks reasonable income by
investing primarily in income-producing equity securities. In choosing these
securities, the Equity-Income Portfolio considers the potential for capital
appreciation. The Portfolio's goal is to achieve a yield which exceeds the
composite yield of the securities comprising the Standard and Poor's 500
Composite Stock Price Index.
Growth Portfolio. This Portfolio seeks to achieve capital appreciation.
The Growth Portfolio normally purchases common stocks, although its investments
are not restricted to any one type of security. Capital appreciation may also be
found in other types of securities, including bonds and preferred stocks.
High Income Portfolio. This Portfolio seeks to obtain a high level of
current income by investing primarily in high-yielding, lower-rated,
fixed-income securities, while also considering growth of capital.
Overseas Portfolio. This Portfolio seeks long term growth of capital
primarily through investments in foreign securities. The Overseas Portfolio
provides a means for diversification by participating in companies and economies
outside of the United States.
VIP Fund II
Asset Manager Portfolio. This Portfolio seeks to obtain high total return
with reduced risk over the long-term by allocating its assets among stocks,
bonds and short-term fixed-income instruments.
Contrafund Portfolio. This Portfolio seeks capital appreciation by
investing in companies believed to be undervalued due to an overly pessimistic
appraisal by the public.
Index 500 Portfolio. This Portfolio seeks to provide investment results
that correspond to the total return (i.e., the combination of capital changes
and income) of common stocks publicly traded in the United States. In seeking
this objective, the Index 500 Portfolio attempts to duplicate the composition
and total return of the Standard and Poor's 500 Composite Stock Price Index
while keeping transaction costs and other expenses low. The Portfolio is
designed as a long-term investment option.
Investment Grade Bond Portfolio. This Portfolio seeks as high a level of
current income as is consistent with the preservation of capital by investing in
a broad range of investment-grade fixed-income securities. The Portfolio will
maintain a dollar-weighted average portfolio maturity of ten years or less.
The Equity-Income, Growth, High Income, and Overseas Portfolios of the VIP
Fund and the Asset Manager, Contrafund, Index 500 and Investment Grade Bond
Portfolios of the VIP Fund II are managed by Fidelity Management & Research
Company ("FMR"). For managing its investments and business affairs, each
Portfolio pays FMR a monthly fee.
For the Equity-Income, Growth, Overseas and Asset Manager Portfolios, the
annual fee rate is the sum of two components:
1. A group fee rate based on the monthly average net assets of all the
mutual funds advised by FMR. This rate cannot rise above 0.52% and it
drops (to as low as a marginal rate of 0.30% when average group assets
exceed $174 billion) as total assets in all these funds rise.
2. An individual fund fee rate of 0.20% for the Equity-Income Portfolio,
0.30% for the Contrafund and Growth Portfolios, 0.40% for the Asset
Manager Portfolio and 0.45% for the Overseas Portfolio.
One-twelfth of the combined annual fee rate is applied to each Portfolio's
net assets averaged over the most recent month, giving a dollar amount which is
the fee for that month.
14
<PAGE> 24
The Index 500 Portfolio pays FMR a monthly management fee at the annual
rate of 0.28% of the Portfolio's average net assets. One-twelfth of this annual
fee rate is applied to the net assets averaged over the most recent month,
giving a dollar amount which is the fee for that month.
For the High Income and Investment Grade Bond Portfolios, the annual fee
rate is the sum of two components:
1. A group fee rate based on the monthly average net assets of all the
mutual funds advised by FMR. This rate cannot rise above 0.37%, and it
drops (to as low as a marginal rate of 0.14%) as total assets in all
these funds rise.
2. An individual fund fee rate of 0.35% for the High Income Portfolio and
0.30% for the Investment Grade Bond Portfolio.
One-twelfth of the combined annual fee rate is applied to the
Portfolio's net assets averaged over the most recent month, giving a dollar
amount which is the fee for that month.
On behalf of the Asset Manager Portfolio and the Contrafund Portfolio,
FMR has entered into sub-advisory agreements with Fidelity Management &
Research (U.K.) Inc. ("FMR (U.K.)") and Fidelity Management & Research (Far
East) Inc. ("FMR Far East"), pursuant to which these entities provide
research and investment recommendations with respect to companies based
outside the United States. FMR (U.K.) primarily focuses on companies based
in Europe while FMR Far East focuses primarily on companies based in Asia
and the Pacific Basin. Under the sub-advisory agreements, FMR and not the
Portfolios pay FMR (U.K.) and FMR Far East fees equal to 110% and 105%,
respectively, of each sub-advisor's costs incurred in connection with its
sub-advisory agreement.
On behalf of the Overseas Portfolio, FMR has entered into sub-advisory
agreements with FMR (U.K.), FMR Far East, and Fidelity International
Investment Advisors (FIIA). Under the sub-advisory agreements, FMR may
receive investment advice and research services with respect to companies
based outside the U.S. and may grant them investment management authority
as well as the authority to buy and sell securities if FMR believes it
would be beneficial to the Portfolio. FIIA, in turn, has entered into a
sub-advisory agreement with its wholly owned subsidiary Fidelity
International Investment Advisors (U.K.) Limited (FIIAL U.K.).
Currently, FMR (U.K.), FMR Far East, FIIA and FIIAL U.K. each focus on
investment opportunities in countries other than the U.S., including
countries in Europe, Asia and the Pacific Basin.
Under the sub-advisory agreements FMR pays the fees of FMR (U.K.), FMR
Far East, and FIIA. FIIA, in turn, pays the fees of FIIAL U.K.
For providing investment advice and research services the sub-advisors
are compensated as follows:
- FMR pays FMR (U.K.) and FMR Far East fees equal to 110% and 105%,
respectively, of FMR U.K.'s and FMR Far East's costs incurred in
connection with providing investment advice and research services.
- FMR pays FIIA 30% of its monthly management fee with respect to the
average market value of investments held by the Portfolio for which FIIA
has provided FMR with investment advice.
- FIIA pays FIIAL U.K. a fee equal to 110% of FIIAL U.K.'s costs incurred
in connection with providing investment advice and research services.
For providing investment management services, the sub-advisors are
compensated according to the following formulas:
- FMR pays FMR (U.K.), FMR Far East, and FIIA 50% of its monthly management
fee with respect to the Portfolio's average net assets managed by the
sub-advisor on a discretionary basis.
- FIIA pays FIIAL U.K. 110% of FIIAL U.K.'s costs incurred in connection
with providing investment management.
15
<PAGE> 25
Each Portfolio utilizes Fidelity Investments Institutional Operations
Company ("FIIOC"), an affiliate of FMR, to maintain the master accounts of the
participating insurance companies. Under the transfer agent agreement with
FIIOC, each Portfolio pays fees based on the type, size, and number of accounts
in each Portfolio and the number of transactions made by shareholders of each
Portfolio.
Each Portfolio also has an agreement with Fidelity Service Co. ("Service"),
an affiliate of FMR under which each Portfolio pays Service to calculate its
daily share prices and to maintain the portfolio and general accounting records
of each Portfolio and to administer each Portfolio's securities lending program.
The fees for pricing and bookkeeping services are based on each Portfolio's
average net assets but must fall within a range of $45,000 to $750,000. The fees
for securities lending services are based on the number and duration of
individual securities loans.
FMR may, from time to time, agree to reimburse a Portfolio for management
fees and other expenses above a specified percentage of average net assets.
Reimbursement arrangements, which may be terminated at any time without notice,
will increase a Portfolio's yield. If FMR discontinues a reimbursement
arrangement, each Portfolio's expenses will go up and its yield will be reduced.
FMR retains the right to be repaid by a Portfolio for expense reimbursements if
expenses fall below the limit prior to the end of a fiscal year. Repayment by a
Portfolio will lower its yield. FMR has voluntarily agreed to reimburse the
management fees and all other expenses (excluding taxes, interest and
extraordinary expenses) in excess of 1.50% of the average net assets of the
Equity-Income and Growth Portfolios, 1.25% of the average net assets of the
Asset Manager Portfolio and 0.28% of the average net assets of the Index 500
Portfolio.
A more extensive description of the VIP Fund and the VIP Fund II, the
investment objectives and policies of the Portfolios, the risks, expenses and
all other aspects of their operation is contained in the prospectuses for the
VIP Fund and VIP Fund II which accompany this Prospectus. You should note that
the VIP Fund and VIP Fund II have other investment portfolios that are not
available with the variable life insurance policies issued by PMLIC.
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
The Variable Account has sixteen Subaccounts, three of which invest
exclusively in shares of Portfolios of the Neuberger & Berman Advisers
Management Trust ("AMT"). Like the MS Fund, the AMT is a "series" type mutual
fund registered with the SEC as a diversified open-end management investment
company issuing a number of series or classes of shares, each of which
represents an interest in a Portfolio of AMT.
The Neuberger & Berman Balanced Subaccount, Neuberger & Berman Growth
Subaccount and Neuberger & Berman Limited Maturity Bond Subaccount of the
Variable Account invest in shares of the Balanced Portfolio, Growth Portfolio
and Limited Maturity Bond Portfolio, respectively, of AMT. (AMT has other
investment portfolios that are not offered to the Variable Account or under the
Policies.) Shares of these Portfolios are purchased and redeemed by the Variable
Account at net asset value without a sales charge. The Variable Account
purchases shares of the Portfolios from AMT in accordance with a participation
agreement between AMT and PMLIC. The termination provisions of these
participation agreements are described below.
Each Portfolio of AMT invests all of its net investable assets in its
corresponding Series (each, a "Series") of Advisers Managers Trust ("Managers
Trust"), an open-end management investment company. Each Series invests in
securities in accordance with an investment objective, policies and limitations
identical to those of its corresponding Portfolio. This "master/feeder fund"
structure is different from that of many other investment companies which
directly acquire and manage their own portfolios of securities. For more
information regarding this structure, see the prospectus for AMT.
In that the investment objective of each Portfolio matches that of its
corresponding Series, the following describes the investment objective of each
Series underlying the Portfolio of AMT in which the Subaccounts will invest. The
investment objectives of the Portfolios of AMT in which the Subaccounts invest
are set forth
16
<PAGE> 26
below. The investment experience of each Subaccount depends upon the investment
performance of its corresponding Portfolio. There is no assurance that any
Portfolio will achieve its stated objective.
Balanced Portfolio. The Series corresponding to this Portfolio seeks
long-term capital growth and reasonable current income without undue risk to
principal through investment of a portion of its assets in common stocks and a
portion of its assets in debt securities.
Growth Portfolio. The Series corresponding to this Portfolio seeks capital
appreciation without regard to income through investments in common stocks of
companies that the investment adviser believes will have the maximum potential
for long-term capital appreciation.
Limited Maturity Bond Portfolio. The Series corresponding to this
Portfolio seeks the highest current income consistent with low risk to principal
and liquidity through investment in a diversified portfolio of fixed and
variable debt securities with a short to intermediate term.
The Investment Adviser for the Series of Managers Trust corresponding to
the Balanced, Growth and Limited Maturity Bond Portfolios of AMT is Neuberger &
Berman Management, Incorporated. The Investment Adviser retains Neuberger &
Berman, without cost to AMT, as sub-adviser to furnish it with investment
recommendations and research information.
As compensation for its services under the Investment Advisory Agreement
AMT pays a fee to the Investment Adviser at the end of each month. For the
Balanced Portfolio this fee is paid at the annual rate of 0.80% of the average
daily net assets of the Portfolio, for the Growth Portfolio, at the annual rate
of 0.70% of the first $250 million of the average of the total net asset value
determined on each calendar day throughout the month (hereinafter called
"average asset value"), 0.675% of the next $250 million of average asset value,
0.650% of the next $250 million of average asset value, 0.625% of the next $250
million of average asset value and 0.60% of the average asset value in excess of
$1 billion and for the Limited Maturity Bond Portfolio, at the annual rate of
0.60% of the average daily net assets of the Portfolio.
In addition to the investment advisory fee, AMT incurs other expenses,
including certain costs of distributing its shares in accordance with a plan
adopted pursuant to Rule 12b-1 under the 1940 Act. The distributor, Neuberger &
Berman Management, Incorporated, has agreed to reimburse each of the Portfolios
for certain expenses.
A more extensive description of AMT, the Investment objectives of the
available Portfolios, the risks, expenses and all other aspects of their
operation is contained in the prospectuses for the Balanced, Growth and Limited
Maturity Bond Portfolios of AMT which accompany this Prospectus.
TCI PORTFOLIOS, INC.
The Variable Account has sixteen Subaccounts, one of which invests
exclusively in shares of a Portfolio of the TCI Portfolios, Inc. ("TCI"). Like
the MS Fund, the TCI is a "series" type mutual fund registered with the SEC as a
diversified open-end management investment company issuing a number of series or
classes of shares, each of which represents an interest in a Portfolio of TCI.
The TCI Growth Subaccount of the Variable Account invests in shares of the
TCI Growth Portfolio of TCI. (TCI has other investment portfolios that are not
offered to the Variable Account or under the Policies.) Shares of the TCI Growth
Portfolio are purchased and redeemed by the Variable Account at net asset value
without a sales charge. The Variable Account purchases shares of TCI Growth
Portfolio from TCI in accordance with a participation agreement between TCI and
PMLIC. The termination provisions of these participation agreements are
described below.
TCI Growth Portfolio seeks capital growth by investing primarily in common
stocks that are considered by management to have better-than-average prospects
for appreciation. There is no assurance that TCI Growth Portfolio will achieve
its stated objective.
17
<PAGE> 27
The investment adviser for the TCI Growth Portfolio is Investors Research
Corporation ("Investors Research"). As compensation for its services, Investors
Research receives a fee at the end of each month at an annual rate of 1% of the
average net assets of the TCI Growth Portfolio.
A more extensive description of TCI and the TCI Growth Portfolio, including
the Portfolio's investment objectives and policies, risks, expenses and other
aspects of its operations are contained in the Prospectus for TCI which
accompanies this Prospectus.
VAN ECK INVESTMENT TRUST
The Variable Account has sixteen Subaccounts, three of which invest
exclusively in shares of Portfolios of Van Eck Investment Trust (the "Van Eck
Trust"). Like the MS Fund, the Van Eck Trust is a "series" type mutual fund
registered with the SEC as a diversified open-end management investment company
issuing a number of series or classes of shares, each of which represents an
interest in a Portfolio of Van Eck Trust.
The Van Eck Global Bond Subaccount, Van Eck Gold and Natural Resources
Subaccount of the Variable Account invest in shares of the Van Eck Worldwide
Bond Portfolio, the Van Eck Gold and Natural Resources Portfolio, and the Van
Eck Worldwide Emerging Markets Portfolio, respectively, of Van Eck Trust. Shares
of the Van Eck Worldwide Bond Portfolio and the Gold and Natural Resources
Portfolio and Worldwide Emerging Markets Portfolio are purchased and redeemed by
the Variable Account at net asset value without a sales charge. The Variable
Account purchases shares of the Portfolios from Van Eck Trust in accordance with
a participation agreement between the Trust and PMLIC. The termination
provisions of this participation agreement are described below.
The investment objectives of the Portfolios of Van Eck Trust are set forth
below. The investment experience of each Subaccount depends upon the investment
performance of its corresponding Portfolio. There is no assurance that these
Portfolios will achieve their stated objectives.
Van Eck Gold and Natural Resources Portfolio seeks long-term capital
appreciation by investing in equity and debt securities of companies engaged in
the exploration, development, production and distribution of gold and other
natural resources such as strategic and other metals, minerals, forest products,
oil, natural gas and coal. Current income is not an investment objective.
Van Eck Worldwide Portfolio seeks high total return through a flexible
policy of investing globally, primarily in debt securities.
Van Eck Worldwide Emerging Markets Portfolio seeks long-term capital
appreciation by investing primarily in equity securities in emerging markets
around the world.
The investment adviser for the Gold and Natural Resources Portfolio, Van
Eck Worldwide Bond Portfolio and Van Eck Worldwide Emerging Markets Portfolio is
Van Eck Associates Corporation ("Van Eck Associates"). As compensation for its
services, Van Eck Associates receives a monthly fee at an annual rate of 0.75%
of the first $500 million of the average daily net assets of the Portfolios,
0.65% of the next $250 million of the daily net assets of the Portfolios, and
0.50% of the average daily net assets of the Portfolios in excess of $750
million.
Peregrine Asset Management (Hong Kong) Limited ("PAM") serves as
sub-investment adviser to the Worldwide Emerging Markets Portfolio pursuant to a
sub-investment advisory agreement with Van Eck Associates. As compensation for
its services, PAM is paid a monthly fee at an annual rate of 0.50% of average
daily net assets by Van Eck Associates from the advisory fees it receives from
Van Eck Trust with respect to this Portfolio.
A more extensive description of Van Eck Trust, Van Eck Gold and Natural
Resources Portfolio, Van Eck Worldwide Bond Portfolio and Van Eck Worldwide
Emerging Markets Portfolio, including each Portfolio's investment objectives and
policies, risks, expenses and other aspects of its operations are contained in
the Prospectus for the Trust that accompanies this Prospectus.
18
<PAGE> 28
TERMINATION OF PARTICIPATION AGREEMENTS
The participation agreements pursuant to which the Funds sell their shares
to Subaccounts of the Variable Account contain varying provisions regarding
termination. The following summarizes those provisions:
The Alger American Fund. The Agreement with The Alger American Fund
provides for termination: 1) by either party on 60 days written notice to
the other; 2) by Alger if the Policies cease to qualify as annuity
contracts or life insurance policies under the Code or the Policies are not
registered, issued or sold in accordance with applicable laws; 3) by any
party in the event of a material irreconcilable conflict; 4) by PMLIC in
the event that formal proceedings are initiated against Alger or the
distributor by the SEC or another regulator; 5) by PMLIC in the event the
Portfolio or trust fails to meet the diversification requirements; 6) by
PMLIC if shares are not reasonably available; 7) by PMLIC if shares of the
Portfolio are not registered, issued or sold in accordance with applicable
laws or applicable law precludes the use of such shares; 8) by PMLIC if
Alger fails to qualify as a regulated investment company under Subchapter M
of the Code; or 9) by Alger's principal underwriter if it determines that
PMLIC has suffered a material adverse change in its business, operation,
financial condition or prospects.
Fidelity Variable Insurance Products Fund and Variable Insurance
Products Fund II. The Agreements provide for termination 1) upon six
months' advance notice by either party, 2) at PMLIC's option if shares of
the Fund are not reasonably available to meet requirements of the policies,
3) at PMLIC's option if shares of the Fund are not registered, issued, or
sold in accordance with applicable laws, if the Fund ceases to qualify as a
regulated investment company under the Code or for a Portfolio of the Fund
in the event such Portfolio fails to meet diversification requirements
under the Code, 4) at the option of the Fund or its principal underwriter
if it determines that PMLIC has suffered material adverse changes in its
business or financial condition or is subject to material adverse
publicity, 5) at the option of PMLIC if the Fund has suffered material
adverse changes in its business or financial condition or is a subject of
material adverse publicity, or 6) at the option of the Fund or its
principal underwriter if PMLIC decides to make another mutual fund
available as a funding vehicle for its policies.
Neuberger & Berman Advisers Management Trust. This Agreement may be
terminated by either party on six months' written notice to the other.
TCI Portfolios, Inc. The agreement with TCI provides for termination
1) by PMLIC or TCI upon six months' prior written notice or in the event
that formal proceedings are initiated against the other party by the SEC or
another regulator, 2) by PMLIC or TCI in the event that shares of TCI
subject to the agreement are not registered, offered or sold in conformity
with applicable law, 3) by PMLIC upon reasonable notice if shares of one of
the then available Portfolios of TCI are no longer available or upon sixty
days notice if PMLIC should substitute shares of another fund or Fund for
those of TCI, 4) upon assignment of the agreement unless both parties agree
to the assignment in writing or upon termination of TCI's investment
management agreement with Investor's Research (unless a new management
agreement is entered into by TCI with Investor's Research), and 5) by TCI
if PMLIC breaches the agreement.
Van Eck Investment Trust. The agreement with Van Eck Trust provides
for termination 1) by PMLIC or Van Eck Trust upon six months prior written
notice or in the event that formal proceedings are initiated against the
other party by the SEC or another regulator, 2) by PMLIC or Van Eck Trust
in the event that shares of Van Eck Trust subject to the agreement are not
registered, offered or sold in conformity with applicable law, 3) by PMLIC
upon reasonable notice if shares of one of the then available Portfolios of
Van Eck Trust are no longer available or upon sixty days' notice if PMLIC
should substitute shares of another fund or Fund for those of Van Eck
Trust, 4) upon assignment of the agreement unless both parties agree to the
assignment in writing.
Should an agreement between PMLIC and a Fund terminate, the Subaccounts
which invest in that Fund will not be able to purchase additional shares of such
Fund. In that event, Owners will no longer be able to allocate cash values or
net premiums to Subaccounts investing in Portfolios of such Fund.
19
<PAGE> 29
Additionally, in certain circumstances, it is possible that a Fund or a
portfolio of a Fund may refuse to sell its shares to a Subaccount despite the
fact that the participation agreement between the Fund and PMLIC has not been
terminated. Should a Fund or portfolio of such Fund decide not to sell its
shares to PMLIC, PMLIC will not be able to honor requests by Owners to allocate
cash values or net premiums to Subaccounts investing in shares of that Fund or
portfolio.
The Company has entered into agreements with the investment advisers of
several of the Funds pursuant to which each such investment adviser will pay the
Company a servicing fee based upon an annual percentage of the average aggregate
net assets invested by the Company on behalf of the Variable Account. These
agreements reflect administrative services provided to the Funds by the Company.
Payments of such amounts by an adviser will not increase the fees paid by the
Funds or their shareholders.
RESOLVING MATERIAL CONFLICTS
The VIP Fund and VIP Fund II are used as investment vehicles for variable
life insurance policies and variable annuity contracts issued by PMLIC and
variable annuity contracts issued by Providentmutual Life and Annuity Company of
America, a subsidiary of PMLIC. AMT is used as an investment vehicle for
variable life insurance policies issued by PMLIC. In addition, the Funds, other
than MS Fund, are also available to registered separate accounts of insurance
companies, other than PMLIC or its affiliates, offering variable annuity and
variable life insurance policies. As a result, there is a possibility that a
material conflict may arise between the interests of Owners whose policy values
are allocated to the Variable Account and the owners of life insurance policies
and variable annuities issued by such other companies whose values are allocated
to one or more other separate accounts investing in any one of the Funds.
In addition, certain funds may sell shares to certain retirement plans
qualifying under Section 401 of the Code (including cash or deferred
arrangements under Section 401(k) of the Code). As a result, there is a
possibility that a material conflict may arise between the interests of Owners
of policies generally, or certain classes of Owners, and such retirement plans
or participants in such retirement plans.
In the event of a material conflict, PMLIC will take any necessary steps,
including removing the Variable Account from that Fund, to resolve the matter.
The Board of Directors or Trustees of the Funds intend to monitor events in
order to identify any material conflicts that possibly may arise and to
determine what action, if any, should be taken in response to those events or
conflicts. See the Individual Fund Prospectuses for more information.
THE GUARANTEED ACCOUNT
For information on the Guaranteed Account, see page 34.
DETAILED DESCRIPTION OF POLICY PROVISIONS
DEATH BENEFIT
General. As long as the Policy remains in force, the Insurance Proceeds of
the Policy will, upon due proof of the death of both Insureds (and fulfillment
of certain other requirements), be paid to the named Beneficiary in accordance
with the designated Death Benefit Option. The proceeds may be paid in cash or
under one of the Settlement Options set forth in the Policy. The amount payable
under the designated Death Benefit Option will be increased by any additional
benefits, and any dividend payable and will be decreased by any outstanding
Policy loan and accrued interest and by any unpaid Monthly Deductions.
Death Benefit Options. The Policy provides two Death Benefit Options:
Option A and Option B. The Owner designates the Death Benefit Option in the
application and may change it as described in "Change in Death Benefit Option,"
Page 22.
20
<PAGE> 30
Option A. The Death Benefit is equal to the greater of: (a) the Face
Amount of the Policy and (b) the Policy Account Value on the Valuation Date on
or next following the last surviving Insured's date of death multiplied by the
specified percentage shown in the table below:
<TABLE>
<CAPTION>
ATTAINED AGE
OF
ATTAINED AGE OF YOUNGER
YOUNGER INSURED PERCENTAGE INSURED PERCENTAGE
- --------------- ---------- ------------- ----------
<S> <C> <C> <C>
40 and under 250% 60 130%
45 215% 65 120%
50 185% 70 115%
55 150% 75 through 90 105%
95 through 99 100%
</TABLE>
For Attained Ages not shown, the percentages will decrease by a ratable portion
for each full year.
Illustration of Option A -- For purposes of this illustration, assume that
the younger Insured is under Attained Age 40 and there is no Policy loan
outstanding.
Under Option A, a Policy with a Face Amount of $200,000 will generally pay
a Death Benefit of $200,000. The specified percentage for a policy with a
younger Insured under Attained Age 40 on the Policy Anniversary prior to the
date of death is 250%. Because the Death Benefit must be equal to or be greater
than 2.50 times the Policy Account Value, any time the Policy Account Value
exceeds $80,000 the Death Benefit will exceed the Face Amount. Each additional
dollar added to the Policy Account Value will increase the Death Benefit by
$2.50. Thus, a policy with a 35 year old younger Insured and a Policy Account
Value of $150,000 will have a Death Benefit of $375,000 (2.50 X $150,000); a
Policy Account Value of $300,000 will yield a Death Benefit of $750,000 (2.50 X
$300,000); a Policy Account Value of $400,000 will yield a Death Benefit of
$1,000,000 (2.50 X $400,000).
Similarly, any time the Policy Account Value exceeds $80,000, each dollar
taken out of the Policy Account Value will reduce the Death Benefit by $2.50. If
at any time, however, the Policy Account Value multiplied by the specified
percentage is less than the Face Amount, the Death Benefit will be the Face
Amount of the Policy.
Option B. The Death Benefit is equal to the greater of: (a) the Face
Amount of the Policy plus the Policy Account Value and (b) the Policy Account
Value multiplied by the specified percentage shown in the table above. (The
Policy Account Value in each case is determined on the Valuation Day on or next
following the last surviving Insured's date of death.)
Illustration of Option B -- For purposes of this illustration, assume that
the younger Insured is under Attained Age 40 and there is no outstanding Policy
loan.
Under Option B, a Policy with a Face Amount of $200,000 will generally pay
a Death Benefit of $200,000 plus the Policy Account Value. Thus, for example, a
Policy with a $50,000 Policy Account Value will have a Death Benefit of $250,000
($200,000 plus $50,000); and a Policy Account Value of $100,000 will yield a
Death Benefit of $300,000. Since the specified percentage is 250%, the Death
Benefit will be at least 2.50 times the Policy Account Value. As a result, if
the Policy Account Value exceeds $133,333, the Death Benefit will be greater
than the Face Amount plus the Policy Account Value. Each additional dollar added
to the Policy Account Value above $133,333 will increase the Death Benefit by
$2.50. A Policy with a Policy Account Value of $150,000 will therefore have a
Death Benefit of $375,000 (2.50 X $150,000); a Policy Account Value of $300,000
will yield a Death Benefit of $750,000 (2.50 X $300,000); and a Policy Account
Value of $500,000 will yield a Death Benefit of $1,250,000 (2.50 X $500,000).
Similarly, any time the Policy Account Value exceeds $133,333, each dollar taken
out of the Policy Account Value will reduce the Death Benefit by $2.50. If at
any time, however, the Policy Account Value multiplied by the applicable
percentage is less than the Face Amount plus the Policy Account Value, the Death
Benefit will be the Face Amount plus the Policy Account Value.
Which Death Benefit Option to Choose. If an Owner prefers to have premium
payments and favorable investment performance reflected partly in the form of an
increasing Death Benefit, the Owner should choose
21
<PAGE> 31
Option B. If an Owner is satisfied with the amount of the Insureds' existing
insurance coverage and prefers to have premium payments and favorable investment
performance reflected to the maximum extent in the Policy Account Value, the
Owner should choose Option A.
Change in Death Benefit Option. After the second Policy Year, at any time
when the Death Benefit would be the Face Amount (if Option A is in effect) or
the Face Amount plus the Policy Account Value (if Option B is in effect), the
Death Benefit Option in effect may be changed by sending PMLIC a written
request. No charges will be imposed to make a change in the Death Benefit
Option. The effective date of any such change will be the Policy Processing Day
on or next following the date PMLIC receives the written request.
If the Death Benefit Option is changed from Option A to Option B, on the
effective date of the change, the Death Benefit will not change and the Face
Amount will be decreased by the Policy Account Value on that date. However, this
change may not be made if it would reduce the Face Amount to less than the
Minimum Face Amount for Policies being issued at that time.
If the Death Benefit Option is changed from Option B to Option A, on the
effective date of the change, the Death Benefit will not change and the Face
Amount will be increased by the Policy Account Value on that date.
A change in the Death Benefit Option may affect the Net Amount at Risk over
time which, in turn, would affect the monthly Cost of Insurance Charge. Changing
from Option A to Option B will generally result in a Net Amount at Risk that
remains level. Such a change will result in a relative increase in the cost of
insurance charges over time because the Net Amount at Risk will, unless the
Death Benefit is based on the applicable percentage of Policy Account Value,
remain level rather than decreasing as the Policy Account Value increases.
Unless the Death Benefit is based on the applicable percentage of Policy Account
Value, changing from Option B to Option A will, if the Policy Account Value
increases, decrease the Net Amount at Risk over time, thereby reducing the cost
of insurance charge.
The effects of these Death Benefit Option changes on the Face Amount, Death
Benefit and Net Amount at Risk can be illustrated as follows. Assume that a
contract under Option A has a Face Amount of $500,000 and a Policy Account Value
of $100,000 and, therefore, a Death Benefit of $500,000 and a Net Amount at Risk
of $400,000 ($500,000 - $100,000). If the Death Benefit Option is changed from
Option A to Option B, the Face Amount will decrease from $500,000 to $400,000
but the Death Benefit and Net Amount at Risk would remain the same. Assume that
a contract under Option B has a Face Amount of $500,000 and a Policy Account
Value of $50,000 and, therefore, the Death Benefit is $550,000 ($500,000 +
$50,000) and a Net Amount at Risk of $500,000 ($550,000 - $50,000). If the Death
Benefit Option is changed from Option B to Option A, the Face Amount will
increase to $550,000, but the Death Benefit and Net Amount at Risk would remain
the same.
If a change in the Death Benefit Option would result in cumulative premiums
exceeding the maximum premium limitations under the Internal Revenue Code for
life insurance, PMLIC will not effect the change.
A change in the Death Benefit Option may have Federal income tax
consequences. (See "Tax Treatment of Policy Benefits," Page 39).
How the Death Benefit May Vary. The amount of the Death Benefit may vary
with the Policy Account Value. The Death Benefit under Option A will vary with
the Policy Account Value whenever the specified percentage of Policy Account
Value exceeds the Face Amount of the Policy. The Death Benefit under Option B
will always vary with the Policy Account Value because the Death Benefit equals
the greater of (a) the Face Amount plus the Policy Account Value and (b) the
Policy Account Value multiplied by the specified percentage.
ABILITY TO DECREASE FACE AMOUNT
Subject to certain limitations, an Owner may generally, at any time after
the second Policy Year, decrease the Policy's Face Amount by submitting a
written application to PMLIC. (Decreases are not
22
<PAGE> 32
permitted for policies issued in Virginia.) The effective date of the decrease
will be the Policy Processing Day on or next following PMLIC's approval of the
request. The effect of a decrease in Face Amount on Policy charges, as well as
other considerations, are described below. Decreases in Face Amount may not be
made within 12 months of a previous decrease.
The amount of a Face Amount decrease must be for at least $25,000 (or such
lesser amount required in a particular state). The Face Amount after any
decrease may not be less than the Minimum Face Amount for Policies being issued
at the time of the decrease. To the extent a decrease in the Face Amount could
result in cumulative premiums exceeding the maximum premium limitations
applicable for life insurance under the Internal Revenue Code, PMLIC will not
effect the decrease.
A decrease in the Face Amount generally will decrease the total Net Amount
at Risk which will decrease an Owner's monthly insurance charges. A decrease in
the Face Amount may result in the imposition of a surrender charge as of the
Policy Processing Day on which the decrease becomes effective. (See "Surrender
Charge Upon Decrease in Face Amount," Page 28).
Any surrender charge applicable to a decrease will be deducted from the
Policy Account Value. The surrender charge will be deducted from the Separate
Accounts and the Guaranteed Account based on the proportion that the value in
such account bears to the total unloaned Policy Account Value. The remaining
Surrender Charge will equal the charge prior to the decrease less the charge
deducted in connection with such decrease.
CHANGES AFFECTING THE DEATH BENEFIT
Owner may decrease the Face Amount. In addition, changing the level of
premium payments, and, to a lesser extent, making a partial withdrawal of Net
Cash Surrender Value may have consequences for the Death Benefit or charges
associated therewith. The consequences of each are summarized below.
A decrease in Face Amount will, subject to applicable percentage
limitations, decrease the insurance protection. It will not reduce the Policy
Account Value, except for the deduction of any surrender charge applicable to
the decrease. The Monthly Deductions will generally be correspondingly lower
following the decrease.
Under Death Benefit Option A, until the applicable percentage of Policy
Account Value exceeds the Face Amount, then (i) if the Owner increases the
premium payments from the current level, the amount of insurance protection will
generally be reduced, and (ii) if the Owner reduces the premium payments from
the current level, the amount of insurance protection will generally be
increased.
Under Death Benefit Option B, until the applicable percentage of Policy
Account Value exceeds the Face Amount plus the Policy Account Value, the level
of premium payments will not affect the amount of insurance protection.
(However, both the Policy Account Value and Death Benefit will be increased if
premium payments are increased and reduced if premium payments are reduced.)
Under either Death Benefit Option, if the Death Benefit is the applicable
percentage of Policy Account Value, then (i) if the Owner increases premium
payments from the current level, the amount of insurance protection will
increase and (ii) if the Owner reduces the premium payments from the current
level, the amount of insurance protection will be lower.
A partial withdrawal of Net Cash Surrender Value will reduce the Death
Benefit. It will not reduce the amount of insurance protection unless the Death
Benefit is based on the applicable percentage of Policy Account Value. This is
because if the Death Benefit is based on the applicable percentage, the decrease
in the Death Benefit will be greater than the amount of a withdrawal. Since the
primary use of a partial withdrawal is to withdraw cash which reduces the Policy
Account Value, the Net Cash Surrender Value is reduced, thereby increasing the
likelihood that the Policy will lapse. (See "Policy Lapse," Page 27).
23
<PAGE> 33
HOW THE DURATION OF THE POLICY MAY VARY
The Policy will remain in force as long as the Net Cash Surrender Value of
the Policy is sufficient to pay the Monthly Deductions and the charges under the
Policy. When the Net Cash Surrender Value is insufficient to pay the charges and
the Grace Period expires without an adequate premium payment by the Owner, the
Policy will lapse and terminate without value. Notwithstanding the foregoing,
during the first two Policy Years the Policy will not lapse if the Minimum
Guarantee Premium has been paid. The Owner has certain rights to reinstate the
Policy. (See "Reinstatement," Page 27).
POLICY ACCOUNT VALUE
The Policy Account Value is the total amount of value held under the Policy
at any time. It is equal to the sum of the Policy's values in the Separate
Accounts, the Guaranteed Account and the Loan Account. The Policy Account Value
minus any applicable Surrender Charge is equal to the Cash Surrender Value.
There is no guaranteed minimum for the portion of the Policy Account Value in
any of the Separate Accounts and, because the Policy Account Value on any future
date depends upon a number of variables, it cannot be predetermined.
