<PAGE>
Rule 497(c) Filing
File No. 33-70926
M A R K E T S T R E E T
.............................
VIP/2
Prospectus dated
May 1, 1995 for:
Provident Mutual Variable Annuity
Separate Account
Flexible Premium Deferred Variable
Annuity Contract
[LOGO OF PROVIDENT MUTUAL APPEARS HERE]
This prospectus must be read along with the current prospectuses for the funds.
PM501 5.95
<PAGE>
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INDIVIDUAL FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
PROVIDENTMUTUAL LIFE AND ANNUITY COMPANY OF AMERICA,
A STOCK LIFE INSURANCE COMPANY
300 CONTINENTAL DRIVE, NEWARK, DELAWARE 19713
TELEPHONE: 1-800-654-7796
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This Prospectus describes the individual flexible premium deferred variable
annuity contract (the "Contract") being offered by Providentmutual Life and
Annuity Company of America ("Providentmutual"), a stock life insurance company
domiciled in Delaware which is a wholly-owned subsidiary of Provident Mutual
Life Insurance Company of Philadelphia ("PMLIC"). The Contract may be sold to
or in connection with retirement plans which may or may not qualify for special
Federal tax treatment under the Internal Revenue Code.
Net Premiums and Contract Values will be allocated, as designated by the
Owner, to one or more of the Subaccounts of the Providentmutual Variable
Annuity Separate Account (the "Variable Account"), or the Guaranteed Account
(which is part of Providentmutual's General Account and pays interest at
declared rates guaranteed to equal or exceed 3%), or both. The assets of each
Subaccount will be invested solely in a corresponding Portfolio of a designated
mutual fund (the "Funds"). The accompanying Prospectuses for the Funds describe
the Portfolios of such Funds. The Contract Account Value prior to the Maturity
Date, except for amounts in the Guaranteed Account, will vary according to the
investment performance of the Portfolios of the Funds in which the selected
Subaccounts are invested. The Owner bears the entire investment risk of amounts
allocated to the Variable Account.
This Prospectus sets forth basic information about the Contract and the
Variable Account that a prospective investor ought to know before investing.
Additional information about the Contract and the Variable Account is contained
in the Statement of Additional Information, which has been filed with the
Securities and Exchange Commission. The Statement of Additional Information is
dated the same as this Prospectus and is incorporated herein by reference. The
Table of Contents for the Statement of Additional Information is on Page 32 of
this Prospectus. You may obtain a copy of the Statement of Additional
Information free of charge by writing to or calling Providentmutual at the
address of phone number shown above.
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PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. THIS
PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR THE FUNDS.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CON-TRARY IS
A CRIMINAL OFFENSE.
----------------
THE DATE OF THIS PROSPECTUS IS MAY 1, 1995.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions............................................................... 1
Table of Expenses......................................................... 2
Summary................................................................... 7
Condensed Financial Information........................................... 10
The Company, Variable Account and Funds................................... 10
Providentmutual Life and Annuity Company of America..................... 10
The Providentmutual Variable Annuity Separate Account................... 11
The Funds............................................................... 11
The Market Street Fund, Inc. ......................................... 12
The Variable Insurance Products Fund and Variable Insurance Products
Fund II.............................................................. 13
The Scudder Variable Life Investment Fund............................. 14
The Quest for Value Accumulation Trust................................ 14
The Dreyfus Variable Investment Fund.................................. 15
The Insurance Management Series....................................... 15
Resolving Material Conflicts.......................................... 16
Addition, Deletion or Substitution of Investments..................... 16
Description of Annuity Contract........................................... 17
Issuance of a Contract.................................................. 17
Premiums................................................................ 17
Free-Look Period........................................................ 17
Allocation of Premiums.................................................. 18
Variable Account Value.................................................. 18
Transfer Privilege...................................................... 19
Withdrawals and Surrender............................................... 21
Death Benefit Before Maturity Date...................................... 22
Proceeds on Maturity Date............................................... 23
Payments................................................................ 23
Special Exchange Program................................................ 24
Modification............................................................ 24
Reports to Contract Owners.............................................. 25
Contract Inquiries...................................................... 25
The Guaranteed Account.................................................... 25
Minimum Guaranteed and Current Interest Rates........................... 25
Transfers from Guaranteed Account....................................... 26
Payment Deferral........................................................ 26
Charges and Deductions.................................................... 26
Surrender Charge (Contingent Deferred Sales Charge)..................... 26
Administrative Charges.................................................. 27
Transfer Processing Fee................................................. 28
Mortality and Expense Risk Charge....................................... 28
Other Charges Including Investment Advisory Fees of the Funds........... 28
Premium Taxes........................................................... 28
Other Taxes............................................................. 29
Payment Options........................................................... 29
Election of Options..................................................... 29
Description of Options.................................................. 29
Yields and Total Returns.................................................. 30
Federal Tax Status........................................................ 32
Introduction............................................................ 32
Tax Status of the Contract.............................................. 32
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Taxation of Annuities.................................................... 33
Transfers, Assignments or Exchanges of a Contract........................ 35
Withholding.............................................................. 35
Multiple Contracts....................................................... 35
Taxation of Qualified Plans.............................................. 35
Possible Charge for Providentmutual's Taxes.............................. 36
Other Tax Consequences................................................... 36
Distribution of Contracts.................................................. 36
Legal Proceedings.......................................................... 37
Voting Rights.............................................................. 37
Financial Statements....................................................... 38
Statement of Additional Information Table of Contents...................... 39
</TABLE>
ii
<PAGE>
DEFINITIONS
ANNUITANT.................... The person whose life determines the annuity
benefits payable under the Contract and whose
death determines the death benefit.
BENEFICIARY.................. The person to whom the proceeds payable on the
death of the Owner or the Annuitant will be
paid.
CASH SURRENDER VALUE......... The Contract Account Value less any applicable
surrender charge and any applicable Premium Tax
Charge.
CONTRACT ACCOUNT VALUE....... The sum of the Variable Account Value and the
Guaranteed Account Value.
CONTRACT YEARS, MONTHS, AND
ANNIVERSARIES................ Are measured from the Contract Date.
GUARANTEED ACCOUNT........... This account is part of Providentmutual's
General Account and is not part of nor
dependent upon the investment performance of
the Variable Account.
HOME OFFICE.................. Providentmutual's office at 300 Continental
Drive, Newark, Delaware 19713.
MATURITY DATE................ The date when the Contract Account Value will
be applied under a Payment Option, unless the
Owner has elected to receive a lump sum payment
of the Cash Surrender Value.
NET PREMIUM.................. The premium paid less any premium tax levied
for the year the premium is paid.
NON-QUALIFIED CONTRACT....... A Contract that is not a "Qualified Contract."
OWNER........................ The person entitled to exercise all rights and
privileges provided in the Contract.
QUALIFIED CONTRACT........... A Contract that is issued in connection with
plans that qualify for special Federal income
tax treatment under sections 401, 403, or 408
of the Internal Revenue Code of 1986, as
amended.
SUBACCOUNT................... The Variable Account has Subaccounts; the
assets of each Subaccount are invested in a
corresponding Portfolio of a designated mutual
fund.
VALUATION DAY................ Each day on which valuation of the assets of a
Subaccount is required by applicable law.
VALUATION PERIOD............. The period that starts at the close of business
on one Valuation Day and ends at the close of
business on the next succeeding Valuation Day.
VARIABLE ACCOUNT............. Providentmutual Variable Annuity Separate
Account which is not part of Providentmutual's
General Account. The Variable Account has
Subaccounts each of which is invested in a
corresponding Portfolio of a designated mutual
fund.
WRITTEN NOTICE............... A written request or notice in a form
satisfactory to Providentmutual which is signed
by the Owner and received at the Home Office.
1
<PAGE>
TABLE OF EXPENSES
The following information regarding expenses assumes that the entire Contract
Account Value is in the Variable Account.
<TABLE>
<CAPTION>
CONTRACT OWNER
TRANSACTION EXPENSES
<S> <C>
Sales Load Imposed on
Premiums............... none
Maximum Contingent
Deferred Sales Charge
(as a percentage of
amount surrendered or
withdrawn)(1).......... 6%
Transfer Processing Fee. No fee for first twelve transfers in Contract Year;
$25 fee for each transfer thereafter during Contract Year.
ANNUAL ADMINISTRATION
FEE.................... $30 per Contract Year
VARIABLE ACCOUNT ANNUAL
EXPENSES
(as a percentage of
Variable Account Value)
Mortality and Expense
Risk Charges........... 1.25%
Account Fees and
Expenses(2)............ .15%
----
Total Variable Account
Annual Expenses........ 1.40%
<CAPTION>
MONEY AGGRESSIVE
GROWTH MARKET BOND MANAGED GROWTH INTERNATIONAL
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
MARKET STREET FUND
ANNUAL EXPENSES
(as a percentage of
average net assets)
Management Fees
(Investment Advisory
Fees).................. 0.35% 0.25% 0.35% 0.40% 0.50% 0.75%
Other Expenses
(after any expense
reimbursement)(3)...... 0.28% 0.30% 0.33% 0.27% 0.36% 0.57%
---- ---- ---- ---- ---- ----
Total Fund Annual Ex-
penses................. 0.63% 0.55% 0.68% 0.67% 0.86% 1.32%
<CAPTION>
HIGH EQUITY-
INCOME INCOME GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------
<S> <C> <C> <C>
VARIABLE INSURANCE
PRODUCTS FUND
ANNUAL EXPENSES(4)
(as a percentage of
average net assets)
Management Fees
(Investment Advisory
Fees).................. 0.61% 0.52% 0.62%
Other Expenses
(after any expense
reimbursement)(3)...... 0.10% 0.06% 0.07%
---- ---- ----
Total Fund Annual Ex-
penses................. 0.71% 0.58% 0.69%
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
ASSET INDEX
MANAGER 500 CONTRAFUND
PORTFOLIO PORTFOLIO PORTFOLIO
----------- --------- -------------
<S> <C> <C> <C>
VARIABLE INSURANCE PRODUCTS
FUND II
ANNUAL EXPENSES(4)
(as a percentage of average
net assets)
Management Fees
(Investment Advisory Fees).... 0.72% 0.00% 0.62%
Other Expenses
(after any expense
reimbursement)(3)............. 0.08% 0.28% 0.89%
---- ---- -----
Total Fund Annual Expenses..... 0.80% 0.28% 1.51%
<CAPTION>
GROWTH &
BOND INCOME INTERNATIONAL
PORTFOLIO PORTFOLIO PORTFOLIO
----------- --------- -------------
<S> <C> <C> <C>
SCUDDER VARIABLE LIFE
INVESTMENT FUND
ANNUAL EXPENSES(4)
(as a percentage of average
net assets)
Management Fees
(Investment Advisory Fees).... 0.48% 0.00% 0.875%
Other Expenses
(after any expense
reimbursement)(3)............. 0.11% 0.75% 0.205%
---- ---- -----
Total Fund Annual Expenses..... 0.59% 0.75% 1.080%
<CAPTION>
EQUITY SMALL CAP MANAGED
PORTFOLIO PORTFOLIO PORTFOLIO
----------- --------- -------------
<S> <C> <C> <C>
QUEST FOR VALUE ACCUMULATION
TRUST
ANNUAL EXPENSES(4)
(as a percentage of average
net assets)
Management Fees
(Investment Advisory Fees).... 0.60% 0.60% 0.60%
Other Expenses
(after any expense
reimbursement)(3)............ 0.12% 0.14% 0.06%
---- ---- -----
Total Fund Annual Expenses..... 0.72% 0.74% 0.66%
<CAPTION>
ZERO COUPON GROWTH & SOCIALLY
2000 INCOME RESPONSIBLE
PORTFOLIO PORTFOLIO PORTFOLIO
----------- --------- -------------
<S> <C> <C> <C>
DREYFUS VARIABLE INVESTMENT
FUND
ANNUAL EXPENSES(4)
(as a percentage of average
net assets)
Management Fees
(Investment Advisory Fees).... 0.45% 0.75% 0.75%
Other Expenses
(after any expense
reimbursement)(4)............ 0.33% 0.57% 0.84%
---- ---- -----
Total Fund Annual Expenses..... 0.78% 1.32% 1.59%
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
U.S. GOVERNMENT
BOND FUND UTILITY
PORTFOLIO PORTFOLIO
--------------- ---------
<S> <C> <C>
INSURANCE MANAGEMENT SERIES
ANNUAL EXPENSES(4)
(as a percentage of average net as-
sets)
Management Fees (Investment Advisory
Fees)............................... 0.00% 0.00%
Other Expenses
(after any expense reimburse-
ment)(3)........................... 0.80% 0.85%
---- ----
Total Fund Annual Expenses........... 0.80% 0.85%
</TABLE>
Premium taxes may be applicable, depending on various states' laws.
The above tables are intended to assist the Owner in understanding the costs
and expenses that will be borne by the Contract Owner, directly or indirectly.
The tables reflect expenses of the Variable Account as well as for the Funds
for the 1994 calendar year. For a more complete description of the various
costs and expenses, see "Charges and Deductions," Page 21.
- --------
(1) A surrender charge is deducted only if a withdrawal or surrender occurs
during the first six Contract Years; no surrender charge is deducted for a
withdrawal or surrender in Contract Years seven and later. For the first
Contract Year, the maximum charge is 6% of the amount withdrawn or
surrendered. Thereafter, the surrender charge decreases by 1% each
subsequent Contract Year until it is zero in Contract Year seven. The
maximum total surrender charge will not exceed 8 1/2% of the total gross
premiums paid under the Contract. Subject to certain restrictions, after
the first Contract Year up to 10% of the Contract Account Value as of the
beginning of a Contract Year may be surrendered or withdrawn without charge
in such Contract Year. (See "Surrender Charge," Page 21.)
(2) Asset-based administration charge.
(3) For the Fidelity Index 500 Portfolio, certain expenses were reimbursed and
advisory fees waived during 1994. It is anticipated that such expense
reimbursement and fee waiver arrangements will continue past the current
year. Absent the expense reimbursement, the 1994 total annual expenses
would have been 0.95% for the Fidelity Index 500 Portfolio. Similar expense
reimbursements and fee waiver arrangements were also in place for the other
Portfolios and it is anticipated that such arrangements will continue past
the current year. However, no expenses were reimbursed or fees waived
during 1994 for these Portfolios because the level of actual expenses and
fees never exceeded the thresholds at which the reimbursement and waiver
arrangements would have become operative.
(4) The fee and expense information regarding the Funds was provided by those
Funds. The Variable Insurance Products Fund, the Variable Insurance
Products Fund II, the Scudder Variable Life Investment Fund, the Quest for
Value Accumulation Trust, the Dreyfus Variable Investment Fund and the
Insurance Management Series are not affiliated with Providentmutual. While
Providentmutual has no reason to doubt the accuracy of these figures
provided by these non-affiliated Funds, Providentmutual does not represent
that they are true and complete, and disclaims all responsibility for these
figures.
4
<PAGE>
EXAMPLES
An Owner would pay the following expenses on a $1,000 investment, assuming a
5% annual return on assets:
1. If the Contract is surrendered at the end of the applicable time period:
<TABLE>
<CAPTION>
10
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS YEARS
---------- ------ ------- ------- -------
<S> <C> <C> <C> <C>
MS Growth................................... $70.64 $104.18 $138.44 $273.70
MS Money Market............................. 69.84 101.73 134.28 265.29
MS Bond..................................... 71.14 105.70 141.04 278.92
MS Managed.................................. 71.04 105.40 140.52 277.87
MS Aggressive Growth........................ 72.93 111.19 150.33 297.48
MS International............................ 77.51 125.11 173.76 343.42
Fidelity High Income........................ 71.44 106.62 142.59 282.03
Fidelity Equity-Income...................... 70.14 102.65 135.84 268.45
Fidelity Growth............................. 71.24 106.01 141.55 279.96
Fidelity Asset Man. ........................ 72.33 109.36 147.24 291.33
Fidelity Contrafund......................... 73.23 112.10 151.87 300.55
Fidelity Index 500.......................... 67.15 93.44 120.12 236.42
Scudder Bond................................ 70.24 102.95 136.36 269.50
Quest Equity................................ 71.54 106.92 143.11 283.07
Quest Small Cap............................. 71.74 107.53 144.14 285.14
Quest Managed............................... 70.94 105.09 140.00 276.83
Scudder Growth & Inc. ...................... 71.84 107.84 144.66 286.18
Scudder International....................... 75.12 117.86 161.60 319.72
Dreyfus Growth & Inc. ...................... 77.51 125.11 173.76 343.42
Dreyfus Socially Resp....................... 80.20 133.22 187.30 369.39
Drey. Zero Coup. 2000....................... 72.13 108.75 146.21 289.27
Federated Gov't Bond........................ 72.33 109.36 147.24 291.33
Federated Utility........................... 72.83 110.88 149.82 296.46
</TABLE>
5
<PAGE>
2. If the Contract is not surrendered or is annuitized at the end of the
applicable time period:
<TABLE>
<CAPTION>
10
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS YEARS
---------- ------ ------- ------- -------
<S> <C> <C> <C> <C>
MS Growth................................... $24.36 $ 74.96 $128.20 $273.70
MS Money Market............................. 23.52 72.44 123.99 265.29
MS Bond..................................... 24.88 76.54 130.82 278.92
MS Managed.................................. 24.78 76.22 130.30 277.87
MS Aggressive Growth........................ 26.77 82.19 140.21 297.48
MS International............................ 31.59 96.53 163.88 343.42
Fidelity High Income........................ 25.20 77.48 132.39 282.03
Fidelity Equity-Income...................... 23.83 73.39 125.57 268.45
Fidelity Growth............................. 24.99 76.85 131.34 279.96
Fidelity Asset Man. ........................ 26.14 80.31 137.09 291.33
Fidelity Contrafund......................... 27.08 83.13 141.77 300.55
Fidelity Index 500.......................... 20.69 63.90 109.69 236.42
Scudder Bond................................ 23.94 73.70 126.10 269.50
Quest Equity................................ 25.30 77.79 132.91 283.07
Quest Small Cap............................. 25.51 78.42 133.96 285.14
Quest Managed............................... 24.67 75.91 129.77 276.83
Scudder Growth & Inc. ...................... 25.62 78.74 134.48 286.18
Scudder International....................... 29.08 89.07 151.59 319.72
Dreyfus Growth & Inc. ...................... 31.59 96.53 163.88 343.42
Dreyfus Socially Resp....................... 34.42 104.89 177.56 369.39
Drey. Zero Coup. 2000....................... 25.93 79.68 136.05 289.27
Federated Gov't Bond........................ 26.14 80.31 137.09 291.33
Federated Utility........................... 26.66 81.87 139.69 296.46
</TABLE>
The Examples provided above assume that no transfer charges or premium taxes
have been assessed. The Examples also assume that the Annual Administration Fee
is $30 and that the Contract Account Value per contract is $10,000, which
translates the Administration Fee into an assumed .30% charge for purposes of
the Examples based on a $1,000 investment.
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. THE
ASSUMED 5% ANNUAL RETURN IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE GREATER OR LESSER
THAN THE ASSUMED AMOUNT.
6
<PAGE>
SUMMARY
THE CONTRACT
Issuance of a Contract. The Contract is an individual flexible premium
deferred variable annuity issued by Providentmutual. Contracts may be sold in
connection with retirement plans which may or may not qualify for special
Federal tax treatment under the Internal Revenue Code. In order to purchase a
Contract, application must be made to Providentmutual through a licensed
Providentmutual representative, who is also a registered representative of PML
Securities Company ("PML") or a broker/dealer having a selling agreement with
PML or a broker/dealer having a selling agreement with such broker/dealer. The
minimum initial premium must be paid to Providentmutual. Annuity payments are
deferred unit the Maturity Date. (See "Issuance of a Contract," Page 13.)
Free-Look Period. The Owner has the right to return the Contract within 10
days after such Owner receives the Contract. The returned Contract will be
treated as if it were never issued. Providentmutual will return to the Owner an
amount equal to the greater of the premiums paid or the Contract Account Value
plus charges deducted, except the Mortality and Expense Risk Charge, Asset-
Based Administration Charge and the Funds' advisory fees and operating
expenses. For Contracts sold to residents of certain states (i.e., Arizona,
Minnesota and Pennsylvania), the amount returned to the Owner will be equal to
the sum of: (i) the difference between the premiums paid, including any
contract fees and charges and the amounts, if any, allocated to the Variable
Account under the Contract; and (ii) the Variable Account Value on the date of
termination. (See "Free-Look Period," Page 13.)
Premiums. The minimum amount which Providentmutual will normally accept as an
initial premium is $2,000. Subsequent premiums of not less than $100 each for
Non-Qualified Contracts and $50 each for Qualified Contracts may be paid under
the Contract. A Planned Periodic Premium schedule may also be selected. (See
"Premiums," Page 13.)
Allocation of Net Premiums. Net Premiums under a Contract will be allocated,
as designated by the Owner, to one or more of the Subaccounts of the Variable
Account or to the Guaranteed Account or to both. Except for Contracts sold to
residents of states where the amount returned under the free-look provision
reflects investment performance, the portion of the initial Net Premium which
is to be allocated to the Variable Account will be allocated to the Money
Market Subaccount for a 15-day period. At the end of that period, the amount in
the Money Market Subaccount will be allocated to the chosen Subaccounts. The
assets of each Subaccount will be invested solely in a corresponding Portfolio
of a designated Fund. The Contract Account Value, except for amounts in the
Guaranteed Account, will vary according to the investment performance of the
Portfolios of the Fund in which the chosen Subaccounts are invested. Interest
will be credited to amounts in the Guaranteed Account at a guaranteed minimum
rate of 3% per year, or a higher current interest rate declared by
Providentmutual. (See "Allocation of Premiums," Page 13.)
Transfers. On or before the Maturity Date, the Owner may request a transfer
of all or part of the amount in a Subaccount or the Guaranteed Account to
another Subaccount or the Guaranteed Account subject to certain restrictions.
The total amount transferred each time must be at least $500 or the entire
amount in the Subaccount, if less. Only one transfer out of the Guaranteed
Account is allowed each Contract Year and must be made within 30 days of the
Contract Anniversary and is limited in amount. After twelve transfers during a
Contract Year, a Transfer Processing Fee of $25 will be assessed for each
additional transfer during such Contract Year. (See "Transfer Privilege," Page
15.)
Withdrawals. At any time before the earlier of the death of the Annuitant or
the Maturity Date, the Owner may withdraw part of the Cash Surrender Value
(Contract Account Value less any applicable Surrender Charge), subject to
certain limitations. (See "Withdrawals," Page 16.)
7
<PAGE>
Surrender. Upon Written Notice received at the Home Office on or before the
earlier of the death of the Annuitant or the Maturity Date, the Owner may
surrender the full Contract value and receive its Cash Surrender Value
(Contract Account Value less any applicable Surrender Charge). (See
"Surrender," Page 17.)
Death Benefit. If the Annuitant dies before the Maturity Date, the
Beneficiary will receive a death benefit. During the first six Contract years,
the death benefit will be equal to the greater of: the premiums paid less any
withdrawn amounts (including applicable surrender charges) or the Contract
Account Value on the date of receipt of due proof of the Annuitant's death.
After the end of the sixth Contract Year, the death benefit will be equal to
the greatest of:
1. the Contract Account Value as of the end of the sixth Contract Year
less subsequent amounts withdrawn; or
2. the Contract Account Value on the date of receipt due proof of the
Annuitant's death; or
3. the premiums paid less any withdrawn amounts (including applicable
Surrender Charges).
If the Owner dies before the Maturity Date, the Contract Account Value (or if
the owner is also the Annuitant, the death benefit) must generally be
distributed to the Beneficiary within five years after the date of the Owner's
death. (See "Death Benefit Before Maturity Date," Page 17.)
CHARGES AND DEDUCTIONS
The following charges and deductions are made in connection with the
Contract:
Surrender Charge (Contingent Deferred Sales Charge). No charge for sales
expenses is deducted from premiums at the time premiums are paid. However, if a
Contract has not been in force for six full Contract Years, upon surrender or
for certain withdrawals a surrender charge is deducted from the amount of the
surrender or withdrawal.
For the first Contract Year, the charge is 6% of the amount withdrawn or
surrendered. Thereafter, the Surrender Charge decreases by 1% each subsequent
Contract Year. In no event will the total Surrender Charge on any one Contract
exceed 8 1/2% of the total gross premiums paid under the Contract. (See
"Surrender Charge," Page 21.)
Subject to certain restrictions, after the first Contract Year up to 10% of
the Contract Account Value as of the beginning of a Contract Year may be
surrendered or withdrawn during such Contract Year free of the Surrender
Charge. (See "Amounts Not Subject to Surrender Charge," Page 21.)
Annual Administration Fee. On each Contract Anniversary prior to and
including the Maturity Date, and on the Maturity Date if it is not a Contract
Anniversary, Providentmutual deducts an Annual Administration Fee of $30 from
the Contract Account Value. The charge is also deducted upon surrender if the
surrender occurs on other than the Contract Anniversary. (See "Annual
Administration Fee," Page 22.)
Transfer Processing Fee. The first twelve transfers of amounts in the
Subaccounts and the Guaranteed Account each Contract year are free. A $25
transfer charge will be assessed for each additional transfer during such
Contract Year. (See "Transfer Processing Fee," Page 22.)
Mortality and Expense Risk Charge. Providentmutual deducts a daily mortality
and expense risk charge to compensate it for assuming certain mortality and
expense risks. On or prior to the Maturity Date, the charge is deducted from
the assets of the Variable Account at an annual rate of 1.25% (approximately
0.70% for mortality risk and 0.55% for expense risks). (See "Mortality and
Expense Risk Charge," Page 22.)
Asset-Based Administration Charge. Providentmutual deducts a daily
administration charge to compensate it for certain expense it incurs in
administration of the Contract. On or prior to the Maturity
8
<PAGE>
Date, the charge is deducted from the assets of the Variable Account at an
annual rate of 0.15%. (See "Asset-Based Administration Charge," Page 22.)
Premium Taxes. If state or other premium taxes are applicable to a Contract,
they will be deducted, depending upon when such taxes are paid to the taxing
authority, either: (i) from premiums as they are received; or (ii) from the
Contract Account Value upon a withdrawal from or surrender of the Contract or
upon application of the Contract Account Value to a Payment Option. (See
"Premium Taxes," Page 23.)
Investment Advisory Fees and Other Expenses of the Funds. Because the
Variable Account purchases shares of the Funds, the net assets of each
Subaccount of the Variable Account will reflect the investment advisory fee
incurred by the corresponding Portfolio of the Funds. For each Portfolio, an
investment advisor is paid a daily fee by the Funds for its investment advisory
services. The advisory fees are based on the average daily net assets of the
Portfolio, and, as a result, the amount of the advisory fee will depend upon
the Portfolio and the assets of such Portfolio. Each Portfolio of the Fund in
which the Variable Account invests is also responsible for its own expenses.
Presently, certain fees and expenses of the Funds are waived and reimbursed.
(See "Other Charges Including Investment Advisory Fees of the Funds," Page 23
and the Funds' Prospectuses.)
ANNUITY PROVISIONS
Maturity Date. On the Maturity Date, the Contract Account Value (less
applicable Premium Tax) will be applied under a Payment Option, unless the
Owner chooses to receive the Cash Surrender Value in a lump sum.
Payment Options. Payments under these options do not depend upon the Variable
Account's performance. The Payment Options are: Life Annuity; Life Annuity with
10 Years Guaranteed; and Alternate Income Option. (See "Payment Options," Page
23.)
FEDERAL TAX STATUS
Generally, a distribution (including a surrender, withdrawal or death benefit
payment) may result in adverse Federal income tax consequences. In certain
circumstances, a 10% penalty tax may apply. For a further discussion of the
Federal income status of Variable Annuity Contracts, see "Federal Tax Status,"
Page 26.
9
<PAGE>
CONDENSED FINANCIAL INFORMATION
The following condensed financial information is derived from the financial
statements of the Variable Account. The data should be read in conjunction with
the financial statements, related notes and other financial information
included in the Statement of Additional Information. See "Financial
Statements," Page 31, concerning financial statements contained in the
Statement of Additional Information.
The table below sets forth certain information regarding the Subaccounts as
of December 1994.
<TABLE>
<CAPTION>
UNIT VALUE NUMBER OF UNITS UNIT VALUE NUMBER OF UNITS
AS OF OUTSTANDING AS OF AS OF OUTSTANDING AS OF
SUBACCOUNT 12/31/94 12/31/94 12/31/93 12/31/93
---------- ---------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C>
Growth.................. 511.45 12,476.41 506.46 3,168.61
Money Market............ 513.30 16,531.43 501.47 4,652.76
Bond.................... 459.55 3,487.30 493.74 1,656.64
Managed................. 482.84 8,582.76 498.70 2,536.72
Aggressive Growth....... 522.44 2,846.86 529.79 452.21
International........... 528.22 15,548.80 534.25 2,539.74
Fidelity High Income.... 507.88 4,060.78 523.11 298.26
Fidelity Equity-Income.. 533.64 16,111.04 505.43 2,674.86
Fidelity Growth......... 492.73 19,272.81 499.75 2,368.98
Fidelity Asset Manager.. 492.38 28,637.01 531.69 2,806.80
Fidelity Contrafund..... -- -- -- --
Fidelity Index 500...... 507.68 3,571.24 509.51 818.51
Scudder Bond............ 468.40 4,419.73 498.86 726.58
Quest Equity............ 515.26 2,813.10 503.29 313.68
Quest Small Cap......... 503.97 8,553.37 516.26 842.45
Quest Managed........... 504.88 15,233.99 498.94 2,723.17
Scudder Growth & Income. -- -- -- --
Scudder International... -- -- -- --
Dreyfus Growth & Income. -- -- -- --
Dreyfus Socially Respon-
sible.................. -- -- -- --
Dreyfus Zero Coupon
2000................... 467.73 3,101.11 493.62 113.90
Federated Government
Bond................... -- -- -- --
Federated Utility....... -- -- -- --
</TABLE>
THE COMPANY, VARIABLE ACCOUNT AND FUNDS
PROVIDENTMUTUAL LIFE AND ANNUITY COMPANY OF AMERICA
The Contracts are issued by Providentmutual Life and Annuity Company of
America ("Providentmutual") which is a stock life insurance company
incorporated under the name of Washington Square Life Insurance Company in the
Commonwealth of Pennsylvania in 1958. The name of the Company was changed from
Washington Square to Providentmutual in 1991 and the Company was redomiciled as
a Delaware insurance company in December, 1992. Providentmutual is currently
licensed to transact life insurance business in 48 states and the District of
Columbia. As of December 31, 1994, Providentmutual had total assets of
approximately $505 million.
Providentmutual is a wholly-owned subsidiary of Provident Mutual Life
Insurance Company ("PMLIC"). PMLIC was chartered by the Commonwealth of
Pennsylvania in 1865 and at the end of 1994 had total assets of approximately
$4.6 billion. PMLIC and Providentmutual entered into a Support Agreement on
April 5, 1993 pursuant to which PMLIC agreed to ensure that Providentmutual's
capital and surplus will be maintained at certain levels and that
Providentmutual will maintain cash or cash equivalents
10
<PAGE>
in an amount sufficient for the payment of benefits and other contractual
claims under contracts issued by PLACA. This agreement may not be modified or
terminated prior to January 1, 1998, and then only under certain circumstances.
Other than this Support Agreement, PMLIC is under no obligation to invest money
in Providentmutual nor is it in any way a guarantor of Providentmutual's
contractual obligations or obligations under the Contract.
Providentmutual is subject to regulation by the Insurance Department of the
State of Delaware as well as by the insurance departments of all other states
and jurisdictions in which it does business. Providentmutual submits annual
statements on its operations and finances to insurance officials in such states
and jurisdictions. The forms for the Contract described in this Prospectus are
filed with and (where required) approved by insurance officials in each state
and jurisdiction in which Contracts are sold.