The Policy Account Value and Cash Surrender Value will reflect the
investment performance of the chosen Separate Accounts, the crediting of
interest in excess of 4% (the guaranteed minimum) for the Guaranteed Account and
the Loan Account, any Net Premiums paid, any transfers, any partial withdrawals,
any loans, any loan repayments, any loan interest paid, and any charges assessed
in connection with the Policy.
Calculation of Policy Account Value. The Policy Account Value is
determined first on the Policy Date and thereafter on each Valuation Day. On the
Policy Date, the Policy Account Value will be the Net Premiums received less any
Monthly Deductions due on the Policy Date. On each Valuation Day after the
Policy Date, the Policy Account Value will be:
(1) The aggregate of the values attributable to the Policy in each
Separate Account, determined by multiplying the number of units the Policy
has in the Separate Account by the Separate Account's Unit Value on that
date;
(2) The value attributable to the Policy in the Guaranteed Account
(See "The Guaranteed Account," Page 34); plus
(3) The value attributable to the Policy in the Loan Account. (See
"Loan Privileges," Page 31).
Determination of Number of Units for the Separate Accounts. Amounts
allocated, transferred or added to a Separate Account under a Policy are used to
purchase units of that Separate Account; units are redeemed when amounts are
deducted, transferred or withdrawn. The number of units a Policy has in a
Separate Account equals the number of units purchased minus the number of units
redeemed up to such time. For each Separate Account, the number of units
purchased or redeemed in connection with a particular transaction is determined
by dividing the dollar amount by the unit value.
Determination of Unit Value. The unit value of a Separate Account is equal
to the unit value on the immediately preceding Valuation Day multiplied by the
Net Investment Factor for that Separate Account on that Valuation Day.
Net Investment Factor. Each Separate Account or Sub-Account of a Separate
Account has its own Net Investment Factor. The Net Investment Factor measures
the daily investment performance of a Separate Account or Sub-Account. The
factor will increase to reflect investment income and capital gains, realized
and unrealized, for the securities of the underlying portfolio or series. The
factor will decrease to reflect any capital losses, realized or unrealized, for
the securities of the underlying portfolio or series.
The asset charge for mortality and expense risks and the transaction charge
for the Zero Coupon Bond Separate Account will be deducted in determining the
applicable Net Investment Factor.
24
<PAGE> 34
PAYMENT AND ALLOCATION OF PREMIUMS
Issuance of a Policy. In order to purchase a Policy, the proposed insureds
must make application to PMLIC through a licensed PMLIC agent who is also a
registered representative of 1717 Capital Management Company ("1717") (formerly
PML Securities Company) or a broker/dealer having a Selling Agreement with 1717
or a broker/dealer having a Selling Agreement with such a broker/dealer. The
Minimum Face Amount of a Policy under PMLIC's rules is currently $200,000
($225,000 in New York State). PMLIC reserves the right to revise its rules from
time to time to specify a different Minimum Face Amount for subsequently issued
policies. A Policy will be issued only to Insureds who individually have an
Issue Age of 21 to 85 and a Joint Equal Age of 25 to 80 and who provide PMLIC
with satisfactory evidence of insurability. Acceptance is subject to PMLIC's
underwriting rules. PMLIC reserves the right to reject an application for any
reason permitted by law. (See "Distribution of Policies," Page 46.)
At the time the applications for the Policy are signed, the applicants can,
subject to PMLIC's underwriting rules, obtain temporary insurance protection,
pending issuance of the Policy, by answering "no" to the Health Questions of the
Temporary Agreement and submitting payment of the Minimum Initial Premium with
the Application. The Minimum Initial Premium will equal the Minimum Annual
Premium multiplied by the following factor:
<TABLE>
<CAPTION>
PREMIUM BILLING MODE
SELECTED AT ISSUE FACTOR
------------------------------------------ -----
<S> <C>
Annual.................................... 1.000
Semi-annual............................... 0.500
Quarterly................................. 0.250
Monthly................................... 0.167
</TABLE>
The amount of temporary coverage is the lesser of the Face Amount applied
for or $500,000. This coverage will end on the earliest of: (a) the 90th day
from the date of application; (b) the date that insurance takes effect under the
Policy; (c) the date a policy, other than as applied for, is offered to the
Applicant; or (d) five days from the date PMLIC mails a notice of termination of
coverage.
Where Minimum Initial Premium is not submitted with the application, it
must be submitted when the Policy is delivered.
Amount and Timing of Premiums. Each premium payment must be for at least
$25. Subject to certain limitations described below, an Owner has considerable
flexibility in determining the amount and frequency of premium payments.
At the time of application, the Owner will select a Planned Periodic
Premium schedule, based on a periodic billing mode of annual, semi-annual, or
quarterly payment. The Owner is entitled to receive a premium reminder notice
from PMLIC at the specified interval. The Owner is not required to pay the
Planned Periodic Premiums in accordance with the specified schedule. The Owner
has the flexibility to alter the amount, frequency and time period over which
premiums are paid.
Payment of the Planned Periodic Premiums will not guarantee that the Policy
will remain in force. Instead, the duration of the Policy depends upon the
Policy's Net Cash Surrender Value. Thus, even if Planned Periodic Premiums are
paid, the Policy will lapse whenever the Net Cash Surrender Value is
insufficient to pay the Monthly Deductions and any other charges under the
Policy and if a Grace Period expires without an adequate payment by the Owner.
Under the Automatic Payment Plan, the Owner can select a monthly payment
schedule pursuant to which premium payments will be automatically deducted from
a bank account or other source, rather than being "billed".
Unless prohibited by a particular state (i.e., New York) any payments made
while there is an outstanding Policy loan will be applied as loan repayments,
unless PMLIC is notified in writing that the amount is to be applied as a
premium payment. (Payments made under New York Policies will be treated as
premium payments and will only be applied as loan repayments if the Owner
specifically requests).
25
<PAGE> 35
Premium Limitations. With regard to a Policy's inside build-up, the
Internal Revenue Code of 1986 (the "Code") provides for exclusion of the Death
Benefit from gross income if total premium payments do not exceed certain stated
limits. In no event can the total of all premiums paid under a Policy exceed
such limits. If at any time a premium is paid which would result in total
premiums exceeding such limits, PMLIC will only accept that portion of the
premium which would make total premiums equal the maximum amount which may be
paid under the Policy. The excess will be refunded. Even if total premiums were
to exceed the maximum premium limitations established by the Code, the excess of
a Policy's Death Benefit over the Policy's Cash Surrender Value would still be
excludable from gross income under the Code.
The maximum premium limitations set forth in the Code depend in part upon
the amount of the Death Benefit at any time. As a result, any Policy changes
which affect the amount of the Death Benefit may affect whether cumulative
premiums paid under the Policy exceed the maximum premium limitations. To the
extent that any such change would result in cumulative premiums exceeding the
maximum premium limitations, PMLIC will not effect such change. (See "Federal
Income Tax Considerations," Page 38).
Unless the Insureds provide satisfactory evidence of insurability, PMLIC
reserves the right to limit the amount of any premium payment if it increases
the Death Benefit more than it increases the Policy Account Value.
Allocation of Net Premiums. The Net Premium equals the premium paid less
the Premium Expense Charge. The application for the Policy will indicate how Net
Premiums should be allocated among the Separate Accounts and/or the Guaranteed
Account. The percentages of each Net Premium that may be allocated to any
account must be in whole numbers and the sum of the allocation percentages must
be 100%. PMLIC will allocate the Net Premiums on the date it receives such
premium at its Home Office.
Where state law requires a refund of premiums paid when a policy is
returned under the Free-Look provision (See "Free-Look for Policy," Page 34) any
portion of the Initial Premium and any subsequent premiums received by PMLIC
before the expiration of a 15-day period beginning on the later of the Policy
Issue Date or the date PMLIC receives the Minimum Initial Premium, which are to
be allocated to the Separate Accounts will be allocated to the Money Market
Separate Account. At the end of the 15-day period, PMLIC will allocate the
amount in the Money Market Separate Account to each of the chosen Separate
Accounts based on the proportion that the allocation percentage for such
Separate Account bears to the sum of the Separate Account premium allocation
percentages.
For example, assume a Policy was issued with Net Premiums allocated 25% to
the Growth Separate Account, 25% to the Bond Separate Account and 50% to the
Guaranteed Account. During the 15-day period stated above, 50% (25% + 25%) of
the premiums will be allocated to the Money Market Separate Account. At the end
of the 15-day period, 50% (25% / 50%) of the amount in the Money Market Separate
Account will be transferred to the Growth Separate Account and 50% to the Bond
Separate Account.
For premium payments received after the 15-day period, Net Premiums will be
allocated based on the allocation percentages then in effect. The allocation
schedules may be changed at any time by providing PMLIC with written notice.
The values of the Separate Accounts will vary with their investment
experience and the Owner bears the entire investment risk. Owners should
periodically review their allocation schedule in light of market conditions and
the Owner's overall financial objectives.
Transfers. The Owner may transfer the Policy Account Value between and
among the Separate Accounts, the Subaccounts of the Variable Account and the
Guaranteed Account by making a written transfer request to PMLIC. The amount
transferred each time must be at least $1,000, unless the total value in an
account is less than $1,000, in which case the entire amount will be
transferred. Transfers between and among the Separate Accounts (and/or
Subaccounts) are made as of the Valuation Day that the request for transfer is
received at the Home Office.
The Owner may, at any time, transfer all or part of the amount in one of
the Separate Accounts (or Sub-Account) to another Separate Account (or
Subaccount) and/or to the Guaranteed Account. (For transfers
26
<PAGE> 36
from the Guaranteed Account to the Separate Accounts, see "Transfers from
Guaranteed Account," Page 35).
After four transfers have been made in any Policy Year, a $25 transfer
charge will be deducted from each transfer during the remainder of such Policy
Year. All transfers included in a request are treated as one transfer
transaction. Transfers resulting from Policy loans, the exercise of exchange
privileges, and the reallocation from the Money Market Separate Account
following the 15-day period after the Issue Date, will not be subject to a
transfer charge and will not count against the four free transfers in any Policy
Year. Under present law, transfers are not taxable transactions.
Policy Lapse. The failure to make a premium payment will not itself cause
a Policy to lapse. Lapse will only occur when the Net Cash Surrender Value is
insufficient to cover the Monthly Deductions and other charges under the Policy
and the Grace Period expires without a sufficient payment. During the first two
Policy Years, the Policy will not lapse if the Minimum Guarantee Premium has
been paid.
The Policy provides for a 61-day Grace Period that is measured from the
date on which notice is sent by PMLIC. Thus, the Policy does not lapse, and the
insurance coverage continues, until the expiration of this Grace Period. In
order to prevent lapse, the Owner must during the Grace Period make a premium
payment equal to three Monthly Deductions. The notice sent by PMLIC will specify
the payment required to keep the Policy in force. Failure to make a sufficient
payment within the Grace Period will result in lapse of the Policy without
value.
Reinstatement. A Policy that lapses without value may be reinstated at any
time within three years (or longer period required in a particular state) after
the expiration of the Grace Period and before the Final Policy Date by
submitting evidence of insurability satisfactory to PMLIC for both Insureds or
evidence for the last surviving Insured and due proof that the first death
occurred before the date of lapse. Payment of an amount sufficient to keep the
Policy in force for at least three months following the effective date of
reinstatement, which is the date the reinstatement application is approved, is
also required. Upon reinstatement, the Policy Account Value will be based upon
the premium paid to reinstate the Policy and the Policy will be reinstated with
the same Policy Date as it had prior to the lapse.
CHARGES AND DEDUCTIONS
Charges will be deducted in connection with the Policy to compensate PMLIC
for (a) providing the insurance benefits set forth in the Policy; (b)
administering the Policy; (c) assuming certain risks in connection with the
Policy; and (d) incurring expenses in distributing the Policy.
PREMIUM EXPENSE CHARGE
Prior to allocation of Net Premiums, premiums paid are reduced by a Premium
Expense Charge which consists of a Premium Tax Charge, a Percent of Premium
Charge and a Federal Tax Charge.
Premium Tax Charge. Various states and some of their subdivisions impose a
tax on premiums received by insurance companies. Premium taxes vary from state
to state and range from 0.75% to 3.5%. A deduction of a percentage of the
premium will be made from each premium payment. The applicable percentage will
be based on the rate for the Insureds' residence.
Percent of Premium Sales Charge. In Policy Years 1 to 10, 5% will be
deducted from each premium payment to partially compensate PMLIC for the cost of
selling the Policy. At the present time, PMLIC does not intend to apply this
charge to premiums paid after Policy Year 10, but reserves the right to do so.
Federal Tax Charge. PMLIC will deduct 1.25% from each premium payment to
cover the cost of Federal taxes resulting from its receipt of such premium
payment under the Policy. Section 848 of the Internal Revenue Code (enacted by
the Omnibus Budget Reconciliation Act of 1990) ties PMLIC's corporate tax
liability (i.e., "tax burden"), in part, to the receipt of such premium
payments. PMLIC represents that this charge is reasonable in relation to its
increased tax burden under Section 848 of the Code. In addition,
27
<PAGE> 37
PMLIC reserves the right to change the amount of this charge if the applicable
Federal tax law changes PMLIC's tax burden.
SURRENDER CHARGE
A Surrender Charge, which consists of a Deferred Administrative Charge and
a Deferred Sales Charge, is imposed if the Policy is surrendered or lapses at
any time before the end of the fifteenth Policy Year. For Policies sold to
residents of New York State, the Surrender Charge applies during the first 12
Policy Years. A portion of this Surrender Charge will be deducted if the Owner
decreases the Initial Face Amount before the end of the fifteenth Policy Year
(12 Policy Years for New York Policies).
The Surrender Charge is designed partially to compensate PMLIC for the cost
of administering and selling the Policy, including agent sales commissions, the
cost of printing the prospectuses and sales literature, and any advertising and
underwriting costs. PMLIC does not expect the surrender charge to cover all of
these costs. To the extent that they do not, PMLIC will cover the short-fall
from its general account assets, which may include profits from the mortality
and expense risk charge.
Deferred Administrative Charge. The Deferred Administrative Charge is as
follows:
<TABLE>
<CAPTION>
FOR NEW YORK POLICIES
---------------------------------------------
CHARGE PER CHARGE PER
POLICY YEAR $1,000 OF INITIAL FACE AMOUNT POLICY YEAR $1,000 OF INITIAL FACE AMOUNT
- ------------- ----------------------------- ------------- -----------------------------
<S> <C> <C> <C>
1-11 $1.50 1-8 $1.50
12 1.20 9 1.20
13 .90 10 .90
14 .60 11 .60
15 .30 12 .30
16 and after 0 13 and after 0
</TABLE>
The actual Deferred Administrative Charge will be the charge described
above less the amount of any Deferred Administrative Charge previously paid at
the time of a decrease in Face Amount. PMLIC expects to realize no profit from
this charge.
Deferred Sales Charge. The Deferred Sales Charge will not exceed the
Maximum Deferred Sales Charge specified in the Policy. During Policy Years 1
through 11 (Policy Years 1 through 8 for New York), this maximum equals: for
Joint Equal Ages 25 through 71, 50% of the Surrender Charge Target Premium for
the Face Amount; for Joint Equal Ages 72 through 75, 40% of the Surrender Charge
Target Premium; and for Joint Equal Ages 76 through 80, 30% of the Surrender
Charge Target Premium. The Maximum Deferred Sales Surrender Charge decreases by
20% of the original amount each year in Policy Years 12 through 15 (Policy Years
9 through 12 for New York).
<TABLE>
<CAPTION>
FOR NEW YORK POLICIES
POLICY YEAR POLICY YEAR
JOINT EQUAL ----------------------------------------------------- ----------------------------------------------------
AGES 1-11 12 13 14 15 16 AND AFTER 1-8 9 10 11 12 13 AND AFTER
-------------- ---- --- --- --- --- ------------ --- --- --- --- --- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
25-71 50% 40% 30% 20% 10% 0 50 % 40% 30% 20% 10% 0
72-75 40 32 24 16 8 0 40 32 24 16 8 0
76-80 30 24 18 12 6 0 30 24 18 12 6 0
</TABLE>
The Deferred Sales Charge actually imposed will equal the lesser of this maximum
and an amount equal to 25% of the premiums actually received during the first
Policy Year up to one Surrender Charge Target Premium plus 4% of all other
premiums paid to the date of surrender or lapse, less any Deferred Sales Charge
previously paid at the time of a decrease in Face Amount.
Surrender Charge Upon Decrease in Face Amount. A Surrender Charge may be
deducted on a decrease in Face Amount. In the event of a decrease, the Surrender
Charge deducted is a fraction of the charge that would apply to a full surrender
of the Policy. The fraction will be determined by dividing the amount of the
decrease by the Face Amount immediately prior to the decrease and multiplying
the result by the Surrender Charge.
28
<PAGE> 38
Allocation of Surrender Charge. The Surrender Charge will be deducted from
the Policy Account Value. For surrender charges resulting from Face Amount
decreases, that part of any such surrender charge will reduce the Policy Account
Value and will be allocated among the accounts based on the proportion that the
value in each of the Separate Accounts and the Guaranteed Account Value bear to
the total unloaned Policy Account Value.
MONTHLY DEDUCTIONS
Charges will be deducted from the Policy Account Value on the Policy Date
and on each Policy Processing Day to compensate PMLIC for administrative
expenses and for the insurance coverage provided by the Policy. The Monthly
Deduction consists of four components -- (a) the cost of insurance, (b)
insurance underwriting and expenses in connection with issuing the Policy, (c)
administrative expenses, and (d) the cost of any additional benefits provided by
rider. Because portions of the Monthly Deduction, such as the cost of insurance,
can vary from month to month, the Monthly Deduction may vary in amount from
month to month. The Monthly Deduction will be deducted from the Separate
Accounts and the Guaranteed Account in accordance with the allocation
percentages for Monthly Deductions chosen by the Owner at the time of
application, or as later changed by PMLIC pursuant to the Owner's written
request.
If a monthly deduction cannot be made on the basis of the allocation
schedule then in effect, the deduction will be made based on the allocation of
Policy Account Value among the Owner's Guaranteed Account Value and the value in
any Separate Account and/or Subaccount.
Cost of Insurance. Because the cost of insurance depends upon several
variables, the cost for each Policy Month can vary. PMLIC will determine the
monthly Cost of Insurance Charge by multiplying the applicable cost of insurance
rate by the Net Amount at Risk for each Policy Month.
The Net Amount at Risk on any Policy Processing Day is the amount by which
the Death Benefit exceeds the Policy Account Value. In calculating the cost of
insurance charge, the rate is applied to the Net Amount at Risk. Any change in
the Net Amount at Risk will affect the total cost of insurance charges paid by
the Owner.
Cost of Insurance Rate. The cost of insurance rate will be based on the
Issue Age, Sex and Premium Class of each Insured and Duration. The actual
monthly cost of insurance rates will be based on PMLIC's expectations as to
future mortality and expense experience. They will not, however, be greater than
the guaranteed maximum cost of insurance rates set forth in the Policy. These
guaranteed maximum rates are based on the Issue Age, Sex, Premium Classes of
each Insured, the Duration, and the 1980 Commissioners Standard Ordinary
Smoker/Nonsmoker Mortality Table. Any change in the cost of insurance rates will
apply to all pairs of Insureds with the same Issue Ages, Sexes, and Premium
Classes and Duration.
Premium Class. The Premium Classes of the Insureds will affect the cost of
insurance rates. PMLIC currently places Insureds into standard classes and
classes with extra ratings which reflect higher mortality risks. In an otherwise
identical Policy, Insureds in the standard class will have a lower cost of
insurance than Insureds in a class with extra ratings. The Standard Premium
Class is divided into three categories: smoker, nonsmoker and preferred.
Nonsmoking Insureds will generally incur lower cost of insurance rates than
Insureds who are classified as smokers in the same Premium Class. Preferred
Insureds will generally incur lower cost of insurance rates than Insureds who
are classified as nonsmokers.
Administrative Charges. PMLIC administers the Policy and the Separate
Accounts and, therefore, will incur certain ordinary administrative expenses and
certain issuance expenses. There are two administrative charges, the Initial
Administrative Charge and the Monthly Administrative Charge. PMLIC does not
expect to make a profit on either of these charges.
Initial Administrative Charge. An Initial Administrative Charge of $17.50
plus $0.11 per $1,000 of Initial Face Amount will be deducted from the Policy
Account Value on each of the first 12 Policy Processing Days as part of the
Monthly Deduction. The Initial Administrative Charge is intended to reimburse
PMLIC for administrative expenses in connection with the issuance of the Policy,
including medical exams, review of
29
<PAGE> 39
applications for insurance, underwriting decisions and processing of the
applications, establishing Policy records, and Policy issue.
Monthly Administrative Charge. A Monthly Administrative Charge (presently
$7.50 plus $0.01 per $1,000 of Face Amount) will be deducted from the Policy
Account Value on the Policy Date and each Policy Processing Day as part of the
Monthly Deduction. This charge may be increased, but in no event will it be
greater than $12 plus $0.03 per $1,000 of Face Amount per month. This charge is
intended to reimburse PMLIC for ordinary administrative expenses expected to be
incurred, including record keeping, processing claims and certain Policy
changes, preparing and mailing reports, and overhead costs.
Additional Benefit Charges. The Monthly Deduction will include charges for
any additional benefits added to the Policy. The monthly charges will be
specified in the applicable Rider.
PARTIAL WITHDRAWAL CHARGE
A charge of $25 will be deducted from the Policy Account Value for each
partial withdrawal of Net Cash Surrender Value. This charge is intended to
compensate PMLIC for the administrative costs in effecting the requested payment
and in making all calculations which may be required by reason of the partial
withdrawal.
TRANSFER CHARGE
After four transfers have been made in any Policy Year, a transfer charge
of $25 will be deducted for each transfer during the remainder of such Policy
Year to compensate PMLIC for the costs of processing such transfers. PMLIC
expects to realize no profit from this charge.
The transfer charge will be deducted from the amount being transferred. The
transfer charge will not apply to transfers resulting from Policy loans, the
exercise of special transfer rights and the initial reallocation of account
values from the Money Market Separate Account to other Separate Accounts. These
transfers will not count against the four free transfers in any Policy Year.
CHARGES AGAINST THE SEPARATE ACCOUNTS
Mortality and Expense Risk Charge. A daily charge will be deducted from
the value of the net assets of the Separate Accounts to compensate PMLIC for
mortality and expense risks assumed in connection with the Policy. This charge
will be deducted at an annual rate of 0.60% (or a daily rate of .001644%) of the
average daily net assets of each Separate Account. This charge may be increased,
but in no event will it be greater than an annual rate of 0.90% of the average
daily net assets of each Separate Account. The mortality risk assumed by PMLIC
is that Insureds may live for a shorter time than projected and, therefore,
greater death benefits than expected will be paid in relation to the amount of
premiums received. The expense risk assumed is that expenses incurred in issuing
and administering the Policies will exceed the administrative charges provided
in the Policy.
If the Mortality and Expense Risk Charge proves insufficient, PMLIC will
provide for all death benefits and expenses and any loss will be borne by PMLIC.
Conversely, PMLIC will realize a gain from this charge to the extent all money
collected from this charge is not needed to provide for benefits and expenses
under the Policies.
Asset Charge Against Zero Coupon Bond Separate Account. PMLIC makes a
daily asset charge against the assets of the Zero Coupon Bond Separate Account.
This charge is to reimburse PMLIC for transaction charges paid directly by PMLIC
to Merrill Lynch, Pierce, Fenner & Smith on the sale of Zero Coupon Trust units
to the Zero Coupon Bond Separate Account. PMLIC pays these amounts from General
Account assets. The amount of the asset charge currently is equivalent to an
annual rate of 0.25% (.000685% per day) of the average daily net assets of each
Sub-Account. This amount may be increased in the future, but in no event will it
exceed an annual rate of 0.50%. The charge will be cost-based (taking into
account a loss of interest) with no anticipated element of profit for PMLIC.
30
<PAGE> 40
OTHER CHARGES
The Separate Accounts purchase shares of the Funds at net asset value. The
net asset value of those shares reflect management fees and expenses already
deducted from the assets of the Funds' Portfolios. The fees and expenses for the
Funds and their Portfolios are described briefly in connection with a general
description of each Fund.
More detailed information is contained in the Funds and the Zero Coupon
Trust Prospectuses which are attached to or accompany this Prospectus.
CONTRACT RIGHTS
LOAN PRIVILEGES
General. The Owner may at any time after the Issue Date borrow money from
PMLIC using the Policy as the only security for the loan. The Owner may obtain
Policy loans in a minimum amount of $500 (or such lesser minimum required in a
particular state) but not exceeding the Policy's Net Cash Surrender Value on the
date of the loan. While either Insured is living, the Owner may repay all or a
portion of a loan and accrued interest.
Interest Rate Charged. The interest rate charged on Policy loans will be
at the fixed rate of 6% per year. Interest is due at the end of each Policy
Year. If interest is not paid when due, it will be added to the loan balance and
bear interest at the same rate.
Allocation of Loans and Collateral. PMLIC will allocate the amount of a
Policy loan among the Separate Accounts (and Subaccounts) and/or the Guaranteed
Account based upon the proportion that the value of the Separate Accounts (and
Subaccounts) and/or the Guaranteed Account Value bear to the total unloaned
Policy Account Value at the time the loan is made.
The collateral for a Policy loan will be the loan amount plus accrued
interest to the next Policy Anniversary, less interest at 4% per annum which
will be earned to such Policy Anniversary. PMLIC will deduct the collateral for
the loan from each account based on the loan allocation and transfer this amount
to the Loan Account. The collateral for any existing loan will be recalculated:
(a) when loan interest is repaid or treated as part of the loaned amount; (b)
when a new loan is made; and (c) when a loan repayment is made. A transfer to or
from the Loan Account will be made to reflect any recalculation of collateral.
At any time, the amount of the outstanding loan under a Policy equals the sum of
all loans (including due and unpaid interest added to the loan balance) minus
any loan repayments.
Interest Credited to Loan Account. As long as the Policy is in force,
PMLIC will credit the amount in the Loan Account with interest at effective
annual rates it determines, but not less than 4% or such higher minimum rate
required under state law. The rate will apply to the calendar year which follows
the date of determination. Loan interest credited will be transferred to the
accounts: (1) when loan interest is paid or treated as part of the loaned
amount; (2) when a loan repayment is made; and (3) when a new loan is made.
Effect of Policy Loan. Policy loans, whether or not repaid, will have a
permanent effect on the Policy Account Value, the Cash Surrender Value, and Net
Cash Surrender Value and may permanently affect the Death Benefit under the
Policy. The effect on the Policy Account Value and Death Benefit could be
favorable or unfavorable, depending on whether the investment performance of the
Separate Accounts (or Sub-accounts) and the interest credited to the Guaranteed
Account is less than or greater than the interest being credited on the assets
in the Loan Account while the loan is outstanding. Compared to a Policy under
which no loan is made, values under a Policy will be lower when the credited
interest rate is less than the investment experience of assets held in the
Separate Accounts and interest credited to the Guaranteed Account. The longer a
loan is outstanding, the greater the effect a Policy loan is likely to have. The
Death Proceeds will be reduced by the amount of any outstanding Policy loan.
Loan Repayments. Unless prohibited by a particular state, PMLIC will
assume that any payments made while there is an outstanding loan on the Policy
is a loan repayment, unless it receives written
31
<PAGE> 41
instructions that it is a premium payment. Repayments up to the amount of the
outstanding loan will be allocated to the accounts based on the amount of the
outstanding loan allocated to each account as of the date of repayment; any
repayment in excess of the amount of the outstanding loan will be allocated to
the accounts based on the amount of interest due on the portion of the
outstanding loan allocated to each account. For this purpose, the amount of the
interest due is determined as of the next Policy Anniversary.
Lapse With Loans Outstanding. The amount of an outstanding loan under a
Policy plus any accrued interest on outstanding loans is not part of Net Cash
Surrender Value. Therefore, the larger the amount of an outstanding loan, the
more likely it is that the Policy could lapse. (See "How the Duration of the
Policy May Vary," Page 24 and "Policy Lapse," Page 27.) In addition, if the
Policy is not a Modified Endowment Policy, lapse of the Policy with outstanding
loans may result in adverse tax consequences. (See "Tax Treatment of Policy
Benefits," Page 39.)
Tax Considerations. Any loans taken from a "Modified Endowment Contract"
will be treated as a taxable distribution. In addition, with certain exceptions,
a 10% additional income tax penalty will be imposed on the portion of any loan
that is included in income. (See "Distributions from Policies Classified as
Modified Endowment Contracts," Page 40).
SURRENDER PRIVILEGE
After the first Policy Year, at any time before the earlier of the death of
the last surviving Insured and the Final Policy Date, the Owner may surrender
the Policy for its Net Cash Surrender Value. The Net Cash Surrender Value is the
Policy Account Value minus any Policy loan and accrued interest and less any
surrender charges. The Net Cash Surrender Value will be determined by PMLIC on
the date it receives, at its Home Office, a surrender request signed by the
Owner. Coverage under the Policy will end on the day the Owner mails or
otherwise sends the written surrender request to PMLIC.
A surrender may have Federal income tax consequences. (See "Tax Treatment
of Policy Benefits," Page 39).
PARTIAL WITHDRAWAL OF NET CASH SURRENDER VALUE
At any time before the earlier of the death of the last surviving Insured
and the Final Policy Date, the Owner may withdraw a portion of the Policy's Net
Cash Surrender Value. The minimum amount which may be withdrawn is $1,500. A
Partial Withdrawal Charge will be deducted from the Policy Account Value (See
"Partial Withdrawal Charge," Page 30). A partial withdrawal will not result in
the imposition of Surrender Charges. (See "Surrender Charge," Page 28.)
The amount of the partial withdrawal and the Partial Withdrawal Charge will
be allocated based on the proportion that the value in the Separate Accounts (or
any Subaccount) and the Guaranteed Account Value bear to the total unloaned
Policy Account Value.
The effect of a partial withdrawal on the Death Benefit and Face Amount
will vary depending upon the Death Benefit Option in effect and whether the
Death Benefit is based on the applicable percentage of Policy Account Value.
(See "Death Benefit Options," Page 20.)
Option A. The effect of a partial withdrawal on the Face Amount and Death
Benefit under Option A can be described as follows:
If the Death Benefit equals the Face Amount, a partial withdrawal will
reduce the Face Amount and the Death Benefit by the amount of the partial
withdrawal.
For the purposes of this illustration (and the following illustrations
of partial withdrawals), assume that the Attained Age of the younger
Insured is under 40 and there is no indebtedness. The applicable percentage
is 250% for a younger Insured with an Attained Age under 40.
Under Option A, a contract with a Face Amount of $300,000 and a Policy
Account Value of $30,000 will have a Death Benefit of $300,000. Assume that
the policyowner takes a partial withdrawal of
32
<PAGE> 42
$10,000. The partial withdrawal will reduce the Policy Account Value to
$19,975 ($30,000 - $10,000 - $25) and the Death Benefit and Face Amount to
$290,000 ($300,000 - $10,000).
If the Death Benefit immediately prior to the partial withdrawal is
based on the applicable percentage of Policy Account Value, the Face Amount
will be reduced by an amount equal to the amount of the partial withdrawal.
The Death Benefit will be reduced to equal the greater of (a) the Face
Amount after the partial withdrawal, and (b) the applicable percentage of
the Policy Account Value after deducting the amount of the partial
withdrawal and the expense charge.
Under Option A, a policy with a Face Amount of $300,000 and a Policy
Account Value of $300,000 will have a Death Benefit of $750,000. Assume
that the policyowner takes a partial withdrawal of $49,975. The partial
withdrawal will reduce the Policy Account Value to $250,000 ($300,000 -
$49,975 - $25) and the Face Amount to $250,025 ($300,000 - $49,975). The
Death Benefit is the greater of (a) the Face Amount of $250,025 and (b) the
applicable percentage of the Policy Account Value $625,000
($250,000 X 2.5). Therefore, the Death Benefit will be $625,000.
Option B. The Face Amount will never be decreased by a partial withdrawal.
A partial withdrawal will, however, always decrease the Death Benefit.
If the Death Benefit equals the Face Amount plus the Policy Account
Value, a partial withdrawal will reduce the Policy Account Value by the
amount of the partial withdrawal and expense charge and thus the Death
Benefit will also be reduced by the amount of the partial withdrawal and
the expense charge.
Under Option B, a policy with a Face Amount of $300,000 and a Policy
Account Value of $90,000 will have a Death Benefit of $390,000
($300,000 + $90,000). Assume the policyowner takes a partial withdrawal of
$20,000. The partial withdrawal will reduce the Policy Account Value to
$69,975 ($90,000 - $20,000 - $25) and the Death Benefit to $369,975
($300,000 + $69,975). The Face Amount is unchanged.
If the Death Benefit immediately prior to the partial withdrawal is
based on the applicable percentage of Policy Account Value, the Death
Benefit will be reduced to equal the greater of (a) the Face Amount plus
the Policy Account Value after deducting the partial withdrawal and expense
charge and (b) the applicable percentage of Policy Account Value after
deducting the amount of the partial withdrawal and the expense charge.
Under Option B, a policy with a Face Amount of $300,000 and a Policy
Account Value of $300,000 will have a Death Benefit of $750,000
($300,000 X 2.5). Assume the policyowner takes a partial withdrawal of
$149,975. The partial withdrawal will reduce the Policy Account Value to
$150,000 ($300,000 $149,975 - $25) and the Death Benefit to the greater of
(a) the Face Amount plus the Policy Account Value $450,000
($300,000 + $150,000) and (b) the Death Benefit based on the applicable
percentage of the Policy Account Value $375,000 ($150,000 X 2.5).
Therefore, the Death Benefit will be $450,000. The Face Amount is
unchanged.
Because a partial withdrawal can affect the Face Amount and the Death
Benefit as described above, a partial withdrawal may also affect the Net Amount
at Risk which is used to calculate the cost of insurance charge under the
Policy. (See "Cost of Insurance," Page 29). A request for partial withdrawal may
not be allowed if or to the extent such withdrawal would reduce the Face Amount
below the Minimum Face Amount for the Policy. Also, if a partial withdrawal
would result in cumulative premiums exceeding the maximum premium limitations
applicable under the Code for life insurance, PMLIC will not allow such partial
withdrawal.
A partial withdrawal of Net Cash Surrender Value may have Federal income
tax consequences. (See "Tax Treatment of Policy Benefits," Page 39).
33
<PAGE> 43
FREE-LOOK PRIVILEGE
Free-Look for Policy. The Policy provides for an initial Free-Look Period.
The Owner may cancel the Policy until the latest of: (a) 45 days after Part I of
the application for the Policy is signed; (b) 10 days after the Owner receives
the Policy; and (c) 10 days after PMLIC mails the Notice of Withdrawal Right to
the Owner. Upon giving notice of cancellation and returning the Policy, the
Owner will receive a refund equal to the sum of: (i) the Policy Account Value as
of the date the returned Policy is received by PMLIC at its Home Office or the
PMLIC representative through whom the Policy was purchased; plus (ii) any
Premium Expense Charges deducted from premiums paid; plus (iii) any Monthly
Deductions charged against the accounts; plus (iv) any Mortality and Expense
Risk charges deducted from the value of the net assets of the Separate Accounts
attributable to the Policy; plus (v) any advisory fees and any other fees and
expenses of the Fund.
When state law requires a refund equal to gross premiums paid, the refund
will instead equal the gross premiums paid on the Policy and will not reflect
the investment experience of the Separate Accounts or interest earnings for the
Guaranteed Account.