THE PROVIDENTMUTUAL VARIABLE ANNUITY SEPARATE ACCOUNT
The Providentmutual Variable Annuity Separate Account is a separate
investment account of Providentmutual, established by the Board of Directors of
Providentmutual on May 9, 1991, under Pennsylvania law. Because Providentmutual
later redomesticated as a Delaware Insurance Company, the Variable Account is
now subject to regulation by the Delaware Insurance Department. Providentmutual
has caused the Variable Account to be registered with the Securities and
Exchange Commission (the "SEC") as a unit investment trust under the investment
Company Act of 1940 (the "1940 Act"). Such registration does not involve
supervision by the SEC of the management or investment policies or practices of
the Variable Account.
The assets of the Variable Account are owned by Providentmutual. However,
these assets are held separate from other assets and are not part of
Providentmutual's General Account. The portion of the assets of the Variable
Account equal to the reserves or other contract liabilities of the Variable
Account will not be charged with liabilities that arise from any other business
Providentmutual conducts. Providentmutual may transfer to its General Account
any assets of the Variable Account which exceed the reserves and the Contract
liabilities of the Variable Account (which will always be at least equal to the
aggregate Contract value allocated to the Variable Account under the
Contracts).
The income, gains or losses, whether or not realized, from the assets of each
Subaccount of the Variable Account are credited to or charged against that
Subaccount without regard to any other income, gains or losses. Providentmutual
may accumulate in the Variable Account the charge for expense and expense
risks, mortality gains and losses and investment results applicable to those
assets that are in excess of the net assets supporting the Contracts.
The Variable Account currently has twenty-three Subaccounts: Growth; Money
Market; Bond; Managed; Aggressive Growth; International; Fidelity High Income;
Fidelity Equity-Income; Fidelity Growth; Fidelity Asset Manager; Fidelity Index
500; Fidelity Contrafund; Scudder Bond; Scudder Growth and Income; Scudder
International; Quest for Value Equity; Quest for Value Small Cap; Quest for
Value Managed; Dreyfus Growth and Income; Dreyfus Socially Responsible; Dreyfus
Zero Coupon 2000; Federated U.S. Government Bond Fund; and Federated Utility.
The assets of each Subaccount are invested exclusively in shares of a
corresponding Portfolio of a designated Fund.
THE FUNDS
The Variable Account currently invests in portfolios of seven series-type
mutual funds: Market Street Fund, Inc.; Variable Insurance Products Fund;
Variable Insurance Products Fund II; Scudder Variable Life Investment Fund;
Quest for Value Accumulation Trust; Dreyfus Variable Investment Fund; and
Insurance Management Series (collectively, the "Funds"). Each of these Funds
are registered with the SEC under the 1940 Act as an open-end diversified
investment company. The SEC does not, however, supervise the management or the
investment practices and policies of the Funds.
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<PAGE>
The assets of each Fund portfolio are separate from other portfolios of that
Fund and each portfolio has separate investment objective and policies. As a
result, each portfolio operates as a separate investment portfolio and the
investment performance of one portfolio has no effect on the investment
performance of any other portfolio. Some of the Funds may, in the future,
create additional portfolios. The investment experience of each of the
Subaccounts of the Variable Account depends on the investment performance of
its corresponding portfolio.
Each of the Funds sells its shares to the Variable Account in accordance with
the terms of a participation agreement between the Fund and Providentmutual.
The termination provisions of those agreements vary. A summary of these
termination provisions may be found in the Statement of Additional Information.
Should an agreement between Providentmutual and a Fund terminate, the Variable
Account will not be able to purchase additional shares of that Fund. In that
event, Owners will no longer be able to allocate Account Values or premium
payments to Subaccounts investing in portfolios of that Fund.
Additionally, in certain circumstances, it is possible that a Fund or a
portfolio of a Fund may refuse to sell its shares to the Variable Account
despite the fact that the participation agreement between the Fund and
Providentmutual has not been terminated. Should a Fund or a portfolio of a Fund
decide not to sell its shares to Providentmutual, Providentmutual will not be
able to honor requests of Owners to allocate their Account Values or premium
payments to Subaccounts investing in shares of that Fund or portfolio.
Certain Subaccounts invest in portfolios that have similar investment
objectives and/or policies; therefore before choosing Subaccounts, carefully
read the individual prospectuses for the Funds along with this prospectus.
THE MARKET STREET FUND, INC.
The Growth, Money Market, Bond, Managed, Aggressive Growth and International
Subaccounts invest in shares of The Market Street Fund, Inc. The Fund currently
issues six "series" or classes of shares, each of which represents an interest
in a separate Portfolio within the 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 Subaccount.
The investment objectives of the Portfolios are set forth below.
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.
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.
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<PAGE>
The Growth Portfolio is advised by Newbold's Asset Management, Inc.; the
Bond, Managed, and Aggressive Growth Portfolios are advised by Sentinel
Advisors Company; and the Money Market and International Portfolios are advised
by Providentmutual Investment Management Company ("PIMC"). Each of these
advisers is registered with the SEC as an investment adviser under the
Investment Advisers Act of 1940. PIMC employs The Boston Company Asset
Management, Inc. to provide investment advisory services in connection with the
International Portfolio.
VARIABLE INSURANCE PRODUCTS AND VARIABLE INSURANCE PRODUCTS FUND II
The Fidelity High Income Subaccount, the Fidelity Equity-Income Subaccount
and the Fidelity Growth Subaccount invest in shares of their corresponding
portfolios of the Variable Insurance Products Fund ("VIP Fund"); the Fidelity
Asset Manager Subaccount, Fidelity Contrafund Subaccount and the Fidelity Index
500 Subaccount invest in shares of their corresponding portfolios of the
Variable Insurance Products Fund II ("VIP Fund II"). The VIP Fund and the VIP
Fund II each offer insurance companies a selection of investment vehicles for
variable annuity contracts and variable life insurance policies. The VIP Fund
issues five "series" or classes of shares, each of which represents an interest
in a separate portfolio within the VIP Fund. Three of these series are
available for investment under the Contracts: High Income Portfolio; Equity-
Income Portfolio; and Growth Portfolio. The VIP Fund II issues four "series",
three of which are available for investment under the Contracts: Asset Manager
Portfolio, Contrafund Portfolio and Index 500 Portfolio.
The investment objectives of the pertinent Portfolios of the Funds are set
forth below.
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.
Equity-Income Portfolio. This Portfolio seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these securities,
the 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
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.
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 to achieve capital appreciation.
It invests primarily in equity securities of companies that are undervalued or
out-of-favor.
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 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.
The Portfolios of the VIP Fund and VIP Fund II are managed by Fidelity
Management & Research Company ("FMR"). On behalf of the Asset Manager
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.
13
<PAGE>
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.
SCUDDER VARIABLE LIFE INVESTMENT FUND
The Scudder Bond Subaccount, the Scudder Growth and Income Subaccount and the
Scudder International Subaccount will invest in shares of their corresponding
portfolios of the Scudder Variable Life Investment Fund ("Scudder Fund"). The
Scudder Fund is designed to provide an investment vehicle for variable annuity
contracts and variable life insurance policies. Therefore, shares of the
Scudder Fund are sold only to insurance company separate accounts including the
Providentmutual Variable Annuity Separate Account.
The Scudder Fund currently consists of six Portfolios. Only the Bond
Portfolio, Growth and Income Portfolio and International Portfolio are
available under the variable annuity Contracts offered by Providentmutual.
Their investment objectives are as follows:
Bond Portfolio. This Portfolio pursues a policy of investing for a high level
of income consistent with a high quality portfolio of securities. It primarily
invests in U.S. Government, corporate, and other notes and bonds.
Growth and Income Portfolio. This Portfolio seeks long-term growth of
capital, current income and growth of income. It primarily invests in common
stocks, preferred stocks and securities convertible into common stocks.
International Portfolio. This Portfolio seeks long-term growth of capital
primarily through diversified holdings of marketable foreign equity
investments. The Portfolio invests in companies, wherever organized, which do
business primarily outside the United States.
Scudder, Stevens & Clark, Inc., an investment adviser registered with the SEC
under the Investment Advisers Act of 1940, as amended, manages daily
investments and business affairs of the Scudder Fund, subject to policies
established by the Trustees of the Scudder Fund.
QUEST FOR VALUE ACCUMULATION TRUST
The Quest for Value Equity Subaccount, the Quest for Value Small Cap
Subaccount and the Quest for Value Managed Subaccount will invest only in
shares of their corresponding portfolios of the Quest for Value Accumulation
Trust ("Quest for Value Trust"). Shares of the Quest for Value Trust are sold
only to separate accounts of life insurance companies established to fund
variable annuity contracts.
The Quest for Value Trust currently has five Portfolios, three of which are
available for investment under the Contracts. The investment objectives of the
Portfolios available with the variable annuity Contracts issued by
Providentmutual are described below.
Equity Portfolio. Long term capital appreciation through investment in a
diversified portfolio of primarily equity securities selected on the basis of a
value-oriented approach to investing.
Small Cap Portfolio. Capital appreciation through investment in a diversified
portfolio of primarily equity securities of companies with market
capitalizations of under $1 billion.
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<PAGE>
Managed Portfolio. Growth of capital over time through investment in a
portfolio consisting of common stocks, bonds, and cash equivalents, the
percentages of which will vary over time based on the investment manager's
assessments of relative investment values.
The Quest for Value Trust receives investment advice with respect to each of
its Portfolios from Quest for Value Advisors, a subsidiary of Oppenheimer
Capital which is a subsidiary of Oppenheimer Financial Corp and which is
registered as an investment adviser under the Investment Advisers Act of 1940.
DREYFUS VARIABLE INVESTMENT FUND
The Dreyfus Growth and Income Subaccount, the Dreyfus Socially Responsible
Subaccount and the Dreyfus Zero Coupon 2000 Subaccount will invest in shares of
their corresponding portfolios of the Dreyfus Variable Investment Fund
("Dreyfus Fund"). The Dreyfus Fund is intended to be a funding vehicle for
variable annuity contracts and variable life insurance policies offered by the
separate accounts of various life insurance companies.
The Dreyfus Fund currently consists of eight Portfolios. Only the Growth and
Income Portfolio, Socially Responsible Portfolio and Zero Coupon 2000 Portfolio
are available with the variable annuity Contracts offered by Providentmutual.
Their investment objectives are as follows:
Growth and Income Portfolio. This Portfolio seeks long-term capital growth,
current income and growth of income, consistent with reasonable investment
risk. The Portfolio invests in equity and debt securities and money market
instruments of domestic and foreign issuers.
Socially Responsible Portfolio. This Portfolio seeks to provide capital
growth through equity investments in companies that, in the opinion of the
Portfolio's management, not only meet traditional investment standards but
which also show evidence that they conduct their business in a manner that
contributes to the quality of life in America.
Zero Coupon 2000 Portfolio. The Zero Coupon 2000 Portfolio's goal is to
provide as high an investment return as is consistent with the preservation of
capital. This Portfolio invests primarily in debt obligations of the U.S.
Treasury that have been stripped of their unmatured interest coupons, interest
coupons that have been stripped from debt obligations issued by the U.S.
Treasury, receipts and certificates for such stripped debt obligations, and
stripped coupons and zero coupon securities issued by domestic corporations.
This Portfolio will consist primarily of portfolio securities which will mature
on or about December 31, 2000.
The Dreyfus Corporation ("Dreyfus") serves as investment adviser to the
Dreyfus Fund. Dreyfus supervises and assists in the overall management of the
Dreyfus Fund's affairs under an Investment Advisory Agreement with the Dreyfus
Fund, subject to the overall authority of the Board of Directors of the Dreyfus
Fund.
INSURANCE MANAGEMENT SERIES
The Federated U.S. Government Bond Fund Subaccount and the Federated Utility
Subaccount will invest in shares of their corresponding portfolios of the
Insurance Management Series. The Insurance Management Series is intended to be
a funding vehicle for variable annuity contracts and variable life insurance
policies offered by the separate accounts of various life insurance companies.
The Insurance Management Series currently consists of Portfolios. Only
the U.S. Government Bond Fund Portfolio and Utility Fund Portfolio are
available with the Variable Annuity Contract offered by Providentmutual. Their
investment objectives are as follows:
U.S. Government Bond Fund Portfolio. This Portfolio seeks to provide current
income. It invests primarily in securities which are guaranteed as to payment
of principal and interest by the U.S. Government, its agencies or
instrumentalities.
15
<PAGE>
Utility Fund Portfolio. This Portfolio seeks to achieve high current income
and moderate capital appreciation. It invests primarily in equity and debt
securities of utility companies.
THERE IS NO ASSURANCE THAT THE STATED OBJECTIVES AND POLICIES OF ANY OF THE
FUNDS WILL BE ACHIEVED.
More detailed information concerning the investment objectives, policies and
restrictions pertaining to the Funds and the expenses, investment advisory
services and charges and the risks attendant to investing in the Portfolios and
other aspects of their operations can be found in the current Prospectus for
each Fund which accompany this prospectus and the current Statement of
Additional Information for each Fund. The Fund prospectuses should be read
carefully before any decision is made concerning the allocation of premium
payments or transfers among the Subaccounts.
You should note that, except for the Portfolios of the Market Street Fund and
the Bond Portfolio of the Scudder Fund, not all of the Portfolios described in
the Prospectuses for the Funds are available with the Contract. Moreover,
Providentmutual cannot guarantee that each Fund will always be available for
its variable annuity contracts, but in the unlikely event that a Fund is not
available, Providentmutual will do everything reasonably practicable to secure
the availability of a comparable fund. Shares of each Portfolio are purchased
and redeemed at net asset value, without a sales charge.
RESOLVING MATERIAL CONFLICTS
The Market Street Fund presently serves as an investment medium for variable
life policies and variable annuity contracts issued by PMLIC and
Providentmutual. At some later date that 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.
The VIP Fund and VIP Fund II are also used as investment vehicles for
variable life insurance policies and variable annuity contracts issued by PMLIC
and Providentmutual. The Scudder Fund, Quest for Value Trust, Dreyfus Fund and
Insurance Management Series are used as investment vehicles for variable
annuity contracts issued by Providentmutual. In addition, the Funds, other than
Market Street Fund, are used by registered separate accounts of insurance
companies, other than PMLIC or its affiliates, offering variable annuity
contracts and variable life insurance policies.
Providentmutual currently does not foresee any disadvantages to Owners
resulting from the Funds selling shares to fund products other than
Providentmutual contracts. However, there is a possibility that a material
conflict may arise between Owners whose policy values are allocated to the
Variable Account and the owners of variable life insurance policies and
variable annuity contracts issued by such other companies whose values are
allocated to one or more other separate accounts investing in any one of the
Funds. In the event of a material conflict, Providentmutual will take any
necessary steps, including removing the Variable Account from that Fund, to
resolve the matter. The Board of Directors of each Fund will monitor events in
order to identify any material conflicts that possibly may arise and determine
what action, if any, should be taken in response to those events or conflicts.
See each individual Fund prospectus for more information.
A full description of the Portfolios of the Funds, their investment
objectives and policies, their risks, expenses, and all other aspects of their
operation is contained in the accompanying Prospectuses for the Funds, which
should be read carefully together with this Prospectus before investing.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
Providentmutual reserves the right, subject to applicable law, to make
additions to, deletions from, or substitutions for the shares that are held in
the Variable Account or that the Variable Account may purchase. If the shares
of a Portfolio of the Fund are no longer available for investment or if in
Providentmutual's
16
<PAGE>
judgment further investment in any Portfolio should become inappropriate in
view of the purposes of the Variable Account, Providentmutual may redeem the
shares, if any, of that Portfolio and substitute shares of another registered
open-end management company. Providentmutual will not substitute any shares
attributable to a Contract's interest in a Subaccount of the Variable Account
without notice and prior approval of the SEC and state insurance authorities,
to the extent required by the 1940 Act or other applicable law.
Providentmutual also reserves the right to establish additional Subaccounts
of the Variable Account, each of which would invest in shares corresponding to
a new Portfolio of the Fund or in shares of another investment company having a
specified investment objective. Subject to applicable law and any required SEC
approval, Providentmutual may, in its sole discretion, establish new
Subaccounts or eliminate one or more Subaccounts if marketing needs, tax
considerations or investment conditions warrant. Any new Subaccounts may be
made available to existing Contract Owners on a basis to be determined by
Providentmutual.
If any of these substitutions or charges are made, Providentmutual may by
appropriate endorsement change the Contract to reflect the substitution or
change. If Providentmutual deems it to be in the best interest of Contract
Owners and Annuitants, and subject to any approvals that may be required under
applicable law, the Variable Account may be operated as a management company
under the 1940 Act, it may be deregistered under that Act if registration is no
longer required, or it may be combined with other Providentmutual separate
accounts.
DESCRIPTION OF ANNUITY CONTRACT
ISSUANCE OF A CONTRACT
In order to purchase a Contract, application must be made to Providentmutual
through a licensed representative of Providentmutual, who is also a registered
representative of PML Securities Company ("PML") or a broker-dealer having a
selling agreement with PML or a broker/dealer having a selling agreement with
such broker/dealer. Contracts may be sold to or in connection with retirement
plans which to not qualify for special tax treatment (Non-Qualified Plans) as
well as retirement plans that qualify for special tax treatment under the
Internal Revenue Code (Qualified Plans).
PREMIUMS
The minimum initial premium which Providentmutual will normally accept is
$2,000. Subsequent premium payments may be paid under the Contract at any time
during the Annuitant's lifetime and before the Maturity Date and must be for at
least $100 each for Non-Qualified Contracts and $50 each for Qualified
Contracts.
At the time of application, a Planned Periodic Premium schedule may be
selected based on a periodic billing mode of annual, semi-annual, or quarterly
payment. The Owner will receive a premium reminder notice at the specified
interval. The Owner may change the Planned Periodic Premium frequency and
amount. Also, 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."
FREE-LOOK PERIOD
The Contract provides for an initial "free-look" period. The Owner has the
right to return the Contract within 10 days after such Owner receives the
Contract. When Providentmutual receives the returned Contract at its Home
Office, it will be canceled and Providentmutual will refund to the Owner an
amount equal to the greater of: (a) the premiums paid under the Contract; and
(b) the sum of (i) the Contract Account Value as of the earlier of the date the
returned Contract is received by Providentmutual at its Home Office or by the
17
<PAGE>
Providentmutual representative through whom the Contract was purchased; plus
(ii) the amount of any charges deducted from the Variable Account except the
Mortality and Expense Risk Charge, Asset-Based Administration Charge and the
Funds' advisory fees and operating expenses. For contracts sold to residents of
certain states (i.e., Arizona, Minnesota and Pennsylvania), the amount returned
to the Owner will be equal to the sum of: (i) the difference between the
premiums paid, including any contract fees and charges, and the amounts, if
any, allocated to the Variable Account under the Contract; and (ii) the
Variable Account Value (or, in Pennsylvania, if there is no Variable Account
Value, the reserve for the Contract on the date the Contract is cancelled
attributable to the amounts allocated to the Variable Account.)
ALLOCATION OF PREMIUMS
If the application for a Contract is properly completed and is accompanied by
all the information necessary to process it, including payment of the initial
premium, the initial Net Premium (premium less deduction of any required
premium tax) will be allocated between the Money Market Subaccount and the
Guaranteed Account within two business days of receipt of such premium by
Providentmutual at its Home Office. If the application is not properly
completed, Providentmutual will retain the premium for up to five business days
while it attempts to complete the application. If the application is not
complete at the end of the 5-day period, Providentmutual will inform the
applicant of the reason for the delay and the initial premium will be returned
immediately, unless the applicant specifically consents to Providentmutual
retaining the premium until the application is complete. Once the application
is complete, the initial Net Premium will be allocated within two business
days.
At the time of application, the Owner selects how the initial Net Premium is
to be allocated among the Subaccounts and the Guaranteed Account. When, as
described above, Net Premium is allocated, the portion of the initial Net
Premium which is to be allocated to the Subaccounts of the Variable Account
will be allocated to the Money Market Subaccount for a 15-day period. After the
expiration of such 15-day period, the amount in the Money Market Subaccount
will be allocated to the chosen Subaccounts based on the proportion that the
allocation percentage for such Subaccount bears to the sum of the Subaccount
allocation percentages. Any subsequent Net Premiums will be allocated at the
end of the Valuation Period in which the subsequent premium is received by
Providentmutual in the same manner, unless the allocation percentages are
changed. Premiums will be allocated in accordance with the allocation schedule
in effect at the time the premium payment is received.
For contracts sold to residents of states where the amount of the premium
returned during the "Free-Look Period" as described above reflects the
investment performance of the Variable Account, (i.e., Arizona, Minnesota and
Pennsylvania) the portion of the initial Net Premium for such Contract which is
to be allocated to the Variable Account will not automatically be allocated to
the Money Market Subaccount for the 15-day period but instead will be credited
to the chosen Subaccounts of the Variable Account within 2 or 5 business days
of receipt of such premium.
The values of the Subaccounts of the Variable Account will vary with the
investment experience of the Subaccounts, and the Owner bears the entire
investment risk. Owners should periodically review their allocation schedule
for premiums in light of market conditions and the Owner's overall financial
objectives.
VARIABLE ACCOUNT VALUE
The Variable Account Value will reflect the investment experience of the
chosen Subaccounts of the Variable Account, any premiums paid, any withdrawals,
any surrenders, any transfers, and any charges assessed in connection with the
Contract. There is no guaranteed minimum Variable Account Value, and, because a
Contract's Variable Account Value on any future date depends upon a number of
variables, it cannot be predetermined.
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<PAGE>
Calculation of Variable Account Value. The Variable Account Value is
determined on each Valuation Date. The value will be the aggregate of the
values attributable to the Contract in each of the Subaccounts, determined for
each Subaccount by multiplying the Subaccount's Unit Value on the relevant
Valuation Date by the number of Subaccount units allocated to the Contract.
Determination of Number of Units. Any amounts allocated to the Subaccounts
will be converted into units of the Subaccount. The number of units to be
credited to the Contract is determined by dividing the dollar amount being
allocated to the Subaccount by the Unit Value for that Subaccount at the end of
the Valuation Period during which the amount was allocated. The number of units
in any Subaccount will be increased at the end of the Valuation Period by any
premiums allocated to the Subaccount during the current Valuation Period and by
any transfers to the Subaccount from another Subaccount or from the Guaranteed
Account during the current Valuation Period. The number of units in any
Subaccount will be decreased at the end of the Valuation Period by any amounts
transferred from the Subaccount to another Subaccount or the Guaranteed Account
during the current Valuation Period and any surrender charge upon a withdrawal
or surrender and the Annual Administration Fee assessed in connection with the
Contract during the current Valuation Period.
Determination of Unit Value. The Unit Value for each Subaccount's first
Valuation Period is set at $50. The Unit Value for a Subaccount is calculated
for each subsequent Valuation Period by multiplying the Unit Value at the end
of the immediately preceding Valuation Period by the Net Investment Factor for
the Valuation Period for which the value is being determined.
Net Investment Factor. The Net Investment Factor is an index that measures
the investment performance of a Subaccount from one Valuation Period to the
next. Each Subaccount has its own Net Investment Factor, which may be greater
or less than one. The Net Investment Factor for each Subaccount for a Valuation
Period equals 1 plus the fraction obtained by dividing (a) by (b) where:
(a) is the net result of:
1. the investment income, dividends, and capital gains, realized or
unrealized, credited during the current Valuation Period; plus
2. any amount credited or released from reserves for taxes
attributable to the operation of the Subaccount; minus
3. the capital losses, realized or unrealized, charged during the
current Valuation Period; minus
4. any amount charged for taxes or any amount set aside during the
Valuation Period as a reserve for taxes attributable to the
operation or maintenance of the Subaccount; minus
5. the amount charged for mortality and expense risk for that
Valuation Period; minus
6. the amount charged for administration for that Valuation Period;
and
(b) is the value of the assets in the Subaccount at the end of the
preceding Valuation Period, adjusted for allocations and transfers to and
withdrawals and transfers from the Subaccount occurring during that
preceding Valuation Period.
TRANSFER PRIVILEGE
Before the Maturity Date, an Owner may transfer all or a part of an amount in
the Subaccount(s) to another Subaccount(s) or to the Guaranteed Account, or
transfer a part of an amount in the Guaranteed Account to the Subaccount(s),
subject to these general restrictions and the additional restrictions below.
The minimum transfer amount must be the lesser of $500 or the entire amount in
that Subaccount or the Guaranteed Account. A transfer request that would reduce
the amount in a Subaccount or the Guaranteed Account below $500 will be treated
as a transfer request for the entire amount in that Subaccount or the
Guaranteed Account.
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<PAGE>
The transfer will be made on the day Written Notice requesting such transfer
is received by Providentmutual. There is no limit on the number of transfers
which can be made between Subaccounts or to the Guaranteed Account. However,
only one transfer may be made from the Guaranteed Account each Contract Year
(See "Transfers from Guaranteed Account", Page 21). The first twelve transfers
during each Contract Year are free. Any unused free transfers do not carry over
to the next Contract Year. A $25 Transfer Processing Fee will be assessed for
the thirteenth and subsequent transfers during a Contract Year. For the purpose
of assessing the fee, each written request is considered to be one transfer,
regardless of the number of Subaccounts or the Guaranteed Account affected by
the transfer. The processing fee will be deducted from the amount being
transferred.
Telephone Transfers. Transfers will be made based upon instructions given by
telephone, provided the appropriate election has been made at the time of
application or proper authorization is provided to Providentmutual.
Providentmutual reserves the right to suspend telephone transfer privileges at
any time, for any class of Contracts, for any reason.
Providentmutual will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine and if it follows such
procedures it will not be liable for any losses due to unauthorized or
fraudulent instructions. Providentmutual, however, may be liable for such
losses if it does not follow those reasonable procedures. The procedures
Providentmutual will follow for telephone transfers include requiring some form
of personal identification prior to acting on instructions received by
telephone, providing written confirmation of the transaction and making a tape-
recording of the instructions given by telephone.
Dollar Cost Averaging. Dollar Cost Averaging is a program which, if elected,
enables the Owner of a Contract to systematically and automatically transfer,
on a monthly basis, specified dollar amounts from the Money Market Subaccount
to the Contract's other Subaccounts. By allocating on a regularly scheduled
basis as opposed to allocating the total amount at one particular time, an
Owner may be less susceptible to the impact of market fluctuations.
Providentmutual, however, makes no guarantee that Dollar Cost Averaging will
result in a profit or protect against loss.
Dollar Cost Averaging may be elected for a period from 6 to 36 months. To
qualify for Dollar Cost Averaging, the following minimum amount must be
allocated to the Money Market Subaccount: 6 months--$3,000; 12 months--$6,000;
24 months--$12,000; 36 months--$18,000. At least $500 must be transferred from
the Money Market Subaccount each month. The amount required to be allocated to
the Money Market Subaccount can be made an initial or subsequent investment or
by transferring amounts into the Money Market Subaccount from the other
Subaccounts or from the Guaranteed Account (which may be subject to certain
restrictions) (See. "Transfers from Guaranteed Account," Page 21.)
Election into this program may occur at the time of application by completing
the authorization on the application or at any time after the Contract is
issued by properly completing the election form and returning it to the Company
by the beginning of the month and ensuring that the required minimum amount is
in the Money Market Subaccount, Dollar Cost Averaging transfers may not
commence until the later of (a) 30 days after the Contract Date and (b) five
days after the end of the free look period.
Once elected, transfers from the Money Market Subaccount will be processed
monthly until the number of designated transfers have been completed, or the
value of the Money Market Subaccount is completely depleted, or the Owner
instructs Providentmutual in writing to cancel the monthly transfers.
Transfers made under the Dollar Cost Averaging program will not count toward
the twelve transfers permitted each Contract Year without imposing the Transfer
Charge. Providentmutual reserves the right to discontinue offering automatic
transfers upon 30 days' written notice to the Owner.
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<PAGE>
WITHDRAWALS AND SURRENDER
Withdrawals. At any time before the earlier of the death of the Annuitant or
the Maturity Date, an Owner may withdraw part of the Cash Surrender Value. The
minimum amount which may be withdrawn is $500; the maximum amount is that which
would leave a cash surrender value of less than $2,000. A withdrawal request
which would reduce the amount in a Subaccount or in the Guaranteed Account
below $500 will be treated as a request for full withdrawal of the amount in
that Subaccount or the Guaranteed Account. Providentmutual will withdraw the
amount requested from the Contract Account Value on the day Written Notice for
the withdrawal is received at its Home Office. Any applicable Surrender Charge
will be deducted from the remaining Contract Account Value. (See "Surrender
Charge," Page 21.)
The Owner may specify the amount to be withdrawn from certain Subaccounts or
the Guaranteed Account for the withdrawal. If the Owner does not so specify or
the amount in the designated Subaccounts or Guaranteed Account is inadequate to
comply with the request, the withdrawal will be made from each Subaccount and
the Guaranteed Account based on the proportion that the value is such account
bears to the Contract Account Value immediately prior to the withdrawal.
A withdrawal may have adverse Federal income tax consequences. (See "Taxation
of Annuities," Page 27.)
Systematic Withdrawals. The Systematic Withdrawal Plan enables the Owner of a
Contract to pre-authorize a periodic exercise of the withdrawal right described
in the Contract. The Owner may elect the plan at the time of application by
completing the authorization on the application form and making a minimum
initial premium payment of $15,000 or by properly completing the election form
after a Contract is issued if it has a Contract Account Value of $15,000.
Certain Federal income tax consequences may apply to systematic withdrawals
from the Contract and the Owner should, therefore, consult with his or her tax
advisor before requesting any Systematic Withdrawal Plan.
Contract Owners entering into the plan instruct Providentmutual to withdraw a
level dollar amount from the Contract on a monthly or quarterly basis. The
minimum, distribution requested must be for at least $100 monthly or at least
$300 quarterly. The maximum amount which can be withdrawn under the plan each
year is 10% of the Contract Account Value as of the beginning of the Contract
Year in which the plan is elected or 10% of the initial premium paid if elected
at the time of application. Providentmutual will notify the Owner of the total
amount to be withdrawn in a subsequent Contract Year will exceed 10% of the
Contract Account Value as of the beginning of such Contract Year. Unless the
Owner instructs Providentmutual to reduce the withdrawal amount for that year
so that it does not exceed the 10% limit, Providentmutual will continue to
process withdrawals for the designated amount. Once the amount of the
withdrawals exceeds the 10% limit, Providentmutual will deduct the applicable
Surrender Charge from the remaining payments made during that Contract Year.
(See "Surrender Charge," Page 21.)
Providentmutual will pay the Owner the amount requested each month or quarter
and cancel units equal to the amount withdrawn from the Subaccounts and the
Guaranteed Account based on the proportion that the value in such Subaccount or
Guaranteed Account bears to the Contract Account Value immediately prior to the
withdrawal. In the event that the amount to be withdrawn exceeds the
Subaccount's Value, Providentmutual will process the withdrawal for the amount
available and will contact the Owner for further instructions.
Each payment under the Systematic Withdrawal Plan of less than 10% of the
Contract Account Value as of the beginning of such Contact Year is not subject
to a Surrender Charge. However, notwithstanding the rules ordinarily governing
the imposition of a Surrender Charge (See "Surrender Charge," Page 21), any
other withdrawal in a year when the Systematic Withdrawal Plan has been
utilized will be subject to the Surrender Charge. If an additional withdrawal
is made from a Contract participating in the plan, systematic withdrawals will
automatically terminate and may only be reinstated on or after the beginning of
the next Contract Year pursuant to a new request.
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<PAGE>
Systematic withdrawals may be discontinued by the Owner at any time upon
written request to Providentmutual. Providentmutual reserves the right to
discontinue offering systematic withdrawals upon 30 days' written notice to
Owners.