SPECIAL TRANSFER AND CONVERSION RIGHTS
Transfer Right for Policy. During the first two years following Policy
issue, the Owner may, on one occasion, transfer the entire Policy Account Value
in the Separate Accounts (or a Subaccount) to the Guaranteed Account without
such transfer counting toward the four transfers permitted without charge during
a Policy Year. If such transfer is made after four transfers have been made
during a Policy Year, no transfer charge will be deducted. After exercising this
transfer right, all subsequent Net Premiums will be allocated to the Guaranteed
Account.
Transfer Right for Change in Investment Policy of Separate Account or
Subaccount. In accordance with the variable life insurance regulations of
certain states, if the investment policy of a Separate Account or Subaccount is
materially changed, the Owner may transfer the portion of the Policy Account
Value in such Separate Account to another Separate Account (or Subaccount) or to
the Guaranteed Account without having such transfer count toward the four
transfers permitted without charge during a Policy Year. If such transfer is
made after four transfers have been made during a Policy Year, no transfer
charge will be deducted.
THE GUARANTEED ACCOUNT
An Owner may allocate some or all of the Net Premiums and transfer some or
all of the Policy Account Value to the Guaranteed Account, which is part of
PMLIC's General Account and pays interest at declared rates guaranteed for each
calendar year (subject to a minimum guaranteed interest rate of 4%). The
principal, after deductions, is also guaranteed. PMLIC's General Account
supports its insurance and annuity obligations. The Guaranteed Account has not,
and is not required to be, registered with the SEC under the Securities Act of
1933, and neither the Guaranteed Account nor PMLIC's General Account has been
registered as an investment company under the Investment Company Act of 1940.
Therefore, neither PMLIC's General Account, the Guaranteed Account, nor any
interests therein are generally subject to regulation under the 1933 Act or the
1940 Act. The disclosures relating to these accounts which are included in this
Prospectus are for your information and have not been reviewed by the SEC.
However, such disclosures may be subject to certain generally applicable
provisions of the Federal securities laws relating to the accuracy and
completeness of statements made in prospectuses.
The portion of the Policy Account Value allocated to the Guaranteed Account
will be credited with rates of interest, as described below. Since the
Guaranteed Account is part of PMLIC's General Account, PMLIC assumes the risk of
investment gain or loss on this amount. All assets in the General Account are
subject to PMLIC's general liabilities from business operations.
MINIMUM GUARANTEED AND CURRENT INTEREST RATES
The Guaranteed Account Value is guaranteed to accumulate at a minimum
effective annual interest rate of 4%. PMLIC will credit the Guaranteed Account
Value with current rates in excess of the minimum
34
<PAGE> 44
guarantee but is not obligated to do so. These current interest rates are
influenced by, but do not necessarily correspond to, prevailing general market
interest rates. Since PMLIC, in its sole discretion, anticipates changing the
current interest rate from time to time, different allocations to and from the
Guaranteed Account Value will be credited with different current interest rates.
The interest rate to be credited to each amount allocated or transferred to the
Guaranteed Account will apply to the end of the calendar year in which such
amount is received or transferred. At the end of the calendar year, PMLIC
reserves the right to declare a new current interest rate on such amount and
accrued interest thereon (which may be a different current interest rate than
the current interest rate on new allocations to the Guaranteed Account on that
date). The rate declared on such amount and accrued interest thereon at the end
of each calendar year will be guaranteed for the following calendar year. Any
interest credited on the amounts in the Guaranteed Account in excess of the
minimum guaranteed rate of 4% per year will be determined in the sole discretion
of PMLIC. The Owner assumes the risk that interest credited may not exceed the
guaranteed minimum rate.
Amounts deducted from the Guaranteed Account for partial withdrawals,
Policy loans, transfers to the Separate Accounts, Monthly Deductions or other
changes are currently, for the purpose of crediting interest, accounted for on a
last in, first out ("LIFO") method. For example, a withdrawal is satisfied by
taking out Guaranteed Account Value attributable to the amount most recently
transferred or allocated to the Guaranteed Account.
PMLIC reserves the right to change the method of crediting interest from
time to time, provided that such changes do not have the effect of reducing the
guaranteed rate of interest below 4% per annum or shorten the period for which
the interest rate applies to less than a calendar year (except for the year in
which such amount is received or transferred).
Calculation of Guaranteed Account Value. The Guaranteed Account Value at
any time is equal to amounts allocated and transferred to it plus interest
credited to it, minus amounts deducted, transferred or withdrawn from it.
Interest will be credited to the Guaranteed Account on each Policy
Processing Day as follows: for amounts in the account for the entire Policy
Month, from the beginning to the end of the month; for amounts allocated to the
account during the prior Policy Month, from the date the Net Premium or loan
repayment is allocated to the end of the month; for amounts transferred to the
account during the Policy Month, from the date of transfer to the end of the
month; and for amounts deducted or withdrawn from the account during the prior
Policy Month, from the beginning of the month to the date of deduction or
withdrawal.
TRANSFERS FROM GUARANTEED ACCOUNT
Within 30 days prior to or following any Policy Anniversary, one transfer
is allowed from the Guaranteed Account to any or all of the Separate Accounts
(or Subaccounts). The amount transferred from the Guaranteed Account may not
exceed 25% of the value of such account. If the written request for such
transfer is received prior to the Policy Anniversary, the transfer will be made
as of the Policy Anniversary; if the written request is received after the
Policy Anniversary, the transfer will be made as of the date PMLIC receives the
written request at its Home Office.
OTHER POLICY PROVISIONS
Amount Payable on Final Policy Date. If one of the Insureds is living on
the Final Policy Date (at the younger Insured's Attained Age 100), PMLIC will
pay the Owner the Policy Account Value less any outstanding Policy loan and
accrued interest and any unpaid Monthly Deductions. Insurance coverage under the
Policy will then end. Payment will generally be made within seven days of the
Final Policy Date.
Payment of Policy Benefits. Insurance Proceeds under a Policy will
ordinarily be paid to the Beneficiary within seven days after PMLIC receives
proof of the death of both Insureds at its Home Office and all other
requirements are satisfied. Interest at the annual rate of 3% or any higher rate
declared by PMLIC or required by law is paid on the Insurance Proceeds from the
date of death of the last surviving Insured until the payment is made.
35
<PAGE> 45
Any amounts payable as a result of the exercise of the free-look right,
surrender, partial withdrawal, or Policy loan will ordinarily be paid within
seven days of receipt of written request at PMLIC's Home Office in a form
satisfactory to PMLIC. In order to be satisfactory, a request must contain all
information necessary to process the transaction and be signed by the contract
Owner.
Generally, the amount of a payment will be determined as of the date of
receipt by PMLIC of all required documents. However, PMLIC may defer the
determination or payment of such amounts if the date for determining such
amounts falls within any period during which: (1) the disposal or valuation of a
Separate Account's assets is not reasonably practicable because the New York
Stock Exchange is closed or conditions are such that, under the SEC's rules and
regulations, trading is restricted or an emergency is deemed to exist; or (2)
the SEC by order permits postponement of such actions for the protection of
PMLIC policyholders. PMLIC also may defer the determination or payment of
amounts from the Guaranteed Account for up to six months.
The Owner may decide the form in which proceeds will be paid. Before the
death of the last surviving Insured, the Owner may arrange for the Insurance
Proceeds to be paid in a lump sum or under a Settlement Option. These choices
are also available upon surrender of the Policy for its Net Cash Surrender Value
and for payment of the Policy Account Value on the Final Policy Date. If no
election is made, payment will be made in a lump sum. The Beneficiary may also
arrange for payment of the Insurance Proceeds in a lump sum or under a
Settlement Option.
The Contract. The Policy and a copy of the applications attached thereto
are the entire contract. Only statements made in the applications can be used to
void the Policy or deny a claim. The statements are considered representations
and not warranties. Only the President or a Vice President of PMLIC can agree to
change or waive any provisions of the Policy and only in writing. As a result of
differences in applicable state laws, certain provisions of the Policy may vary
from state to state.
Ownership. The Owner is the Insureds, jointly unless a different Owner is
named in the application or thereafter changed. After the death of the first
Insured, the surviving Insured will be the Owner, unless otherwise provided.
While both or one of the Insureds is living, the Owner is entitled to exercise
any of the rights stated in the Policy or otherwise granted by PMLIC. If the
Insureds and the Owner are not the same, and the Owner dies while an Insured is
living, these rights will vest in the estate of the Owner, unless otherwise
provided.
Beneficiary. The Beneficiary is designated in the application for the
Policy, unless thereafter changed by the Owner before the death of the last
surviving Insured by written notice to PMLIC. Any Insurance Proceeds for which
there is not a designated Beneficiary surviving at the death of the last
surviving Insured are payable in a single sum to the executors or administrators
of the last surviving Insured.
Change of Owner and Beneficiary. As long as the Policy is in force, the
Owner or Beneficiary may be changed by written request in a form acceptable to
PMLIC. The change will take effect as of the date it is signed, whether or not
one of the Insureds is living when the request is received by PMLIC. PMLIC will
not be responsible for any payment made or action taken before it receives the
written request.
Split Dollar Arrangements. The Owner or Owners may enter into a Split
Dollar Arrangement between each other or another person or persons whereby the
payment of premiums and the right to receive the benefits under the Policy
(i.e., Net Cash Surrender Value or Death Proceeds) are split between the
parties. There are different ways of allocating such rights. No transfer of
Policy rights pursuant to a Split Dollar Arrangement will be binding on PMLIC
unless in writing and received by PMLIC. The parties who elect to enter into a
Split Dollar Arrangement should consult their own tax advisers regarding the tax
consequences of such an arrangement.
Assignments. The Owner may assign any and all rights under the Policy. No
assignment binds PMLIC unless in writing and received by PMLIC. PMLIC assumes no
responsibility for determining whether an assignment is valid and the extent of
the assignee's interest. All assignments will be subject to any Policy loan. The
interest of any Beneficiary or other person will be subordinate to any
assignment. A payee who is not also
36
<PAGE> 46
the Owner may not assign or encumber Policy benefits, and to the extent
permitted by applicable law, such benefits are not subject to any legal process
for the payment of any claim against the payee.
Misstatement of Age and Sex. If the age or sex of either Insured has been
misstated in the applications, the Death Benefit and any benefits provided by
riders will be such as the most recent Monthly Deductions would have provided at
the correct ages and sexes of the Insureds.
Suicide. PMLIC's liability is limited to payment of a sum equal to the
premiums paid less any Policy loan and accrued interest on such loan and any
partial withdrawals if:
(a) both Insureds commit suicide within two years of the Policy Issue
Date (except where state law requires a shorter period) and within
90 days of each other; or
(b) the last surviving Insured dies by suicide within such two year
period and within 90 days of the death of the first of the
Insureds to die; or
(c) the last surviving Insured lives for more than 90 days beyond the
date that the first Insured's death occurred by suicide and does not
exchange the Policy as described below.
During the 90 day period following the date that the first Insured dies by
suicide, the surviving Insured may exchange the survivorship policy, without
evidence of insurability, for a fixed-benefit policy issued by PMLIC on the life
of such surviving Insured. The Policy Issue Date for the new policy will be the
91st day after the date of the first Insured's death. In the event one of the
Insureds commits suicide within two years of the Policy Issue Date and the
surviving Insured does not exercise this exchange right, coverage under the
Policy will end on the 91st day following such death.
If one of the Insureds commits suicide within two years of the Policy Issue
Date and the surviving Insured dies, other than by suicide, within 90 days of
the date of the first death, PMLIC will pay the Insurance Proceeds to the
Beneficiary.
Incontestability. The Policy will be incontestable after it has been in
force during each Insured's lifetime for two years from the Issue Date (or such
other date as required by state law). Similar incontestability will apply to
reinstatement after it has been in force during each Insured's lifetime for two
years from its effective date. Before such times, however, PMLIC may contest the
validity of the Policy (or changes) based on material misstatements in the
initial or any subsequent application.
Dividends. The Policy is participating; however, no dividends are expected
to be paid on the Policy.
If dividends are ever declared, they will be paid under one of the
following options:
(a) Paid in cash; or
(b) Applied as a Net Premium.
The Owner must choose an option at the time the application for the Policy
is signed. If no option is chosen, any dividend will be applied as a Net Premium
payment. The Owner may change the option by giving written notice to PMLIC.
Settlement Options. In lieu of a single sum payment on death or surrender,
an election may be made to apply the proceeds under any one of the fixed-benefit
Settlement Options provided in the Policy. The options are described below.
Proceeds at Interest Option. Left on deposit to accumulate with PMLIC with
interest payable at a rate of at least 3% per year.
Instalments of a Specified Amount Option. Payable in equal instalments
until proceeds applied under the Option and interest on the unpaid balance at 3%
per year and any additional interest are exhausted.
Instalments for a Specified Period Option. Payable in the number of equal
monthly instalments set forth in the election. Payments may be increased by
additional interest which would increase the instalments certain. The guaranteed
interest rate is 3% per year.
37
<PAGE> 47
Life Income Option. Payable in equal monthly instalments during the
payee's life. Payments will be made either with or without a guaranteed minimum
number. If there is to be a minimum number of payments, they will be for either
120 or 240 months or until the proceeds applied under the Option are exhausted,
as elected.
Joint and Survivor Life Income. Payable in equal monthly instalments
during the joint lives of the payee and one other person and during the life of
the survivor. The minimum number of payments will be for either 120 or 240
months, as elected.
Supplementary Benefits. The following supplementary benefits, which are
subject to the restrictions and limitations set forth therein, may be included
in a Policy:
Disability Waiver Benefit. Subject to certain age and underwriting
restrictions, the Policy may include a Disability Waiver Benefit Rider for
either or both Insureds providing that in the event of such Insured's total
disability before Attained Age 60 and continuing for at least six months, PMLIC
will apply a premium payment to the Policy on each Policy Processing Day during
the first two Policy Years (the amount of the payment will be based on the
Minimum Annual Premium). PMLIC will also waive all monthly deductions after the
commencement of and during the continuance of such total disability after the
first two Policy Years. If this rider is added, the Monthly Deduction will be
increased to include the cost of this rider.
Policy Split Option. Under certain circumstances, the Policy can be split
on a 50/50 basis into two fixed-benefit life insurance policies, one on the life
of each Insured, with evidence of insurability. A policy split can be made if a
final divorce decree is issued with respect to the marriage of the two Insureds
or if the Federal Estate Tax law is changed resulting in removal of the
unlimited marital deduction or a reduction of at least 50% in the estate taxes
payable on death. The Face Amount and Policy Account Value less Policy loans and
accrued interest will be divided evenly between the two new policies. For a
discussion of the tax consequences of a policy split see "Taxation of Policy
Split" on page .
Change of Insured. Upon request, the Policy may include a Change of
Insured Rider by which one of the Insureds under a Policy may be changed to a
New Insured, subject to certain conditions and evidence of insurability. The
Monthly Deduction for cost of insurance will be changed to that for the New
Insured and the Remaining Insured as of the effective date of the change. Making
a change under this Rider may have adverse federal income tax consequences.
Accordingly, the Owner should consult a tax adviser before deciding to exercise
a change under this Rider.
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following summary provides a general description of the Federal income
tax considerations associated with the Policy and does not purport to be
complete or to cover all situations. This discussion is not intended as tax
advice. Counsel or other competent tax advisors should be consulted for more
complete information. This discussion is based upon PMLIC's understanding of the
present Federal income tax laws as they are currently interpreted by the
Internal Revenue Service (the "Service"). No representation is made as to the
likelihood of continuation of the present Federal income tax laws or of the
current interpretations by the Internal Revenue Service.
TAX STATUS OF THE POLICY
In order to qualify as a life insurance contract for federal tax purposes,
the Policy must meet the definition of a life insurance contract which is set
forth in Section 7702 of the Internal Revenue Code of 1986, as amended (the
"Code"). The manner in which Section 7702 should be applied to certain features
of the Policy offered in this Prospectus is not directly addressed by Section
7702 or any guidance issued to date under Section 7702. Nevertheless, PMLIC
believes it is reasonable to conclude that the Policy will meet the Section 7702
definition of a life insurance contract. In the absence of final regulations or
other pertinent interpretations of Section 7702, however, there is necessarily
some uncertainty as to whether a Policy will
38
<PAGE> 48
meet the statutory life insurance contract definition, particularly if the Owner
pays the full amount of premiums permitted under the Policy. An Owner
contemplating the payment of such premiums should do so only after consulting a
tax adviser. If a Contract were determined not to be a life insurance contract
for purposes of Section 7702, such contract would not provide most of the tax
advantages normally provided by a life insurance contract.
If it is subsequently determined that a Policy does not satisfy Section
7702, PMLIC may take whatever steps are appropriate and necessary to attempt to
cause such a Policy to comply with Section 7702. For these reasons, PMLIC
reserves the right to restrict Policy transactions as necessary to attempt to
qualify it as a life insurance contract under Section 7702.
Section 817(h) of the Code requires that the investments of each of the
Separate Accounts must be "adequately diversified" in accordance with Treasury
regulations in order for the Policy to qualify as a life insurance contract
under Section 7702 of the Code (discussed above). The Separate Accounts, through
the Fund and the Zero Coupon Trust, intend to comply with the diversification
requirements prescribed in Treas. Reg. sec.1.817-5, which affect how the Fund's
and Trust's assets are to be invested. PMLIC believes that the Separate Accounts
will, thus, meet the diversification requirement, and PMLIC will monitor
continued compliance with this requirement. In certain circumstances, owners of
variable life insurance contracts may be considered the owners, for federal
income tax purposes, of the assets of the separate accounts used to support
their contracts. In those circumstances, income and gains from the separate
account assets would be includible in the variable contract owner's gross
income. The IRS has stated in published rulings that a variable contract owner
will be considered the owner of separate account assets if the contract owner
possesses incidents of ownership in those assets, such as the ability to
exercise investment control over the assets. The Treasury Department has also
announced, in connection with the issuance of regulations concerning
diversification, that those regulations "do not provide guidance concerning the
circumstances in which investor control of the investments of a segregated asset
account may cause the investor (i.e., the Policyowner), rather than the
insurance company, to be treated as the owner of the assets in the account."
This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which policyholders may direct their
investments to particular subaccounts without being treated as owners of the
underlying assets."
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the IRS in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the Owner has additional flexibility in allocating premium payments and
Policy Value and the investment objective of certain Portfolios (i.e. the Gold
and Natural Resources Portfolio) may be narrower. These differences could result
in a Owner being treated as the owner of a pro rata portion of the assets of the
Separate Accounts. In addition, PMLIC does not know what standards will be set
forth, if any, in the regulations or rulings which the Treasury Department has
stated it expects to issue. PMLIC therefore reserves the right to modify the
Policy as necessary to attempt to prevent an Owner from being considered the
owner of a pro rata share of the assets of the Separate Accounts.
The following discussion assumes that the Policy will qualify as a life
insurance contract for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
In General. PMLIC believes that the proceeds and cash value increases of a
Policy should be treated in a manner consistent with a fixed-benefit life
insurance policy for Federal income tax purposes. Thus, the Death Benefit under
the Policy should be excludable from the gross income of the Beneficiary under
Section 101(a)(1) of the Code.
Depending on the circumstances, the exchange of a Policy, the receipt of a
Policy in an exchange, a change in the Policy's Death Benefit Option (i.e., a
change from Death Benefit Option A to Death Benefit Option B or vice versa), a
Policy loan, a partial withdrawal, a surrender, a change in ownership, a change
of insured, an adjustment of face amount, a change in insurance protection, or
an assignment of the Policy may have Federal income tax consequences. In
addition, Federal, state and local transfer, and other tax consequences of
ownership or receipt of Policy proceeds depend on the circumstances of each
Owner or
39
<PAGE> 49
Beneficiary. A person considering any such transaction should consult a tax
adviser before effecting the transaction.
Generally, the Owner will not be deemed to be in constructive receipt of
the Policy Account Value, including increments thereof, until there is a
distribution. The tax consequences of distributions from, and loans taken from
or secured by, a Policy depend on whether the Policy is classified as a
"Modified Endowment Contract". Whether a Policy is or is not a Modified
Endowment Contract, upon a complete surrender or lapse of a Policy or when
benefits are paid at a Policy's maturity date, if the amount received plus the
amount of indebtedness exceeds the total investment in the Policy, the excess
will generally be treated as ordinary income subject to tax.
Modified Endowment Contracts. The Internal Revenue Code establishes a
class of life insurance contracts designated as "Modified Endowment Contracts,"
which applies to Policies entered into or materially changed after June 20,
1988.
Due to the Policy's flexibility, classification as a Modified Endowment
Contract will depend on the individual circumstances of each Policy. In general,
a Policy will be a Modified Endowment Contract if the accumulated premiums paid
at any time during the first seven Policy Years exceeds the sum of the net level
premiums which would have been paid on or before such time if the Policy
provided for paid-up future benefits after the payment of seven level annual
premiums. The determination of whether a Policy will be a Modified Endowment
Contract after a material change generally depends upon the relationship of the
Death Benefit and Policy Account Value at the time of such change and the
additional premiums paid in the seven years following the material change. At
the time a premium is credited which would cause the Policy to become a Modified
Endowment Contract, PMLIC will notify the Owner that unless a refund of the
excess premium is requested by the Owner, the Policy will become a Modified
Endowment Contract. The Owner will have 30 days after receiving such
notification to request the refund. The excess premium paid (with either
required interest or positive Separate Account earnings, if any) will be
returned to the Owner upon receipt by PMLIC of the refund request. The amount to
be refunded will be deducted from the Policy Account Value in the Separate
Accounts and in the Guaranteed Account in the same proportion as the premium
payment was allocated to such accounts. In the event that earnings on such
excess premium is not at least 4%, the premium plus an amount equal to interest
at an annual rate of 4% will be returned.
The rules relating to whether a Policy will be treated as a Modified
Endowment Contract are complex and cannot be fully described in the limited
confines of this summary. Therefore, a current or prospective Owner should
consult with a competent advisor to determine whether a policy transaction will
cause the Policy to be treated as a Modified Endowment Contract.
Distributions from Policies Classified as Modified Endowment
Contracts. Policies classified as Modified Endowment Contract will be subject
to the following tax rules: First, all distributions, including distributions
upon surrender and partial withdrawals from such a Policy are treated as
ordinary income subject to tax up to the amount equal to the excess (if any) of
the Policy Account Value immediately before the distribution over the investment
in the Policy (described below) at such time. Second, loans taken from or
secured by, such a Policy are treated as distributions from such a Policy and
taxed accordingly. Past due loan interest that is added to the loan amount will
be treated as a loan. Third, a 10 percent additional income tax is imposed on
the portion of any distribution from, or loan taken from or secured by, such a
Policy that is included in income except where the distribution or loan is made
on or after the Owner attains age 59 1/2, is attributable to the Owner's
becoming disabled, or is part of a series of substantially equal periodic
payments for the life (or life expectancy) of the Owner or the joint lives (or
joint life expectancies) of the Owner and the Owner's Beneficiary.
If a Policy becomes a modified endowment contract after it is issued,
distributions made during the policy year in which it becomes a modified
endowment contract, distributions in any subsequent policy year and
distributions within two years before the Policy becomes a modified endowment
contract will be subject to the tax treatment described above. This means that a
distribution from a Policy that is not a modified endowment contract could later
become taxable as a distribution from a modified endowment contract.
40
<PAGE> 50
Distributions From Policies Not Classified as Modified Endowment
Contracts. Distributions from a Policy that is not a Modified Endowment
Contract, are generally treated as first recovering the investment in the Policy
(described on page 33) and then, only after the return of all such investment in
the Policy, as distributing taxable income. An exception to this general rule
occurs in the case of a decrease in the Policy's Death Benefit or any other
change that reduces benefits under the Policy in the first 15-years after the
Policy is issued and that results in a cash distribution to the Owner in order
for the Policy to continue complying with the Section 7702 definitional limits.
Such a cash distribution will be taxed in whole or in part as ordinary income
(to the extent of any gain in the Policy) under rules prescribed in Section
7702.
Loans from, or secured by, a Policy that is not a Modified Endowment
Contract are not treated as distributions. Instead, such loans are treated as
indebtedness of the Owner.
Finally, neither distributions (including distributions upon surrender) nor
loans from, or secured by, a Policy that is not a Modified Endowment Contract
are subject to the 10 percent additional tax.
Policy Loan Interest. Interest paid on any loan under a Policy may not be
deductible. An owner should consult a tax adviser before deducting any policy
loan interest.
Investment in the Policy. Investment in the Policy means: (i) the
aggregate amount of any premiums or other consideration paid for a Policy, minus
(ii) the aggregate amount received under the Policy which is excluded from gross
income of the Owner (except that the amount of any loan from, or secured by, a
Policy that is a Modified Endowment Contract, to the extent such amount is
excluded from gross income, will be disregarded), plus (iii) the amount of any
loan from, or secured by, a Policy that is a Modified Endowment Contract to the
extent that such amount is included in the gross income of the Owner.
Multiple Policies. All Modified Endowment Contracts that are issued by
PMLIC (or its affiliates) to the same Owner during any calendar year are treated
as one Modified Endowment Contract for purposes of determining the amount
includible in the gross income under Section 72(e) of the Code.
Taxation of Policy Split. The Policy Split Option Rider permits a Policy
to be split into two other fixed-benefit life policies upon the occurrence of a
divorce of the joint insureds or certain changes in federal estate tax law. A
policy split could have adverse tax consequences; for example, it is not clear
whether a policy split will be treated as a nontaxable exchange under Sections
1031 through 1043 of the Code. If a policy split is not treated as a nontaxable
exchange, a split could result in the recognition of taxable income in an amount
up to any gain in the Policy at the time of the split. In addition, it is not
clear whether, in all circumstances, the individual contracts that result from a
policy split would be treated as life insurance contracts for federal income tax
purposes and, if so treated, whether the individual contracts would be
classified as modified endowment contracts. Before you exercise rights provided
by the policy split option, it is important that you consult with a competent
tax advisor regarding the possible consequences of a policy split.
Other Tax Considerations. The transfer of the Policy or the designation of
a Beneficiary may have federal, state, and/or local transfer and inheritance tax
consequences, including the imposition of gift, estate and generation-skipping
transfer taxes. For example, the transfer of the Policy to, or the designation
as beneficiary of, or the payment of proceeds to, a person who is assigned to a
generation which is two or more generations below the generation assignment of
the Owner, may have generation skipping transfer tax considerations under
Section 2601 of the Code.
The individual situation of each Owner or Beneficiary will determine the
extent, if any, to which federal, state and local transfer taxes may be imposed.
Consult with your tax adviser for specific information in connection with these
taxes. In addition, the Policy may be used in various arrangements, including
nonqualified deferred compensation or salary continuance plans, split dollar
insurance plans, executive bonus plans, retiree medical benefit plans and
others. The tax consequences of such plans may vary depending on the particular
facts and circumstances of each individual arrangement. Therefore, if you are
contemplating the use of a Policy in any arrangement the value of which depends
in part on its tax consequences, you should be sure to consult a qualified tax
advisor regarding the tax attributes of the particular arrangement.
41
<PAGE> 51
CHARGE FOR PMLIC'S TAXES
As a result of the Omnibus Budget Reconciliation Act of 1990, insurance
companies are generally required to capitalize and amortize certain policy
acquisition expenses associated with premium payments over a ten year period
rather than currently deducting such expenses. This treatment applies to the
deferred acquisition expenses of a Policy and results in a significantly higher
corporate income tax liability for PMLIC in early policy years. PMLIC makes a
charge to compensate for the anticipated higher corporate income taxes that
result from the receipt of premiums under a Policy (See "Federal Tax Charge,"
Page 27).
Currently, PMLIC makes no other charges (other than premium taxes) for any
federal, state or local taxes that it incurs that may be attributable to the
Separate Accounts or to the Policies. PMLIC, however, reserves the right to
deduct from the Separate Accounts any such taxes which are imposed on the
investment earnings of the Separate Accounts. Currently no such taxes are
imposed.
LEGAL DEVELOPMENTS REGARDING UNISEX ACTUARIAL TABLES
In 1983, the United States Supreme Court held in Arizona Governing
Committee v. Norris that optional annuity benefits provided under an employee's
deferred compensation plan could not, under Title VII of the Civil Rights Act of
1964, vary between men and women on the basis of sex. In that case, the Court
applied its decision only to benefits derived from contributions made on or
after August 1, 1983. Subsequent decisions of lower federal courts indicate that
in other factual circumstances the Title VII prohibition of sex-distinct
benefits may apply at an earlier date. In addition, legislative, regulatory, or
decisional authority of some states may prohibit use of sex-distinct mortality
tables under certain circumstances. The Policies offered by this Prospectus are
based upon actuarial tables which distinguish between men and women and, thus,
the Policy provides different benefits to men and women of the same age.
Accordingly, employers and employee organizations should consider, in
consultation with legal counsel, the impact of these authorities on any
employment-related insurance or benefits program before purchasing the Policy
and in determining whether this Policy is appropriate.
VOTING RIGHTS
All of the assets held in the Growth, Money Market, Bond, Managed,
Aggressive Growth and International Separate Accounts and the Subaccounts of the
Variable Account will be invested in shares of corresponding Portfolios of the
Funds. (The organizational documents governing the Trust do not contemplate
meetings of holders of the Trust units nor any action taken by vote of such
holders.) The Fund does not hold routine annual shareholders' meetings.
Shareholders' meetings will be called whenever each Fund believes that it is
necessary to vote to elect the Board of Directors of the Fund and to vote upon
certain other matters that are required by the 1940 Act to be approved or
ratified by the shareholders of a mutual fund. PMLIC is the legal owner of Fund
shares and as such has the right to vote upon any matter that may be voted upon
at a shareholders' meeting. However, in accordance with its view of present
applicable law, PMLIC will vote the shares of the Funds at meetings of the
shareholders of the appropriate Fund or Portfolio in accordance with
instructions received from policyowners. Fund shares held in each Separate
Account or Subaccount for which no timely instructions from policyowners are
received will be voted by PMLIC in the same proportion as those shares in that
Separate Account or Subaccount for which instructions are received.
Each policyowner having a voting interest will be sent proxy material and a
form for giving voting instructions. Policyowners may vote, by proxy or in
person, only as to the portfolios that correspond to the Separate Accounts or
Subaccounts in which their Policy values are allocated. The number of shares
held in each Separate Account or Sub-Account attributable to a Policy for which
the policyowner may provide voting instructions will be determined by dividing
the Policy's value in that account by the net asset value of one share of the
corresponding Portfolio as of the record date for the shareholder meeting.
Fractional shares will be counted. For each share of a Portfolio for which
policyowners have no interest, PMLIC will cast votes, for or against any matter,
in the same proportion as policyowners vote.
42
<PAGE> 52
If required by state insurance officials, PMLIC may disregard voting
instructions if such instructions would require shares to be voted so as to
cause a change in the investment objectives or policies of one or more of the
portfolios, or to approve or disapprove an investment policy or investment
adviser of one or more of the Portfolios. In addition, PMLIC may disregard
voting instructions in favor of changes initiated by a policyowner or the Fund's
Board of Directors provided that PMLIC's disapproval of the change is reasonable
and is based on a good faith determination that the change would be contrary to
state law or otherwise inappropriate, considering the portfolio's objectives and
purposes, and the effect the change would have on PMLIC. If PMLIC does disregard
voting instructions, it will advise policyowners of that action and its reasons
for such action in the next semi-annual report to policyowners.
At some later time, MS Fund shares may be held by separate accounts of
insurance companies not affiliated with PMLIC. PMLIC expects that those shares
will be voted in accordance with instructions of the owners of insurance
policies and contracts issued by those other insurance companies. This will
dilute the effect of voting instructions of policyowners.
Shares of the Funds other than the MS Fund are currently being offered to
variable life insurance and variable annuity separate accounts of life insurance
companies other than PMLIC that are not affiliated with PMLIC. PMLIC understands
that shares of these Funds also will be voted by such other life insurance
companies in accordance with instructions from their policyowners invested in
such separate accounts. This will dilute the effect of voting instructions of
policyowners of the Policies.
CHANGES IN APPLICABLE LAW, FUNDING AND OTHERWISE
The voting rights described in this Prospectus are created under applicable
Federal securities laws. To the extent that such laws or regulations promulgated
thereunder eliminate the necessity to solicit voting instructions from Owners or
restrict such voting rights, PMLIC reserves the right to proceed in accordance
with any such laws or regulations.
PMLIC also reserves the right, subject to compliance with applicable law,
including approval of Owners, if so required: (1) to transfer assets determined
by PMLIC to be associated with the class of policies to which the Policies
belong from one Separate Account to another Separate Account by withdrawing the
same percentage of each investment in the account with appropriate adjustments
to avoid odd lots and fractions (such transfers will not count against the four
free transfers during a Policy Year); (2) to create additional separate
investment accounts, to create divisions (or Subaccounts) from, or combine or
remove divisions (or Subaccounts) from, Separate Accounts, or to combine any two
or more accounts including the Separate Accounts (or Subaccounts); (3) to
operate one or more of the Separate Accounts (or Subaccounts) as a management
investment company under the 1940 Act, or in any other form permitted by law;
(4) to deregister the unit investment trust under the 1940 Act; and (5) to
modify the provisions of the Policies to comply with applicable laws. PMLIC has
reserved all rights in respect of its corporate name and any part thereof,
including without limitation the right to withdraw its use and to grant its use
to one or more other separate accounts and other entities.
Although PMLIC believes it to be highly unlikely, it is possible that in
the judgment of its management, one or more of the Portfolios or series of the
Zero Coupon Trust may become unsuitable for investment by the corresponding
Separate Account or Subaccount because of a change in investment policy, or a
change in the tax laws, or because the shares or units are no longer available
for investment or for any other reasonable cause. In that event, PMLIC may seek
to substitute the shares of another portfolio or series or of an entirely
different mutual fund or trust. Before this would be done, the approval of the
SEC and possibly one or more state insurance departments would be obtained, to
the extent legally required.
43
<PAGE> 53
OFFICERS AND DIRECTORS OF PMLIC
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND POSITION* DURING THE PAST FIVE YEARS
- ------------------------------------- ------------------------------------------------------
<S> <C>
L. J. Rowell, Jr..................... 1994 to present -- Chairman and Chief Executive
Chairman of the Board Officer of PMLIC; 1992 to 1994 -- Chairman, President
and Chief Executive Officer and Chief Executive Officer of PMLIC; 1991 to
1992 -- President and Chief Executive Officer of
PMLIC; 1987 to 1991 -- President and Chief Operating
Officer of PMLIC; 1984 to 1987 -- President of
PMLIC.
Dr. Dorothy M. Brown................. 1992 to present -- Acting President of the
Director Pennsylvania Academy of the Fine Arts; 1979 to
16 Meredith Road 1991 -- President of Rosemont College.
Wynnewood, PA 19096
Robert J. Casale..................... 1988 to present -- Group President/Brokerage
Director Information Services Group of Automatic Data
2 Journal Square Processing Inc.; 1986 to 1988 -- Managing Director
Jersey City, NJ 07306 of Kidder Peabody; 1975 to 1986 -- President,
Special Markets Group of AT&T.
Nicholas DeBenedictus................ 1993 to present -- Chairman, President and
Philadelphia Suburban Corp. Chief Executive Officer of Philadelphia Suburban
762 Lancaster Avenue Corporation; 1989 to 1992 -- Senior Vice President
Bryn Mawr, PA 19010 of Philadelphia Electric Company.
Dr. Claire M. Fagin.................. 1994 to present -- Leadership Professor and Dean
Director Emeritus of the School of Nursing, University of
Nursing Education Bldg. S-2 Pennsylvania; 1993 to 1994 -- Interim President of
Philadelphia, PA 19104 University of Pennsylvania; 1992 to
1993 -- Leadership Professor and Dean Emeritus of
the School of Nursing, University of Pennsylvania;
1977 to 1992 -- Professor and Margaret Bond Simon
Dean of Nursing, School of Nursing, University of
Pennsylvania.
Philip C. Herr, II................... 1961 to present -- Partner -- Herr, Potts & Herr.
Director
Herr, Potts & Herr
100 Matsonford Road
Suite 446
Radnor, PA 19087
J. Richard Jones..................... 1981 to present -- President and Chief Executive
Director Officer of Jackson-Cross Company.
100 North 20th Street
Philadelphia, PA 19103
Robert W. Kloss...................... 1994 to present -- President and Chief Operating
President and Chief Operating Officer of PMLIC; 1986 to 1994 -- President and Chief
Officer Executive Officer of Covenant Life Insurance
Director Company.
John A. Miller....................... 1992 to present -- Chairman of the Executive Committee
Director of PMLIC; 1991 to 1992 -- Chairman of the Board of
Directors of PMLIC; 1984 to 1991 -- Chairman and
Chief Executive Officer of PMLIC.
</TABLE>
44
<PAGE> 54
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND POSITION* DURING THE PAST FIVE YEARS
- ------------------------------------- ------------------------------------------------------
<S> <C>
John P. Neafsey...................... 1993 to present -- President of JN Associates;
Director 1990 to 1993 -- President of Greenwich Capital
765 Hollow Tree Ridge Road Markets, Inc.; 1987 to 1990 -- Executive Vice
Darien, CT 06820 President, Director and Chief Financial Officer of
Sun Company, Inc.; 1978 to 1987 -- Senior Vice
President of Finance and Information Systems and
Chief Financial Officer of Sun Company, Inc.
Charles L. Orr....................... 1993 to present -- President and Chief Executive
Director Office of Shaklee Corporation; 1990 to
Shaklee Corporation 1993 -- President of Shaklee U.S., Inc.
Shaklee Terraces
444 Market Street
San Francisco, CA 94111
William A. Pollard................... 1989 to present -- Retired; 1961 to 1988 -- Chairman
Director of Reliance Insurance Company.
26 Main Street
Essex, CT 06426
Donald A. Scott...................... 1964 to present -- Senior Partner -- Morgan, Lewis and
Director Bockius.
2000 One Logan Square
Philadelphia, PA 19103
John J. F. Sherrerd.................. 1969 to present -- Partner -- Miller, Anderson &
Director Sherrerd.
One Tower Bridge
West Conshohocken, PA 19428
Harold A. Sorgenti................... 1991 to present -- Partner -- The Freedom Chemical
Director Company; 1979 to 1991 -- President and Chief
Mellon Center, Suite 3905 Executive Officer of Arco Chemical Company.
1735 Market Street
Philadelphia, PA 19103
William R. Wilson.................... 1993 to present -- Retired; 1981 to 1992 -- Chairman
Director and Chief Executive Officer of Lukens, Inc.
Oaklands Business Parks, Inc.
600 West Lincoln Highway
Exton, PA 19341
Gerald B. Beam....................... 1995 to present -- Executive Vice
Executive Vice President -- President -- Individual Insurance Operations of PMLIC;
Individual Insurance Operations 1988 to 1995 -- Executive Vice
President -- Corporate of PMLIC; 1987 to
1988 -- Senior Vice President -- Corporate of PMLIC;
1983 to 1987 -- Senior Vice
President -- Administration of PMLIC.
John R. McClelland................... 1988 to present -- Executive Vice President and Chief
Executive Vice President Financial Officer of PMLIC; 1968 to 1988 -- Senior
and Chief Financial Officer Vice President and Chief Financial Officer of
Continental American Life Insurance Company.
</TABLE>
45
<PAGE> 55
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND POSITION* DURING THE PAST FIVE YEARS
- ------------------------------------- ------------------------------------------------------
<S> <C>
Charlene Parsons..................... 1995 to present -- Executive Vice
Executive Vice President -- President -- Corporate of PMLIC; 1991 to 1994 -- Vice
Corporate President -- Human Resources of PMLIC; 1989 to
1991 -- Assistant Vice President -- Human Resources
of PMLIC.
Stanley R. Reber..................... 1988 to present -- Executive Vice President and Chief
Executive Vice President Investment Officer of PMLIC; 1985 to 1988 -- Senior
and Chief Investment Officer Vice President -- Investments of PMLIC.
Mary Lynn Finelli.................... 1986 to present -- Vice President and Controller of
Vice President and PMLIC; 1976 to 1986 -- Principal of Arthur Young
Controller Company.
Craig L. Snyder...................... Vice President -- Mortgage Loans and Real Estate of
Vice President -- PMLIC.
Mortgage Loans and
Real Estate
Guy H. Edwards....................... Vice President -- Information Services of PMLIC.
Vice President --
Information Services
William P. Loesche................... 1994 to present -- Counsel and Secretary of PMLIC;
Counsel 1988 to 1994 -- Counsel and Assistant Secretary of
and Secretary PMLIC.
Rosanne Gatta........................ 1994 to present -- Vice President and Treasurer of
Assistant Vice President PMLIC; 1985 to 1994 -- Assistant Vice President and
and Treasurer Treasurer of PMLIC.
</TABLE>
- ---------------
* Unless otherwise indicated, the address is 1050 Westlakes Drive, Berwyn,
Pennsylvania 19312.
A Fidelity Bond in the amount of $5 million covering PMLIC's officers and
employees has been issued by National Union Insurance Company, a subsidiary of
American International Group.
DISTRIBUTION OF POLICIES
Applications for the Policies are solicited by agents who are licensed by
state insurance authorities to sell PMLIC's variable life insurance policies,
and who are also registered representatives of 1717 Capital Management Company
("1717") (formerly PML Securities Company) or registered representatives of
broker/dealers who have Selling Agreements with PML or registered
representatives of broker/dealers who have Selling Agreements with such
broker/dealers. PML, whose address is Christiana Executive Campus, P.O. Box
15626, Wilmington, Delaware 19850, is a registered broker/dealer under the
Securities Exchange Act of 1934 (the "1934 Act") and a member of the National
Association of Securities Dealers, Inc. (the "NASD"). 1717 is an indirect
wholly-owned subsidiary of PMLIC. 1717 acts as the principal underwriter, as
defined in the 1940 Act, of the Policies (as well as other variable life
policies) for the Separate Accounts pursuant to an Underwriting Agreement to
which the Accounts, PML and PMLIC are parties. 1717 is also the principal
underwriter of variable annuity contracts issued by PMLIC and variable life
insurance policies and variable annuity contracts issued by Providentmutual Life
and Annuity Company of America, a wholly-owned subsidiary of PMLIC. The Policies
are offered and sold only in those states where their sale is lawful.
1717 receives no compensation as principal underwriter of the Policies.
The insurance underwriting and the determination of the proposed Insureds'
Premium Classes and whether to accept or reject an application for a Policy is
done by PMLIC. PMLIC will refund any premiums
46
<PAGE> 56
paid if a Policy ultimately is not issued or will refund the applicable amount
if the Policy is returned under the Free-Look provision.
Agents are compensated for sales of the Policies on a commission and
service fee basis and with other forms of compensation. During the first Policy
Year, agent commissions will not be more than 45% of the premiums paid up to a
target amount (used only to determine commission payments) and 2% of the
premiums paid in excess of that amount. For Policy Year 2, the agent commissions
will not be more than 5 1/2% of the premiums paid; for Policy Years 3 through
10, 6 1/2%; for Policy Years 11 through 15, 2 5/6%; and for years 16 and later,
2% of the premiums paid. Agents may also receive expense allowances. The agent
may be required to return the first year commission less the deferred sales
charge imposed if a Policy is not continued through the second Policy Year.
POLICY REPORTS
At least once each Policy Year a statement will be sent to the Owner
describing the status of the Policy, including setting forth the Face Amount,
the current Death Benefit, any Policy loans and accrued interest, the current
Policy Account Value, the Guaranteed Account Value, the Loan Account Value, the
value in each Separate Account, premiums paid since the last report, charges
deducted since the last report, any partial withdrawals since the last report,
and the current Net Cash Surrender Value. At the present time, PMLIC plans to
send these Policy Statements on a quarterly basis. In addition, a statement will
be sent to an Owner showing the status of the Policy following the transfer of
amounts from one Separate Account or Sub-Account of a Separate Account to
another, the taking out of a loan, a repayment of a loan, a partial withdrawal
and the payment of any premiums (excluding those paid by bank draft or otherwise
under the Automatic Payment Plan).
An Owner will be sent a semi-annual report containing the financial
statements of the Separate Accounts and the Funds and Trust as required by the
1940 Act.
STATE REGULATION
PMLIC is subject to regulation and supervision by the Insurance Department
of the Commonwealth of Pennsylvania 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 Policy form has been filed with,
and where required approved by, insurance officials in each jurisdiction where
the Policies are sold. PMLIC 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.
EXPERTS
The Financial Statements listed on Page F-1 have been included in this
Prospectus, in reliance on the reports of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
Actuarial matters included in the Prospectus have been examined by Scott V.
Carney, FSA, MAAA, Actuary of PMLIC, as stated in his opinion filed as an
exhibit to the Registration Statement.
LEGAL MATTERS
Sutherland, Asbill & Brennan of Washington, D.C. has provided advice on
legal matters relating to certain aspects of Federal securities law applicable
to the issue and sale of the Policies. Matters of the Commonwealth of
Pennsylvania law pertaining to the Policies, including PMLIC's right to issue
the Policies and its qualification to do so under applicable laws and
regulations issued thereunder, have been passed upon by Linda E. Senker,
Esquire, Senior Associate General Counsel of PMLIC.
47
<PAGE> 57
APPENDIX A
ILLUSTRATION OF DEATH BENEFITS, POLICY ACCOUNT VALUES
AND NET CASH SURRENDER VALUES
The following tables illustrate how the Death Benefits, Policy Account
Values and Net Cash Surrender Values of a Policy may change with the investment
experience of the Separate Accounts. The tables show how the Death Benefits,
Policy Account Values and Net Cash Surrender Values of a Policy issued to two
Insureds of given ages and sexes would vary over time if the investment return
on the assets held in each Portfolio of the Fund and Trust were a uniform,
gross, annual rate of 0%, 6% and 12%.
The tables on pages A-3 to A-8 illustrate a Policy issued to a male
Insured, Age 55 and a female Insured, Age 55, both in the Preferred Premium
Class with a Face Amount of $1,000,000 and a Planned Periodic Premium of $10,000
paid at the beginning of each Policy Year. The Death Benefits, Policy Account
Values and Net Cash Surrender Values would be lower if either Insured was in a
nonsmoker or smoker class or a class with extra ratings, since the cost of
insurance charges would increase. Also, the values would be different from those
shown if the gross annual investment returns averaged 0%, 6% and 12% over a
period of years, but fluctuated above and below those averages for individual
Policy Years.
The second column of the tables show the amount to which the premiums would
accumulate if an amount equal to those premiums were invested to earn interest,
after taxes, at 5% compounded annually. The columns shown under the heading
"Guaranteed" assume that throughout the life of the policy, the monthly charge
for cost of insurance is based on the maximum level permitted under the Policy
(based on the 1980 CSO Smoker/Nonsmoker Table), a Premium Expense Charge of
8.25% (2% Premium Tax Charge, 5% of Premium Sales Charge and 1.25% Federal Tax
Charge) in all Policy Years, a maximum monthly administrative fee of $42, the
initial administrative charge of $127.50 in each of the first 12 policy months,
and a daily charge for mortality and expense risks equivalent to an annual rate
of 0.90%; the columns under the heading "Current" assume that throughout the
life of the Policy, the monthly charge for cost of insurance is based on the
current cost of insurance rate, a Premium Expense Charge of 8.25% in Policy
Years 1 through 10 and 3.25% (2% Premium Tax Charge and 1.25% Federal Tax
Charge) thereafter, the current monthly administrative fee of $17.50, the
initial administrative charge of $127.50 in each of the first 12 policy months,
and a daily charge for mortality and expense risks equivalent to an annual rate
of 0.60%.
The amounts shown in all tables reflect an averaging of certain other asset
charges described below that may be assessed under the Policy, depending upon
how premiums are allocated. The total of the asset charges reflected in the
Current and Guaranteed illustrations, including the Mortality and Expense Risk
Charge listed above, is 1.37% and 1.69%, respectively. This total charge is
based on an assumption that an Owner allocates the Policy values equally among
the Growth, Money Market, Bond, Managed, Aggressive Growth and International
Separate Accounts and among each Sub-Account of the Variable Account and of the
Zero Coupon Bond Separate Account. These asset charges reflect an investment
advisory fee of 0.55% which represents an average of the fees incurred by the
Portfolios during the most recent fiscal year and expenses of 0.22% which is
based on an average of the actual expenses incurred by the Portfolios during the
most recent fiscal year. For all of the Portfolios, the annual expenses used in
the illustrations are net of certain reimbursements that may or may not
continue.
Currently there is an expense reimbursement agreement between PMLIC and the
MS Fund pursuant to which PMLIC reimburses MS Fund expenses, excluding
investment advisory fees, in excess of 0.40% for all Portfolios except the
International Portfolio and 0.75% for the International Portfolio. There was no
reimbursement in 1995. The MS Fund expenses, excluding advisory fees, during
1995 were 0.27% for the Growth Portfolio, 0.25% for the Money Market Portfolio,
0.25% for the Bond Portfolio, 0.26% for the Managed Portfolio, 0.27% for the
Aggressive Growth Portfolio and 0.40% for the International Portfolio. It is
anticipated that this agreement will continue past the current year. If it does
not continue, Fund expenses may increase.
A-1
<PAGE> 58
Absent reimbursements, the investment advisory fees and other expenses
during the most recent fiscal year for the portfolios were:
VIP Fund Equity-Income Portfolio 0.61%, VIP Fund Growth Portfolio
0.70%, VIP Fund High Income Portfolio 0.71%, VIP Fund overseas Portfolio
0.91%, VIP Fund II Asset Manager Portfolio 0.81%, VIP Fund II Index 500
Portfolio 0.47%, VIP Fund II Investment Grade Bond Portfolio 0.59%, VIP
Fund II Contrafund Portfolio 0.72%, Alger American Small Capitalization
Portfolio 0.92%, AMT Growth Portfolio 0.89%, AMT Balanced Portfolio 0.97%,
AMT Limited Maturity Bond Portfolio 0.72%, TCI Growth Portfolio 1.0%, and
Van Eck Worldwide Bond Portfolio 0.98% and Van Eck Gold and Natural
Resources Portfolio 0.96%. Van Eck Worldwide Emerging Markets Portfolio was
not available in 1995.
The tables also reflect the fact that no charges for Federal or state
income taxes are currently made against the Separate Accounts. If such a charge
is made in the future, it would take a higher gross annual rate of return to
produce the same Policy values.
The tables illustrate the Policy values that would result based upon the
hypothetical investment rates of return if premiums are paid and allocated as
indicated, no amounts are allocated to the Guaranteed Account, and no Policy
loans are made. The tables are also based on the assumption that the Owner has
not requested a decrease in the Face Amount, that no partial withdrawals have
been made and no transfers have been made in any Policy Year.
Upon request, PMLIC will provide a comparable illustration based upon the
proposed Insureds' Ages and Premium Classes, the Death Benefit Option, Face
Amount, Planned Periodic Premium and riders requested. PMLIC reserves the right
to charge a reasonable fee for this service to persons who request more than one
policy illustration during a Policy Year.
A-2
<PAGE> 59
PROVIDENT MUTUAL
FLEXIBLE PREMIUM ADJUSTABLE SURVIVORSHIP VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT MALE INSURED--ISSUE AGE 55--PREFERRED
FEMALE INSURED--ISSUE AGE 55--PREFERRED
DEATH BENEFIT OPTION A ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
<TABLE>
<CAPTION>
GUARANTEED* CURRENT**
PREMIUMS ----------------------------------- -----------------------------------
END OF ACCUMULATED POLICY NET CASH POLICY NET CASH
POLICY AT 5% INT. ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------- --------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 6,958 2,958 1,000,000 7,283 3,283 1,000,000
2 21,525 15,205 10,805 1,000,000 15,877 11,477 1,000,000
3 33,101 23,181 18,381 1,000,000 24,220 19,420 1,000,000
4 45,256 30,865 25,665 1,000,000 32,288 27,088 1,000,000
5 58,019 38,233 32,633 1,000,000 40,058 34,458 1,000,000
6 71,420 45,253 39,253 1,000,000 47,500 41,500 1,000,000
7 85,491 51,885 45,485 1,000,000 54,574 48,174 1,000,000
8 100,266 58,072 51,272 1,000,000 61,216 54,416 1,000,000
9 115,779 63,740 56,540 1,000,000 67,712 60,512 1,000,000
10 132,068 68,796 61,196 1,000,000 74,130 66,530 1,000,000
11 149,171 73,145 65,145 1,000,000 80,955 72,955 1,000,000
12 167,130 76,676 69,236 1,000,000 87,697 80,257 1,000,000
13 185,986 79,280 73,700 1,000,000 94,376 88,796 1,000,000
14 205,786 80,836 77,116 1,000,000 100,983 97,263 1,000,000
15 226,575 81,196 79,336 1,000,000 107,342 105,482 1,000,000
16 248,404 80,148 80,148 1,000,000 113,142 113,142 1,000,000
17 271,324 77,331 77,331 1,000,000 118,439 118,439 1,000,000
18 295,390 72,515 72,515 1,000,000 123,061 123,061 1,000,000
19 320,660 65,128 65,128 1,000,000 126,840 126,840 1,000,000
20 347,193 54,585 54,585 1,000,000 129,602 129,602 1,000,000
25 501,135 0 0 0 121,223 121,223 1,000,000
</TABLE>
* These values reflect investment results using maximum cost of insurance
rates, mortality and expense risk, premium expense and administrative charges
and the maximum transaction charge for the zero coupon bond account.
** These values reflect investment results using current cost of insurance
rates, mortality and expense risk, premium expense and administrative charges
and the current transaction charge for the zero coupon bond account.
The death benefit may, and the policy account values and net cash surrender
values will differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, THE DEATH
BENEFIT, POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD ALSO BE
DIFFERENT FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE
SEPARATE ACCOUNTS AND THE DIFFERENT RATES OF RETURN OF THE SEPARATE ACCOUNTS IF
THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%
OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SEPARATE ACCOUNTS.
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-3
<PAGE> 60
PROVIDENT MUTUAL
FLEXIBLE PREMIUM ADJUSTABLE SURVIVORSHIP VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT MALE INSURED--ISSUE AGE 55--PREFERRED
FEMALE INSURED--ISSUE AGE 55--PREFERRED
DEATH BENEFIT OPTION A ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
<TABLE>
<CAPTION>
GUARANTEED* CURRENT**
PREMIUMS ----------------------------------- -----------------------------------
END OF ACCUMULATED POLICY NET CASH POLICY NET CASH
POLICY AT 5% INT. ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------- --------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 7,432 3,432 1,000,000 7,769 3,769 1,000,000
2 21,525 16,630 12,230 1,000,000 17,348 12,948 1,000,000
3 33,101 26,080 21,280 1,000,000 27,225 22,425 1,000,000
4 45,256 35,766 30,566 1,000,000 37,387 32,187 1,000,000
5 58,019 45,670 40,070 1,000,000 47,820 42,220 1,000,000
6 71,420 55,764 49,764 1,000,000 58,503 52,503 1,000,000
7 85,491 66,012 59,612 1,000,000 69,405 63,005 1,000,000
8 100,266 76,358 69,558 1,000,000 80,467 73,667 1,000,000
9 115,779 86,728 79,528 1,000,000 91,985 84,785 1,000,000
10 132,068 97,027 89,427 1,000,000 104,047 96,447 1,000,000
11 149,171 107,154 99,154 1,000,000 117,192 109,192 1,000,000
12 167,130 116,992 109,552 1,000,000 130,958 123,518 1,000,000
13 185,986 126,417 120,837 1,000,000 145,391 139,811 1,000,000
14 205,786 135,299 131,579 1,000,000 160,513 156,793 1,000,000
15 226,575 143,472 141,612 1,000,000 176,188 174,328 1,000,000
16 248,404 150,707 150,707 1,000,000 192,147 192,147 1,000,000
17 271,324 156,631 156,631 1,000,000 208,463 208,463 1,000,000
18 295,390 160,980 160,980 1,000,000 225,003 225,003 1,000,000
19 320,660 163,168 163,168 1,000,000 241,638 241,638 1,000,000
20 347,193 162,578 162,578 1,000,000 258,234 258,234 1,000,000
25 501,135 89,722 89,722 1,000,000 335,825 335,825 1,000,000
</TABLE>
* These values reflect investment results using maximum cost of insurance
rates, mortality and expense risk, premium expense and administrative charges
and the maximum transaction charge for the zero coupon bond account.
** These values reflect investment results using current cost of insurance
rates, mortality and expense risk, premium expense and administrative charges
and the current transaction charge for the zero coupon bond account.
The death benefit may, and the policy account values and net cash surrender
values will differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, THE DEATH
BENEFIT, POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD ALSO BE
DIFFERENT FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE
SEPARATE ACCOUNTS AND THE DIFFERENT RATES OF RETURN OF THE SEPARATE ACCOUNTS IF
THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%
OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SEPARATE ACCOUNTS.
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-4
<PAGE> 61
PROVIDENT MUTUAL
FLEXIBLE PREMIUM ADJUSTABLE SURVIVORSHIP VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT MALE INSURED--ISSUE AGE 55--PREFERRED
FEMALE INSURED--ISSUE AGE 55--PREFERRED
DEATH BENEFIT OPTION A ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
<TABLE>
<CAPTION>
GUARANTEED* CURRENT**
PREMIUMS ----------------------------------- -----------------------------------
END OF ACCUMULATED POLICY NET CASH POLICY NET CASH
POLICY AT 5% INT. ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------- --------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 7,909 3,909 1,000,000 8,256 4,256 1,000,000
2 21,525 18,114 13,714 1,000,000 18,878 14,478 1,000,000
3 33,101 29,211 24,411 1,000,000 30,470 25,670 1,000,000
4 45,256 41,266 36,066 1,000,000 43,107 37,907 1,000,000
5 58,019 54,346 48,746 1,000,000 56,873 51,273 1,000,000
6 71,420 68,519 62,519 1,000,000 71,853 65,853 1,000,000
7 85,491 83,854 77,454 1,000,000 88,136 81,736 1,000,000
8 100,266 100,412 93,612 1,000,000 105,793 98,993 1,000,000
9 115,779 118,243 111,043 1,000,000 125,263 118,063 1,000,000
10 132,068 137,392 129,792 1,000,000 146,805 139,205 1,000,000
11 149,171 157,911 149,911 1,000,000 171,186 163,186 1,000,000
12 167,130 179,855 172,415 1,000,000 198,162 190,722 1,000,000
13 185,986 203,291 197,711 1,000,000 228,027 222,447 1,000,000
14 205,786 228,306 224,586 1,000,000 261,079 257,359 1,000,000
15 226,575 254,985 253,125 1,000,000 297,505 295,645 1,000,000
16 248,404 283,392 283,392 1,000,000 337,421 337,421 1,000,000
17 271,324 313,514 313,514 1,000,000 381,280 381,280 1,000,000
18 295,390 345,491 345,491 1,000,000 429,424 429,424 1,000,000
19 320,660 379,280 379,280 1,000,000 482,268 482,268 1,000,000
20 347,193 414,924 414,924 1,000,000 540,318 540,318 1,000,000
25 501,135 629,873 629,873 1,000,000 935,772 935,772 1,000,000
</TABLE>
* Those values reflect investment results using maximum cost of insurance
rates, mortality and expense risk, premium expense and administrative charges
and the maximum transaction charge for the zero coupon bond account.
** These values reflect investment results using current cost of insurance
rates, mortality and expense risk, premium expense and administrative charges
and the current transaction charge for the zero coupon bond account.
The death benefit may, and the policy account values and net cash surrender
values will differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD ALSO BE
DIFFERENT FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE
SEPARATE ACCOUNTS AND THE DIFFERENT RATES OF RETURN OF THE SEPARATE ACCOUNTS IF
THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%
OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SEPARATE ACCOUNTS,
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-5
<PAGE> 62
PROVIDENT MUTUAL
FLEXIBLE PREMIUM ADJUSTABLE SURVIVORSHIP VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT MALE INSURED--ISSUE AGE 55--PREFERRED
FEMALE INSURED--ISSUE AGE 55--PREFERRED
DEATH BENEFIT OPTION B ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
<TABLE>
<CAPTION>
GUARANTEED* CURRENT**
PREMIUMS ----------------------------------- -----------------------------------
END OF ACCUMULATED POLICY NET CASH POLICY NET CASH
POLICY AT 5% INT. ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------- --------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 6,957 2,957 1,006,957 7,283 3,283 1,007,283
2 21,525 15,202 10,802 1,015,202 15,875 11,475 1,015,875
3 33,101 23,171 18,371 1,023,171 24,210 19,410 1,024,210
4 45,256 30,841 25,641 1,030,841 32,263 27,063 1,032,263
5 58,019 38,184 32,584 1,038,184 40,007 34,407 1,040,007
6 71,420 45,163 39,163 1,045,163 47,406 41,406 1,047,406
7 85,491 51,733 45,333 1,051,733 54,416 48,016 1,054,416
8 100,266 57,830 51,030 1,057,830 60,963 54,163 1,060,963
9 115,779 63,371 56,171 1,063,371 67,351 60,151 1,067,351
10 132,068 68,251 60,651 1,068,251 73,651 66,051 1,073,651
11 149,171 72,362 64,362 1,072,362 80,349 72,349 1,080,349
12 167,130 75,582 68,142 1,075,582 86,954 79,514 1,086,954
13 185,986 77,787 72,207 1,077,787 93,489 87,909 1,093,489
14 205,786 78,847 75,127 1,078,847 99,944 96,224 1,099,944
15 226,575 78,602 76,742 1,078,602 106,122 104,262 1,106,122
16 248,404 76,830 76,830 1,076,830 111,670 111,670 1,111,670
17 271,324 73,156 73,156 1,073,156 116,645 116,645 1,116,645
18 295,390 67,364 67,364 1,067,364 120,848 120,848 1,120,848
19 320,660 58,891 58,891 1,058,891 124,079 124,079 1,124,079
20 347,193 47,201 47,201 1,047,201 126,135 126,135 1,126,135
25 501,135 0 0 0 111,016 111,016 1,111,016
</TABLE>
* These values reflect investment results using maximum cost of insurance
rates, mortality and expense risk, premium expense and administrative charges
and the maximum transaction charge for the zero coupon bond account.
** These values reflect investment results using current cost of insurance
rates, mortality and expense risk, premium expense and administrative charges
and the current transaction charge for the zero coupon bond account.
The death benefit may, and the policy account values and net cash surrender
values will differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN, THE DEATH
BENEFIT, POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD ALSO BE
DIFFERENT FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE
SEPARATE ACCOUNTS AND THE DIFFERENT RATES OF RETURN OF THE SEPARATE ACCOUNTS IF
THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%
OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SEPARATE ACCOUNTS,
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-6
<PAGE> 63
PROVIDENT MUTUAL
FLEXIBLE PREMIUM ADJUSTABLE SURVIVORSHIP VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT MALE INSURED--ISSUE AGE 55--PREFERRED
FEMALE INSURED--ISSUE AGE 55--PREFERRED
DEATH BENEFIT OPTION B ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6%
<TABLE>
<CAPTION>
GUARANTEED* CURRENT**
PREMIUMS ----------------------------------- -----------------------------------
END OF ACCUMULATED POLICY NET CASH POLICY NET CASH
POLICY AT 5% INT. ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------- --------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 7,432 3,432 1,007,432 7,769 3,769 1,007,769
2 21,525 16,627 12,227 1,016,627 17,345 12,945 1,017,345
3 33,101 26,068 21,268 1,026,068 27,214 22,414 1,027,214
4 45,256 35,738 30,538 1,035,738 37,358 32,158 1,037,358
5 58,019 45,610 40,010 1,045,610 47,758 42,158 1,047,758
6 71,420 55,651 49,651 1,055,651 58,385 52,385 1,058,385
7 85,491 65,813 59,413 1,065,813 69,198 62,798 1,069,198
8 100,266 76,030 69,230 1,076,030 80,124 73,324 1,080,124
9 115,779 86,208 79,008 1,086,208 91,475 84,275 1,091,475
10 132,068 96,230 88,630 1,096,230 103,342 95,742 1,103,342
11 149,171 105,965 97,965 1,105,965 116,262 108,262 1,116,262
12 167,130 115,262 107,822 1,115,262 129,769 122,329 1,129,769
13 185,986 123,958 118,378 1,123,958 143,911 138,331 1,143,911
14 205,786 131,877 128,157 1,131,877 158,706 154,986 1,158,706
15 226,575 138,802 136,942 1,138,802 173,980 172,120 1,173,980
16 248,404 144,437 144,437 1,144,437 189,384 189,384 1,189,384
17 271,324 148,315 148,315 1,148,315 204,977 204,977 1,204,977
18 295,390 150,106 150,106 1,150,106 220,552 220,552 1,220,552
19 320,660 149,105 149,105 1,149,105 235,892 235,892 1,235,892
20 347,193 144,593 144,593 1,144,593 250,763 250,763 1,250,763
25 501,135 41,678 41,678 1,041,678 308,287 308,287 1,308,287
</TABLE>
* These values reflect investment results using maximum cost of insurance
rates, mortality and expense risk, premium expense and administrative charges
and the maximum transaction charge for the zero coupon bond account.
** These values reflect investment results using current cost of insurance
rates, mortality and expense risk, premium expense and administrative charges
and the current transaction charge for the zero coupon bond account.
The death benefit may, and the policy account values and net cash surrender
values will differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD ALSO BE
DIFFERENT FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE
SEPARATE ACCOUNTS AND THE DIFFERENT RATES OF RETURN OF THE SEPARATE ACCOUNTS IF
THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%
OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SEPARATE ACCOUNTS.
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-7
<PAGE> 64
PROVIDENT MUTUAL
FLEXIBLE PREMIUM ADJUSTABLE SURVIVORSHIP VARIABLE LIFE INSURANCE
$1,000,000 FACE AMOUNT MALE INSURED--ISSUE AGE 55--PREFERRED
FEMALE INSURED--ISSUE AGE 55--PREFERRED
DEATH BENEFIT OPTION B ANNUAL PREMIUM $10,000
ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12%
<TABLE>
<CAPTION>
GUARANTEED* CURRENT**
PREMIUMS ----------------------------------- -----------------------------------
END OF ACCUMULATED POLICY NET CASH POLICY NET CASH
POLICY AT 5% INT. ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER DEATH
YEAR PER YEAR VALUE VALUE BENEFIT VALUE VALUE BENEFIT
- ------ ----------- ------- --------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 10,500 7,908 3,908 1,007,908 8,256 4,256 1,008,256
2 21,525 18,110 13,710 1,018,110 18,875 14,475 1,018,875
3 33,101 29,198 24,398 1,029,198 30,458 25,658 1,030,458
4 45,256 41,232 36,032 1,041,232 43,073 37,873 1,043,073
5 58,019 54,273 48,673 1,054,273 56,798 51,198 1,056,798
6 71,420 68,376 62,376 1,068,376 71,705 65,705 1,071,705
7 85,491 83,596 77,196 1,083,596 87,866 81,466 1,087,866
8 100,266 99,968 93,168 1,099,968 105,329 98,529 1,105,329
9 115,779 117,513 110,313 1,117,513 124,544 117,344 1,124,544
10 132,068 136,228 128,628 1,136,228 145,771 138,171 1,145,771
11 149,171 156,105 148,105 1,156,105 169,761 161,761 1,169,761
12 167,130 177,117 169,677 1,177,117 196,262 188,822 1,196,262
13 185,986 199,230 193,650 1,199,230 225,558 219,978 1,225,558
14 205,786 222,400 218,680 1,222,400 257,929 254,209 1,257,929
15 226,575 246,543 244,683 1,246,543 293,489 291,629 1,293,489
16 248,404 271,498 271,498 1,271,498 332,189 332,189 1,332,189
17 271,324 296,920 296,920 1,296,920 374,411 374,411 1,374,411
18 295,390 322,591 322,591 1,322,591 420,302 420,302 1,420,302
19 320,660 347,902 347,902 1,347,902 470,025 470,025 1,470,025
20 347,193 372,197 372,197 1,372,197 523,748 523,748 1,523,748
25 501,135 450,050 450,050 1,450,050 858,948 858,948 1,858,948
</TABLE>
* These values reflect investment results using maximum cost of insurance
rates, mortality and expense risk, premium expense and administrative charges
and the maximum transaction charge for the zero coupon bond account.
** These values reflect investment results using current cost of insurance
rates, mortality and expense risk, premium expense and administrative charges
and the current transaction charge for the zero coupon bond account.
The death benefit may, and the policy account values and net cash surrender
values will differ if premiums are paid in different amounts or frequencies.
IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY
AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS.
ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH
BENEFIT, POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE
DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO
THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED
ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT,
POLICY ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD ALSO BE
DIFFERENT FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE
SEPARATE ACCOUNTS AND THE DIFFERENT RATES OF RETURN OF THE SEPARATE ACCOUNTS IF
THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%
OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SEPARATE ACCOUNTS.
NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL, RATES OF RETURN CAN BE
ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
A-8
<PAGE> 65
APPENDIX B
LONG TERM MARKET TRENDS
The information below is a record of the compound annual returns of common
stocks, high-grade corporate bonds and 30-day U.S. Treasury bills over 20 year
holding periods.* The compound annual returns assume the reinvestment of
dividends, capital gains and interest. This is an historical record and is not
intended as a projection of future performance. Charges associated with a
variable life policy are not reflected.
The data indicates that, historically, the investment performance of common
stocks over long periods of time has been positive and has generally been
superior to that of long-term, high-grade debt securities. Common stocks have,
however, been subject to more dramatic market adjustments over short periods of
time. To the extent that cash value is allocated to separate accounts which
invest in common stocks, these trends indicate the potential advantages of
holding a variable life insurance policy for a long period of time.
The following chart illustrates the compound annual returns of the S&P 500
Composite Stock Price Index for each of the 20-year periods shown. These returns
are compared to the compound annual returns of high-grade corporate bonds and
U.S. Treasury bills for the same periods. (The 20-year periods selected for the
chart begin in 1936 and have ending periods at five year intervals.)
COMPOUND ANNUAL RETURNS (PER ANNUM)
TWENTY YEAR HOLDING PERIODS
[BAR GRAPH]
- ---------------
*Sources: Common stock returns--Standard & Poor's 500 Composite Stock Price
Index. Corporate bond returns--Salomon Brothers Long Term High Grade Corporate
Bond Index, and U.S. Treasury Bill returns--C.R.S.P. U.S. Government Bond File
through 1976 and The Wall Street Journal thereafter. All data from: (C)Ibbotson,
Roger G., and Rex A. Sinquefield, Stocks, Bonds, Bills and Inflation (SBBI),
1982, updated in Stocks, Bonds, Bills and Inflation 1996 Yearbook(TM), Ibbotson
Associates, Inc., Chicago. All rights reserved.
B-1
<PAGE> 66
Over the 51 20-year time periods beginning in 1926 and ending in 1995 (i.e.
1926-1945, 1927-1946, and so on through 1976-1995):
-- The compound annual return of common stocks was superior to that of
high-grade, long-term corporate bonds in 48 of the 51 periods.
-- The compound annual return of common stocks surpassed that of U.S.
Treasury bills in each of the 51 periods.
-- Common stock compound annual returns exceeded the average annual rate of
inflation in each of the 51 periods.
Over the 41 30-year time periods beginning in 1926 and ending in 1995, the
compound annual return of common stocks was superior to that of high-grade,
long-term corporate bonds, U.S. Treasury bills and inflation in all 41 periods.