Surrender. At any time before the earlier of the death of the Annuitant or
the Maturity Date, the Owner may request a surrender of the Contract for its
Cash Surrender Value (Contract Account Value less any applicable Surrender
Charge). The proceeds paid to the Contract Owner will equal the amount of the
surrender less the Surrender Charge and any withholding or premium taxes. (See
"Surrender Charge," Page 21.) The Cash Surrender Value will be determined on
the date Written Notice of Surrender and the Contract are received at
Providentmutual's Home Office. The Cash Surrender Value will be paid in a lump
sum unless the Owner requests payment under a Payment Option. A surrender may
have adverse Federal income tax consequences. (See "Taxation of Annuities."
Page 27.)
Restrictions on Distributions from Certain Contracts. There are certain
restrictions on surrenders of and withdrawals from Contracts used as funding
vehicles for Internal Revenue Code 403(b) retirement plans. Section 403(b)(11)
of the Internal Revenue Code of 1986, as amended, restricts the distribution
under Section 403(b) annuity contracts of: (i) elective contributions made in
years beginning after December 31, 1988; (ii) earnings on those contributions;
and (iii) earnings in such years on amounts held as of the last year beginning
before January 1, 1989. Distributions of those amounts may only occur upon the
death of the employee, attainment of age 59 1/2, separation from service,
disability, or financial hardship. In addition, income attributable to elective
contributions may not be distributed in the case of hardship.
Contract Termination. Providentmutual may end this Contract and pay the Cash
Surrender Value to the Owner if, before the Maturity Date, all of these events
simultaneously exist;
1. no premiums have been paid for at least two years;
2. the Contract Account Value is less than $2,000; and
3. the total premiums paid, less any partial withdrawals, is less than
$2,000.
Providentmutual will mail the Owner a notice of its intention to end the
Contract at least six months in advance. The Contract will automatically
terminate on the date specified in the notice, unless Providentmutual receives
an additional premium payment before the termination date specified in the
notice. This additional premium payment must be for at least the required
minimum amount. (Termination of the Contract under this provision is not
permitted in New Jersey.)
DEATH BENEFIT BEFORE MATURITY DATE
Death of Annuitant. If the Annuitant dies before the Maturity Date,
Providentmutual will pay the death benefit under the Contract to the
Beneficiary. During the first six Contract Years, the death benefit is equal to
the greater of: the premiums paid, less any withdrawals (including applicable
surrender charges); or the Contract Account Value on the date Providentmutual
receives due proof of Annuitant's death. After the end of the sixth Contract
Year, the death benefit is equal to the greatest of:
1. the Contract Account Value as of the end of the sixth Contract Year
less subsequent amounts withdrawn; or
2. the Contract Account Value on the date Providentmutual receives due
proof of the Annuitant's death; or
3. the premiums paid, less any withdrawals (including applicable
Surrender Charges).
There is no death benefit payable if the Annuitant dies after the Maturity
Date. The proceeds will be paid to the Beneficiary in a lump sum unless the
Owner or Beneficiary elects a Payment Option. If the Annuitant is the Owner,
the proceeds must be distributed in accordance with the rules set forth below
in "Death of Owner" for the death of an Owner before the Maturity Date.
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Death of Owner. If an Owner dies before the Maturity Date, Federal tax law
requires (for a Non-Qualified Contract) that the Contract Account Value (or if
the Owner is the Annuitant, the proceeds payable upon the Annuitant's death) be
distributed to the Beneficiary within five years after the date of the Owner's
death. If an Owner dies on or after the Maturity Date, any remaining payments
must be distributed at least as rapidly as under the Payment Option in effect
on the date of such Owner's death.
These distribution requirements will be considered satisfied as to any
portion of the proceeds payable to or for the benefit of a designated
Beneficiary, and which is distributed over the life (or a period not exceeding
the life expectancy) of that Beneficiary, provided that such distributions
begin within one year of the Owner's death. However, if the Owner's spouse is
the designated Beneficiary, the Contract may be continued with such surviving
spouse as the new Owner. If the Contract has joint owners, the surviving joint
owner will be the designated Beneficiary. Joint owners must be husband and wife
as of the Contract Date.
If the Owner is not an individual, the Annuitant, as determined in accordance
with Section 72(s) of the Internal Revenue Code, will be treated as Owner for
purposes of these distribution requirements, and any changes in the Annuitant
will be treated as the death of the Owner.
Other rules may apply to a Qualified Contract.
PROCEEDS ON MATURITY DATE
The maturity Date is selected by the Owner, subject to Providentmutual's
approval and state law.
On the Maturity Date, the proceeds will be applied under the Life Annuity
with Ten Year Certain Payment Option, unless the Owner chooses to have the
proceeds paid under another Payment Option or in a lump sum. If a Payment
Option is elected, the amount which will be applied is the Contract Account
Value; if a lump sum payment is chosen, the amount paid will be the Cash
Surrender Value on the Maturity Date.
The Maturity Date may be changed subject to these limitations: the Owner's
Written Notice must be received at the Home Office at least 30 days before the
current Maturity Date; the requested Maturity Date must be a date that is at
least 30 days after receipt of the Written Notice; and the requested Maturity
Date must be not later than the first day of the month after the Annuitant's
90th birthday, or any earlier date required by law.
PAYMENTS
Any withdrawal, Cash Surrender Value, or death benefit will usually be paid
within seven days of receipt of written request or receipt and filing of due
proof of death. However, payments may be postponed if:
1. the New York Stock Exchange is closed, other than customary weekend and
holiday closings, or trading on the exchange is restricted as determined
by the SEC; or
2. the SEC permits by an order the postponement for the protection of
policyowners; or
3. the SEC determines that an emergency exists that would make the disposal
of securities held in the Variable Account or the determination of the
value of the Variable Account's net assets not reasonably practicable.
If a recent check or draft has been submitted, Providentmutual has the right
to defer payment until such check or draft has been honored.
Providentmutual has the right to defer payment of any withdrawal, cash
surrender, or transfer from the Guaranteed Account for up to six months from
the date of receipt of Written Notice for a withdrawal, surrender, or transfer.
If payment is not made within 30 days after receipt of documentation necessary
to complete the transaction, or such shorter period required by a particular
jurisdiction, interest will be added to the amount paid from the date of
receipt of documentation at 3% or such higher rate required for a particular
state.
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SPECIAL EXCHANGE PROGRAM
The owner of a variable annuity contract issued by Providentmutual between
June 1, 1993 and the date the Contract becomes available in the applicable
state (the "Other Variable Annuity Contract"), may exchange the Other Variable
Annuity Contract for the Contract described in this prospectus under the terms
described below.
1. The application for the new Contract must be received by Providentmutual
at its Home Office within 60 days of the date the Contract becomes
available in the applicable state.
2. The "Contract Date" for the new Contact will be the "Issue Date" of the
Other Variable Annuity Contract.
3. The exchange will be made without imposition of the surrender charge
applicable to the Other Variable Annuity Contract. The contract account
value for the Other Variable Annuity Contract will become the Contract
Account Value for the new Contact and will be applied to the Contract as
is (i.e., without reallocations or changes until after the Contract has
been issued).
4. The Surrender Charge period for the Contract will begin on its Contract
Date (the Issue Date of the Other Variable Annuity Contract).
5. The amount of the premium subject to the Surrender Charge will be the
premium(s) paid for the Other Variable Annuity Contract.
6. No additional premium tax will be deducted at the time the Contract is
issued. After the issuance of the Contract, the amount of the premium
tax due will be based upon the premium(s) paid under the Other Variable
Annuity Contract.
7. The Annual Administration Fee will not be deducted upon surrender of the
Other Variable Annuity Contract but on the Contract Anniversary (the
yearly anniversary of the Issue Date of the Other Variable Annuity
Contract).
8. Any other charges under the Contract will only be deducted beginning
from the date the Contract is issued.
Summary Comparison of the Contract to the Other Variable Annuity
Contract. The Mortality and Expense Risk Charge for the Contract is 1.25% while
the Charge for Other Variable Annuity Contract is currently 1.20%, subject to a
maximum of 1.25%. In addition, the Contract includes an Asset-based
Administration Charge of 0.15%. However, the Contract also includes additional
investment options and other features not available with the Other Variable
Annuity Contract. The Contract has 16 Subaccounts available for investment
while the Other Variable Annuity Contract has six. The Contract has Dollar Cost
Averaging and Systematic Withdrawals as added features. Twelve transfers under
the Contract may be made in each Contract Year without the imposition of a
Transfer Charge compared to four under the Other Variable Annuity Contract.
Finally, in addition to the death benefit paid upon the Annuitant's death
provided in the Other Variable Annuity Contract, the Contract provides a change
in the death benefit if the Annuitant dies after the sixth Contract Year (See
"Death Benefit Before Maturity Date," Page 17.).
Tax Considerations. Providentmutual believes that an exchange of an Other
Variable Annuity Contract for a Contract generally should be treated as a
nontaxable exchange of annuity contracts within the meaning of Section 1035 of
the Internal Revenue Code of 1986, as amended. The Contract received in the
exchange will, however, generally be treated as a newly issued annuity contract
as of the date of the exchange. Accordingly, Other Variable Annuity Contract
owners should consult counsel or other competent tax advisors before effecting
an exchange to determine whether there are any tax consequences resulting from
the Contract being treated as issued on the date of the exchange (e.g., loss of
grandfathering or aggregation with other annuity contracts issued during the
same calendar year as the exchange).
MODIFICATION
Upon notice to the Owner, Providentmutual may modify the Contract, but only
if such modification:
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1. is necessary to make the Contract or the Variable Account comply with
any law or regulation issued by a governmental agency to which
Providentmutual is subject; or
2. is necessary to assure continued qualification of the Contract under the
Internal Revenue Code or other Federal or state laws relating to
retirement annuities or variable annuity contracts; or
3. is necessary to reflect a change in the operation of the Variable
Account; or
4. provides additional Variable Account and/or fixed accumulation options.
In the event of any such modifications, Providentmutual will make appropriate
endorsement to the Contract.
REPORTS TO CONTRACT OWNERS
At least annually, Providentmutual will mail to each Contract Owner, at such
Owner's last known address of record, a report containing the Contract Account
Value and Cash Surrender Value of the Contract and any further information
required by and applicable law or regulation. The information will be as of a
date not more than two months prior to the date of mailing.
CONTRACT INQUIRIES
Inquiries regarding a Contract may be made by writing to Providentmutual at
its Home Office, 300 Continental Drive, Newark, Delaware 19713.
THE GUARANTEED ACCOUNT
An Owner may allocate some or all of the Net Premiums and transfer some or
all of the Contract Account Value to the Guaranteed Account, which is part of
Providentmutual's General Account and pays interest at declared rates
guaranteed for each calendar year (subject to a minimum guaranteed interest
rate of 3%). The principal, after deductions, is also guaranteed.
Providentmutual'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 Providentmutual's General Account has been registered as
an investment company under the Investment Company Act of 1940. Therefore,
neither Providentmutual'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 Federal securities laws relating to the accuracy and completeness
of statements made in prospectuses.
The portion of the Contract Account Value allocated to the Guaranteed Account
will be credited with rates of interest, as described below. Since the
Guaranteed Account is part of Providentmutual's General Account,
Providentmutual assumes the risk of investment gain or loss on this amount. All
assets in the General Account are subject to Providentmutual'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 3%. Providentmutual intends to credit the
Guaranteed Account Value with current rates in excess of the minimum 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 Providentmutual, 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
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<PAGE>
calendar year in which such amount is received or transferred. At the end of
the calendar year, Providentmutual will determine a new current interest rate
on such amount and accrued interest thereon (which may be a different current
interest rate from 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 3% per year will be
determined in the sole discretion of Providentmutual. The Owner assumes the
risk that interest credited may not exceed the guaranteed minimum rate.
Amounts deducted from the Guaranteed Account for the administration fee,
withdrawals, transfers to the Subaccounts, or other charges are currently, for
the purpose of crediting interest, accounted for on a last-in, first-out
("LIFO") method.
Providentmutual 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 3% 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.
TRANSFERS FROM GUARANTEED ACCOUNT
Within 30 days prior to or following any contract Anniversary, one transfer
is allowed from the Guaranteed Account to any or all of the Subaccounts. The
amount transferred from the Guaranteed Account may not exceed 25% of the
guaranteed Account Value on the date of transfer, unless the balance after the
transfer is less than $500 in which case the entire amount will be transferred.
If the written request for such transfer is received prior to the Contract
Anniversary, the transfer will be made as of the Contract Anniversary; if the
written request is received after the Contract Anniversary, the transfer will
be made as of the date Providentmutual receives the written request at its Home
Office.
PAYMENT DEFERRAL
Providentmutual has the right to defer payment of any withdrawal, cash
surrender, or transfer from the Guaranteed Account for up to six months from
the date of receipt of the Written Notice for withdrawal, surrender, or
transfer.
CHARGES AND DEDUCTIONS
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE)
General. No charge for sales expense is deducted from premiums at the time
premiums are paid. However, within certain time limits described below, a
Surrender Charge (contingent deferred sales charge) is deducted from the
Contract Account Value if a withdrawal is made or a Contract is surrendered
before annuity payments begin. In the event surrender charges are not
sufficient to cover sales expenses, the loss will be borne by Providentmutual;
conversely, if the amount of such charges proves more than enough, the excess
will be retained by Providentmutual. Providentmutual does not currently believe
that the surrender charges imposed will cover the expected costs of
distributing the Contracts. Any shortfall will be made up from
Providentmutual's general assets which may include amounts derived from the
Mortality and Expense Risk Charge.
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<PAGE>
Charges for Withdrawals or Surrender. If a withdrawal is made or a Contract
is surrendered, the applicable Surrender Charge will be as follows:
<TABLE>
<CAPTION>
CONTRACT YEAR IN WHICH CHARGES AS PERCENTAGE OF
WITHDRAWAL OR AMOUNT
SURRENDER OCCURS WITHDRAWN OR SURRENDERED
---------------------- ------------------------
<S> <C>
1 6%
2 5
3 4
4 3
5 2
6 1
7 and after 0
</TABLE>
No Surrender Charge is deducted if the withdrawal or surrender occurs after
six full Contract Years. In addition, no Surrender Charge is deducted on the
Maturity Date if the Contract proceeds are applied under a Payment Option.
In no event will the total Surrender Charges assessed under a Contract exceed
8 1/2% of the total gross premiums paid under that contract.
If the Contract is being surrendered, the Surrender Charge is deducted from
the Contract Account Value in determining the Cash Surrender Value. For a
withdrawal, the Surrender Charge is deducted from the Contract Account Value
remaining after the amount requested is withdrawn.
Amounts Not Subject to Surrender Charge. Subject to certain restrictions, up
to 10% of the Contract Account Value as of the beginning of a Contract Year may
be withdrawn or surrendered in that Contract Year without a Surrender Charge.
Specifically, after the first Contract Year, the otherwise applicable Surrender
Charge will not be applied to the first and second withdrawals during a
Contract Year to the extent that the amount withdrawn is not in excess of 10%
of the Contract Account Value as of the beginning of such Contract Year. During
the first Contract Year, the full amount of all withdrawals (and any surrender)
will be subject to the Surrender Charge.
After the first Contract Year, any amounts withdrawn in excess of 10% or
subsequent to the second withdrawal in a Contract Year will be assessed a
Surrender Charge. This right is not cumulative from Contract Year to Contract
Year. If the Contract is surrendered and there have been no prior withdrawals
during such Contract Year, no Surrender Charge will apply to the amount of the
surrender up to 10% of the Contract Account Value as of the beginning of that
Contract Year. If a surrender is made during a Contract Year in which one or
more withdrawals have been made, the Contract Owner may surrender free of
charge an amount equal to 10% of the Contract Account Value as of the beginning
of the Contract Year less the total amount previously withdrawn during such
Contract Year without imposition of the Surrender Charge. In the event that a
surrender is made in excess of the amount which may be surrendered free of
charge, only the excess amount will be subject to the Surrender Charge.