From 1926 through 1995 the compound annual return for common stocks was
10.5%, compared to 5.7% for high-grade, long-term corporate bonds, 5.2% for
Long-Term Government Bonds, 3.7% for U.S. Treasury bills and 3.1% for the
Consumer Price Index.
------------------------
SUMMARY TABLE: HISTORIC S&P 500 COMPOSITE STOCK INDEX RESULTS FOR
SPECIFIC HOLDING PERIODS
The following chart categorizes the historical results of the Standard &
Poor's 500 Composite Stock Index, with dividends reinvested, over one-year,
five-year, ten-year and twenty-year periods beginning in 1926 and ending in
1995.
The chart shows that historically, the longer that a portfolio matching the
S&P 500 Composite Stock Index was held, the less likely was the chance of a
loss. Conversely, the shorter the holding period of such a portfolio, the more
likely was the chance of a loss. The chart also shows that shorter term results
tend to be more extreme than longer term results.
THE CHART IS NOT A PROJECTION OR REPRESENTATION OF FUTURE STOCK MARKET
RESULTS. IT CANNOT BE TAKEN AS REPRESENTATIVE OF THE PERFORMANCE OF ANY ONE
SEPARATE ACCOUNT. Rather it shows the historic performance of a broad index of
stocks over arbitrarily selected time periods.
PERCENT OF HOLDING PERIODS WITH THE FOLLOWING RETURNS:
<TABLE>
<CAPTION>
GREATER
THAN
HOLDING NEGATIVE 0-5.00% 5.01-10.00% 10.01-15.00% 15.01-20.00% 20.00%
PERIOD RETURN RETURN RETURN RETURN RETURN RETURN
- --------- --------- ------- ----------- ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
1 year 28.6% 4.3% 11.4% 7.1% 11.4% 37.1%
5 years 10.6% 15.2% 15.2% 33.3% 16.7% 9.1%
10 years 3.3% 11.7% 36.1% 23.0% 24.6% 1.6%
20 years 0.0% 5.9% 33.3% 54.9% 5.9% 0.0%
</TABLE>
- ---------------
Source: All basic data from: (C)Ibbotson, Roger G., and Rex A. Sinquefield,
Stocks, Bonds, Bills and Inflation (SBBI), 1982, updated in Stocks, Bonds, Bills
and Inflation 1996 Yearbook(TM), Ibbotson Associates, Inc., Chicago. All rights
reserved.
B-2
<PAGE> 67
TREASURY BILLS ADJUSTED FOR INFLATION
The data below show the annual rate of return over 20-year holding periods
of U.S. Treasury Bills after adjusting for inflation as measured by the Urban
Consumer Price Index. This annual rate, as adjusted, is also called the real
interest rate and is represented as the real interest rate in the chart below.
U.S. Treasury Bills are considered to be one of the safest kinds of investments,
as they are backed by the U.S. government. However, the highest
inflation-adjusted return of U.S. Treasury Bills over the historic 20-year
periods presented below has been modest.
TREASURY BILLS ADJUSTED FOR INFLATION
AVERAGE ANNUAL RETURNS
TWENTY-YEAR HOLDING PERIODS
[BAR GRAPH]
Selected 20-year periods ending on year shown above.
- ---------------
Source: All basic data from: (C)Ibbotson, Roger G., and Rex A. Sinquefield,
Stocks, Bonds, Bills and Inflation (SBBI), 1982, updated in Stocks, Bonds, Bills
and Inflation 1996 Yearbook(TM), Ibbotson Associates, Inc., Chicago. All rights
reserved.
---------------------------
THE "DOLLAR COST AVERAGING" INVESTMENT METHOD
As the Compound Annual Returns graph indicates, the investment performance
of many common stocks has generally been positive over certain relatively long
periods. Common stocks have, however, also been subject to market declines,
often dramatic ones, and general volatility of prices over shorter time periods.
The price fluctuations of common stocks has historically been greater than that
of high-grade debt securities.
The relative volatility of common stock prices as compared with prices of
high-grade debt instruments offers both advantages and disadvantages to
investors. Unfortunately, many investors who otherwise might be interested in
common stocks see only the disadvantages and not the advantages of stock price
fluctuation. The primary disadvantage, of course, is that price declines can be
prolonged and substantial, and when this occurs, investors cannot liquidate
their investments without realizing losses. Price declines, however, also offer
investors important opportunities.
Opportunity arises from the fact that investors can purchase more common
stock for the same amount of money than they would before prices declined.
Investors may take advantage of this if they remain willing to
B-3
<PAGE> 68
continue investing in both rising and falling markets. The dollar cost averaging
method of investing demonstrates this.
In this method of investing:
- Relatively constant dollar amounts are invested at regular intervals
(monthly, quarterly, or annually).
- Stock market fluctuations, especially the savings on purchases from price
declines, are exploited for the investor's benefit.
HOW DOLLAR COST AVERAGING WORKS
<TABLE>
<CAPTION>
INVESTMENTS AT COMMON STOCK SHARES
REGULAR INTERVALS MARKET PRICE PURCHASED
- ----------------- ------------ ---------
<S> <C> <C>
$ 150 $ 20 7.5
150 15 10.0
150 10 15.0
150 5 30.0
150 10 15.0
150 15 10.0
------ ---------
$ 900 87.5
Total Value of 87.5 shares @ $15/share $1,312.50
Less Investment made (900.00)
---------
Gain/Profit $ 412.50
</TABLE>
Though the market price has not returned to the initial high of $20 per
share, dollar cost averaging has permitted the investor to purchase more shares
at a savings and thus realize a significant gain. Obviously, the dollar cost
averaging method only works if the investor continues to invest relatively
constant amounts over a long period of time.
This plan of investing does not assure a profit or protect against a loss
in declining markets; it does allow investors to take advantage of market
fluctuations. Since the success of this strategy is dependent on systematic
investing, purchasers should consider their ability to sustain their payments
through all periods of marketing fluctuations.
How does the dollar cost averaging method relate to a variable life
insurance policy? A policyowner may invest his or her net premiums in a separate
account, and, although a Policy's value in the separate accounts is affected by
several factors other than investment experience (e.g., cash value charges and
charges against the separate account), the dollar cost averaging method can be
generally applied to the Policy to the extent that the policyowner pays premiums
on a regular basis and he or she allocates net premiums to separate accounts
which invest in common stocks in relatively constant amounts.
B-4
<PAGE> 69
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Policyowners and
Board of Directors of
The Provident Mutual Life Insurance
Company
Philadelphia, Pennsylvania
We have audited the accompanying statements of assets and liabilities of the
Provident Mutual Variable Separate Accounts (Growth, Money Market, Bond,
Managed, Aggressive Growth, International, Zero Coupon Bond and Variable) as of
December 31, 1995, and the related statements of operations and changes in net
assets for each of the three years in the period then ended for the Growth,
Money Market, Bond, Managed, Aggressive Growth, International and Zero Coupon
Bond Separate Accounts and for each of the two years in the period ended
December 31, 1995 and the period July 30, 1993 (Date of Inception) to December
31, 1993 for the Variable Separate Account. These financial statements are the
responsibility of the management of the Variable Separate Accounts. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1995 by correspondence with
the transfer agents and trustees. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Provident Mutual Variable
Separate Accounts (Growth, Money Market, Bond, Managed, Aggressive Growth,
International, Zero Coupon Bond and Variable) as of December 31, 1995, and the
results of their operations and the changes in their net assets for each of the
three years in the period then ended for the Growth, Money Market, Bond,
Managed, Aggressive Growth, International and Zero Coupon Bond Separate Accounts
and for each of the two years in the period ended December 31, 1995 and the
period July 30, 1993 (Date of Inception) to December 31, 1993 for the Variable
Separate Account in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 14, 1996
F-2
<PAGE> 70
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Assets and Liabilities, December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY AGGRESSIVE
GROWTH MARKET BOND MANAGED GROWTH INTERNATIONAL
SEPARATE SEPARATE SEPARATE SEPARATE SEPARATE SEPARATE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Investment in the Market Street
Fund, Inc., at market value:
Growth Portfolio................ $ 142,348,646
Money Market Portfolio.......... $ 16,709,104
Bond Portfolio.................. $ 10,441,919
Managed Portfolio............... $ 26,990,924
Aggressive Growth Portfolio..... $19,287,880
International Portfolio......... $23,966,392
Dividends receivable.............. 76,160
Receivable from Provident Mutual
Life Insurance Company.......... 227,315
------------ ----------- ----------- ----------- ----------- -----------
Total Assets...................... 142,348,646 17,012,579 10,441,919 26,990,924 19,287,880 23,966,392
------------ ----------- ----------- ----------- ----------- -----------
LIABILITIES
Payable to Provident Mutual Life
Insurance Company............... 87,709 14,465 14,918
------------ ----------- ----------- ----------- ----------- -----------
NET ASSETS........................ $ 142,260,937 $ 17,012,579 $ 10,427,454 $ 26,976,006 $19,287,880 $23,966,392
============ =========== =========== =========== =========== ===========
Held for the benefit of
policyowners.................... $ 141,926,198 $ 16,676,873 $ 10,117,971 $ 26,816,653 $19,206,123 $23,911,718
Attributable to Provident Mutual
Life Insurance Company.......... 334,739 335,706 309,483 159,353 81,757 54,674
------------ ----------- ----------- ----------- ----------- -----------
$ 142,260,937 $ 17,012,579 $ 10,427,454 $ 26,976,006 $19,287,880 $23,966,392
============ =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE> 71
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Assets and Liabilities, December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ZERO COUPON BOND
SEPARATE ACCOUNT
- -----------------------------------------------------------------------------------------------------------------
1996 2006
SERIES SERIES
SUBACCOUNT SUBACCOUNT
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Investment in the Stripped ("Zero") U.S. Treasury Securities Fund, Provident Mutual
Series A, at market value:
1996 Series......................................................................... $2,027,498
2006 Series......................................................................... $4,790,307
LIABILITIES
Payable to Provident Mutual Life Insurance Company.................................... 896 545
---------- ----------
NET ASSETS............................................................................ $2,026,602 $4,789,762
========== ==========
Held for the benefit of policyowners.................................................. 1,916,584 4,682,891
Attributable to Provident Mutual Life Insurance Company............................... 110,018 106,871
---------- ----------
$2,026,602 $4,789,762
========== ==========
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE> 72
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Assets and Liabilities, December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE SEPARATE ACCOUNT
- ------------------------------------------------------------------------------------------------------------------
FIDELITY FIDELITY FIDELITY FIDELITY
EQUITY- FIDELITY HIGH FIDELITY ASSET FIDELITY INVESTMENT
INCOME GROWTH INCOME OVERSEAS MANAGER INDEX 500 GRADE BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Investment in the Variable
Insurance Products Fund, at
market value:
Equity-Income Portfolio.... $33,745,541
Growth Portfolio........... $46,351,182
High Income Portfolio...... $3,315,059
Overseas Portfolio......... $8,551,710
Investment in the Variable
Insurance Products Fund II,
at market value:
Asset Manager Portfolio.... $27,114,550
Index 500 Portfolio........ $8,932,987
Investment Grade Bond
Portfolio................ $2,346,721
LIABILITIES
Payable to Provident Mutual
Life Insurance Company..... 15,054 14,453 14,721
----------- ----------- -------- ---------- ----------- ---------- --------
NET ASSETS................... $33,730,487 $46,336,729 $3,300,338 $8,551,710 $27,114,550 $8,932,987 $2,346,721
=========== =========== ======== ========== =========== ========== ========
Held for the benefit of
policyowners............... $33,706,861 $46,246,171 $3,270,966 $8,517,818 $27,067,302 $8,919,408 $2,317,925
Attributable to Provident
Mutual Life Insurance
Company.................... 23,626 90,558 29,372 33,892 47,248 13,579 28,796
----------- ----------- -------- ---------- ----------- ---------- --------
$33,730,487 $46,336,729 $3,300,338 $8,551,710 $27,114,550 $8,932,987 $2,346,721
=========== =========== ======== ========== =========== ========== ========
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE> 73
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Assets and Liabilities, December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE SEPARATE ACCOUNT
- ------------------------------------------------------------------------------------------------------------------
NEUBERGER NEUBERGER NEUBERGER VAN ECK VAN ECK
& BERMAN & BERMAN & BERMAN LIMITED TCI WORLDWIDE GOLD AND NATURAL
BALANCED GROWTH MATURITY BOND GROWTH BOND RESOURCES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
ASSETS
Investment in the Neuberger &
Berman Advisers Management
Trust, at market value:
Balanced Portfolio.......... $3,223,304
Growth Portfolio............ $10,620,383
Limited Maturity Bond
Portfolio................. $1,108,362
Investment in TCI Portfolios,
Inc., at market value:
TCI Growth Portfolio........ $5,046,844
Investment in the Van Eck
Worldwide Insurance Trust,
at market value:
Worldwide Bond Portfolio.... $1,812,368
Gold and Natural Resources
Portfolio................. $901,280
LIABILITIES
Payable to Provident Mutual
Life Insurance Company...... 14,478 15,068
---------- ----------- ---------- ---------- ---------- --------
NET ASSETS.................... $3,223,304 $10,605,905 $1,108,362 $5,031,776 $1,812,368 $901,280
========== =========== ========== ========== ========== ========
Held for the benefit of
policyowners................ $3,175,584 $10,567,704 $1,080,510 $4,997,910 $1,786,055 $872,076
Attributable to Provident
Mutual Life Insurance
Company..................... 47,720 38,201 27,852 33,866 26,313 29,204
---------- ----------- ---------- ---------- ---------- --------
$3,223,304 $10,605,905 $1,108,362 $5,031,776 $1,812,368 $901,280
========== =========== ========== ========== ========== ========
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE> 74
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Operations for the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY AGGRESSIVE
GROWTH MARKET BOND MANAGED GROWTH INTERNATIONAL
SEPARATE SEPARATE SEPARATE SEPARATE SEPARATE SEPARATE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends................................ $ 3,702,641 $ 817,140 $ 548,703 $ 1,057,761 $ 94,132
EXPENSES
Mortality and expense risks.............. 767,425 101,404 56,053 152,755 $ 106,115 139,362
Operating expense reimbursement.......... (12,376) (538) (1,846)
----------- -------- ---------- ---------- ---------- ----------
Total expenses........................... 755,049 100,866 54,207 152,755 106,115 139,362
----------- -------- ---------- ---------- ---------- ----------
Net investment income (loss)............. 2,947,592 716,274 494,496 905,006 (106,115) (45,230)
----------- -------- ---------- ---------- ---------- ----------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Realized gain distributions reinvested... 7,782,999 24,410 109,290 444,778
Net realized gain from redemption of
investment shares...................... 1,322,359 8,291 502,630 169,077 440,185
----------- -------- ---------- ---------- ---------- ----------
Net realized gain on investments......... 9,105,358 8,291 527,040 278,367 884,963
----------- -------- ---------- ---------- ---------- ----------
Net unrealized appreciation
(depreciation)
of investments:
Beginning of year...................... 3,760,116 (660,717) (168,478) 1,000,654 372,684
End of year............................ 23,244,683 443,614 3,562,768 2,711,686 2,138,159
----------- -------- ---------- ---------- ---------- ----------
Net unrealized appreciation of
investments during the year............ 19,484,567 1,104,331 3,731,246 1,711,032 1,765,475
----------- -------- ---------- ---------- ---------- ----------
Net realized and unrealized gain
on investments......................... 28,589,925 1,112,622 4,258,286 1,989,399 2,650,438
----------- -------- ---------- ---------- ---------- ----------
Net increase in net assets resulting
from operations........................ $ 31,537,517 $ 716,274 $ 1,607,118 $ 5,163,292 $1,883,284 $ 2,605,208
=========== ======== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements
F-7
<PAGE> 75
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Operations for the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ZERO COUPON BOND
SEPARATE ACCOUNT
- -----------------------------------------------------------------------------------------------------------------
1996 2006
SERIES SERIES
SUBACCOUNT SUBACCOUNT
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
EXPENSES
Mortality and expense risks........................................................... $ 11,204 $ 24,226
Asset charge.......................................................................... 4,511 8,855
-------- ---------
Net investment loss................................................................... (15,715) (33,081 )
-------- ---------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from redemption of investment shares................................ 46,689 103,889
-------- ---------
Net realized gain on investments...................................................... 46,689 103,889
-------- ---------
Net unrealized appreciation (depreciation) of investments:
Beginning of year................................................................... 89,755 (32,676 )
End of year......................................................................... 195,315 910,239
-------- ---------
Net unrealized appreciation of investments during the year............................ 105,560 942,915
-------- ---------
Net realized and unrealized gain on investments....................................... 152,249 1,046,804
-------- ---------
Net increase in net assets resulting from operations.................................. $136,534 $1,013,723
======== =========
</TABLE>
See accompanying notes to financial statements
F-8
<PAGE> 76
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Operations for the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE SEPARATE ACCOUNT
- ----------------------------------------------------------------------------------------------------------------
FIDELITY FIDELITY FIDELITY FIDELITY
EQUITY- FIDELITY HIGH FIDELITY ASSET FIDELITY INVESTMENT
INCOME GROWTH INCOME OVERSEAS MANAGER INDEX 500 GRADE BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends.................... $ 537,930 $ 119,536 $ 41,451 $ 14,561 $ 459,474 $ 50,011 $ 28,403
EXPENSES
Mortality and expense
risks...................... 149,976 229,692 10,896 39,734 171,262 35,351 9,588
---------- ---------- -------- -------- ---------- ---------- --------
Net investment income
(loss)..................... 387,954 (110,156 ) 30,555 (25,173) 288,212 14,660 18,815
---------- ---------- -------- -------- ---------- ---------- --------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Realized gain distributions
reinvested................. 640,717 14,561 6,844
Net realized gain (loss) from
redemption of investment
shares..................... 38,430 50,953 6,119 5,737 (74,582 ) 89,812 11,650
---------- ---------- -------- -------- ---------- ---------- --------
Net realized gain (loss)
on investments............. 679,147 50,953 6,119 20,298 (74,582 ) 96,656 11,650
---------- ---------- -------- -------- ---------- ---------- --------
Net unrealized appreciation
(depreciation) of
investments:
Beginning of year.......... 80,034 60,179 (1,350) (77,282) (1,113,746) 20,259 (2,065)
End of year................ 5,231,207 8,695,334 207,596 502,338 2,425,055 1,377,575 173,631
---------- ---------- -------- -------- ---------- ---------- --------
Net unrealized appreciation
of investments during the
year....................... 5,151,173 8,635,155 208,946 579,620 3,538,801 1,357,316 175,696
---------- ---------- -------- -------- ---------- ---------- --------
Net realized and unrealized
gain on investments........ 5,830,320 8,686,108 215,065 599,918 3,464,219 1,453,972 187,346
---------- ---------- -------- -------- ---------- ---------- --------
Net increase in net assets
resulting from
operations................. $6,218,274 $8,575,952 $245,620 $574,745 $3,752,431 $1,468,632 $206,161
========== ========== ======== ======== ========== ========== ========
</TABLE>
See accompanying notes to financial statements
F-9
<PAGE> 77
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Operations for the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE SEPARATE ACCOUNT
- -----------------------------------------------------------------------------------------------------------------
NEUBERGER NEUBERGER NEUBERGER VAN ECK VAN ECK
& BERMAN & BERMAN & BERMAN LIMITED TCI WORLDWIDE GOLD AND NATURAL
BALANCED GROWTH MATURITY BOND GROWTH BOND RESOURCES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends..................... $ 38,294 $ 10,198 $ 15,353 $ 1,318 $ 89,753 $ 7,028
EXPENSES
Mortality and expense risks... 17,742 47,689 4,199 18,644 8,303 4,526
-------- ---------- ------- -------- -------- -------
Net investment income
(loss)...................... 20,552 (37,491 ) 11,154 (17,326) 81,450 2,502
-------- ---------- ------- -------- -------- -------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Realized gain distributions
reinvested.................. 12,309 136,648
Net realized gain (loss) from
redemption of investment
shares...................... 14,321 (13,352 ) 2,057 24,415 9,650 (2,771)
-------- ---------- ------- -------- -------- -------
Net realized gain (loss)
on investments.............. 26,630 123,296 2,057 24,415 9,650 (2,771)
-------- ---------- ------- -------- -------- -------
Net unrealized appreciation
(depreciation) of
investments:
Beginning of year........... (87,659) (221,388 ) 267 25,541 9,600 (11,497)
End of year................. 337,802 1,140,571 44,695 584,114 70,122 65,442
-------- ---------- ------- -------- -------- -------
Net unrealized appreciation of
investments during the
year........................ 425,461 1,361,959 44,428 558,573 60,522 76,939
-------- ---------- ------- -------- -------- -------
Net realized and unrealized
gain on investments......... 452,091 1,485,255 46,485 582,988 70,172 74,168
-------- ---------- ------- -------- -------- -------
Net increase in net assets
resulting from operations... $472,643 $1,447,764 $ 57,639 $565,662 $151,622 $ 76,670
======== ========== ======= ======== ======== =======
</TABLE>
See accompanying notes to financial statements
F-10
<PAGE> 78
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Operations for the Year Ended December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY AGGRESSIVE
GROWTH MARKET BOND MANAGED GROWTH INTERNATIONAL
SEPARATE SEPARATE SEPARATE SEPARATE SEPARATE SEPARATE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends.............................. $ 2,895,053 $346,198 $ 417,963 $ 846,092 $ 22,011
EXPENSES
Mortality and expense risks............ 613,808 52,749 42,772 132,673 $ 69,831 89,444
Operating expense reimbursement........ (14,824) (1,594) (2,834)
----------- -------- ---------- ---------- ---------- ----------
Total expenses......................... 598,984 51,155 39,938 132,673 $ 69,831 89,444
----------- -------- ---------- ---------- ---------- ----------
Net investment income (loss)........... 2,296,069 295,043 378,025 713,419 (69,831) (67,433)
----------- -------- ---------- ---------- ---------- ----------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Realized gain distributions
reinvested........................... 72,943 182,646 937,642 153,775
Net realized gain from redemption of
investment shares.................... 1,247,733 24,007 370,225 17,586 167,183
----------- -------- ---------- ---------- ---------- ----------
Net realized gain on investments....... 1,320,676 206,653 1,307,867 17,586 320,958
----------- -------- ---------- ---------- ---------- ----------
Net unrealized appreciation
(depreciation) of investments:
Beginning of year.................... 5,664,372 383,384 2,400,938 960,399 894,279
End of year.......................... 3,760,116 (660,717) (168,478) 1,000,654 372,684
----------- -------- ---------- ---------- ---------- ----------
Net unrealized appreciation
(depreciation) of investments during
the year............................. (1,904,256) (1,044,101) (2,569,416) 40,255 (521,595)
----------- -------- ---------- ---------- ---------- ----------
Net realized and unrealized gain (loss)
on investments....................... (583,580) (837,448) (1,261,549) 57,841 (200,637)
----------- -------- ---------- ---------- ---------- ----------
Net increase (decrease) in net assets
resulting from operations............ $ 1,712,489 $295,043 $ (459,423) $ (548,130) $ (11,990) $(268,070)
=========== ======== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements
F-11
<PAGE> 79
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Operations for the Year Ended December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ZERO COUPON BOND
SEPARATE ACCOUNT
- -----------------------------------------------------------------------------------------------------------------
1996 2006
SERIES SERIES
SUBACCOUNT SUBACCOUNT
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
EXPENSES
Mortality and expense risks........................................................... $ 9,707 $ 15,822
Asset charge.......................................................................... 4,021 5,887
-------- ---------
Net investment loss................................................................... (13,728 ) (21,709 )
-------- ---------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from redemption of investment shares................................ 133,126 174,318
-------- ---------
Net realized gain on investments...................................................... 133,126 174,318
-------- ---------
Net unrealized appreciation (depreciation) of investments:
Beginning of year................................................................... 216,172 367,021
End of year......................................................................... 89,755 (32,676 )
-------- ---------
Net unrealized depreciation of investments during the year............................ (126,417 ) (399,697 )
-------- ---------
Net realized and unrealized gain (loss) on investments................................ 6,709 (225,379 )
-------- ---------
Net decrease in net assets resulting from operations.................................. $ (7,019 ) $(247,088 )
======== =========
</TABLE>
See accompanying notes to financial statements
F-12
<PAGE> 80
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Operations for the Year Ended December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE SEPARATE ACCOUNT
- -----------------------------------------------------------------------------------------------------------------
FIDELITY FIDELITY FIDELITY FIDELITY
EQUITY- FIDELITY HIGH FIDELITY ASSET FIDELITY INVESTMENT
INCOME GROWTH INCOME OVERSEAS MANAGER INDEX 500 GRADE BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends.................... $188,377 $ 37,485 $ 147,161
EXPENSES
Mortality and expense
risks...................... 48,837 90,831 $ 859 $ 5,635 100,744 $ 8,356 $ 827
---------- ---------- -------- -------- ---------- ---------- --------
Net investment income
(loss)..................... 139,540 (53,346) (859) (5,635) 46,417 (8,356) (827)
---------- ---------- -------- -------- ---------- ---------- --------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Realized gain distributions
reinvested................. 183,020 396,740 221,249 1,061
Net realized gain (loss) from
redemption of investment
shares..................... (4,249) (15,721) 36 (3,069 ) (4,737) 76
---------- ---------- -------- -------- ---------- ---------- --------
Net realized gain (loss)
on investments............. 178,771 381,019 36 218,180 (3,676) 76
---------- ---------- -------- -------- ---------- ---------- --------
Net unrealized appreciation
(depreciation) of
investments:
Beginning of year.......... 17,789 73,837 177,220 (5,191)
End of year................ 80,034 60,179 (1,350) (77,282) (1,113,746 ) 20,259 (2,065)
---------- ---------- -------- -------- ---------- ---------- --------
Net unrealized appreciation
of investments during the
year....................... 62,245 (13,658) (1,350) (77,282) (1,290,966 ) 25,450 (2,065)
---------- ---------- -------- -------- ---------- ---------- --------
Net realized and unrealized
gain on investments........ 241,016 367,361 (1,314) (77,282) (1,072,786 ) 21,774 (1,989)
---------- ---------- -------- -------- ---------- ---------- --------
Net increase in net assets
resulting from
operations................. $380,556 $314,015 $ (2,173) $(82,917) $(1,026,369) $ 13,418 $ (2,816)
========== ========== ======== ======== ========== ========== ========
</TABLE>
See accompanying notes to financial statements
F-13
<PAGE> 81
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Operations for the Year Ended December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE SEPARATE ACCOUNT
- -----------------------------------------------------------------------------------------------------------------
NEUBERGER NEUBERGER NEUBERGER VAN ECK VAN ECK
& BERMAN & BERMAN & BERMAN LIMITED TCI WORLDWIDE GOLD AND NATURAL
BALANCED GROWTH MATURITY BOND GROWTH BOND RESOURCES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends..................... $ 18,165 $ 7,036 $ 105 $ 627
EXPENSES
Mortality and expense risks... 10,179 16,940 $ 296 $ 2,373 1,180 613
-------- ---------- ------- -------- -------- -------
Net investment income
(loss)...................... 7,986 (9,904 ) (296) (2,373) (1,075) 14
-------- ---------- ------- -------- -------- -------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Realized gain distributions
reinvested.................. 30,012 145,411
Net realized gain (loss) from
redemption of investment
shares...................... (11,081) (22,663 ) 730 (264) 349 171
-------- ---------- ------- -------- -------- -------
Net realized gain (loss) on
investments................. 18,931 122,748 730 (264) 349 171
-------- ---------- ------- -------- -------- -------
Net unrealized appreciation
(depreciation) of
investments:
Beginning of year........... 3,604 9,662
End of year................. (87,659) (221,388 ) 267 25,541 9,600 (11,497)
-------- ---------- ------- -------- -------- -------
Net unrealized appreciation
(depreciation) of
investments during the
year........................ (91,263) (231,050 ) 267 25,541 9,600 (11,497)
-------- ---------- ------- -------- -------- -------
Net realized and unrealized
gain (loss) on
investments................. (72,332) (108,302 ) 997 25,277 9,949 (11,326)
-------- ---------- ------- -------- -------- -------
Net increase (decrease) in net
assets resulting from
operations.................. $(64,346) $(118,206 ) $ 701 $ 22,904 $ 8,874 $(11,312)
======== ========== ======= ======== ======== =======
</TABLE>
See accompanying notes to financial statements
F-14
<PAGE> 82
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Operations for the Year Ended December 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY AGGRESSIVE
GROWTH MARKET BOND MANAGED GROWTH INTERNATIONAL
SEPARATE SEPARATE SEPARATE SEPARATE SEPARATE SEPARATE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends.................................. $ 2,598,029 $ 204,473 $ 351,046 $ 478,546 $ 14,646 $ 13,459
EXPENSES
Mortality and expense risks................ 569,882 29,751 36,204 100,735 50,939 24,339
Operating expense reimbursement............ (18,542) (3,065) (3,863)
------------ ---------- ---------- --------- ---------- -----------
Total expenses............................. 551,340 26,686 32,341 100,735 50,939 24,339
------------ ---------- ---------- --------- ---------- -----------
Net investment income (loss)............... 2,046,689 177,787 318,705 377,811 (36,293) (10,880)
------------ ---------- ---------- --------- ---------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Realized gain distributions reinvested..... 3,362,822 34,873
Net realized gain (loss) from redemption of
investment shares........................ 2,239,680 139,331 230,241 (48,475) 25,580
------------ ---------- ---------- --------- ---------- -----------
Net realized gain (loss) on investments.... 5,602,502 139,331 230,241 (48,475) 60,453
------------ ---------- ---------- --------- ---------- -----------
Net unrealized appreciation (depreciation)
of investments:
Beginning of year........................ 4,658,841 232,292 1,379,794 290,576 (48,462)
End of year.............................. 5,664,372 383,384 2,400,938 960,399 894,279
------------ ---------- ---------- --------- ---------- -----------
Net unrealized appreciation of investments
during the year.......................... 1,005,531 151,092 1,021,144 669,823 942,741
------------ ---------- ---------- --------- ---------- -----------
Net realized and unrealized gain on
investments.............................. 6,608,033 290,423 1,251,385 621,348 1,003,194
------------ ---------- ---------- --------- ---------- -----------
Net increase in net assets resulting from
operations............................... $ 8,654,722 $ 177,787 $ 609,128 $ 1,629,196 $585,055 $ 992,314
============ ============ =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-15
<PAGE> 83
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Operations for the Year Ended December 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ZERO COUPON BOND
SEPARATE ACCOUNT
- -----------------------------------------------------------------------------------------------------------------
1996 2006
SERIES SERIES
SUBACCOUNT SUBACCOUNT
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
EXPENSES
Mortality and expense risks........................................................... $ 8,737 $ 12,021
Asset charge.......................................................................... 3,791 4,500
-------- ---------
Net investment loss................................................................... (12,528) (16,521)
-------- ---------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain from redemption of investment shares................................ 209,652 83,620
-------- ---------
Net realized gain on investments...................................................... 209,652 83,620
-------- ---------
Net unrealized appreciation (depreciation) of investments:
Beginning of year................................................................... 304,301 123,553
End of year......................................................................... 216,172 367,021
-------- ---------
Net unrealized appreciation (depreciation) of investments during the year............. (88,129) 243,468
-------- ---------
Net realized and unrealized gain on investments....................................... 121,523 327,088
-------- ---------
Net increase in net assets resulting from operations.................................. $108,995 $310,567
======== =========
</TABLE>
See accompanying notes to financial statements
F-16
<PAGE> 84
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Operations for the Period July 30, 1993 (Date of Inception)
to December 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE SEPARATE ACCOUNT
- -----------------------------------------------------------------------------------------------------------------
FIDELITY NEUBERGER NEUBERGER
FIDELITY FIDELITY ASSET FIDELITY & BERMAN & BERMAN
EQUITY-INCOME GROWTH MANAGER INDEX 500 BALANCED GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends.............................. $18,298 $ 6,687
EXPENSES
Mortality and expense risks............ 2,985 $ 5,658 $ 4,248 326 $ 373 $ 897
------- ------- -------- ------ ------ -------
Net investment income (loss)........... 15,313 (5,658) (4,248) 6,361 (373) (897)
------- ------- -------- ------ ------ -------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Realized gain distributions
reinvested........................... 2,821
Net realized gain from redemption of
investment shares.................... 261 92 740 1,534
------- ------- -------- ------ ------ -------
Net realized gain on investments....... 261 2,913 740 1,534
------- ------- -------- ------ ------ -------
Net unrealized appreciation
(depreciation) of investments:
Beginning of period....................
End of period.......................... 17,789 73,837 177,220 (5,191) 3,604 9,662
------- ------- -------- ------ ------ -------
Net unrealized appreciation
(depreciation) of investments during
the period........................... 17,789 73,837 177,220 (5,191) 3,604 9,662
------- ------- -------- ------ ------ -------
Net realized and unrealized gain (loss)
on investments....................... 18,050 73,837 177,220 (2,278) 4,344 11,196
------- ------- -------- ------ ------ -------
Net increase in net assets resulting
from operations...................... $33,363 $ 68,179 $172,972 $ 4,083 $3,971 $ 10,299
======= ======= ======== ====== ====== =======
</TABLE>
See accompanying notes to financial statements
F-17
<PAGE> 85
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Changes in Net Assets for the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY AGGRESSIVE
GROWTH MARKET BOND MANAGED GROWTH INTERNATIONAL
SEPARATE SEPARATE SEPARATE SEPARATE SEPARATE SEPARATE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income (loss).... $ 2,947,592 $ 716,274 $ 494,496 $ 905,006 $ (106,115) $ (45,230)
Net realized gain on
investments................... 9,105,358 8,291 527,040 278,367 884,963
Net unrealized appreciation of
investments during the year... 19,484,567 1,104,331 3,731,246 1,711,032 1,765,475
------------ ------------ ----------- ----------- ----------- -----------
Net increase in net assets
from operations............... 31,537,517 716,274 1,607,118 5,163,292 1,883,284 2,605,208
------------ ------------ ----------- ----------- ----------- -----------
FROM VARIABLE LIFE POLICY
TRANSACTIONS
Policyowners' net premiums...... 31,018,881 25,991,971 2,748,728 5,437,753 6,979,778 9,246,142
Cost of insurance and
administrative charges........ (10,800,913) (2,892,532) (854,427) (2,184,118) (2,095,129) (2,653,024)
Surrenders and forfeitures...... (6,000,652) (483,482) (459,150) (1,593,554) (741,748) (749,885)
Transfers between investment
portfolios.................... (3,728,068) (18,394,049) (5,935) (1,219,218) 939,005 (706,696)
Net withdrawals due to
policy loans.................. (2,394,343) (216,018) (159,387) (166,162) (463,436) (428,384)
Withdrawals due to death
benefits...................... (179,253) (13) (742) (86,605) (962) (2,302)
------------ ------------ ----------- ----------- ----------- -----------
Net increase in net assets
derived from policy
transactions.................. 7,915,652 4,005,877 1,269,087 188,096 4,617,508 4,705,851
------------ ------------ ----------- ----------- ----------- -----------
Return of capital to Provident
Mutual Life Insurance
Company....................... (500,000)
------------ ------------ ----------- ----------- ----------- -----------
Total increase in net assets.... 39,453,169 4,222,151 2,876,205 5,351,388 6,500,792 7,311,059
NET ASSETS
Beginning of year............. 102,807,768 12,790,428 7,551,249 21,624,618 12,787,088 16,655,333
------------ ------------ ----------- ----------- ----------- -----------
End of year................... $ 142,260,937 $ 17,012,579 $ 10,427,454 $ 26,976,006 $19,287,880 $23,966,392
============ ============ =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-18
<PAGE> 86
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Changes in Net Assets for the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ZERO COUPON BOND
SEPARATE ACCOUNT
- -----------------------------------------------------------------------------------------------------------------
1996 2006
SERIES SERIES
SUBACCOUNT SUBACCOUNT
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment loss................................................................... $ (15,715 ) $ (33,081 )
Net realized gain on investments...................................................... 46,689 103,889
Net unrealized appreciation of investments during the year............................ 105,560 942,915
---------- ----------
Net increase in net assets from operations............................................ 136,534 1,013,723
---------- ----------
FROM VARIABLE LIFE POLICY TRANSACTIONS
Policyowners' net premiums............................................................ 343,230 1,330,797
Cost of insurance and administrative charges.......................................... (138,727 ) (557,882 )
Surrenders and forfeitures............................................................ (43,836 ) (118,177 )
Transfers between investment portfolios............................................... 9,271 435,416
Net withdrawals due to policy loans................................................... (10,176 ) (42,959 )
Withdrawals due to death benefits..................................................... (6,089 ) (13,021 )
---------- ----------
Net increase in net assets derived from policy transactions........................... 153,673 1,034,174
---------- ----------
Total increase in net assets.......................................................... 290,207 2,047,897
NET ASSETS
Beginning of year................................................................... 1,736,395 2,741,865
---------- ----------
End of year......................................................................... $2,026,602 $4,789,762
========== ==========
</TABLE>
See accompanying notes to financial statements
F-19
<PAGE> 87
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Changes in Net Assets for the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE SEPARATE ACCOUNT
- ------------------------------------------------------------------------------------------------------------------
FIDELITY FIDELITY FIDELITY FIDELITY
EQUITY- FIDELITY HIGH FIDELITY ASSET FIDELITY INVESTMENT
INCOME GROWTH INCOME OVERSEAS MANAGER INDEX 500 GRADE BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income
(loss)..................... $ 387,954 $ (110,156 ) $ 30,555 $ (25,173 ) $ 288,212 $ 14,660 $ 18,815
Net realized gain (loss)
on investments............. 679,147 50,953 6,119 20,298 (74,582 ) 96,656 11,650
Net unrealized appreciation
of investments during the
year....................... 5,151,173 8,635,155 208,946 579,620 3,538,801 1,357,316 175,696
----------- ----------- ---------- ---------- ----------- ---------- ----------
Net increase in net assets
from operations............ 6,218,274 8,575,952 245,620 574,745 3,752,431 1,468,632 206,161
----------- ----------- ---------- ---------- ----------- ---------- ----------
FROM VARIABLE LIFE POLICY
TRANSACTIONS
Policyowners' net premiums... 13,095,871 17,511,135 1,445,564 3,784,564 10,792,167 4,239,917 1,185,287
Cost of insurance and
administrative charges..... (3,309,981 ) (4,789,358 ) (294,993 ) (928,908 ) (3,421,593 ) (917,384 ) (302,207 )
Surrenders and forfeitures... (472,892 ) (862,489 ) (37,516 ) (109,478 ) (1,270,363 ) (258,007 ) (19,498 )
Transfers between investment
portfolios................. 6,941,542 6,044,742 1,436,977 2,186,754 (3,131,839 ) 2,120,394 724,450
Net withdrawals due to
policy loans............... (527,820 ) (732,057 ) (11,036 ) (116,872 ) (272,150 ) (126,445 ) (43,336 )
Withdrawals due to
death benefits............. (944 ) (4,026 ) (1,606 ) (650 ) (842 )
----------- ----------- ---------- ---------- ----------- ---------- ----------
Net increase in net assets
derived from policy
transactions............... 15,725,776 17,167,947 2,537,390 4,815,410 2,695,380 5,058,475 1,544,696
----------- ----------- ---------- ---------- ----------- ---------- ----------
Total increase in net
assets..................... 21,944,050 25,743,899 2,783,010 5,390,155 6,447,811 6,527,107 1,750,857
NET ASSETS
Beginning of year.......... 11,786,437 20,592,830 517,328 3,161,555 20,666,739 2,405,880 595,864
----------- ----------- ---------- ---------- ----------- ---------- ----------
End of year................ $33,730,487 $46,336,729 $3,300,338 $8,551,710 $27,114,550 $8,932,987 $2,346,721
=========== =========== ========== ========== =========== ========== ==========
</TABLE>
See accompanying notes to financial statements
F-20
<PAGE> 88
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Changes in Net Assets for the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE SEPARATE ACCOUNT
- ------------------------------------------------------------------------------------------------------------------
NEUBERGER NEUBERGER NEUBERGER VAN ECK VAN ECK
& BERMAN & BERMAN & BERMAN LIMITED TCI WORLDWIDE GOLD AND NATURAL
BALANCED GROWTH MATURITY BOND GROWTH BOND RESOURCES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income
(loss)...................... $ 20,552 $ (37,491 ) $ 11,154 $ (17,326 ) $ 81,450 $ 2,502
Net realized gain (loss) on
investments................. 26,630 123,296 2,057 24,415 9,650 (2,771)
Net unrealized appreciation of
investments during the
year........................ 425,461 1,361,959 44,428 558,573 60,522 76,939
---------- ---------- -------- ---------- -------- --------
Net increase in net assets
from operations............. 472,643 1,447,764 57,639 565,662 151,622 76,670
---------- ---------- -------- ---------- -------- --------
FROM VARIABLE LIFE POLICY
TRANSACTIONS
Policyowners' net premiums.... 1,179,627 4,320,950 436,960 2,085,717 756,804 418,351
Cost of insurance and
administrative charges...... (478,895 ) (1,153,245 ) (99,801) (491,728 ) (179,695 ) (130,611)
Surrenders and forfeitures.... (151,809 ) (214,306 ) (1,233) (119,956 ) (36,252 ) (39,102)
Transfers between investment
portfolios.................. 415,228 2,575,178 495,684 1,896,269 507,453 179,444
Net withdrawals due to policy
loans....................... (56,816 ) (129,622 ) (2,306) (35,265 ) (25,846 ) (8,641)
Withdrawals due to death
benefits.................... (22 ) (5,466 ) (502 )
---------- ---------- -------- ---------- -------- --------
Net increase in net assets
derived from policy
transactions................ 907,313 5,393,489 829,304 3,334,535 1,022,464 419,441
---------- ---------- -------- ---------- -------- --------
Total increase in net
assets...................... 1,379,956 6,841,253 886,943 3,900,197 1,174,086 496,111
NET ASSETS
Beginning of year........... 1,843,348 3,764,652 221,419 1,131,579 638,282 405,169
---------- ---------- -------- ---------- -------- --------
End of year................. $3,223,304 $10,605,905 $1,108,362 $5,031,776 $1,812,368 $ 901,280
========== ========== ======== ========== ======== ========
</TABLE>
See accompanying notes to financial statements
F-21
<PAGE> 89
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Changes in Net Assets for the Year Ended December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY AGGRESSIVE
GROWTH MARKET BOND MANAGED GROWTH INTERNATIONAL
SEPARATE SEPARATE SEPARATE SEPARATE SEPARATE SEPARATE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income (loss).... $ 2,296,069 $ 295,043 $ 378,025 $ 713,419 $ (69,831) $ (67,433)
Net realized gain on
investments................... 1,320,676 206,653 1,307,867 17,586 320,958
Net unrealized appreciation
(depreciation) of investments
during the year............... (1,904,256) (1,044,101) (2,569,416) 40,255 (521,595)
------------ ----------- ---------- ----------- ----------- -----------
Net increase (decrease) in net
assets from operations........ 1,712,489 295,043 (459,423) (548,130) (11,990) (268,070)
------------ ----------- ---------- ----------- ----------- -----------
FROM VARIABLE LIFE POLICY
TRANSACTIONS
Policyowners' net premiums...... 32,073,847 26,832,956 2,395,570 6,730,502 5,400,860 8,417,599
Cost of insurance and
administrative charges........ (11,488,613) (1,844,311) (722,171) (2,516,072) (1,702,505) (2,137,893)
Surrenders and forfeitures...... (6,074,016) (379,092) (390,546) (1,279,553) (491,142) (415,597)
Transfers between investment
portfolios.................... (11,701,585) (19,508,999) (117,956) (938,232) (295,222) 3,419,821
Net withdrawals due to
policy loans.................. (1,190,781) (65,552) (159,300) (317,032) (115,478) (151,310)
Withdrawals due to
death benefits................ (34,657) (293) (23,244) (79,354) (1,117)
------------ ----------- ---------- ----------- ----------- -----------
Net increase in net assets
derived from policy
transactions.................. 1,584,195 5,034,709 982,353 1,600,259 2,795,396 9,132,620
------------ ----------- ---------- ----------- ----------- -----------
Return of capital to Provident
Mutual Life Insurance
Company....................... (1,300,000) (2,500,000) (500,000) (100,000)
------------ ----------- ---------- ----------- ----------- -----------
Total increase in net assets.... 1,996,684 2,829,752 22,930 952,129 2,783,406 8,864,550
NET ASSETS
Beginning of year............. 100,811,084 9,960,676 7,528,319 20,672,489 10,003,682 7,790,783
------------ ----------- ---------- ----------- ----------- -----------
End of year................... $ 102,807,768 $ 12,790,428 $ 7,551,249 $ 21,624,618 $12,787,088 $16,655,333
============ =========== ========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-22
<PAGE> 90
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Changes in Net Assets for the Year Ended December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ZERO COUPON BOND
SEPARATE ACCOUNT
- -----------------------------------------------------------------------------------------------------------------
1996 2006
SERIES SERIES
SUBACCOUNT SUBACCOUNT
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment loss................................................................... $ (13,728 ) $ (21,709 )
Net realized gain on investments...................................................... 133,126 174,318
Net unrealized depreciation of investments during the year............................ (126,417 ) (399,697 )
---------- ----------
Net decrease in net assets from operations............................................ (7,019 ) (247,088 )
---------- ----------
FROM VARIABLE LIFE POLICY TRANSACTIONS
Policyowners' net premiums............................................................ 298,778 1,319,905
Cost of insurance and administrative charges.......................................... (123,276 ) (520,009 )
Surrenders and forfeitures............................................................ (239,993 ) (59,803 )
Transfers between investment portfolios............................................... (163,212 ) (57,040 )
Net repayments (withdrawals) due to policy loans...................................... 110,200 (21,660 )
Withdrawals due to death benefits..................................................... (76,716 )
---------- ----------
Net increase (decrease) in net assets derived from policy transactions................ (117,503 ) 584,677
---------- ----------
Total increase (decrease) in net assets............................................... (124,522 ) 337,589
NET ASSETS
Beginning of year................................................................... 1,860,917 2,404,276
---------- ----------
End of year......................................................................... $1,736,395 $2,741,865
========== ==========
</TABLE>
See accompanying notes to financial statements
F-23
<PAGE> 91
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Changes in Net Assets for the Year Ended December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE SEPARATE ACCOUNT
- ------------------------------------------------------------------------------------------------------------------
FIDELITY FIDELITY FIDELITY FIDELITY
EQUITY- FIDELITY HIGH FIDELITY ASSET FIDELITY INVESTMENT
INCOME GROWTH INCOME OVERSEAS MANAGER INDEX 500 GRADE BOND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income
(loss)..................... $ 139,540 $ (53,346 ) $ (859) $ (5,635 ) $ 46,417 $ (8,356 ) $ (827)
Net realized gain (loss) on
investments................ 178,771 381,019 36 218,180 (3,676 ) 76
Net unrealized appreciation
(depreciation) of
investments during the
year....................... 62,245 (13,658 ) (1,350) (77,282 ) (1,290,966 ) 25,450 (2,065)
----------- ----------- -------- ---------- ----------- ---------- --------
Net increase (decrease) in
net assets from
operations................. 380,556 314,015 (2,173) (82,917 ) (1,026,369 ) 13,418 (2,816)
----------- ----------- -------- ---------- ----------- ---------- --------
FROM VARIABLE LIFE POLICY
TRANSACTIONS
Policyowners' net premiums... 5,551,283 10,832,297 186,378 1,050,375 9,671,149 1,598,160 241,144
Cost of insurance and
administrative charges..... (1,265,129 ) (2,671,488 ) (31,764) (170,165 ) (2,399,851 ) (314,407 ) (32,175)
Surrenders and forfeitures... (132,728 ) (309,821 ) (928) (34,253 ) (272,749 ) (9,218 ) (1,015)
Transfers between investment
portfolios................. 4,261,977 6,924,780 347,006 2,369,734 10,242,354 782,658 365,717
Net repayments (withdrawals)
due to policy loans........ (46,568 ) (199,085 ) (6,191) 3,781 (3,620 ) (2,272 ) 9
----------- ----------- -------- ---------- ----------- ---------- --------
Net increase in net assets
derived from policy
transactions............... 8,368,835 14,576,683 494,501 3,219,472 17,237,283 2,054,921 573,680
----------- ----------- -------- ---------- ----------- ---------- --------
Capital contribution from
Provident Mutual Life
Insurance Company.......... 25,000 25,000 25,000
----------- ----------- -------- ---------- ----------- ---------- --------
Total increase in net
assets..................... 8,749,391 14,890,698 517,328 3,161,555 16,210,914 2,068,339 595,864
NET ASSETS
Beginning of year.......... 3,037,046 5,702,132 -- -- 4,455,825 337,541 --
----------- ----------- -------- ---------- ----------- ---------- --------
End of year................ $11,786,437 $20,592,830 $517,328 $3,161,555 $20,666,739 $2,405,880 $595,864
=========== =========== ======== ========== =========== ========== ========
</TABLE>
See accompanying notes to financial statements
F-24
<PAGE> 92
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Changes in Net Assets for the Year Ended December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE SEPARATE ACCOUNT
- -----------------------------------------------------------------------------------------------------------------
NEUBERGER NEUBERGER NEUBERGER VAN ECK VAN ECK
& BERMAN & BERMAN & BERMAN LIMITED TCI WORLDWIDE GOLD AND NATURAL
BALANCED GROWTH MATURITY BOND GROWTH BOND RESOURCES
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income
(loss)...................... $ 7,986 $ (9,904 ) $ (296) $ (2,373 ) $ (1,075) $ 14
Net realized gain (loss) on
investments................. 18,931 122,748 730 (264 ) 349 171
Net unrealized appreciation
(depreciation) of
investments during the
year........................ (91,263 ) (231,050 ) 267 25,541 9,600 (11,497)
---------- ---------- -------- ---------- -------- --------
Net increase (decrease) in net
assets from operations...... (64,346 ) (118,206 ) 701 22,904 8,874 (11,312)
---------- ---------- -------- ---------- -------- --------
FROM VARIABLE LIFE POLICY
TRANSACTIONS
Policyowners' net premiums.... 860,866 2,004,874 71,398 441,248 198,216 130,837
Cost of insurance and
administrative charges...... (276,705 ) (534,031 ) (16,110) (84,751 ) (34,637) (26,284)
Surrenders and forfeitures.... (7,129 ) (46,226 ) (8) (29,550 ) (19,484) (905)
Transfers between investment
portfolios.................. 933,031 1,446,509 140,427 751,260 455,077 291,264
Net repayments (withdrawals)
due to policy loans......... (11,834 ) (11,021 ) 11 5,468 5,236 (3,431)
---------- ---------- -------- ---------- -------- --------
Net increase in net assets
derived from policy
transactions................ 1,498,229 2,860,105 195,718 1,083,675 604,408 391,481
---------- ---------- -------- ---------- -------- --------
Capital contribution from
Provident Mutual Life
Insurance Company........... 25,000 25,000 25,000 25,000
---------- ---------- -------- ---------- -------- --------
Total increase in net
assets...................... 1,433,883 2,741,899 221,419 1,131,579 638,282 405,169
NET ASSETS
Beginning of year........... 409,465 1,022,753 -- -- -- --
---------- ---------- -------- ---------- -------- --------
End of year................. $1,843,348 $3,764,652 $221,419 $1,131,579 $638,282 $405,169
========== ========== ======== ========== ======== ========
</TABLE>
See accompanying notes to financial statements
F-25
<PAGE> 93
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Changes in Net Assets for the Year Ended December 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY AGGRESSIVE
GROWTH MARKET BOND MANAGED GROWTH INTERNATIONAL
SEPARATE SEPARATE SEPARATE SEPARATE SEPARATE SEPARATE
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income (loss)....... $ 2,046,689 $ 177,787 $ 318,705 $ 377,811 $ (36,293) $ (10,880)
Net realized gain on investments... 5,602,502 139,331 230,241 (48,475) 60,453
Net unrealized appreciation of
investments during the year...... 1,005,531 151,092 1,021,144 669,823 942,741
------------ ----------- ---------- ----------- ----------- -----------
Net increase in net assets from
operations....................... 8,654,722 177,787 609,128 1,629,196 585,055 992,314
------------ ----------- ---------- ----------- ----------- -----------
FROM VARIABLE LIFE POLICY
TRANSACTIONS
Policyowners' net premiums......... 41,302,955 10,659,122 2,468,712 7,263,463 5,847,548 3,008,029
Cost of insurance and
administrative charges........... (12,735,311) (1,045,287) (629,254) (2,012,715) (1,657,184) (650,724)
Surrenders and forfeitures......... (5,570,627) (248,023) (359,714) (848,018) (363,244) (121,576)
Transfers between investment
portfolios....................... (9,049,583) (7,297,047) (10,380) 1,964,338 (604,558) 3,054,327
Net withdrawals due to
policy loans..................... (1,665,759) (101,482) (114,126) (417,872) (193,321) (36,628)
Net withdrawals due to
death benefits................... (140,557) (5,269) (69,455) (32,332) (4,857) (10,187)
------------ ----------- ---------- ----------- ----------- -----------
Net increase in net assets derived
from policy transactions......... 12,141,118 1,962,014 1,285,783 5,916,864 3,024,384 5,243,241
------------ ----------- ---------- ----------- ----------- -----------
Total increase in net assets....... 20,795,840 2,139,801 1,894,911 7,546,060 3,609,439 6,235,555
NET ASSETS
Beginning of year................ 80,015,244 7,820,875 5,633,408 13,126,429 6,394,243 1,555,228
------------ ----------- ---------- ----------- ----------- -----------
End of year...................... $ 100,811,084 $ 9,960,676 $ 7,528,319 $ 20,672,489 $10,003,682 $ 7,790,783
============ =========== ========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-26
<PAGE> 94
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Changes in Net Assets for the Year Ended December 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ZERO COUPON BOND
SEPARATE ACCOUNT
- -----------------------------------------------------------------------------------------------------------------
1996 2006
SERIES SERIES
SUBACCOUNT SUBACCOUNT
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment loss................................................................... $ (12,528 ) $ (16,521 )
Net realized gain on investments...................................................... 209,652 83,620
Net unrealized appreciation (depreciation) of investments during the year............. (88,129 ) 243,468
---------- ----------
Net increase in net assets from operations............................................ 108,995 310,567
---------- ----------
FROM VARIABLE LIFE POLICY TRANSACTIONS
Policyowners' net premiums............................................................ 270,276 948,636
Cost of insurance and administrative charges.......................................... (104,956 ) (281,444 )
Surrenders and forfeitures............................................................ (45,800 ) (38,202 )
Transfers between investment portfolios............................................... 386,445 145,014
Net repayments (withdrawals) due to policy loans...................................... (121,456 ) (3,520 )
---------- ----------
Net increase in net assets derived from policy transactions........................... 384,509 770,484
---------- ----------
Total increase in net assets.......................................................... 493,504 1,081,051
NET ASSETS
Beginning of year................................................................... 1,367,413 1,323,225
---------- ----------
End of year......................................................................... $1,860,917 $2,404,276
========== ==========
</TABLE>
See accompanying notes to financial statements
F-27
<PAGE> 95
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Statements of Changes in Net Assets for the Period July 30, 1993 (Date of
Inception) to December 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE SEPARATE ACCOUNT
- ----------------------------------------------------------------------------------------------------------------
FIDELITY FIDELITY NEUBERGER NEUBERGER
EQUITY- FIDELITY ASSET FIDELITY & BERMAN & BERMAN
INCOME GROWTH MANAGER INDEX 500 BALANCED GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
FROM OPERATIONS
Net investment income (loss)....... $ 15,313 $ (5,658 ) $ (4,248 ) $ 6,361 $ (373) $ (897 )
Net realized gain on investments... 261 2,913 740 1,534
Net unrealized appreciation
(depreciation) of investments
during the period................ 17,789 73,837 177,220 (5,191) 3,604 9,662
---------- ---------- ---------- -------- -------- ----------
Net increase in net assets from
operations....................... 33,363 68,179 172,972 4,083 3,971 10,299
---------- ---------- ---------- -------- -------- ----------
FROM VARIABLE LIFE POLICY
TRANSACTIONS
Policyowners' net premiums......... 808,888 1,331,780 990,009 109,112 141,640 342,464
Cost of insurance and
administrative charges........... (97,822 ) (207,265 ) (123,856 ) (15,141) (17,846) (39,761 )
Surrenders and forfeitures......... (22,039 ) (29,822 ) (16,190 ) (2,298 )
Transfers between investment
portfolios....................... 2,286,678 4,524,451 3,406,898 217,374 257,438 686,249
Net repayments (withdrawals) due to
policy loans..................... 2,978 (10,191 ) 992 (2,887) (738) 800
---------- ---------- ---------- -------- -------- ----------
Net increase in net assets derived
from policy transactions......... 2,978,683 5,608,953 4,257,853 308,458 380,494 987,454
---------- ---------- ---------- -------- -------- ----------
Capital contribution from Provident
Mutual Life Insurance Company.... 25,000 25,000 25,000 25,000 25,000 25,000
---------- ---------- ---------- -------- -------- ----------
Total increase in net assets....... 3,037,046 5,702,132 4,455,825 337,541 409,465 1,022,753
NET ASSETS
Beginning of period
---------- ---------- ---------- -------- -------- ----------
End of period...................... $3,037,046 $5,702,132 $4,455,825 $337,541 $409,465 $1,022,753
========== ========== ========== ======== ======== ==========
</TABLE>
See accompanying notes to financial statements
F-28
<PAGE> 96
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. ORGANIZATION
The Growth, Money Market, Bond, Managed, Aggressive Growth, International,
Zero Coupon Bond and Variable Separate Accounts (Separate Accounts) were
established by Provident Mutual Life Insurance Company (Provident Mutual) under
the provisions of the Pennsylvania Insurance Law. Each Separate Account is a
separate investment account to which assets are allocated to support the
benefits payable under single premium, modified premium, scheduled premium and
flexible premium adjustable variable life insurance policies (the Policies). The
Aggressive Growth, International, and Variable Separate Accounts are not
available with single premium and scheduled premium policies. The Zero Coupon
Bond Separate Account is not available with scheduled premium policies.
The Policies are distributed principally through career agents and brokers.
Provident Mutual has structured the Separate Accounts as unit investment
trusts registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended.
The Growth, Money Market, Bond, Managed, Aggressive Growth and
International Separate Accounts invest in the corresponding portfolios of the
Market Street Fund, Inc.
The Zero Coupon Bond Separate Account is comprised of two Subaccounts.
Funds are transferred to Merrill Lynch, Pierce, Fenner & Smith (MLPFS), who
serves as sponsor of The Stripped ("Zero") U.S. Treasury Securities Fund,
Provident Mutual Series A (Zero Coupon Trust). The 1996 Series and the 2006
Series Subaccounts invest in the designated series of the Zero Coupon Trust.
The Variable Separate Account is comprised of thirteen Subaccounts: the
Fidelity Equity-Income, Fidelity Growth, Fidelity High Income and Fidelity
Overseas Subaccounts invest in the corresponding portfolios of the Variable
Insurance Products Fund; the Fidelity Asset Manager, Fidelity Index 500 and
Fidelity Investment Grade Bond Subaccounts invest in the corresponding
portfolios of the Variable Insurance Products Fund II; the Neuberger & Berman
Balanced, Neuberger & Berman Growth and Neuberger & Berman Limited Maturity Bond
Subaccounts invest in the corresponding portfolios of the Neuberger & Berman
Advisers Management Trust; the TCI Growth Subaccount invests in the
corresponding portfolio of the TCI Portfolios, Inc.; and the Van Eck Worldwide
Bond and Van Eck Gold and Natural Resources Subaccounts invest in the
corresponding portfolios of the Van Eck Worldwide Insurance Trust. During 1995,
the Van Eck Worldwide Bond Subaccount changed its name from the Van Eck Global
Bond Subaccount and the Van Eck Worldwide Insurance Trust changed its name from
the Van Eck Investment Trust.
Net premiums from in-force Policies are allocated to the Separate Accounts
in accordance with policyowner instructions and are recorded as variable life
policy transactions in the statements of changes in net assets. Such amounts are
used to provide money to pay benefits under the Policies (Note 4). Each Separate
Account's assets are the property of Provident Mutual.
F-29
<PAGE> 97
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
1. ORGANIZATION, CONTINUED:
Transfers between investment portfolios include transfers between the
Separate Accounts and the Guaranteed Account (not shown), which is part of
Provident Mutual's General Account.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed
by the Separate Accounts included in the financial statements.
Investment Valuation:
Investment shares are valued at the net asset values of the respective
Portfolios. Transactions are recorded on the trade date. Dividend income is
recorded on the ex-dividend date.
Realized Gains and Losses:
Realized gains and losses on sales of investment shares are determined
using the specific identification basis for financial reporting and income tax
purposes.
Federal Income Taxes:
The operations of the Separate Accounts are included in the Federal income
tax return of Provident Mutual. Under the provisions of the Policies, Provident
Mutual has the right to charge the Separate Accounts for Federal income tax
attributable to the Separate Accounts. No charge is currently being made against
the Separate Accounts for such tax.
Estimates:
The preparation of the accompanying financial statements required
management to make estimates and assumptions that affect the reported values of
assets and liabilities as of December 31, 1995 and the reported amounts from
operations and policy transactions during 1995, 1994 and 1993. Actual results
could differ from those estimates.
F-30
<PAGE> 98
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS
At December 31, 1995, the investments of the respective Separate
Accounts/Subaccounts are as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES COST MARKET VALUE
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
Market Street Fund, Inc.:
Growth Portfolio................................ 8,701,018 $119,103,963 $142,348,646
Money Market Portfolio.......................... 16,709,104 $16,709,104 $16,709,104
Bond Portfolio.................................. 949,265 $9,998,305 $10,441,919
Managed Portfolio............................... 1,902,109 $23,428,156 $26,990,924
Aggressive Growth Portfolio..................... 1,109,778 $16,576,194 $19,287,880
International Portfolio......................... 1,863,636 $21,828,233 $23,966,392
The Stripped ("Zero") U.S. Treasury Securities
Fund, Provident Mutual Series A:
1996 Series..................................... 2,063,170 $1,832,183 $2,027,498
2006 Series..................................... 8,362,090 $3,880,068 $4,790,307
Variable Insurance Products Fund:
Equity-Income Portfolio......................... 1,751,196 $28,514,334 $33,745,541
Growth Portfolio................................ 1,587,369 $37,655,848 $46,351,182
High Income Portfolio........................... 275,109 $3,107,463 $3,315,059
Overseas Portfolio.............................. 501,567 $8,049,372 $8,551,710
Variable Insurance Products Fund II:
Asset Manager Portfolio......................... 1,717,198 $24,689,495 $27,114,550
Index 500 Portfolio............................. 117,990 $7,555,412 $8,932,987
Investment Grade Bond Portfolio................. 188,039 $2,173,090 $2,346,721
Neuberger & Berman Advisers Management Trust:
Balanced Portfolio.............................. 183,979 $2,885,502 $3,223,304
Growth Portfolio................................ 410,688 $9,479,812 $10,620,383
Limited Maturity Bond Portfolio................. 75,347 $1,063,667 $1,108,362
TCI Portfolios, Inc.:
TCI Growth Portfolio............................ 418,478 $4,462,730 $5,046,844
Van Eck Worldwide Insurance Trust:
Worldwide Bond Portfolio........................ 162,690 $1,742,246 $1,812,368
Gold and Natural Resources Portfolio............ 62,502 $835,838 $901,280
</TABLE>
F-31
<PAGE> 99
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS, CONTINUED
During the years ended December 31, 1995, 1994 and 1993, transactions in
investment shares were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET STREET FUND, INC.
------------------------------------------------------------------------------------------------------------------
GROWTH PORTFOLIO MONEY MARKET PORTFOLIO
------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1995 1994 1993
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased................... 1,059,897 1,080,717 1,707,590 13,655,624 17,190,183 6,775,142
Shares received from reinvestment
of:
Dividends........................ 256,696 209,566 192,436 871,001 311,999 203,382
Capital gain distributions....... 601,004 5,192 256,623
----------- ----------- ----------- ----------- ------------ ----------
Total shares acquired.............. 1,917,597 1,295,475 2,156,649 14,526,625 17,502,182 6,978,524
Total shares redeemed.............. (565,932) (1,109,401) (813,191) (10,536,224) (14,410,319) (5,032,299)
----------- ----------- ----------- ----------- ------------ ----------
Net increase in shares owned....... 1,351,665 186,074 1,343,458 3,990,401 3,091,863 1,946,225
Shares owned, beginning of year.... 7,349,353 7,163,279 5,819,821 12,718,703 9,626,840 7,680,615
----------- ----------- ----------- ----------- ------------ ----------
Shares owned, end of year.......... 8,701,018 7,349,353 7,163,279 16,709,104 12,718,703 9,626,840
=========== =========== =========== =========== ============ ==========
Cost of shares acquired............ $27,059,436 $18,166,403 $29,090,935 $14,526,625 $17,502,182 $ 6,978,524
=========== =========== =========== =========== ============ ==========
Cost of shares redeemed............ $ 7,086,303 $14,301,798 $ 9,048,483 $10,536,224 $14,410,319 $ 5,032,299
=========== =========== =========== =========== ============ ==========
</TABLE>
F-32
<PAGE> 100
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET STREET FUND, INC.
------------------------------------------------------------------------------------------------------------------
BOND PORTFOLIO MANAGED PORTFOLIO
------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1995 1994 1993
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased.......................... 192,313 215,657 241,829 208,590 404,364 529,511
Shares received from reinvestment of:
Dividends............................... 53,908 41,462 31,894 83,429 69,944 37,456
Capital gain distributions.............. 16,975 2,072 74,713
---------- ---------- ---------- ---------- ---------- ----------
Total shares acquired..................... 246,221 274,094 273,723 294,091 549,021 566,967
Total shares redeemed..................... (74,556) (169,094) (126,024) (204,288) (289,831) (84,997)
---------- ---------- ---------- ---------- ---------- ----------
Net increase in shares owned.............. 171,665 105,000 147,699 89,803 259,190 481,970
Shares owned, beginning of year........... 777,600 672,600 524,901 1,812,306 1,553,116 1,071,146
---------- ---------- ---------- ---------- ---------- ----------
Shares owned, end of year................. 949,265 777,600 672,600 1,902,109 1,812,306 1,553,116
========== ========== ========== ========== ========== ==========
Cost of shares acquired................... $2,538,587 $2,786,406 $3,027,281 $3,791,908 $6,775,390 $7,352,456
========== ========== ========== ========== ========== ==========
Cost of shares redeemed................... $ 767,042 $1,716,106 $1,271,745 $2,171,165 $3,176,894 $ 888,939
========== ========== ========== ========== ========== ==========
</TABLE>
F-33
<PAGE> 101
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET STREET FUND, INC.
------------------------------------------------------------------------------------------------------------------
AGGRESSIVE GROWTH PORTFOLIO INTERNATIONAL PORTFOLIO
------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1995 1994 1993
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased......................... 336,867 285,002 303,002 524,968 844,765 497,174
Shares received from reinvestment of:
Dividends.............................. 1,011 8,442 1,888 1,536
Capital gain distributions............. 7,271 39,890 13,188 3,981
---------- ---------- ---------- ---------- ---------- -----------
Total shares acquired.................... 344,138 285,002 304,013 573,300 859,841 502,691
Total shares redeemed.................... (62,003) (101,582) (93,130) (141,765) (74,503) (28,201)
---------- ---------- ---------- ---------- ---------- -----------
Net increase in shares owned............. 282,135 183,420 210,883 431,535 785,338 474,490
Shares owned, beginning of year.......... 827,643 644,223 433,340 1,432,101 646,763 172,273
---------- ---------- ---------- ---------- ---------- -----------
Shares owned, end of year................ 1,109,778 827,643 644,223 1,863,636 1,432,101 646,763
---------- ---------- ---------- ---------- ---------- -----------
Cost of shares acquired.................. $5,631,340 $4,286,558 $4,279,618 $6,827,356 $10,211,219 $5,451,619
========== ========== ========== ========== ========== ===========
Cost of shares redeemed.................. $ 841,580 $1,492,974 $1,374,378 $1,281,772 $ 711,372 $ 267,159
========== ========== ========== ========== ========== ===========
</TABLE>
F-34
<PAGE> 102
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE STRIPPED ("ZERO") U.S. TREASURY SECURITIES
FUND, PROVIDENT MUTUAL SERIES A
------------------------------------------------------------------------------------------------------------------
1996 SERIES 2006 SERIES
------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1995 1994 1993
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased.......................... 364,596 405,453 992,348 2,903,418 3,167,109 2,172,457
Shares received from reinvestment of:
Dividends...............................
Capital gain distributions..............
---------- ---------- ---------- ---------- ---------- -----------
Total shares acquired..................... 364,596 405,453 992,348 2,903,418 3,167,109 2,172,457
Total shares redeemed..................... (217,641) (552,954) (574,388) (935,891) (1,839,197) (556,458)
---------- ---------- ---------- ---------- ---------- -----------
Net increase (decrease) in shares owned... 146,955 (147,501) 417,960 1,967,527 1,327,912 1,615,999
Shares owned, beginning of year........... 1,916,215 2,063,716 1,645,756 6,394,563 5,066,651 3,450,652
---------- ---------- ---------- ---------- ---------- -----------
Shares owned, end of year................. 2,063,170 1,916,215 2,063,716 8,362,090 6,394,563 5,066,651
========== ========== ========== ========== ========== ===========
Cost of shares acquired................... $ 345,561 $ 365,288 $ 885,300 $1,461,490 $1,375,238 $ 997,897
========== ========== ========== ========== ========== ===========
Cost of shares redeemed................... $ 160,308 $ 365,268 $ 303,737 $ 353,785 $ 633,039 $ 167,747
========== ========== ========== ========== ========== ===========
</TABLE>
F-35
<PAGE> 103
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS, CONTINUED
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
VARIABLE INSURANCE PRODUCTS FUND
------------------------------------------------------------------------------------------------------------------
EQUITY-INCOME PORTFOLIO GROWTH PORTFOLIO
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
1995 1994 1993* 1995 1994 1993*
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased....................... 937,870 565,671 192,238 659,784 702,697 241,595
Shares received from reinvestment of:
Dividends............................ 30,564 12,305 1,198 5,481 1,723
Capital gain distributions........... 42,404 12,169 18,232
----------- ---------- ---------- ----------- ----------- ----------
Total shares acquired.................. 1,010,838 590,145 193,436 665,265 722,652 241,595
Total shares redeemed.................. (27,488) (15,098) (637) (27,312) (14,831)
----------- ---------- ---------- ----------- ----------- ----------
Net increase in shares owned........... 983,350 575,047 192,799 637,953 707,821 241,595
Shares owned, beginning of year........ 767,846 192,799 949,416 241,595
----------- ---------- ---------- ----------- ----------- ----------
Shares owned, end of year.............. 1,751,196 767,846 192,799 1,587,369 949,416 241,595
=========== ========== ========== =========== =========== ==========
Cost of shares acquired................ $17,235,825 $8,978,638 $2,968,531 $17,731,718 $15,362,715 $5,502,172
=========== ========== ========== =========== =========== ==========
Cost of shares redeemed................ $ 427,894 $ 231,263 $ 9,503 $ 608,521 $ 332,236 $
=========== ========== ========== =========== =========== ==========
</TABLE>
* For the period July 30, 1993 (date of inception) to December 31, 1993.