ADMINISTRATIVE CHARGES
Annual Administration Fee. On each Contract Anniversary prior to and
including the Maturity Date, and upon surrender of the Contract or on the
Maturity Date (other than on a Contract Anniversary), Providentmutual deducts
from the Contract Account Value an Annual Administration Fee of $30 to
reimburse it for administrative expenses relating to the Contract. The charge
will be deducted from each Subaccount and the Guaranteed Account based on the
proportion that the value in each such account bears to the total Contract
Account Value. (In some states such as Washington and South Carolina, the
charge can only be deducted from the Guaranteed Account to the extent of
premiums allocated to such account during the Contract Year plus the amount of
interest in excess of the guaranteed minimum which is credited to the
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account for the Contract Year. The portion of the charge which is allocable to
the Guaranteed Account but cannot be deducted from such account due to this
limitation will be deducted proportionally from the Subaccounts.)
Providentmutual does not expect to make a profit on this fee. No Annual
Administration Fee is payable during the annuity period.
Asset-Based Administration Charge. To compensate Providentmutual for costs
associated with administration of the Contracts, prior to the Maturity Date
Providentmutual deducts a daily asset-based administration charge from the
assets of the Variable Account equal to an annual rate of .15%. Providentmutual
does not expect to make a profit from this charge.
The Contracts are administered by PMLIC pursuant to a Service Agreement
between Providentmutual and PMLIC. Under the agreement, PMLIC also maintains
records of transactions relating to the Contracts and provides other services.
TRANSFER PROCESSING FEE
The first twelve transfers during each Contract Year are free. A $25 Transfer
Processing Fee will be assessed for each additional transfer during such
Contract Year. For the purpose of assessing the fee, each Written Notice of
transfer is considered to be one transfer, regardless of the number of
Subaccounts or accounts affected by the transfer. The processing fee will be
deducted from the amount being transferred. Providentmutual does not expect a
profit from this fee.
MORTALITY AND EXPENSE RISK CHARGE
To compensate Providentmutual for assuming mortality and expense risks, prior
to the Maturity Date Providentmutual deducts a daily Mortality and Expense Risk
Charge from the assets of the Variable Account. Providentmutual will impose a
charge in an amount that is equal to an annual rate of 1.25% (daily rate of
.00342466%) (approximately 0.70% for mortality risk and 0.55% for expense
risk).
The mortality risk Providentmutual assumes is that Annuitants may live for a
longer period of time than estimated when the guarantees in the contract were
established. Because of these guarantees, each Payee is assured that longevity
will not have an adverse effect on the annuity payments received. The mortality
risk Providentmutual assumes also includes a guarantee to pay a death benefit
if the Annuitant dies before the Maturity Date. The expense risk
Providentmutual assumes is the risk that the surrender charges, administration
fees, and transfer fees may be insufficient to cover actual future expenses.
If the Mortality and Expense Risk Charge is insufficient to cover the actual
cost of the mortality and expense risks undertaken by Providentmutual,
Providentmutual will bear the loss. Conversely, if the charge proves more than
sufficient, the excess will be profit to Providentmutual and will be available
for any proper corporate purpose including, among other things, payment of
sales expenses.
OTHER CHARGES INCLUDING INVESTMENT ADVISORY FEES OF THE FUNDS
Because the Variable Account purchases shares of the Funds, the net assets of
each Subaccount of the Variable Account will reflect the investment advisory
fees and operating expense incurred by the Funds. For each Portfolio, an
investment advisor is paid a daily fee by the Funds for its investment advisory
services. Each advisory fee is a percentage of a Portfolio's average daily net
assets, and thus the actual fee paid depends on the Portfolio and the assets of
such Portfolio. Each Portfolio of the Funds is also responsible for its
operating expenses. See the accompanying current Prospectuses for the Funds for
further details.
PREMIUM TAXES
Various states and other governmental entities levy a premium tax, currently
ranging up to 3.5%, on annuity contracts issued by insurance companies. Premium
tax rates are subject to change from time to time
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by legislative and other governmental action. In addition, other governmental
units within a state may levy such taxes.
The timing of tax levies varies from one taxing authority to another. If
premium taxes are applicable to a Contract, they will be deducted, depending on
when such taxes are paid to the taxing authority, either (a) from premiums as
they are received, or (b) from the Contract proceeds upon (i) a withdrawal from
or surrender of the Contract or (ii) application of the proceeds to a Payment
Option.
OTHER TAXES
Currently, no charge will be made against the Variable Account for Federal
income taxes. Providentmutual may, however, make such a charge in the future if
income or gains within the Variable Account will result in any Federal income
tax liability to Providentmutual. Charges for other taxes attributable to the
Variable Account, if any, may also be made.
PAYMENT OPTIONS
The Contract ends on the Maturity Date, at which time the Contract Account
Value will be applied under a Payment Option, unless the Owner elects to
receive the Cash Surrender Value in a single sum. If an election of a Payment
Option has not been filed at Providentmutual's Home Office on the Maturity
Date, the proceeds will be paid as a life annuity with payments for ten years
guaranteed. Prior to the Maturity Date, the Owner can have the Cash Surrender
Value applied under a Payment Option, or a Beneficiary can have the death
benefit applied under a Payment Option. Any premium tax applicable will be
deducted from the Cash Surrender Value or the Contract Account Value at the
time payments commence. The Contract must be surrendered so that the applicable
amount can be paid in a lump sum or a supplemental contract for the applicable
Payment Option can be issued.
The Payment Options available are described below. The term "Payee" means a
person who is entitled to receive payment under that option. The Payment
Options are fixed, which means that each option has a fixed and guaranteed
amount to be paid during the annuity period that is not in any way dependent
upon the investment experience of the Variable Account.
ELECTION OF OPTIONS
An option may be elected, revoked, or changed at any time before the Maturity
Date while the Annuitant is living. If the Payee is other than the Owner, the
election of a Payment Option requires the consent of Providentmutual. If an
election is not in effect at the Annuitant's death or if payment is to be made
in one sum under an existing election, the Beneficiary may elect one of the
options after the death of the Annuitant.
An election of option and any revocation or change must be made by Written
Notice. It must be filed with the Home Office.
An option may not be elected if any periodic payment under the election would
be less than $50. Subject to this condition, payments may be made annually,
semi-annually, quarterly, or monthly and are made at the beginning of such
period.
DESCRIPTION OF OPTIONS
Option A--Life Annuity Option. To have the proceeds paid in equal amounts
each month during the Payee's lifetime with payments ceasing with the last
payment prior to the death of the Payee. No amounts are payable after the Payee
dies. Therefore, if the Payee dies immediately following the date of the first
payment, the Payee will receive one monthly payment only.
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Option B--Life Annuity Option with 10 Years Guaranteed. To have the proceeds
paid in equal amounts each month during the Payee's lifetime with the guarantee
that payments will be made for a period of not less than ten years. Under this
option, if any Beneficiary dies while receiving payment, the present value of
the current dollar amount on the date of death of any remaining guaranteed
payments will be paid in one sum to the executors or administrators of the
Beneficiary unless otherwise provided in writing. Calculation of such present
value shall be at 3% which is the rate of interest assumed in computing the
amount of annuity payments.
The amount of each payment will be determined from the Tables in the Contract
which apply to the particular option using the Payee's age and sex. If the
Contract is sold in a group or employer-sponsored arrangement, the amount of
the payments will be based on the Payee's age, only. Age will be determined
from the nearest birthday at the due date of the first payment.
Alternate Income Option. In lieu of one of the above options, the Contract
Account Value, Cash Surrender Value or death benefit, as applicable, may be
settled under an Alternate Income Option based on Providentmutual's single
premium immediate annuity rates in effect at the time of settlement. Such rates
will be adjusted to a due basis. The first payment will be made immediately (at
the beginning of the first month, rather than at the end of the month) which
will result in receiving one additional payment. The income will be increased
by 4%. In no case will the income be less than that which would be payable if
the amount were used to purchase a single premium immediate annuity adjusted to
a due basis.
YIELDS AND TOTAL RETURNS
From time to time, Providentmutual may advertise or include in sales
literature yields, effective yields, and total returns for the Subaccounts.
THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND DO NOT INDICATE OR PROJECT
FUTURE PERFORMANCE. Each Subaccount may, from time to time, advertise or
include in sales literature performance relative to certain performance
rankings and indices compiled by independent organizations. More detailed
information as to the calculation of performance information, as well as
comparisons with unmanaged market indices, appears in the Statement of
Additional Information.
Effective yields and total returns for the Subaccounts are based on the
investment performance of the corresponding Portfolio of the Funds. The Funds'
performance in part reflects the Funds' expenses. See the Prospectuses for the
Funds.
The yield of the Money Market Subaccount refers to the annualized income
generated by an investment in the Subaccount over a specified seven-day period.
The yield is calculated by assuming that the income generated for that seven-
day period is generated each seven-day period over a 52-week period and is
shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment in the
Subaccount is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment.
The yield of a Subaccount (except the Money Market Subaccount) refers to the
annualized income generated by an investment in the Subaccount over a specified
30-day or one-month period. The yield is calculated by assuming that the income
generated by the investment during that 30-day or one-month period is generated
each period over a 12-month period and is shown as a percentage of the
investment.
The total return of a Subaccount refers to return quotations assuming an
investment under a Contract has been held in the Subaccount for various periods
of time including, but not limited to, a period measured from the date the
Subaccount commenced operations. When a Subaccount has been in operation for
one, five, and ten years, respectively, the total return for these periods will
be provided. For periods prior to the date the Variable Account commenced
operations, performance information for Contracts funded by the Subaccounts
will be calculated based on the performance of the Funds' Portfolios and the
assumption that
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the Subaccounts were in existence for the same periods as those indicated for
the Funds' Portfolios, with the level of Contract charges that were in effect
at the inception of the Subaccounts for the Contracts.
The average annual total return quotations represent the average annual
compounded rates of return that would equate an initial investment of $1,000
under a Contract to the redemption value of that investment as of the last day
of each of the periods for which total return quotations are provided. Average
annual total return information shows the average percentage change in the
value of an investment in the Subaccount from the beginning date of the
measuring period to the end of that period. This standardized version of
average annual total return reflects all historical investment results, less
all charges and deductions applied against the Subaccount (including any
surrender charge that would apply if an Owner terminated the Contract at the
end of each period indicated, but excluding any deductions for premium taxes).
In addition to the standard version described above, total return performance
information computed on two different non-standard bases may be used in
advertisements. Average total return information may be presented, computed on
the same basis as described above, except deductions will not include the
Surrender Charge. In addition, Providentmutual may from time to time disclose
average annual total return in non-standard formats and cumulative total return
for Contracts funded by the Subaccounts.
Providentmutual may, from time to time, also disclose yield, standard total
returns, and non-standard total returns for the Portfolios of the Funds,
including such disclosure for periods prior to the date the Variable Account
commenced operations.
Non-standard performance data will only be disclosed if the standard
performance data for the required periods is also disclosed. For additional
information regarding the calculation of other performance data, please refer
to the Statement of Additional Information.
In advertising and sales literature, the performance of each Subaccount may
be compared to the performance of other variable annuity issuers in general or
to the performance of particular types of variable annuities investing in
mutual funds, or investment series of mutual funds with investment objectives
similar to each of the Subaccounts. Lipper Analytical Services, Inc. ("Lipper")
and the Variable Annuity Research Data Service ("VARDS") are independent
services which monitor and rank the performance of variable annuity issuers in
each of the major categories of investment objectives on an industry-wide
basis.
Lipper's rankings include variable life insurance issuers as well as variable
annuity issuers. VARDS rankings compare only variable annuity issuers. The
performance analyses prepared by Lipper and VARDS each rank such issuers on the
basis of total return, assuming reinvestment of distributions, but do not take
sales charges, redemption fees, or certain expense deductions at the separate
account level into consideration. In addition, VARDS prepares risk adjusted
rankings, which consider the effects of market risk on total return
performance. This type of ranking provides data as to which funds provide the
highest total return within various categories of funds defined by the degree
of risk inherent in their investment objectives.
Advertising and sales literature may also compare the performance of each
Subaccount to the Standard & Poor's Index of 500 Common Stocks, a widely used
measure of stock performance. This unmanaged index assumes the reinvestment of
dividends but does not reflect any "deduction" for the expense of operating or
managing an investment portfolio. Other independent ranking services and
indices may also be used as a source of performance comparison.
Providentmutual may also report other information including the effect of
tax-deferred compounding on a Subaccount's investment returns, or returns in
general, which may be illustrated by tables, graphs, or charts. All income and
capital gains derived from Subaccount investments are reinvested and can lead
to substantial long-term accumulation of assets, provided that the underlying
Portfolio's investment experience is positive.
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FEDERAL TAX STATUS
THE FOLLOWING DISCUSSION IS GENERAL AND IS NOT INTENDED AS TAX ADVICE
INTRODUCTION
This discussion is not intended to address the tax consequences resulting
from all of the situations in which a person may be entitled to or may receive
a distribution under the annuity contract issued by Providentmutual. Any person
concerned about these tax implications should consult a competent tax advisor
before initiating any transaction. This discussion is based upon
Providentmutual's understanding of the present Federal income tax laws, as they
are currently interpreted by the Internal Revenue Service. No representation is
made as to the likelihood of the continuation of the present Federal income tax
laws or of the current interpretation by the Internal Revenue Service,
Moreover, no attempt has been made to consider any applicable state or other
tax laws.
The Contract may be purchased on a non-qualified basis ("Non-Qualified
Contract") or purchased and used in connection with plans qualifying for
favorable tax treatment ("Qualified Contract"). The Qualified Contract is
designed for use by individuals whose premium payments are comprised solely of
proceeds from and/or contributions under retirement plans which are intended to
qualify as plans entitled to special income tax treatment under Sections
401(a), 403(b), or 408 of the Internal Revenue Code of 1986, as amended (the
"Code"). The ultimate effect of Federal income taxes on the amounts held under
a Contract, or annuity payments, and on the economic benefit to the Owner, the
Annuitant, or the Beneficiary depends on the type of retirement plan, on the
tax and employment status of the individual concerned, and on Providentmutual's
tax status. In addition, certain requirements must be satisfied in purchasing a
Qualified Contract with proceeds from a tax-qualified plan and receiving
distributions from a Qualified Contract in order to continue receiving
favorable tax treatment. Therefore, purchasers of Qualified Contracts should
seek competent legal and tax advice regarding the suitability of a Contract for
their situation, the applicable requirements, and the tax treatment of the
rights and benefits of a Contract. The following discussion assumes that
Qualified Contracts are purchased with proceeds from and/or contributions under
retirement plans that qualify for the intended special Federal income tax
treatment.
TAX STATUS OF THE CONTRACT
Diversification Requirements. Section 817(h) of the Code provides that
separate account investments underlying a contract must be "adequately
diversified" in accordance with Treasury regulations in order for the contract
to qualify as an annuity contract under Section 72 of the Code. The Variable
Account, through each Portfolio of the Funds, intends to comply with the
diversification requirements prescribed in regulations under Section 817(h) of
the Code, which affect how the assets in the various Subaccounts may be
invested. Although Providentmutual does not have control over the Funds in
which the Variable Account invests, we believe that each Portfolio in which the
Variable Account owns shares will meet the diversification requirements and
that therefore the Contract will be treated as an annuity contact under the
Code.
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for Federal income tax purposes, of the assets of the
separate account used to support their contracts. In those circumstances,
income and gains from the separate account assets would be includable in the
variable annuity contract owner's gross income. Several years ago, the IRS
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. More recently, the Treasury Department announced, in
connection with the issuance of regulations concerning investment
diversification, that those regulations "do not provide guidance concerning the
circumstances in which investor control of the investments of a segregated
asset account may cause the investor, rather that 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."
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The ownership rights under the contract are similar to, but different in
certain resects from, those described by the Service in rulings in which it was
determined that contractowners were not owners of separate account assets. For
example, the Owner of the Contract has the choice of one or more Subaccounts in
which to allocate premiums and Contract values, and may be able to transfer
among Subaccounts more frequently than in such rulings. These differences could
result in the Owner's being treated as the owner of the assets of the Variable
Account. In addition, Providentmutual 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. Providentmutual therefore reserves the right to
modify the Contract as necessary to attempt to prevent the Owner from being
considered the owner of the assets of the Variable Account.
Required Distributions. In addition to the requirements of Section 817(h) of
the Code, in order to be treated as an annuity contract for Federal income tax
purposes, Section 72(s) of the Code requires any Non-Qualified Contract to
provide that; (a) if any Owner dies on or after the Maturity Date but prior to
the time the entire interest in the Contract has been distributed, the
remaining portion of such interest will be distributed at least as rapidly as
under the method of distribution being used as of the date of that Owner's
death; and (b) if any Owner dies prior to the annuity commencement date, the
entire interest in the Contract will be distributed within five years after the
date of the Owner's death. These requirements will be considered satisfied as
to any portion of the Owner's interest which is payable to or for the benefit
of a "designated beneficiary" and which is distributed over the life of such
Beneficiary or over a period not extending beyond the life expectancy of that
Beneficiary, provided that such distributions begin within one year of that
Owner's death. The Owner's "designated beneficiary" is the person designated by
such owner as a Beneficiary and to whom ownership of the Policy passes by
reason of death and must be a natural person. However, if the owner's
"designated beneficiary" is the surviving spouse of the Owner, the contract may
be continued with the surviving spouse as the new Owner.
The Non-Qualified Contract contain provisions which are intended to comply
with the requirements of Section 72(s) of the Code, although no regulations
interpreting these requirements have yet been issued. Providentmutual intends
to review such provisions and modify them if necessary to assure that they
comply with the requirements of Code Section 72(s) when clarified by regulation
or otherwise.
Other rules may apply to Qualified Contracts.
The following discussion assumes that the Contracts will qualify as annuity
contracts for Federal income tax purposes.
TAXATION OF ANNUITIES
In General. Section 72 of the Code governs taxation of annuities in general.
Providentmutual believes that an Owner who is a natural person generally is not
taxed on increases in the value of a Contract until distribution occurs by
withdrawing all or part of the Contract Account Value (e.g., partial
withdrawals and complete surrenders) or as annuity payments under the Payment
Option elected. For this purpose, the assignment, pledge, or agreement to
assign or pledge any portion of the Contract Account Value (and in the case of
a Qualified Contract, any portion of an interest in the qualified plan)
generally will be treated as a distribution. The taxable portion of a
distribution (in the form of a single sum payment or an annuity) is taxable as
ordinary income.
The Owner of any annuity contract who is not a natural person generally must
include in income any increase in the excess of the Contract Account Value over
the "investment in the contract" during the taxable year. There are some
exceptions to this rule, and a prospective Owner that is not a natural person
may wish to discuss these with a competent tax advisor.
The following discussion generally applies to Contracts owned by natural
persons.
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Withdrawals. In the case of a withdrawal from a Qualified Contract, under
Section 72(e) of the Code a ratable portion of the amount received is taxable,
generally based on the ratio of the "investment in the contract" to the
participant's total accrued benefit or balance under the retirement plan. The
"investment in the contract" generally equals the portion, if any, of any
premium payments paid by or on behalf of any individual under a Contract which
was not excluded from the individual's gross income. For Contracts issued in
connection with qualified plans, the "investment in the contract" can be zero.
Special tax rules may be available for certain distributions from Qualified
Contracts.
In the case of a withdrawal from a Non-Qualified Contract before the Maturity
Date, under Code Section 72(e) amounts received are generally first treated as
taxable income to the extent that the accumulation value immediately before the
withdrawal exceeds the "investment in the contract" at that time. Any
additional amount withdrawn is not taxable.
In the case of a full surrender under a Qualified or Non-Qualified Contract,
the amount received generally will be taxable only to the extent it exceeds the
"investment in the contract."
Annuity Payments. Although tax consequences may vary depending on the Payment
Option elected under an annuity contract, under Code Section 72(b), generally
(prior to recovery of the investment in the contract) gross income does not
include that part of the amount received as an annuity under an annuity
contract that bears the same ratio to such amount as the investment in the
contract bears to the expected return at the annuity starting date. Stated
differently, prior to recovery of the investment in the contract, in general,
there is no tax on the amount of each payment which represents the same ratio
that the "investment in the contract" bears to the total expected value of the
annuity payments for the term of payments; however, the remainder of each
income payment is taxable. After the "investment in the contact" is recovered,
the full amount of any additional annuity payments is taxable.
Taxation of Death Benefit Proceeds. Amounts may be distributed from a
Contract because of the death of the Owner or an Annuitant. Generally, such
amounts are includible in the income of the recipient as follows: (i) if
distributed in a lump sum, they are taxed in the same manner as a full
surrender of the contract; or (ii) if distributed under a Payment Option, they
are taxed in the same way as annuity payments.
Penalty Tax on Certain Withdrawals. In the case of a distribution pursuant to
a Non-Qualified Contract, there may be imposed a Federal penalty tax equal to
10% of the amount treated as taxable income. In general, however, there is no
penalty on distributions:
1. made on or after the taxpayer reaches age 59 1/2.
2. made on or after the death of the holder (or if the holder is not an
individual, the death of the primary annuitant);
3. attributable to the taxpayer's becoming disabled;
4. a part of a series of substantially equal periodic payments (not less
frequently than annually) for the life (or life expectancy) of the
taxpayer or the joint lives (or joint life expectancies) of the taxpayer
and his or her designated beneficiary;
5. made under an annuity contract that is purchased with a single premium
when the annuity starting date is no later than a year from purchase of
the annuity and substantially equal periodic payments are made, not less
frequently than annually, during the annuity period; and
6. made under certain annuities issued in connection with structured
settlement agreements.
Other tax penalties may apply to certain distributions under a Qualified
Contract, as well as to certain contributions, loans, and other circumstances.
Possible Tax Changes. In recent years, legislation has been proposed that
would have adversely modified the federal taxation of certain annuities. For
example, one such proposal would have changed the
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tax treatment of non-qualified annuities that did not have "substantial life
contingencies" by taxing income as it is credited to the annuity. Although as
of the date of this prospectus Congress is not considering any legislation
regarding the taxation of annuities, there is always the possibility that the
tax treatment of annuities could change by legislation or other means (such as
IRS regulations, revenue rulings, and judicial decisions). Moreover, it is also
possible that any legislative change could be retroactive (that is, effective
prior to the date of such change).
TRANSFERS, ASSIGNMENTS OR EXCHANGES OF A CONTRACT
A transfer of ownership of a Contract, the designation of an Annuitant, Payee
or other Beneficiary who is not also the Owner, the selection of certain
Maturity Dates or the exchange of a Contract may result in certain tax
consequences to the Owner that are not discussed herein. An Owner contemplating
any such transfer, assignment, or exchange of a Contract should contact a
competent tax advisor with respect to the potential effects of such a
transaction.
WITHHOLDING
Pension and annuity distributions generally are subject to withholding for
the recipient's Federal income tax liability at rates that vary according to
the type of distribution and the recipient's tax status. Recipients, however,
generally are provided the opportunity to elect not to have tax withheld from
distributions. Effective January 1, 1993, distribution from certain qualified
plans are generally subject to mandatory withholding.
MULTIPLE CONTRACTS
All non-qualified deferred annuity contracts entered into after October 21,
1988 that are issued by Providentmutual (or its affiliates) to the same Owner
during any calendar year are treated as one annuity Contract for purposes of
determining the amount includible in gross income under Code Section 72(e).
This rule could affect the time when income is taxable and the amount that
might be subject to the 10% penalty tax described above. In addition, the
Treasury Department has specific authority to issue regulations that prevent
the avoidance of Section 72(e) through the serial purchase of annuity contracts
or otherwise. There may also be other situations in which the Treasury may
conclude that it would be appropriate to aggregate two or more annuity
contracts purchased by the same Owner. Accordingly, a Contract Owner should
consult a competent tax advisor before purchasing more than one annuity
contract.
TAXATION OF QUALIFIED PLANS
The Contracts are designed for use with several types of qualified plans. The
tax rules applicable to participants in these qualified plans vary according to
the type of plan and the terms and conditions of the plan itself. Therefore, no
attempt is made to provide more than general information about the use of the
Contracts with the various types of qualified retirement plans. Contract
Owners, the Annuitants, and Beneficiaries are cautioned that the rights of any
person to any benefits under these qualified retirement plans may be subject to
the terms and conditions of the plans themselves, regardless of the terms and
conditions of the Contract, but Providentmutual shall not be bound by the terms
and conditions of such plans to the extent such terms contradict the Contract,
unless Providentmutual consents. Some retirement plans are subject to
distribution and other requirements that are not incorporated into our Contract
administration procedures. Owners, participants and beneficiaries are
responsible for determining that contributions, distributions and other
transactions with respect to the Contracts comply with applicable law. Brief
descriptions follow of the various types of qualified retirement plans in
connection with a Contract. Providentmutual will amend the Contract as
necessary to confirm it to the requirements of the Code.
Corporate Pension and Profit Sharing Plans. Section 401(a) of the Code
permits corporate employers to establish various types of retirement plans for
employees. These retirement plans may permit the purchase of the Contracts to
accumulate retirement savings under the plans. Adverse tax or other legal
consequences
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to the plan, to the participant or to both may result if this Contract is
assigned or transferred to any individual as a means to provide benefit
payments, unless the plan complies with all legal requirements applicable to
such benefits prior to transfer of the Contract. Corporate employers intending
to use the Contract with such plans should seek competent advice.
Individual Retirement Annuities. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an
"Individual Retirement Annuity" or "IRA". These IRAs are subject to limits on
the amount that may be contributed, the persons who may be eligible, and on the
time when distributions may commence. Also, distributions for certain other
types of qualified retirement plans may be "rolled over" on a tax-deferred
basis into an IRA. Sales of the Contract for use with IRAs may be subject to
special requirements of the Internal Revenue Service. The Internal Revenue
Service has not reviewed the Contract for qualification as an IRA, and has not
addressed in a ruling of general applicability whether a death benefit
provision such as the provision in the Contract comports with IRA qualification
requirements.
Tax Sheltered Annuities. Section 403(b) of the Code allows employees of
certain Section 501(c)(3) organizations and public schools to exclude from
their gross income the premiums paid, within certain limits, on a Contract that
will provide an annuity for the employee's retirement. These payments may be
subject to FICA (social security) tax.
POSSIBLE CHARGE FOR PROVIDENTMUTUAL'S TAXES
At the present time, the Company makes no charge to the Subaccounts for any
Federal, state, or local taxes that the Company incurs which may be
attributable to such Subaccounts or to the Contracts. The Company, however,
reserves the right in the future to make a charge for any such tax or other
economic burden resulting from the application of the tax laws that it
determines to be properly attributable to the Subaccounts or to the Contracts.
If any tax charges are made in the future, they will be accumulated daily and
transferred from the applicable Subaccount to Providentmutual's General
Account. Any investment earnings on tax charges accumulated in a Subaccount
will be retained by Providentmutual.
OTHER TAX CONSEQUENCES
As noted above, the foregoing comments about the Federal tax consequences
under these Contracts are not exhaustive, and special rules are provided with
respect to other tax situations not discussed in this Prospectus. Further, the
Federal income tax consequences discussed herein reflect Providentmutual's
understanding of current law and the law may change. Federal estate and state
and local estate, inheritance, and other tax consequences of ownership or
receipt of distributions under a Contract depend on the individual
circumstances of each Owner or recipient of the distribution. A competent tax
advisor should be consulted for further information.
DISTRIBUTION OF CONTRACTS
The Contracts will be offered to the public on a continuous basis, and
Providentmutual does not anticipate discontinuing the offering of the
Contracts. However, Providentmutual reserves the right to discontinue the
offering. Applications for Contracts are solicited by agents who are licensed
by applicable state insurance authorities to sell Providentmutual's variable
annuity contracts and who are also registered representatives of PML Securities
Company ("PML") or broker/dealers. PML is a wholly owned indirect subsidiary of
Provident Mutual Life Insurance Company of Philadelphia and is registered with
the SEC under the Securities Exchange Act of 1934 as a broker-dealer and is a
member of the National Association of Securities Dealers, Inc.
36
<PAGE>
PML acts as the Principal Underwriter, as defined in the Investment Company
Act of 1940, of the Contracts for the Variable Account pursuant to an
Underwriting Agreement between Providentmutual and PML. PML is not obligated to
sell any specific number of Contracts. PML's principal business address is
Christiana Executive Campus, P.O. Box 15626, Wilmington, Delaware 19850. The
Contracts may also be sold through other broker-dealers registered under the
Securities Exchange Act of 1934 whose representatives are authorized by
applicable law to sell variable annuity contracts. PML has entered into a
Selling Agreement with Sentinel Financial Services Company (SFSC), a registered
broker-dealer affiliated with PML. Under the terms of the Selling Agreement,
SFSC will be national distributor of the Contracts. Registered Representatives
of SFSC will solicit applications and SFSC will also enter into selling
agreements with other broker-dealers with respect to distribution of the
Contracts. PML and SFSC receive the full commissions on Contracts sold by their
registered representatives. Nonaffiliated broker-dealers receive full
commissions on Contracts sold by their registered representatives, less a
nominal charge by PML or SFSC for expenses incurred. The commissions paid are
no greater than 6% of premiums.
LEGAL PROCEEDINGS
There are at present no legal proceedings to which the Variable Account is a
party or the assets of the Variable Account are subject. Providentmutual is not
involved in any litigation that is of material importance in relation to its
total assets or that relates to the Variable Account.
VOTING RIGHTS
In accordance with its view of present applicable law, Providentmutual will
vote the Portfolio shares held in the Variable Account at special shareholder
meetings of the Funds in accordance with instructions received from persons
having voting interests in the corresponding Subaccounts. If, however, the
Investment Company Act of 1940 or any regulation thereunder should be amended,
or if the present interpretation thereof should change, or Providentmutual
determines that it is allowed to vote the Portfolio shares in its own right, it
may elect to do so.
The number of votes which are available to an Owner will be calculated
separately for each Subaccount of the Variable Account, and may include
fractional votes. The number of votes attributable to a Subaccount will be
determined by applying an Owner's percentage interest, if any, in a particular
Subaccount to the total number of votes attributable to that Subaccount. An
Owner holds a voting interest in each Subaccount to which the Variable Account
Value is allocated. The Owner only has voting interest prior to the Maturity
Date.
The number of votes of a Portfolio which are available to the Contract Owner
will be determined as of the date coincident with the date established by that
Portfolio for determining shareholders eligible to vote at the relevant meeting
of each Fund. Voting instructions will be solicited by written communication
prior to such meeting in accordance with procedures established by the Funds.
Fund shares as to which no timely instructions are received and shares held
by Providentmutual in a Subaccount as to which an Owner has no beneficial
interest will be voted in proportion to the voting instructions which are
received with respect to all Contracts participating in that Subaccount. Voting
instructions to abstain on any item to be voted upon will be applied on a pro
rata basis to reduce the votes eligible to be cast.
37
<PAGE>
FINANCIAL STATEMENTS
The audited statements of financial condition for Providentmutual as of
December 31, 1994 and 1993 and the related statements of operations, changes in
capital and surplus and cash flows for each of the three years in the period
ended December 31, 1994 as well as the Report of Independent Accountants are
contained in the Statement of Additional Information. The Variable Account
commenced operations on April 14, 1992. Accordingly, the audited statements of
assets and liabilities for the Variable Account as of December 31, 1993 and the
related statements of operations and changes in net assets for the year then
ended and the statements of operations and changes in net assets for the period
April 14, 1992 (Date of Inception) to December 31, 1992 are included in the
Statement of Additional Information for the Variable Account.