F-36
<PAGE> 104
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS, CONTINUED
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
VARIABLE INSURANCE PRODUCTS FUND
------------------------------------------------------------------------------------------------------------------
HIGH INCOME PORTFOLIO OVERSEAS PORTFOLIO
------------------------------------------------------------------------------------------------------------------
1995 1994 1995 1994
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares purchased.............................................. 232,086 49,207 316,944 201,774
Shares received from reinvestment of:
Dividends................................................... 4,088 971
Capital gain distributions.................................. 971
---------- -------- ---------- ----------
Total shares acquired......................................... 236,174 49,207 318,886 201,774
Total shares redeemed......................................... (9,155) (1,117) (19,077) (16)
---------- -------- ---------- ----------
Net increase in shares owned.................................. 227,019 48,090 299,809 201,758
Shares owned, beginning of year............................... 48,090 201,758
---------- -------- ---------- ----------
Shares owned, end of year..................................... 275,109 48,090 501,567 201,758
========== ======== ========== ==========
Cost of shares acquired....................................... $2,687,554 $530,853 $5,114,360 $3,239,101
========== ======== ========== ==========
Cost of shares redeemed....................................... $ 98,892 $ 12,052 $ 303,825 $ 264
========== ======== ========== ==========
</TABLE>
* For the period July 30, 1993 (date of inception) to December 31, 1993.
F-37
<PAGE> 105
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND II
------------------------------------------------------------------------------------------------------------------
ASSET MANAGER PORTFOLIO
------------------------------------------------------------------------------------------------------------------
1995 1994 1993*
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares purchased............................................................. 489,727 1,215,379 280,749
Shares received from reinvestment of:
Dividends.................................................................. 33,935 9,853
Capital gain distributions................................................. 14,760
---------- ----------- ----------
Total shares acquired........................................................ 523,662 1,239,992 280,749
Total shares redeemed........................................................ (305,140) (22,065)
---------- ----------- ----------
Net increase in shares owned................................................. 218,522 1,217,927 280,749
Shares owned, beginning of year.............................................. 1,498,676 280,749
---------- ----------- ----------
Shares owned, end of year.................................................... 1,717,198 1,498,676 280,749
========== =========== ==========
Cost of shares acquired...................................................... $7,461,536 $17,945,452 $4,151,925
========== =========== ==========
Cost of shares redeemed...................................................... $4,552,526 $ 316,892
========== =========== ==========
</TABLE>
* For the period July 30, 1993 (date of inception) to December 31, 1993.
F-38
<PAGE> 106
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND II
------------------------------------------------------------------------------------------------------------------
INVESTMENT GRADE
INDEX 500 PORTFOLIO BOND PORTFOLIO
------------------------------------------------------------------------------------------------------------------
1995 1994 1993* 1995 1994
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shares purchased......................................... 88,644 42,480 5,665 148,445 55,695
Shares received from reinvestment of:
Dividends.............................................. 868 120 2,620
Capital gain distributions............................. 119 19 51
---------- ---------- -------- ---------- --------
Total shares acquired.................................... 89,631 42,499 5,836 151,065 55,695
Total shares redeemed.................................... (14,435) (5,494) (47) (17,097) (1,624)
---------- ---------- -------- ---------- --------
Net increase in shares owned............................. 75,196 37,005 5,789 133,968 54,071
Shares owned, beginning of year.......................... 42,794 5,789 54,071
---------- ---------- -------- ---------- --------
Shares owned, end of year................................ 117,990 42,794 5,789 188,039 54,071
========== ========== ======== ========== ========
Cost of shares acquired.................................. $5,976,098 $2,369,165 $330,466 $1,765,445 $615,840
========== ========== ======== ========== ========
Cost of shares redeemed.................................. $ 806,307 $ 311,392 $ 2,618 $ 190,284 $ 17,911
========== ========== ======== ========== ========
</TABLE>
* For the period July 30, 1993 (date of inception) to December 31, 1993.
F-39
<PAGE> 107
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST
------------------------------------------------------------------------------------------------------------------
BALANCED PORTFOLIO
------------------------------------------------------------------------------------------------------------------
1995 1994 1993*
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares purchased................................................................ 74,181 112,008 26,901
Shares received from reinvestment of:
Dividends..................................................................... 2,584 1,201
Capital gain distributions.................................................... 830 1,985
---------- ---------- --------
Total shares acquired........................................................... 77,595 115,194 26,901
Total shares redeemed........................................................... (20,656) (13,992) (1,063)
---------- ---------- --------
Net increase in shares owned.................................................... 56,939 101,202 25,838
Shares owned, beginning of year................................................. 127,040 25,838
---------- ---------- --------
Shares owned, end of year....................................................... 183,979 127,040 25,838
========== ========== ========
Cost of shares acquired......................................................... $1,276,739 $1,747,257 $415,727
========== ========== ========
Cost of shares redeemed......................................................... $ 322,244 $ 216,239 $ 15,738
========== ========== ========
</TABLE>
* For the period July 30, 1993 (date of inception) to December 31, 1993.
F-40
<PAGE> 108
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
------------------------------------------------------------------------------------------------------------------
LIMITED MATURITY
GROWTH PORTFOLIO BOND PORTFOLIO
------------------------------------------------------------------------------------------------------------------
1995 1994 1993* 1995 1994
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shares purchased......................................... 228,427 148,623 42,605 64,863 22,298
Shares received from reinvestment of:
Dividends.............................................. 490 326 1,128
Capital gain distributions............................. 6,560 6,741
---------- ---------- -------- ------- -------
Total shares acquired.................................... 235,477 155,690 42,605 65,991 22,298
Total shares redeemed.................................... (10,148) (11,266) (1,670) (6,437) (6,505)
---------- ---------- -------- ------- -------
Net increase in shares owned............................. 225,329 144,424 40,935 59,554 15,793
Shares owned, beginning of year.......................... 185,359 40,835 15,793
---------- ---------- -------- ------- -------
Shares owned, end of year................................ 410,688 185,359 40,935 75,347 15,793
========== ========== ======== ======== ========
Cost of shares acquired.................................. $5,737,857 $3,274,504 $1,022,479 $932,610 $311,339
========== ========== ======== ======== ========
Cost of shares redeemed.................................. $ 244,085 $ 272,703 $ 38,240 $ 90,095 $ 90,187
========== ========== ======== ======== ========
</TABLE>
* For the period July 30, 1993 (date of inception) to December 31, 1993.
F-41
<PAGE> 109
- --------------------------------------------------------------------------------
The Variable Separate Accounts
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TCI PORTFOLIOS, INC. VAN ECK WORLDWIDE INSURANCE TRUST
------------------------------------------------------------------------------------------------------------------
TCI GROWTH PORTFOLIO WORLDWIDE BOND GOLD AND NATURAL
PORTFOLIO RESOURCES PORTFOLIO
------------------------------------------------------------------------------------------------------------------
1995 1994 1995 1994 1995 1994
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased............................... 308,637 124,514 101,345 64,509 49,696 31,344
Shares received from reinvestment of:
Dividends.................................... 145 8,113 534
Capital gain distributions................... 11 46
---------- ---------- ---------- ---------- -------- --------
Total shares acquired.......................... 308,782 124,514 109,458 64,520 50,230 31,390
Total shares redeemed.......................... (13,168) (1,650) (9,283) (2,005) (18,610) (508)
---------- ---------- ---------- ---------- -------- --------
Net increase in shares owned................... 295,614 122,864 100,175 62,515 31,620 30,882
Shares owned, beginning of year................ 122,864 62,515 30,882
---------- ---------- ---------- ---------- -------- --------
Shares owned, end of year...................... 418,478 122,864 162,690 62,515 62,502 30,882
========== ========== ========== ========== ======== ========
Cost of shares acquired........................ $3,475,266 $1,121,214 $1,204,346 $648,828 $674,277 $423,320
========== ========== ========== ========== ======== ========
Cost of shares redeemed........................ $ 118,574 $ 15,176 $ 90,782 $ 20,146 $255,105 $ 6,654
========== ========== ========== ========== ======== ========
</TABLE>
F-42
<PAGE> 110
- --------------------------------------------------------------------------------
The Variable Separate Accounts of
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
4. RELATED PARTY TRANSACTIONS
Provident Mutual makes certain deductions from premiums before amounts are
allocated to each Separate Account selected by the policyowner. The deductions
may include (1) administrative charges, (2) state premium taxes, (3) premium
processing charges, (4) premiums for supplementary benefits, (5) premiums for
extra mortality risks, (6) sales charges, (7) premiums for optional benefits,
and (8) a risk charge for the guaranteed minimum death benefit. See original
policy documents for specific charges assessed.
In addition to the aforementioned charges, each Separate Account is charged
for mortality and expense risks assumed by Provident Mutual. The annual rates
charged to cover these risks are:
For scheduled premium and single premium policies -- currently 0.35% of the
net assets held for the benefit of policyowners.
For modified premium policies -- currently 0.60% of the net assets held for
the benefit of policyowners.
For flexible premium adjustable policies ("OptionsPlus") -- currently 0.75%
of the net assets held for the benefit of policyowners, guaranteed not to
exceed 0.90%.
For flexible premium adjustable survivorship policies ("Survivor
OptionsPlus") -- currently 0.60% of the net assets held for the benefit of
policyowners, guaranteed not to exceed 0.90%.
For flexible premium adjustable policies (other than "OptionsPlus") --
currently 0.75% of the net assets held for the benefit of policyowners.
Each Separate Account is also charged by Provident Mutual for the cost of
insurance protection. For single premium policies, the charge is accrued daily
and deducted from the amount provided for investment annually. For scheduled
premium, modified premium and flexible premium adjustable policies, the charge
is deducted monthly. The amount of the charge is computed based upon the amount
of insurance provided during the year and the insured's attained age. Depending
upon the type of policy, additional monthly deductions may be made for (1)
administrative charges, (2) minimum death benefit charges, (3) first year policy
charges and (4) supplementary charges. See original policy documents for
additional monthly charges. These charges are included in the statements of
changes in net assets.
The policies provide for an initial free-look period. If a policy is
cancelled within certain time constraints, the policyowner will receive a refund
equal to the policy account value plus certain deductions made under the policy.
Where state law requires a minimum refund equal to gross premiums paid, the
refund will instead equal the gross premiums paid on the policy and will not
reflect investment experience.
F-43
<PAGE> 111
- --------------------------------------------------------------------------------
The Variable Separate Accounts of
Provident Mutual Life Insurance Company
Notes to Financial Statements -- concluded
- --------------------------------------------------------------------------------
4. RELATED PARTY TRANSACTIONS, CONTINUED
If a single premium or modified premium policy is surrendered within the
first nine policy years, a contingent deferred sales load charge and/or
contingent deferred administrative charge are assessed. These same charges are
assessed if a flexible premium adjustable policy is surrendered within the first
ten policy years. These charges are assessed if a flexible premium adjustable
survivorship policy is surrendered before the fifteenth policy year (twelfth
policy year for New York policies). These charges are recorded as administrative
charges in the statements of changes in net assets.
For scheduled premium and single premium policies, Provident Mutual has
agreed to make a daily adjustment to the net rate of return of the Growth, Money
Market and Bond Separate Accounts to offset completely all Market Street Fund,
Inc. expenses charged to the portfolios in which the Separate Accounts invest,
except for (1) all brokers' commissions, (2) transfer taxes, investment advisory
fees and other fees and expenses for services relating to purchases and sales of
portfolio investments, and (3) income tax liabilities. The total amounts
reimbursed for the Growth, Money Market and Bond Separate Accounts for the years
ended December 31, 1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
MONEY
GROWTH MARKET BOND
SEPARATE SEPARATE SEPARATE
ACCOUNT ACCOUNT ACCOUNT
-------- -------- --------
<S> <C> <C> <C>
Year ending December 31,
1995........................................................ $ 12,376 $ 538 $1,846
1994........................................................ $ 14,824 $1,594 $2,834
1993........................................................ $ 18,542 $3,065 $3,863
</TABLE>
These amounts are shown as an operating expense reimbursement reducing
total expenses in the statements of operations.
Provident Mutual makes a daily asset charge against the assets of the Zero
Coupon Bond Separate Account. The charge is to reimburse Provident Mutual for
the transaction charge paid directly by Provident Mutual to MLPFS on the sale of
the Zero Coupon Trust units to the Zero Coupon Bond Separate Account. Provident
Mutual pays these amounts from General Account assets. The amount of the asset
charge currently is equivalent to an effective annual rate of .25% of the
average daily net assets of each Subaccount. This amount may be increased in the
future, but in no event will it exceed an effective annual rate of .50%. The
charge will be cost based (taking into account the loss of interest) with no
anticipated element of profit for Provident Mutual.
F-44
<PAGE> 112
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Board of Directors of Provident Mutual
Life Insurance Company
We have audited the accompanying statements of financial condition of Provident
Mutual Life Insurance Company as of December 31, 1995 and 1994, and the related
statements of operations, changes in surplus and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Provident Mutual Life Insurance
Company as of December 31, 1995 and 1994, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1995, in conformity with accounting principles prescribed or permitted by the
Insurance Department of the Commonwealth of Pennsylvania, which are considered
generally accepted accounting principles for mutual life insurance companies.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 6, 1996
F-45
<PAGE> 113
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Statements of Financial Condition
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
- ---------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
ADMITTED ASSETS
Bonds.......................................................... $2,312,791 $2,257,935
Preferred stocks............................................... 14,675 16,831
Common stocks.................................................. 11,864 9,651
Investments in unconsolidated subsidiaries..................... 36,784 36,993
Investment in real estate...................................... 37,988 41,398
Real estate occupied by the company............................ 31,544 28,912
Policy loans................................................... 357,810 369,373
Mortgage loans................................................. 649,351 664,663
Other long-term investments.................................... 38,475 41,750
Cash and short-term investments................................ 81,195 55,973
---------- ----------
Total cash and invested assets............................ 3,572,477 3,523,479
Premiums due and deferred...................................... 67,403 69,388
Investment income due and accrued.............................. 62,853 66,807
Other assets................................................... 18,832 13,253
Separate account assets........................................ 1,210,583 969,112
---------- ----------
Total admitted assets..................................... $4,932,148 $4,642,039
========== ==========
LIABILITIES
Aggregate policy and claim reserves............................ $2,996,817 $2,978,388
Policyowners dividends payable................................. 65,174 63,502
Other policyowner obligations.................................. 164,623 169,120
Other liabilities.............................................. 141,153 153,632
Asset valuation reserve........................................ 42,366 40,596
Interest maintenance reserve................................... 7,278 8,071
Separate account liabilities................................... 1,202,644 960,360
---------- ----------
Total liabilities......................................... 4,620,055 4,373,669
---------- ----------
SURPLUS
Unassigned surplus............................................. 306,684 263,212
Contingency reserve............................................ 5,409 5,158
---------- ----------
Total surplus............................................. 312,093 268,370
---------- ----------
Total liabilities and surplus............................. $4,932,148 $4,642,039
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE> 114
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME
Premium and annuity income.......................... $687,004 $677,740 $607,421
Net investment income............................... 278,732 230,542 218,150
Other income........................................ 16,036 14,044 15,811
-------- -------- --------
Total income................................... 981,772 922,326 841,382
-------- -------- --------
BENEFITS AND EXPENSES
Life, accident and health, and other policy
benefits......................................... 576,349 561,967 532,488
Increase in aggregate policy reserves............... 48,990 84,628 81,537
Transfers to (from) separate account, net........... 53,593 20,951 (27,551)
-------- -------- --------
678,932 667,546 586,474
-------- -------- --------
Commissions......................................... 38,586 37,563 34,513
General insurance expenses.......................... 106,030 106,175 97,477
Insurance taxes, licenses and fees.................. 14,836 13,775 12,547
Federal income taxes................................ 34,346 18,668 21,531
-------- -------- --------
Total benefits and expenses.................... 872,730 843,727 752,542
-------- -------- --------
Net income before dividends to policyowners
and realized capital losses................. 109,042 78,599 88,840
Dividends to policyowners........................... 65,439 57,288 60,388
-------- -------- --------
Net income before realized capital losses...... 43,603 21,311 28,452
Realized capital losses, net of tax................. (6,210) (7,227) (8,694)
-------- -------- --------
Net income....................................... $ 37,393 $ 14,084 $ 19,758
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE> 115
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Statements of Changes in Surplus
For the Years Ended December 31, 1995, 1994 and 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SURPLUS
- ----------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C>
Balance, January 1, 1993.................................................... $191,321
Net income.................................................................. 19,758
Net unrealized capital loss on investments.................................. (1,340)
Change in asset valuation reserve........................................... (3,868)
Other changes, net of decrease in non-admitted assets....................... 2,099
--------------
Balance, December 31, 1993.................................................. 207,970
Net income.................................................................. 14,084
Net unrealized capital loss on investments.................................. (2,274)
Surplus received in merger.................................................. 45,110
Change in asset valuation reserve........................................... 195
Other changes, net of increase in non-admitted assets....................... 3,285
--------------
Balance, December 31, 1994.................................................. 268,370
Net income.................................................................. 37,393
Net unrealized capital gain on investments.................................. 3,533
Change in asset valuation reserve........................................... (1,770)
Other changes, net of decrease in non-admitted assets....................... 4,567
--------------
Balance, December 31, 1995.................................................. $312,093
============
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE> 116
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH PROVIDED
Net cash provided by operations:
Premiums and annuity considerations...................... $ 674,497 $ 657,954 $ 595,275
Other deposits received.................................. 14,381 12,604 14,880
Allowances and reserve adjustments received on
reinsurance............................................ 4,366 7,508 1,252
Investment income received, net of expenses.............. 284,470 231,401 210,533
Other income received.................................... 11,915 9,196 2,051
Life, accident and health claims paid.................... (78,638) (67,241) (78,411)
Surrender benefits paid.................................. (236,450) (279,727) (223,730)
Other benefits paid to policyowners...................... (258,037) (209,564) (220,065)
Commissions, insurance expenses and other taxes paid..... (172,318) (167,698) (144,628)
Funds transferred from (to) separate accounts............ (73,313) 13,142 (20,700)
Dividends paid to policyowners........................... (63,615) (62,700) (67,196)
Federal income taxes paid................................ (23,723) (15,950) (15,369)
Net decrease in policy loans and premium notes........... 13,141 19,047 18,268
-------- ------- -------
Net cash provided by operations........................ 96,676 147,972 72,160
-------- ------- -------
Investments sold, matured or repaid:
Bonds.................................................... 370,526 327,229 922,024
Stocks................................................... 9,303 18,407 19,229
Mortgage loans........................................... 94,292 90,777 78,218
Real estate and other invested assets.................... 26,647 39,933 26,118
-------- ------- -------
Total investments sold, matured or repaid.............. 500,768 476,346 1,045,589
Cash and short-term investments of merged companies........ -- 18,591 18,613
Other cash provided........................................ 4,348 11,056 6,360
-------- ------- -------
Total cash provided.................................... 601,792 653,965 1,142,722
-------- ------- -------
CASH APPLIED
Cost of investments acquired:
Bonds.................................................... 426,569 526,143 1,070,410
Stocks................................................... 4,286 9,855 17,201
Mortgage loans........................................... 80,812 81,787 58,226
Real estate and other invested assets.................... 31,036 20,218 16,557
-------- ------- -------
Total investments acquired............................. 542,703 638,003 1,162,394
Other cash applied......................................... 33,867 5,631 4,433
-------- ------- -------
Total cash applied..................................... 576,570 643,634 1,166,827
-------- ------- -------
Net change in cash and short-term investments.......... 25,222 10,331 (24,105)
Cash and short-term investments:
Beginning of year.......................................... 55,973 45,642 69,747
-------- ------- -------
End of year................................................ $ 81,195 $ 55,973 $ 45,642
======== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE> 117
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Provident Mutual Life Insurance Company (the Company) is organized as a
mutual life insurance company which conducts its business for the benefit of its
policyowners.
The Company sells life, annuity and pension products directly and through
its wholly-owned subsidiaries. The Company distributes its products principally
through a career distribution sales force. The Company is licensed to operate in
50 states, which are responsible for product regulation. Sales in 14 states
accounted for 83% of the Company's sales for the year ended December 31, 1995.
For many of the life and annuity products, the insurance departments of the
states in which the Company conducts business must approve products and policy
forms in advance of sales.
The Company's wholly-owned subsidiaries are Providentmutual Life and
Annuity Company of America (PLACA), Provident Mutual International Life
Insurance Company (PMILIC) and Providentmutual Holding Company (PHC).
PLACA specializes primarily in the development and sale of various annuity
products and sells certain traditional and variable life products, also sold by
Provident Mutual, through a personal producing general agency sales force.
PMILIC's business consists of life insurance assumed from Provident Mutual.
PHC is a downstream holding company whose major subsidiary is Sigma
American Corporation (Sigma). Sigma is a general partner in a joint venture that
provides investment advisory, mutual fund distribution, trust and administrative
services to a group of mutual funds and other parties.
Effective November 1, 1994, Covenant Life Insurance Company (Covenant), a
Pennsylvania mutual life insurance company, was merged into Provident Mutual.
The transaction was accounted for similar to a pooling of interests, whereby the
assets, liabilities and surplus of each company were combined at their
respective book values. The statement of operations for the year ended December
31, 1994 includes the activity of Covenant since November 1, 1994. Surplus of
Covenant as of November 1, 1994 has been included as an addition to surplus. The
Covenant policyowners became entitled to the same rights and privileges as
Provident Mutual's policyowners. Costs of completing the merger were
approximately $3,225, net of related income taxes.
F-50
<PAGE> 118
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Organization, continued
Covenant sold traditional and universal life insurance products and
individual annuities primarily to the religious community. Summary financial
information of Covenant is as follows (in thousands):
<TABLE>
<CAPTION>
TEN MONTHS ENDED YEAR ENDED
OCTOBER 31, 1994 DECEMBER 31, 1993
---------------- -----------------
<S> <C> <C>
Statement of Operations Data:
Revenues, excl. capital gains (losses)............... $ 78,802 $ 105,397
-------- --------
Net income (loss).................................... $ (8,889) $ 5,543
======== ========
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, 1994 DECEMBER 31, 1993
---------------- -----------------
<S> <C> <C>
Statement of Financial Condition Data:
Assets............................................... $630,917 $ 627,157
Liabilities.......................................... 585,807 574,776
-------- --------
Surplus.............................................. $ 45,110 $ 52,381
======== ========
</TABLE>
Continental American Life Insurance Company (CALIC) was a wholly-owned
stock life insurance company until January 31, 1993, at which time it was
converted to a mutual company and merged into Provident Mutual, whereby the
CALIC policyowners became entitled to the same rights and privileges as
Provident Mutual's policyowners. CALIC provided life and health insurance
products primarily through direct response marketing. The transaction was
accounted for similar to a pooling of interests, whereby the assets, liabilities
and surplus of each company were combined at their respective book values. Costs
of completing the merger were approximately $3,137, including related taxes. As
a result of the merger, PMILIC became a direct subsidiary of the Company. The
statement of operations and statement of cash flows for the year ended December
31, 1993 include the activity of CALIC since January 31, 1993, the date of the
merger.
Basis of Presentation
The accompanying financial statements have been prepared on the basis of
accounting principles prescribed or permitted by the National Association of
Insurance Commissioners (NAIC) and the Insurance Department of the Commonwealth
of Pennsylvania. The financial statements vary from those filed for statutory
purposes only as to presentation. In accordance with Pennsylvania Insurance Law
and Regulations, the Company's subsidiaries are not consolidated for statutory
filing purposes.
The preparation of the accompanying financial statements required
management to make estimates and assumptions that affect the reported values of
assets and liabilities as of December 31, 1995 and 1994 and the reported amounts
of revenues and expenses during 1995, 1994 and 1993. Actual results could differ
from those estimates.
F-51
<PAGE> 119
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Basis of Presentation, continued
In January 1995, the Financial Accounting Standard Board (FASB) issued
Statement of Financial Accounting Standards No. 120, "Accounting and Reporting
by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain
Long-Duration Participating Contracts" (SFAS 120). SFAS 120 extends the
requirements of FASB Statements No. 60, "Accounting and Reporting by Insurance
Enterprises", No. 97, "Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale
of Investments", and No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts," to mutual life insurance companies.
The American Institute of Certified Public Accountants has established
accounting for certain participating life insurance contracts of mutual life
insurance enterprises in its Statement of Position 95-1, "Accounting for Certain
Insurance Activities of Mutual Life Insurance Enterprises" (SOP 95-1).
SFAS 120 is effective for financial statements issued for fiscal years beginning
after December 15, 1995 and will be applied retroactively to the earliest year
presented when adopted.
SFAS 120 also amends FASB Interpretation No. 40, "Applicability of
Generally Accepted Accounting Principles to Mutual Life Insurance and Other
Enterprises" (Interpretation No. 40), to defer the effective date of the general
provisions of that Interpretation to fiscal years beginning after December 15,
1995, so that Interpretation No. 40, SFAS 120, and SOP 95-1 are concurrently
effective. When the Company prepares financial statements in conformity with
Interpretation No. 40, the accounting treatment for certain items, such as
policy reserves, new business acquisition costs, asset valuation reserves and
income taxes will be different than for financial statements issued in
conformity with statutory accounting principles. In addition, the Company
believes surplus presented in accordance with Interpretation No. 40 will be
greater than surplus presented in accordance with statutory accounting
principles.
Invested Assets
Bonds are stated at amortized cost, except bonds in default which are
stated at market value as prescribed by the NAIC. Private placements are stated
as prescribed by the NAIC or at amortized cost.
Common stocks are carried at market value. The cost of common stocks was
$13,848 and $12,936 at December 31, 1995 and 1994, respectively. Preferred
stocks are carried at cost if designated "in good standing", otherwise at market
value as prescribed by the NAIC.
Short-term investments include those investments whose maturities at the
time of acquisition were one year or less. These investments are carried at
amortized cost which approximates market value.
Investments in unconsolidated subsidiaries are carried on the equity
method. Changes in the investments in unconsolidated subsidiaries, excluding
additional amounts invested and return of capital distributions, are included in
unrealized capital gains or losses. Dividends received from these subsidiaries
are included in net investment income.
F-52
<PAGE> 120
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Invested Assets, continued
Mortgage and policy loans are stated primarily at unpaid principal
balances.
Real estate investments are carried at cost, less encumbrances and
accumulated depreciation. The Company uses the constant yield method of
depreciation for real estate investments acquired before December 31, 1990 and
the straight-line method for acquisitions made thereafter. Foreclosed real
estate is carried at lower of cost or market value and is held for sale.
Foreclosed real estate is depreciated using the straight-line method. Real
estate occupied by the Company is depreciated using the straight-line and
constant yield methods of depreciation. Accumulated depreciation for real estate
totalled $9,914 and $9,080 at December 31, 1995 and 1994, respectively.
Effective January 1, 1996, properties previously depreciated using the constant
yield method will prospectively be depreciated using the straight-line method
over the remaining useful lives of the properties.
Other invested assets consist primarily of real estate joint ventures
carried on the equity basis and limited partnerships carried at lower of cost or
market value.
Investment Valuation Reserves
The asset valuation reserve (AVR) is designed to mitigate the effect of
valuation and credit-related losses on surplus. The interest maintenance reserve
(IMR) is designed to reduce fluctuations in surplus resulting from market
interest rate movements. The AVR covers all invested asset classes with risk of
loss, including bonds, common stocks, mortgage loans and real estate. The IMR
captures realized gains on the sale of all types of fixed income securities
which resulted from changes in the overall level of interest rates. These gains
are amortized into income over the remaining life of each investment sold.
Separate investment valuation reserves in addition to the AVR have been
provided for impairments of real estate, mortgage loans and other invested
assets and totalled $25,341 and $33,877 at December 31, 1995 and 1994,
respectively. Changes in these reserves are reflected as charges or credits to
surplus in unrealized capital gains and losses.
Policy Reserves
Reserves for traditional life insurance policies are computed principally
on the net level premium method and the Commissioners' Reserve Valuation Method
using the 1941, 1958 and 1980 Commissioners' Standard Ordinary (CSO) mortality
tables and the American Experience mortality tables with assumed interest rates
ranging from 2.25% to 6%. Reserves for variable life insurance policies are
computed principally on the preliminary term method using the 1958 and 1980 CSO
mortality tables with assumed interest rates ranging from 4% to 5.5%.
Reserves for deferred annuities are computed principally on the
Commissioners' Annuity Reserve Valuation Method (CARVM) using the 1951 Group
Annuity Mortality (GAM) Table, the 1955 American
F-53
<PAGE> 121
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Policy Reserves, continued
Annuity Mortality (AAM) Table and the 1971 and 1983 Individual Annuity Mortality
(IAM) Table at assumed interest rates ranging from 2% to 8.5%. Reserves for
variable annuities are computed principally on the CARVM using the 1983 IAM
mortality table with assumed interest rates ranging from 5.5% to 6.25%. Reserves
for immediate annuities and supplementary contracts with life contingencies are
based principally on the 1951 GAM mortality table, the 1955 AAM mortality table
and the 1983 IAM mortality table at assumed interest rates ranging from 2% to
8.25%. Reserves for deposit funds, including immediate participation guarantee
funds and guaranteed interest contracts, are based upon the accumulated balance
values, including accrued interest.
Premium and Expense Recognition
Life insurance premiums are recognized as income when due. Annuity and
pension fund deposits are recognized as income when received. Policy acquisition
costs, such as commissions, marketing and policy issuance costs incurred in
connection with acquiring new business, are charged to operations as incurred.
Capital Gains and Losses
Realized capital gains and losses on sales of investments, net of related
Federal income taxes, resulting from changes in interest rates are included in
the IMR and are amortized into operating income over the remaining lives of the
investments sold. Credit-related realized gains and losses are recorded as
capital gains and losses in the statements of operations. Capital gains and
losses are recognized on a specific identification basis.
Unrealized gains and losses on investments are reflected as a change in
unassigned surplus and represent the difference between cost and market values
as prescribed by the NAIC.
Policyowner Dividends
A significant amount of the Company's life insurance business is written on
a participating basis. Annually, the Board of Directors declares the amount of
dividends to be paid in the following calendar year. At December 31, 1995 and
1994, the Company had guaranteed the payment of $10,000 in policyowner dividends
payable in 1996 and 1995, respectively. Bonds have been placed in trust to
secure this guarantee. Declared dividends are included in the accompanying
financial statements as a liability and as a charge to operations.
Reinsurance
Premiums, benefits and expenses are recorded net of experience refunds,
reserve adjustments and amounts assumed from or ceded to reinsurers, including
commission and expense allowances.
F-54
<PAGE> 122
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Separate Accounts
Separate account assets and liabilities represent segregated funds
administered and invested by the Company for the benefit of pension and annuity
contractowners, variable life insurance policyowners, several of the Company's
retirement plans and guaranteed interest contractowners (GIC). With the
exception of GIC-related assets, separate account assets are primarily carried
at market values determined as of the balance sheet date. Assets related to
GIC's are held at values prescribed by the NAIC, primarily amortized cost.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the fair values and statement values of the
Company's financial instruments at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------- -------------------------
FAIR STATEMENT FAIR STATEMENT
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Bonds.............................. $2,435,653 $2,312,791 $2,152,129 $2,257,935
Common stock....................... $11,864 $11,864 $9,651 $9,651
Redeemable preferred stocks........ $8,744 $8,036 $7,780 $8,128
Nonredeemable preferred stocks..... $5,784 $6,639 $8,004 $8,703
Commercial mortgage loans.......... $700,677 $648,251 $669,737 $663,146
Residential mortgage loans......... $1,186 $1,100 $1,506 $1,517
LIABILITIES FOR INVESTMENT-TYPE
INSURANCE CONTRACTS
Guaranteed interest contracts...... $386,454 $374,893 $378,462 $387,898
Group annuities.................... $1,005,040 $1,003,843 $853,590 $899,353
Supplementary contracts without
life contingencies............... $26,333 $26,183 $27,683 $27,695
Individual annuities............... $477,154 $480,788 $463,797 $467,678
</TABLE>
The underlying investment risk of the Company's variable life and variable
annuity contracts is assumed by the owner. These reserve liabilities are
primarily reported in the separate accounts. The liabilities in the separate
accounts are recorded at amounts equal to the related assets at market value.
Fair values for the Company's insurance contracts other than
investment-type contracts are not required to be disclosed under Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Values of
Financial Instruments." However, the estimated fair value and future cash flows
of
F-55
<PAGE> 123
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
2. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure to
changing interest rates through the matching of investment maturities with
amounts due under insurance contracts. The estimated fair value of all assets
without a corresponding revaluation of all liabilities associated with insurance
contracts can be misinterpreted.
The following notes summarize the major methods and assumptions used in
estimating the fair values of financial instruments:
Investment Securities
Bonds, common stocks and preferred stocks are valued based upon quoted
market prices, where available. If quoted market prices are not available, as in
the case of private placements, fair values are based on quoted market prices of
comparable instruments. (See Note 3).
Mortgage Loans
Mortgage loans are valued using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality. For mortgage loans classified as nonperforming, the
fair value was set equal to the lesser of the unpaid principal balance or the
market value of the underlying property.
Policy Loans
Policy loans are issued with either fixed or variable interest rates,
depending upon the terms of the policies. For those loans with fixed interest
rates, the interest rates range from 4% to 8%. For loans with variable interest
rates, the interest rates are primarily adjusted quarterly based upon changes in
a corporate bond index. Future cash flows of policy loans are uncertain and
difficult to predict. As a result, management deems it impractical to calculate
the fair value of policy loans.
Guaranteed Interest Contracts
The fair value of guaranteed interest contract liabilities is based upon
discounted future cash flows. Contract account balances are accumulated to the
maturity dates at the guaranteed rate of interest. Accumulated values are
discounted using interest rates for which liabilities with similar durations
could be sold. The statement value and fair value of the assets backing up the
guaranteed interest contract liabilities were $378,493 and $386,748,
respectively, at December 31, 1995 and $387,112 and $378,444, respectively, at
December 31, 1994.
F-56
<PAGE> 124
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
2. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
Group Annuities
The fair value of group annuities is primarily based upon termination
value, which is calculated by applying contractual market value adjustments to
the account balances. For those contracts not subject to market value
adjustments at termination, book value represents fair value.
Individual Annuities and Supplementary Contracts
The fair value of individual annuities and supplementary contracts without
life contingencies is based primarily on surrender values. For those individual
annuities and supplementary contracts that are not surrenderable, discounted
future cash flows are used for calculating fair value.
Policyowner Dividends and Coupon Accumulations
The policyowners' dividend and coupon accumulation liabilities will
ultimately be settled in cash, applied towards the payment of premiums, or left
on deposit with the Company at interest. Management deems it impractical to
calculate the fair value of these liabilities due to valuation difficulties
involving the uncertainties of final settlement.
3. DEBT SECURITIES AND REDEEMABLE PREFERRED STOCKS
The statement value and estimated fair value of investments in debt
securities and redeemable preferred stocks as of December 31, 1995 and 1994 are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------
GROSS GROSS ESTIMATED
STATEMENT UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies............ $ 102,901 $ 5,415 $ 275 $ 108,041
Obligations of states and political
subdivisions......................... 102,143 4,034 653 105,524
Debt securities issued by foreign
governments.......................... 22,116 1,073 64 23,125
Corporate securities including
mortgage-backed securities........... 2,085,631 128,857 15,525 2,198,963
---------- -------- -------- ----------
Subtotal--bonds................. 2,312,791 139,379 16,517 2,435,653
Redeemable preferred stocks............ 8,036 715 7 8,744
---------- -------- -------- ----------
Total........................... $2,320,827 $ 140,094 $ 16,524 $2,444,397
========== ======== ======== ==========
</TABLE>
F-57
<PAGE> 125
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. DEBT SECURITIES AND REDEEMABLE PREFERRED STOCKS, CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-------------------------------------------------------
GROSS GROSS ESTIMATED
STATEMENT UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies............ $ 103,041 $ 723 $ 2,848 $ 100,916
Obligations of states and political
subdivisions......................... 94,918 1,226 5,812 90,332
Debt securities issued by foreign
governments.......................... 36,983 495 2,970 34,508
Corporate securities including
mortgage-backed securities........... 2,022,993 16,790 113,410 1,926,373
---------- -------- -------- ----------
Subtotal--bonds................. 2,257,935 19,234 125,040 2,152,129
Redeemable preferred stocks............ 8,128 49 397 7,780
---------- -------- -------- ----------
Total........................... $2,266,063 $ 19,283 $ 125,437 $2,159,909
========== ======== ======== ==========
</TABLE>
The statement value and estimated fair value of debt securities and
redeemable preferred stocks at December 31, 1995, by contractual maturity, are
as follows:
<TABLE>
<CAPTION>
STATEMENT ESTIMATED
VALUE FAIR VALUE
---------- ----------
<S> <C> <C>
Due in one year or less......................................... $ 62,132 $ 63,823
Due after one year through five years........................... 461,412 478,517
Due after five years through ten years.......................... 816,306 868,775
Due after ten years............................................. 972,941 1,024,538
---------- ----------
Subtotal--bonds.......................................... 2,312,791 2,435,653
Redeemable preferred stocks..................................... 8,036 8,744
---------- ----------
Total.................................................... $2,320,827 $2,444,397
========== ==========
</TABLE>
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Mortgage-backed securities are included based on their
final maturity.
Proceeds from sales and maturities of investments in debt securities during
1995, 1994 and 1993 were $370,526, $327,229 and $922,024, respectively. Gross
gains of $2,781, $6,513 and $15,803 and gross losses of $2,356, $11,334 and
$5,088 were realized on those sales in 1995, 1994 and 1993, respectively.
F-58
<PAGE> 126
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
4. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
The Company's common stock values of its wholly-owned subsidiaries are
summarized as follows:
<TABLE>
<CAPTION>
NET UNREALIZED
CAPITAL LOSSES AND
DECEMBER 31, OTHER SURPLUS DECEMBER 31,
1994 NET INCOME TRANSACTIONS 1995
------------ ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Provident Mutual International Life
Insurance Company.................... $ 1,637 $ 140 $ 1,777
Providentmutual Holding Company........ 5,974 1,746 $ (3,350) 4,370
Providentmutual Life and Annuity
Company of America................... 29,382 1,581 (326) 30,637
------- ------ ------- -------
$ 36,993 $3,467 $ (3,676) $ 36,784
======= ====== ======= =======
</TABLE>
The Company's unconsolidated subsidiaries had combined assets of $640,745
and $520,846 and liabilities of $603,961 and $483,853 at December 31, 1995 and
1994, respectively.
Effective with the Covenant merger on November 1, 1994, the common stock of
Covenant Financial Services, Inc., with a value of $558, was contributed by the
Company to PHC.
5. BENEFIT PLANS
The Company has two non-contributory pension plans (one defined benefit and
one defined contribution) covering substantially all of its employees and
agents. Pension expense for these plans was $1,590, $2,151 and $2,374 in 1995,
1994 and 1993, respectively. The Company's funding policy is to contribute
annually the maximum amount deductible for Federal income tax purposes.
A comparison of the accumulated plan benefits and assets for the defined
benefit plan, determined as of the most recent actuarial valuation dates, is
presented below:
<TABLE>
<CAPTION>
JANUARY 1,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Actuarial present value of accumulated plan benefits at 8%:
Vested........................................................... $ 67,731 $ 58,549
Nonvested........................................................ 2,242 1,941
------- -------
$ 69,973 $ 60,490
======= =======
Net assets available for benefits................................ $123,586 $106,456
======= =======
</TABLE>
Effective January 1, 1995, the Covenant Life Insurance Company Pension Plan
was merged into the Company's defined benefit plan. The actuarial present value
of accumulated plan benefits at 7.5% as of
F-59
<PAGE> 127
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
5. BENEFIT PLANS, CONTINUED
January 1, 1994, the most recent actuarial valuation date, was $17,868 for
vested participants and $831 for non-vested participants. The net assets
available for plan benefits as of January 1, 1994 was $31,228.
The Company also sponsors several non-qualified unfunded excess benefit,
supplemental executive retirement and deferred compensation plans and
contributory investment plans qualified under Section 401(k) of the Internal
Revenue Code. Total expense recorded for these plans was $3,619, $3,411 and
$2,829 in 1995, 1994 and 1993, respectively. At December 31, 1995 and 1994, the
actuarially determined accrued liability of the unfunded plans was $9,419 and
$10,130, respectively.
Effective November 1, 1994, the Covenant Life Insurance Company Profit
Sharing and 401(k) Plan was merged into the Company's corresponding plan.
In addition, the Company provides certain health care and life insurance
benefits (postretirement benefits) for retired employees. Substantially all of
the Company's employees may become eligible for post-retirement benefits if they
reach normal retirement age while still working for the Company.
On January 1, 1993, the Company changed its method of accounting for the
costs of its retiree benefit plans to the accrual method, and elected to
amortize its transition obligation of $31,681 over 20 years. As of December 31,
1995 and 1994, the unamortized transition obligation was $26,929 and $28,513,
respectively.
Net postretirement benefit costs for the years ended December 31, 1995,
1994 and 1993 were $3,168, $3,416 and $4,072, respectively, and include the
expected costs of such benefits for newly eligible or vested employees,
including interest costs, the amortization of the transition obligation, offset
by the expected return on plan assets.
At December 31, 1995 and 1994, the unfunded postretirement benefit
obligation for retirees and other fully eligible or vested plan participants was
$33,262 and $33,321, respectively. The obligation at December 31, 1994 included
$2,519 attributable to Covenant which had been fully recognized prior to 1993.
The estimated cost of the benefit obligation for active non-vested employees was
$4,187 and $3,609, respectively. The discount rate used in determining the
accumulated postretirement benefit obligation as of December 31, 1995 was 7.0%,
and the health care cost trend rate was 8.3%, graded to 5.1% over 7 years.
The health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost trend
rates by one percentage point in each year would increase the postretirement
benefit obligation as of December 31, 1995 by $1,985 and the estimated
eligibility cost and interest cost components of net periodic postretirement
benefit cost for 1995 by $142.
In January 1991, the Company established a retiree health account under the
provisions of Section 401(h) of the Internal Revenue Code. In December 1995, the
Company transferred $1,573 of
F-60
<PAGE> 128
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
5. BENEFIT PLANS, CONTINUED
excess assets from the defined benefit pension plan to pay for 1995 qualified
retiree health benefits. An additional transfer of excess assets in the amount
of $1,600 was made in December 1994 to pay for 1994 qualified retiree health
benefits. In December 1993, $1,384 of excess assets were transferred to pay 1993
qualified retiree health benefits.
6. POLICY AND CLAIMS RESERVES
The withdrawal characteristics of the Company's annuity actuarial reserves
and deposit liabilities as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
Reserves
Subject to discretionary withdrawal--with adjustment:
--with market value adjustment.............................................. $ 999,058
--at book value less surrender charges...................................... 393,246
----------
Subtotal............................................................... 1,392,304
Subject to discretionary withdrawal--without adjustment:
--at book value (minimal or no charge or adjustment)........................ 632,068
Not subject to discretionary withdrawal provision........................... 444,834
----------
Total annuity actuarial reserves and deposit liabilities (gross)....... 2,469,206
Less: reinsurance........................................................... 393,888
----------
Total annuity actuarial reserves and deposit liabilities (net)......... $2,075,318
==========
</TABLE>
The amounts above are included in the statement of financial condition as
aggregate policy and claim reserves totalling $1,268,967 and separate account
liabilities totalling $806,351.
F-61
<PAGE> 129
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
7. REINSURANCE
The Company has assumed and ceded reinsurance on certain life, accident and
health and annuity contracts under various agreements. The tables below
highlight the amounts shown in the accompanying financial statements which are
net of reinsurance activity:
<TABLE>
<CAPTION>
CEDED ASSUMED
GROSS TO OTHER FROM OTHER NET
AMOUNT COMPANIES COMPANIES AMOUNT
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1995:
Life insurance in force.......... $29,415,103 $11,295,744 $921,414 $19,040,773
=========== ========== ======== ===========
Premiums......................... $ 778,274 $ 95,149 $ 3,879 $ 687,004
=========== ========== ======== ===========
Reserves......................... $ 3,477,099 $ 481,719 $ 1,437 $ 2,996,817
=========== ========== ======== ===========
December 31, 1994:
Life insurance in force.......... $27,633,503 $ 8,803,212 $536,150 $19,366,530
=========== ========== ======== ===========
Premiums......................... $ 804,175 $ 130,760 $ 4,325 $ 677,740
=========== ========== ======== ===========
Reserves......................... $ 3,384,945 $ 415,467 $ 8,910 $ 2,978,388
=========== ========== ======== ===========
December 31, 1993:
Life Insurance in force.......... $23,138,172 $ 9,914,609 $332,243 $13,555,806
=========== ========== ======== ===========
Premiums......................... $ 621,265 $ 16,506 $ 2,662 $ 607,421
=========== ========== ======== ===========
Reserves......................... $ 2,709,467 $ 320,529 $ 1,249 $ 2,390,187
=========== ========== ======== ===========
</TABLE>
The Company is party to various coinsurance, modified coinsurance and
yearly renewable term agreements which provide for reinsurance ceded of selected
individual traditional and variable life insurance and annuity policies.
The Company also has assumed a small amount of yearly renewable term
reinsurance from unaffiliated insurers.
The Company has a reinsurance agreement with a third party to cede 65
percent of the premiums and reserves related to its single premium deferred
annuity (SPDA) product. Total premiums ceded and reserve credits taken related
to this treaty were $55,437 and $312,875 respectively, at December 31, 1995,
$99,888 and $278,573, respectively, at December 31, 1994, and $24,413 and
$193,039, respectively, at December 31, 1993.
A coinsurance agreement exists between the Company and PLACA with respect
to annuities issued after 1984. The agreement includes SPDA's, single premium
immediate annuities and supplementary
F-62
<PAGE> 130
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
7. REINSURANCE, CONTINUED
contracts. PLACA retains full statutory minimum reserves on all policies and
supplementary contracts covered. Pursuant to this agreement, PLACA has taken no
reserve credits at December 31, 1995, 1994 and 1993.
Approximately $733,258, $235,712 and $133,489 of PLACA's life insurance in
force was assumed by the Company under reinsurance agreements at December 31,
1995, 1994 and 1993, respectively.
The Company remains contingently liable with respect to ceded insurance
should any reinsurer be unable to meet its contractual obligations.
8. FEDERAL INCOME TAXES
The Company files a consolidated Federal income tax return with its
wholly-owned life insurance subsidiaries. The tax liability is accrued on a
separate company basis and includes an equity tax, a portion of which is
allocated to the subsidiaries. In accordance with statutory accounting
practices, no deferred taxes are provided for timing differences between pretax
accounting income and taxable income.
The provision for Federal income tax includes an equity tax of $7,375, $158
and $5,755 for the years ended December 31, 1995, 1994 and 1993, respectively,
and includes the following components:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------- ------
<S> <C> <C> <C>
Gross current year equity tax expense....................... $8,000 $ 6,375 $6,175
Subsidiary equity tax allocation............................ (625) (550) (420)
True down of prior years' equity tax........................ -- (5,667) --
------ ------- ------
$7,375 $ 158 $5,755
====== ======== ======
</TABLE>
The provision for Federal income taxes from operations differs from the
normal relationship of Federal income tax to pretax income as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Federal income tax at statutory rate...................... $27,282 $13,993 $17,495
Equity tax................................................ 7,375 158 5,755
Specified policy acquistion costs......................... 4,135 4,804 4,624
Difference between statutory and tax reserves............. (807) 1,215 (57)
Policyholder dividends.................................... 588 (1,798) (5,918)
Bad debt.................................................. (2,999) (922) --
Other..................................................... (1,228) 1,218 (368)
------- ------- -------
Provision for Federal income tax from operations.......... $34,346 $18,668 $21,531
======= ======= =======
</TABLE>
F-63
<PAGE> 131
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
8. FEDERAL INCOME TAXES, CONTINUED
The Company's Federal income tax returns through the year 1982 have been
audited by the Internal Revenue Service (IRS) and are closed; years 1983 through
1987 are at the appeals office of the IRS and are still open; and years 1988
through the present are still open. In the opinion of management, adequate
provision has been made for the possible effect of potential assessments related
to prior years' taxes.
9. RELATED PARTY TRANSACTIONS
Agreements
The contractual obligations under PLACA's SPDA contracts in force and
issued before September 1988 are guaranteed by the Company. Total annuity
contracts affected by this guarantee in force at December 31, 1995 and 1994
totaled approximately $117,169 and $134,097, respectively.
The Company provides various administrative services to its subsidiaries
under service agreements which provide for the allocation of costs to the
subsidiaries. Fees for services charged to subsidiaries by the Company totaled
$12,377, $9,457 and $9,740 for the years ended December 31, 1995, 1994 and 1993,
respectively.
Lease Guarantee
The Company is the guarantor of payments required under a lease in the
event of default by its indirect subsidiary, Sigma. The lease period is for ten
years commencing January 1990, with an average annual rent cost of approximately
$555.
10. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space, data processing equipment and certain
other equipment under operating leases expiring on various dates between 1996
and 2003. Most of the leases contain renewal and purchase options based on
prevailing fair market values.
F-64
<PAGE> 132
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
10. COMMITMENTS AND CONTINGENCIES, CONTINUED
Future minimum rent payments required and related sublease rentals
receivable under non-cancelable operating leases in effect at December 31, 1995,
and which have initial or remaining terms of one year or more, are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER RENTAL SUBLEASE RENTALS
31: PAYMENTS RECEIVABLE
----------------------- -------- ----------------
<S> <C> <C>
1996................... $11,789 $ 183
1997................... 10,552 1,547
1998................... 9,428 1,968
1999................... 3,257 --
2000................... 1,931 --
Thereafter............. 2,264 --
------- -------
$39,221 $3,698
======= =======
</TABLE>
Rent expense for the years ended December 31, 1995, 1994 and 1993 relating
to these leases amounted to $17,382, $18,032 and $16,732, respectively.
Financial Instruments With Off-Balance-Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its borrowers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include investment commitments related to its interests in
real estate and mortgage loans, financial guarantees of indebtedness, marketable
securities lending and interest rate futures contracts. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of amounts recognized in the statements of financial condition.
At December 31, 1995, the Company had outstanding mortgage loan, real
estate and limited partnership commitments of approximately $30,461. The
mortgage loan commitments, which expire through April 1996, were issued during
1995 at interest rates consistent with rates applicable on December 31, 1995. As
a result, the fair value of these commitments approximates the face amount.
The Company guarantees indebtedness of certain real estate partnerships of
which it is an investor. Any estimated deficiencies between the amount of debt
guaranteed and the partnerships' ability to service the debt is provided for in
the asset valuation process through reserves.
It is the Company's policy to use derivatives (exchange-traded or
over-the-counter financial instruments whose value is based upon or derived from
a specific underlying index or commodity) for the purpose of reducing exposure
to interest rate fluctuations, and not for income generation or speculative
purposes. Derivative options utilized by the Company are long and short
positions on United States Treasury notes and bond futures and certain interest
rate swaps.
F-65
<PAGE> 133
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
10. COMMITMENTS AND CONTINGENCIES, CONTINUED
Financial Instruments With Off-Balance-Sheet Risk, continued
Derivatives are used for hedging existing bonds (including cash reserves)
against adverse price or interest rate movements and for fixing liability costs
at the time of product sales. The Company closed out hedge positions consisting
of 160 treasury futures contracts with a dollar value of $16,000 in 1995, 2,253
treasury futures contracts with a dollar value of $225,300 in 1994, and 711
treasury futures contracts with a dollar value of $71,100 in 1993. The
approximate net (losses) gains generated from the hedge positions were $(153),
$1,121 and $439 for the years ended December 31, 1995, 1994 and 1993,
respectively. The Company uses interest rate swaps to synthetically convert a
floating rate bond into a fixed rate bond and thereby match fixed rate
liabilities. The Company had two swaps outstanding with a notional principal
amount of $8,000 as of December 31, 1995 and 1994, respectively. The average
unexpired term of the swaps outstanding was .9 years as of December 31, 1995.
Periodically the Company enters securities lending agreements to earn
additional investment income on its securities. The borrower must provide cash
collateral prior to or at the inception of the loan. There were no securities
lending positions at December 31, 1995.
Investment Portfolio Credit Risk
Bonds
The Company's bond investment portfolio is predominately comprised of
investment grade securities. At December 31, 1995 and 1994, approximately
$101,001 and $92,026, respectively, in debt security investments (4.4% and
4.0%, respectively, of the total debt security portfolio) were considered
"below investment grade". Securities are classified as "below investment
grade" by utilizing rating criteria established by the NAIC. These criteria
are not necessarily equivalent to the rating criteria employed by
independent bond rating agencies.
The Company had debt security investments in the financial services
industry at both December 31, 1995 and 1994 that exceeded 5% of total
assets.
Mortgage Loans
The Company originates mortgage loans either directly or through
mortgage correspondents and brokers throughout the country. Loans are
primarily related to underlying real property investments in office and
apartment buildings and retail/commercial and industrial facilities.
Mortgage loans are collateralized by the related properties and such
collateral generally approximates a minimum 133% of the original loan value
at the time the loan is made.
At December 31, 1995, there were no delinquent mortgage loans (i.e.,
loans where payments on principal and/or interest are over 90 days past
due). At December 31, 1994, delinquent mortgage loans totalled $11,571, or
1.7%, of the mortgage loan portfolio.
F-66
<PAGE> 134
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
10. COMMITMENTS AND CONTINGENCIES, CONTINUED
The Company had loans outstanding in California, Pennsylvania and
Virginia (1994 only) where principal balances in the aggregate exceeded 20%
of the Company's surplus.
Lines of Credit
The Company has approximately $42.0 million of available unused lines of
credit at December 31, 1995.
Litigation and Unasserted Claims
The Company is involved in various litigation, as both plaintiff and
defendant, which has arisen in the ordinary course of business and as a result
of the merger with Covenant and which, in the opinion of management and legal
counsel, will not have a material effect on the Company's financial position.
Insurance companies are subject to assessments, up to statutory limits, by
state guaranty funds for losses of policyholders of insolvent insurance
companies. In the opinion of management, the outcome of the proceedings and
assessments will not have a material adverse effect on the financial position of
the Company. Guaranty fund assessments totalled $2,230, $2,174 and $1,442 in
1995, 1994 and 1993, respectively. Of those amounts, $1,522, $1,653 and $700 in
1995, 1994 and 1993, respectively, are creditable against future years' premium
taxes.
F-67
<PAGE> 135
PART II
OTHER INFORMATION
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
RULE 484 UNDERTAKING
Article VIII of PMLIC's By-Laws provides, in part:
To the fullest extent permitted by law, the Company shall indemnify
any present, former or future Director, officer, or employee of the Company
or any person who may serve or has served at its request as officer or
Director of another corporation of which the Company is a creditor or
stockholder, against the reasonable expenses, including attorney's fees,
necessarily incurred in connection with the defense of any action, suit or
other proceeding to which any of them is made a party because of service as
Director, officer or employee of the Company or such other corporation, or
in connection with any appeal therein, and against any amounts paid by such
Director, officer or employee in settlement of, or in satisfaction of a
judgement or fine in, any such action or proceeding, except expenses
incurred in defense of or amounts paid in connection with any action, suit
or other proceeding in which such Director, officer or employee shall be
adjudged to be liable for negligence or misconduct in the performance of
his duty.
Insofar as indemnification or liability arising under the Securities Act of
1933 may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the foregoing provision, 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 any 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 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.
REPRESENTATIONS PURSUANT TO RULE 6e-3(T)
This filing is made pursuant to Rule 6c-3 and 6e-3(T) under the Investment
Company Act of 1940. Registrant elects to be governed by Rule
6e-3(T)(b)(13)(i)(A).
Registrant makes the following representations:
(1) Section 6e-3(T)(b)(13)(iii)(F) has been relied upon.
(2) The level of the Mortality and Expense Risk Charge is within the
range of industry practice for comparable flexible premium variable life
insurance policies. The methodology used to support this representation is
based on analysis of other policies registered under the Securities Act of
1933, including the level of other expense charges, and uncertainties in
terms of expense and mortality factors. Registrant undertakes to keep and
make available to the Commission upon request the documents used to support
this representation.
(3) Registrant has concluded that there is a reasonable likelihood
that the distribution financing arrangement of the Separate Accounts
comprising the Registrant will benefit the Separate Accounts and
II-1
<PAGE> 136
Owners and the Registrant will keep and make available to the Commission on
request a memorandum setting forth the basis for this representation.
(4) The Separate Accounts comprising the Registrant will invest only
in management investment companies which have undertaken to have a board of
directors, a majority of whom are not interested persons of the company,
formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
A reconciliation and tie-in of the information shown in the Prospectus
with items of Form N-8B-2.
The Prospectus consisting of pages.
The undertaking to file reports.
Rule 484 undertaking.
Representations pursuant to Rule 6e-3(T).
The signatures.
The following exhibits:
<TABLE>
<S> <C> <C> <C> <C>
1.A. (1) (a) Resolution adopted by the Board of Directors of PMLIC establishing the
Provident Mutual Variable Growth Separate Account, Provident Mutual
Variable Money Market Separate Account, Provident Mutual Variable Bond
Separate Account, Provident Mutual Variable Managed Separate Account, and
Provident Mutual Variable Zero Coupon Bond Separate Account(1)
(b) Resolution adopted by the Board of Directors of PMLIC establishing the
Provident Mutual Variable Aggressive Growth Separate Account(2)
(c) Resolution adopted by the Board of Directors of PMLIC establishing the
Provident Mutual Variable International Separate Account(3)
(d) Resolution adopted by the Board of Directors of PMLIC establishing the
Provident Mutual Variable Separate Account(4)
(2) None
(3) (a) (i) Underwriting Agreement(5)
(ii) Amendments to Underwriting Agreement(2) and (3)
(iii) Amendment to Underwriting Agreement(4)
(b) (i) Personal Producing General Agent's Agreement, Supplement and Commission
Schedule(6)
(ii) Personal Producing Agent's Agreement, Supplement and Commission Schedule(6)
(iii) Special Agent's Career Agreement and Supplement(6)
(iv) Special Agent's Agreement(6)
(v) Corporate Agent's Agreement and Supplement(6)
(c) (i) Commission Schedules -- See Exhibits 1.A.(3)(b)(i) and (ii) above(6)
(ii) Commission Schedules for Variable Life Insurance Products for Agents under
Special Agent's Career Agreement(6)
(iii) Commission Schedules for Variable Life Insurance Products for Agents under
Special Agent's Agreement(6)
</TABLE>
II-2
<PAGE> 137
<TABLE>
<S> <C> <C> <C> <C>
(iv) Commission Schedule for Variable Life Insurance Products for Corporate
Agents with Special Agent's Career Agreement(6)
(d) Form of Selling Agreement between PML and Broker-Dealers(6)
(4) None
(5) (a) Individual Flexible Premium Adjustable Variable Life Insurance Policy [Form
C130 (return of premium with performance); Form C130(A) (return of premiums
paid)]; Applications (forms A1 1.91 and A2 1.91); Disability Waiver Benefit
Rider (form C902); Change of Insured Rider (form C905); Policy Split Option
(form C615) and Agreement for Temporary Life Insurance of a Limited Amount
(form A35 12.90)(7)
(b) Description of Separate Accounts -- Form VLSA(4)
(c) Supplementary Application for Variable Life Insurance Policy -- Form A57
7.93(8)
(d) Initial Allocation Schedule -- Form A58 7.93(4)
(6) (a) Charter of PMLIC(1)
(b) By-Laws of PMLIC(9)
(7) None
(8) None
(9) (a) The form of Application is contained in the specimen copy of the Individual
Flexible Premium Adjustable Survivorship Variable Life Insurance Policy
(see Exhibit 1.A.(5)).
2. See Exhibit 1.A.(5)
3.A. Consent of Linda E. Senker, Esquire
B. Consent of Sutherland, Asbill & Brennan
4. None
5. Inapplicable
6. Consent of Scott V. Carney, FSA, MAAA
7. Consent of Coopers & Lybrand L.L.P., Independent Accountants
8. Memorandum on Issuance, Transfer and Redemption(10)
9. Powers of Attorney(7)
10. (a) Participation Agreement among Market Street Fund, Inc., Provident Mutual
Life Insurance Company of Philadelphia and PML Securities Company(6)
(b) Participation Agreement among Variable Insurance Products Fund II, Fidelity
Distributors Corporation and PMLIC(4)
(c) Participation Agreement among Variable Insurance Products Fund II, Fidelity
Distributors Corporation and PMLIC(4)
(d) Sales Agreement between Neuberger & Berman Advisers Management Trust and
PMLIC(4)
(e) Participation Agreement among The Alger American Fund, Provident Mutual
Life Insurance Company, Providentmutual Life and Annuity Company of America
and Fred Alger and Company Incorporated.
11. Sponsorship Agreement between PMLIC and MLPFS for Zero Coupon Trust(11)
</TABLE>
- ---------------
<TABLE>
<C> <S>
(1) Incorporated herein by reference to the Registration Statement filed on Form S-6 on
November 4, 1985, (File No. 33-1331).
(2) Incorporated herein by reference to Post-Effective Amendment No. 5 to the Registration
Statement filed on Form S-6 on March 2, 1989, (File No. 33-2625).
</TABLE>
II-3
<PAGE> 138
<TABLE>
<C> <S>
(3) Incorporated herein by reference to the Registration Statement filed on Form S-6 on
August 7, 1991, (File No. 33-42133).
(4) Incorporated herein by reference to Post-Effective Amendment No. 11 to the Registration
Statement filed on Form S-6 on June 22, 1993, (File No. 33-2625).
(5) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Registration
Statement filed on Form S-6 on April 16, 1986, (File No. 33-1331).
(6) Incorporated herein by reference to Post-Effective Amendment No. 1 to the Registration
Statement filed on Form S-6 on May 1, 1991, (File No. 33-38463).
(7) Incorporated herein by reference to the Registration Statement filed on Form S-6 on
December 7, 1992 (File No. 33-55470).
(8) Incorporated herein by reference to the Post-Effective Amendment No. 4 to the
Registration Statement filed on Form S-6 on June 21, 1993 (File No. 33-42133).
(9) Incorporated herein by reference to the Registration Statement filed on Form S-6 on
December 7, 1989 (File No. 33-32478).
(10) Incorporated herein by reference to the Post-Effective Amendment No. 2 to the
Registration Statement filed on Form S-6 on May 7, 1993 (File No. 33-55470).
(11) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Registration
Statement filed on Form S-6 on June 20, 1986 (File No. 33-2625).
</TABLE>
II-4
<PAGE> 139
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, PROVIDENT
MUTUAL LIFE INSURANCE COMPANY CERTIFIES THAT IT MEETS ALL THE REQUIREMENTS FOR
EFFECTIVENESS OF THIS POST-EFFECTIVE AMENDMENT PURSUANT TO RULE 485(b) UNDER THE
SECURITIES ACT OF 1933 AND, HAS DULY CAUSED THIS POST-EFFECTIVE AMENDMENT TO
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
PHILADELPHIA AND COMMONWEALTH OF PENNSYLVANIA ON THE DAY OF APRIL, 1996.
PROVIDENT MUTUAL LIFE INSURANCE
COMPANY
By: /s/ L. J. ROWELL, JR.
------------------------------------
L . J. ROWELL, JR.
Chairman and Chief Executive Officer
Attest: /s/ LINDA E. SENKER
--------------------------------
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY
THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------------------------------------- --------------------------------- ---------------
<C> <S> <C>
/s/ L. J. ROWELL, JR. Chairman of the Board and Chief April , 1996
- ---------------------------------------- Executive Officer (Principal
L . J. ROWELL, JR. Executive Officer)
/s/ JOHN R. MCCLELLAND Executive Vice President and April , 1996
- ---------------------------------------- Chief Financial Officer
JOHN R. MCCLELLAND (Principal Financial Officer)
/s/ MARY LYNN FINELLI Vice President and Controller April , 1996
- ---------------------------------------- (Principal Accounting Officer)
MARY LYNN FINELLI
DOROTHY M. BROWN* Director April , 1996
ROBERT J. CASALE* Director April , 1996
NICHOLAS DEBENEDICTUS* Director April , 1996
CLAIRE M. FAGIN* Director April , 1996
PHILIP C. HERR* Director April , 1996
J. RICHARD JONES* Director April , 1996
</TABLE>
II-5
<PAGE> 140
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------------------------------------- --------------------------------- ---------------
<C> <S> <C>
ROBERT W. KLOSS* Director April , 1996
JOHN A. MILLER* Director April , 1996
JOHN P. NEAFSEY* Director April , 1996
CHARLES L. ORR* Director April , 1996
WILLIAM A. POLLARD Director April , 1996
DONALD A. SCOTT* Director April , 1996
JOHN J. F. SHERRERD* Director April , 1996
HAROLD A. SORGENTI* Director April , 1996
WILLIAM R. WILSON* Director April , 1996
*By: /s/ LINDA E. SENKER
- ----------------------------------------
LINDA E. SENKER
Attorney-in-fact,
Pursuant to Power of Attorney
</TABLE>
II-6
<PAGE> 141
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Provident
Mutual Variable Growth Separate Account, Provident Mutual Variable Money Market
Separate Account, Provident Mutual Variable Bond Separate Account, Provident
Mutual Variable Managed Separate Account, Provident Mutual Variable Zero Coupon
Bond Separate Account, Provident Mutual Variable Aggressive Growth Separate
Account, Provident Mutual Variable International Separate Account and Provident
Mutual Variable Separate Account certify that they meet all the requirements for
effectiveness of this Post-Effective Amendment pursuant to Rule 485(b) under the
Securities Act of 1933 and, have duly caused this post-effective amendment to
the Registration Statement under the Securities Act of 1933 to be signed on
their behalf by the undersigned, thereunto duly authorized, in the City of
Philadelphia and Commonwealth of Pennsylvania on the day of April, 1996.
PROVIDENT MUTUAL VARIABLE GROWTH SEPARATE ACCOUNT
PROVIDENT MUTUAL VARIABLE MONEY MARKET SEPARATE ACCOUNT
PROVIDENT MUTUAL VARIABLE BOND SEPARATE ACCOUNT
PROVIDENT MUTUAL VARIABLE MANAGED SEPARATE ACCOUNT
PROVIDENT MUTUAL VARIABLE ZERO COUPON BOND SEPARATE ACCOUNT
PROVIDENT MUTUAL VARIABLE AGGRESSIVE GROWTH SEPARATE ACCOUNT
PROVIDENT MUTUAL VARIABLE INTERNATIONAL SEPARATE ACCOUNT
PROVIDENT MUTUAL VARIABLE SEPARATE ACCOUNT
(Registrant)
By: PROVIDENT MUTUAL LIFE INSURANCE COMPANY
(Depositor)
By: /s/ L. J. ROWELL, JR.
------------------------------------
L. J. Rowell, Jr.
Chairman and Chief Executive Officer
Attest: /s/ LINDA E. SENKER
- --------------------------------------
II-7
<PAGE> 1
EXHIBIT 3-A
April 19, 1996
Provident Mutual Life Insurance Company
1600 Market Street
Philadelphia, Pennsylvania 19103
Gentlemen:
I hereby consent to the use of my name under the heading "Legal Matters" in the
Prospectus filed as part of Post-Effective Amendment No. 6 to the Registration
Statement on Form S-6 (File No. 33-55470) for the Provident Mutual Variable
Growth Separate Account, the Provident Mutual Variable Money Market Separate
Account, the Provident Mutual Variable Bond Separate Account, the Provident
Mutual Variable Managed Separate Account, the Provident Mutual Variable Zero
Coupon Bond Separate Account, the Provident Mutual Variable Aggressive Growth
Separate Account, the Provident Mutual Variable International Separate Account
and the Provident Mutual Variable Separate Account.
Sincerely,
Linda E. Senker
LES/ja
<PAGE> 1
EXHIBIT 3-B
SUTHERLAND, ASBILL & BRENNAN
1275 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20004-2404
TEL: (202) 353-0100
FAX: (202) 637-3593
ATLANTA
AUSTIN
NEW YORK
WASHINGTON
April 29, 1996
Provident Mutual Life Insurance Company
1600 Market Street
Philadelphia, Pennsylvania 19103
Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the prospectus for certain modified premium variable life insurance
policies filed as part of post-effective amendment No. 6 to the registration
statement on Form S-6 for Provident Mutual Variable Growth Separate Account,
Provident Mutual Variable Money Market Separate Account, Provident Mutual
Variable Bond Separate Account, Provident Mutual Variable Managed Separate
Account, Provident Mutual Variable Zero Coupon Bond Separate Account, Provident
Mutual Variable Aggressive Growth Separate Account, Provident Mutual Variable
International Separate Account and Provident Mutual Variable Separate Account
(File No. 33-55470). 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
By: ________________________
Stephen E. Roth
<PAGE> 1
EXHIBIT 6
April 19, 1996
Provident Mutual Life Insurance Company
1600 Market Street
Philadelphia, Pennsylvania 19103
Gentlemen:
I hereby consent to the use of my name under the heading "Experts" in the
Prospectus filed as part of Post-Effective Amendment No. 6 to the Registration
Statement on Form S-6 (File No. 33-55470) for the Provident Mutual Variable
Growth Separate Account, the Provident Mutual Variable Money Market Separate
Account, the Provident Mutual Variable Bond Separate Account, the Provident
Mutual Variable Managed Separate Account, the Provident Mutual Variable Zero
Coupon Bond Separate Account, the Provident Mutual Variable Aggressive Growth
Separate Account, the Provident Mutual Variable International Separate Account
and the Provident Mutual Variable Separate Account.
Sincerely,
Scott V. Carney, FSA, MAAA
Assistant Vice President & Actuary
SVC/LES/ja
<PAGE> 1
EXHIBIT 7
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion, in this Post-Effective Amendment
No. 6 to the Registration Statement under the Securities Act of 1933, as
amended, filed on Form S-6 (File No. 33-55470) for the Provident Mutual
Variable Separate Accounts (Growth, Money Market, Bond, Managed, Zero Coupon
Bond, Aggressive Growth, International and Variable), of the following reports:
1. Our report dated February 6, 1996 on our audits of the
financial statements of Provident Mutual Life Insurance Company
as of December 31, 1995 and 1994 and for each of the three
years in the period ended December 31, 1995.
2. Our report dated February 14, 1996 on our audits of the
financial statements of the Provident Mutual Variable Separate
Accounts (Growth, Money Market, Bond, Managed, Aggressive
Growth, International, Zero Coupon Bond and Variable) as of
December 31, 1995 and for each of the three years in the period
ended December 31, 1995 for the Growth, Money Market, Bond,
Managed, Aggressive Growth, International and Zero Coupon Bond
Separate Accounts and for each of the two years in the period
ended December 31, 1995 and the period July 30, 1993 (Date of
Inception) to December 31, 1993 for the Variable Separate
Account.
We also consent to the reference to our Firm under the caption
"Experts".
/s/ Coopers & Lybrand
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 24, 1996