38
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Contract Provisions............................................. S-2
The Contract............................................................. S-2
Incontestability......................................................... S-2
Misstatement of Age or Sex............................................... S-2
Non-Participation........................................................ S-2
Calculation of Yields and Total Returns.................................... S-2
Money Market Subaccount Yields........................................... S-2
Other Subaccount Yields.................................................. S-3
Average Annual Total Returns............................................. S-4
Other Total Returns...................................................... S-6
Effect of the Administration Fee on Performance Data..................... S-7
Termination of Participation Agreements.................................... S-8
Safekeeping of Account Assets.............................................. S-9
State Regulation........................................................... S-9
Records and Reports........................................................ S-9
Legal Matters.............................................................. S-9
Experts.................................................................... S-9
Other Information.......................................................... S-9
Financial Statements....................................................... S-10
</TABLE>
39
<PAGE>
PROVIDENT MUTUAL LIFE INSURANCE COMPANY
HOME OFFICE: 1600 MARKET STREET, PHILADELPHIA, PENNSYLVANIA 19103
(215) 636-5000
ADMINISTRATIVE OFFICE: 300 CONTINENTAL DRIVE, NEWARK, DELAWARE 19713
1-800-654-7796
STATEMENT OF ADDITIONAL INFORMATION
VARIABLE ANNUITY SEPARATE ACCOUNT
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
This Statement of Additional Information contains information in addition to
the information described in the Prospectus for the flexible premium deferred
variable annuity contract (the "Contract") offered by Provident Mutual Life
Insurance Company. This Statement of Additional Information is not a
Prospectus, and it should be read only in conjunction with the Prospectuses for
the Contract and the Market Street Fund, Inc., the Variable Insurance Products
Fund, the Variable Insurance Products Fund II, the Scudder Variable Life
Investment Fund, the Quest for Value Accumulation Trust and the Dreyfus
Variable Investment Fund. The Prospectus is dated the same as this Statement of
Additional Information. You may obtain a copy of the Prospectus by writing or
calling us at our address or phone number shown above.
The date of this Statement of Additional Information is May 1, 1995.
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS*
<TABLE>
<S> <C>
ADDITIONAL CONTRACT PROVISIONS (13-27)...................................... 2
The Contract.............................................................. 2
Incontestability.......................................................... 2
Misstatement of Age or Sex................................................ 2
Dividends................................................................. 2
CALCULATION OF YIELDS AND TOTAL RETURNS (27-28)............................. 2
Money Market Subaccount Yields............................................ 2
Other Subaccount Yields................................................... 3
Average Annual Total Returns.............................................. 4
Other Total Returns....................................................... 6
Effect of the Administration Fee on Performance Data...................... 7
TERMINATION OF PARTICIPATION AGREEMENTS (12)................................ 7
SAFEKEEPING OF ACCOUNT ASSETS............................................... 8
STATE REGULATION (8)........................................................ 9
RECORDS AND REPORTS......................................................... 9
LEGAL MATTERS (33).......................................................... 9
EXPERTS..................................................................... 9
OTHER INFORMATION........................................................... 9
FINANCIAL STATEMENTS (34)................................................... 10
</TABLE>
- --------
* Numbers in parentheses refer to corresponding pages of the Prospectus.
<PAGE>
ADDITIONAL CONTRACT PROVISIONS
THE CONTRACT
The entire contract is made up of the policy and the application. The
statements made in the application are deemed representations and not
warranties. Provident Mutual cannot use any statement in defense of a claim or
to void the Contract unless it is contained in the application and a copy of
the application is attached to the Contract at issue.
INCONTESTABILITY
Provident Mutual will not contest the Contract after it has been in force
during the Annuitant's lifetime for two years from the Contract Date.
MISSTATEMENT OF AGE OR SEX
If the age or sex of the annuitant has been misstated, the amount which will
be paid is that which the proceeds would have purchased at the correct age and
sex.
If an overpayment is made because of an error in age or sex, the overpayment
plus interest at 3% compounded annually will be a debt against the Contract. If
the debt is not repaid, future payments will be reduced accordingly.
If an underpayment is made because of an error in age or sex, any annuity
payments will be recalculated at the correct age and sex and future payments
will be adjusted. The underpayment with interest at 3% compounded annually will
be paid in a single sum.
DIVIDENDS
The Contract is eligible for dividends. Provident Mutual will determine the
share of its divisible surplus to be apportioned to the Contract on a yearly
basis. Since this Contract will probably not contribute to surplus, Provident
Mutual does not expect to credit dividends to it. If a dividend is credited, it
will be paid to the Owner in cash.
CALCULATION OF YIELDS AND TOTAL RETURNS
From time to time, Provident Mutual may disclose yields, total returns, and
other performance data pertaining to the Contracts for a Subaccount. Such
performance data will be computed, or accompanied by performance data computed,
in accordance with the standards defined by the Securities and Exchange
Commission.
Because of the charges and deductions imposed under a Contract, the yield for
the Subaccounts will be lower than the yield for their respective Portfolios.
The calculations of yields, total returns, and other performance data do not
reflect the effect of any premium tax that may be applicable to a particular
Contract.
MONEY MARKET SUBACCOUNT YIELDS
From time to time, advertisements and sales literature may quote the current
annualized yield of the Money Market Subaccount for a seven-day period in a
manner which does not take into consideration any realized or unrealized gains
or losses on shares of the Money Market Portfolio or on its portfolio
securities.
This current annualized yield is computed by determining the net change
(exclusive of realized gains and losses on the sale of securities and
unrealized appreciation and depreciation) at the end of the seven-day period in
the value of a hypothetical account under a Contract having a balance of 1 unit
of the Money
S-2
<PAGE>
Market Subaccount at the beginning of the period, dividing such net change in
account value by the value of the hypothetical account at the beginning of the
period to determine the base period return, and annualizing this quotient on a
365-day basis. The net change in account value reflects: 1) net income from the
Portfolio attributable to the hypothetical account; and 2) charges and
deductions imposed under the Contract which are attributable to the
hypothetical account. The charges and deductions include the per unit charges
for the hypothetical account for: 1) the Annual Administration Fee; 2) the
Asset-Based Administration Charge; and 3) the Mortality and Expense Risk
Charge. For purposes of calculating current yields for a Contract, an average
per unit administration fee is used based on the $30 administration fee
deducted at the end of each Contract Year. Current Yield will be calculated
according to the following formula:
Current Yield = ((NCS - ES)/UV) X (365/7)
Where:
NCS = the net change in the value of the Portfolio (exclusive of realized
gains or losses on the sale of securities and unrealized appreciation
and depreciation) for the seven-day period attributable to a
hypothetical account having a balance of 1 Subaccount unit.
ES = per unit expenses attributable to the hypothetical account for the
seven-day period.
UV = the unit value on the first day of the seven-day period.
The effective yield of the Money Market Subaccount determined on a compounded
basis for the same seven-day period may also be quoted.
The effective yield is calculated by compounding the unannualized base period
return according to the following formula:
Effective Yield = (1 + ((NCS - ES)/UV))/365/7/ - 1
Where:
NCS = the net change in the value of the Portfolio (exclusive of realized
gains and losses on the sale of securities and unrealized
appreciation and depreciation) for the seven-day period attributable
to a hypothetical account having a balance of 1 Subaccount unit.
ES = per unit expenses attributable to the hypothetical account for the
seven-day period.
UV = the unit value for the first day of the seven-day period.
Because of the charges and deductions imposed under the Contract, the yield
for the Money Market Subaccount will be lower than the yield for the Money
Market Portfolio.
The current and effective yields on amounts held in the Money Market
Subaccount normally will fluctuate on a daily basis. THEREFORE, THE DISCLOSED
YIELD FOR ANY GIVEN PAST PERIOD IS NOT AN INDICATION OR REPRESENTATION OF
FUTURE YIELDS OR RATES OF RETURN. The Money Market Subaccount's actual yield is
affected by changes in interest rates on money market securities, average
portfolio maturity of the Money Market Portfolio, the types and quality of
portfolio securities held by the Money Market Portfolio and the Money Market
Portfolio's operating expenses. Yields on amounts held in the Money Market
Subaccount may also be presented for periods other than a seven-day period.
OTHER SUBACCOUNT YIELDS
From time to time, sales literature or advertisements may quote the current
annualized yield of one or more of the Subaccounts (except the Money Market
Subaccount) for a Contract for 30-day or one-month periods. The annualized
yield of a Subaccount refers to income generated by the Subaccount over a
specific 30-day or one-month period. Because the yield is annualized, the yield
generated by a Subaccount during a 30-day or one-month period is assumed to be
generated each period over a 12-month period.
S-3
<PAGE>
The yield is computed by: 1) dividing the net investment income of the
Portfolio attributable to the Subaccount units less Subaccount expenses for the
period; by 2) the maximum offering price per unit on the last day of the period
times the daily average number of units outstanding for the period; by 3)
compounding that yield for a six-month period; and by 4) multiplying that
result by 2. Expenses attributable to the Subaccount include the Annual
Administration Fee, the Asset-Based Administration Charge and the Mortality and
Expense Risk Charge. The yield calculation assumes an administration fee of $30
per year per Contract deducted at the end of each Contract Year. For purposes
of calculating the 30-day or one-month yield, an average administration fee per
dollar of Contract value in the Variable Account is used to determine the
amount of the charge attributable to the Subaccount for the 30-day or one-month
period. The 30-day or one-month yield is calculated according to the following
formula:
Yield = 2 X (((NI - ES)/(U X UV)) + 1)/6-1/,
Where:
NI = net income of the Portfolio for the 30-day or one-month period
attributable to the Subaccount's units.
ES = expenses of the Subaccount for the 30-day or one-month period.
U = the average number of units outstanding.
UV = the unit value at the close (highest) of the last day in the 30-day or
one-month period.
Because of the charges and deductions imposed under the Contracts, the yield
for the Subaccount will be lower than the yield for the corresponding Fund
Portfolio.
The yield on the amounts held in the Subaccounts normally will fluctuate over
time. THEREFORE, THE DISCLOSED YIELD FOR ANY GIVEN PAST PERIOD IS NOT AN
INDICATION OR REPRESENTATION OF FUTURE YIELDS OR RATES OF RETURN. The
Subaccount's actual yield is affected by the types and quality of portfolio
securities held by the Portfolio and its operating expenses.
Yield calculations do not take into account the Surrender Charge under the
Contract equal to 1% to 6% of premiums paid during the six years prior to the
surrender or withdrawal (including the year in which the surrender is made) on
amounts surrendered or withdrawn under the contract. A Surrender Charge will
not be imposed on the first or second withdrawal in any Contract Year on an
amount up to 10% of the Contract Account Value as of the beginning of such
year.
AVERAGE ANNUAL TOTAL RETURNS
From time to time, sales literature or advertisements may also quote average
annual total returns for one or more of the Subaccounts for various periods of
time.
Until a Subaccount has been in operation for 10 years, Provident Mutual will
always include quotes of average annual total return for the period measured
from the date the Contracts were first offered for sale. When a Subaccount has
been in operation for 1, 5, and 10 years, respectively, the average annual
total return for these periods will be provided. Average annual total returns
for other periods of time may, from time to time, also be disclosed.
Average annual total returns represent the average annual compounded rates of
return that would equate an initial investment of $1,000 under a Contract to
the redemption value of that investment as of the last day of each of the
periods. The ending date for each period for which total return quotations are
provided will be for the most recent month-end practicable, considering the
type and media of the communication and will be stated in the communication.
Average annual total returns will be calculated using Subaccount unit values
which Provident Mutual calculates on each Valuation Day based on the
performance of the Subaccount's underlying Portfolio, the deductions for the
Mortality and Expense Risk Charge, the Asset-Based Administration Charge, and
the Annual Administration Fee. The calculation assumes that the Administration
Fee is $30 per year per contract
S-4
<PAGE>
deducted at the end of each Contract Year. For purposes of calculating average
annual total return, an average per dollar administration fee attributable to
the hypothetical account for the period is used. The calculation also assumes
surrender of the Contract at the end of the period for the return quotation.
Total returns will therefore reflect a deduction of the Surrender Charge for
any period less than seven years. The total return will then be calculated
according to the following formula:
TR= ((ERV/P)/1N/) - 1
Where:
TR - the average annual total return net of Subaccount recurring charges.
ERV - the ending redeemable value (net of any applicable Surrender Charge)
of the hypothetical account at the end of the period
P - a hypothetical initial payment of $1,000.
N - the number of years in the period.
From time to time, sales literature or advertisements may also quote average
annual total returns for periods prior to the date the Variable Account
commenced operations. Such performance information for the Subaccounts will be
calculated based on the performance of the Portfolios and the assumption that
the Subaccounts were in existence for the same periods as those indicated for
the Portfolios, with the level of Contract charges currently in effect. In
addition, sales literature or advertisements may quote average annual total
return for the Subaccounts for the period before the Contracts were registered
under the 1933 Act, with the level of Contract charges currently in effect.
The Funds have provided the total return information for the Portfolios,
including the Portfolio total return information used to calculate the total
returns of the Subaccounts for periods prior to the Subaccounts' inception of
the Subaccounts. The Variable Insurance Products Fund, the Variable Insurance
Products Fund II, the Scudder Variable Life Investment Fund, the Quest for
Value Accumulation Trust and the Dreyfus Variable Investment Fund are not
affiliated with Provident Mutual. While Provident Mutual has no reason to doubt
the accuracy of these figures provided by these non-affiliated Funds, Provident
Mutual does not represent that they are true and complete, and disclaims all
responsibility for these figures.
Such average annual total return information for the Subaccounts is as
follows:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE PERIOD
1-YEAR 5-YEAR FROM DATE OF INCEPTION
PERIOD ENDED PERIOD ENDED OF FUND PORTFOLIO
SUBACCOUNT 12/31/94 12/31/94 TO 12/31/94
- ---------- ------------ ------------ ----------------------
<S> <C> <C> <C>
Growth......................... (4.32)% 5.55% 9.15%
Money Market................... (2.94)% 2.72% 4.03%
Bond........................... (12.21)% 4.33% 5.27%
Managed........................ (8.48)% 4.27% 5.63%
Aggressive Growth.............. (6.68)% 11.35% 10.31%
International.................. (6.43)% -- 4.10%
Fidelity High Income........... (8.21)% 12.07% 9.14%
Fidelity Equity-Income......... 0.27% 8.57% 9.18%
Fidelity Growth................ (6.70)% 8.93% 10.78%
Fidelity Asset Manager......... (12.68)% 8.77% 8.16%
Fidelity Index 500............. (5.66)% -- 3.48%
Scudder Bond................... (11.40)% 5.87% 6.39%
Quest for Value Equity......... (2.93)% 9.17% 10.51%
Quest for Value Small Cap...... (7.68)% 11.99% 12.09%
Quest for Value Managed........ (4.11)% 11.63% 14.26%
Dreyfus Zero Coupon 2000....... (10.54)% -- 8.12%
</TABLE>
S-5
<PAGE>
Providentmutual may also disclose average annual total returns for the Fund's
Portfolios since their inception, including such disclosure for periods prior
to the date the Variable Account commenced operations.
Such average annual total return information for the Portfolios of the Funds
is as follows:
<TABLE>
<CAPTION>
FOR THE 1-YEAR FOR THE 5-YEAR FOR THE PERIOD
FUND PERIOD ENDED PERIOD ENDED FROM DATE OF INCEPTION
PORTFOLIO (DATE OF INCEPTION) 12/31/94 12/31/94 TO 12/31/94
- ----------------------------- -------------- -------------- ----------------------
<S> <C> <C> <C>
Growth (December 12, 1985)............................ 2.40% 7.48% 10.90%
Money Market (December 12, 1985)...................... 3.86% -- --
Bond (December 12, 1985).............................. (5.62)% 6.24% 7.00%
Managed (December 12, 1985)........................... (1.82)% 6.20% 7.38%
Aggressive Growth (May 1, 1989)....................... 0% 14.13% 12.35%
International (November 1, 1991)...................... 0.26% -- 6.74%
Fidelity High Income (September 19, 1985)............. (1.64)% 14.01% 10.88%
Fidelity Equity-Income (October 9, 1986).............. 7.07% 10.51% 10.94%
Fidelity Growth (October 9, 1986)..................... (.02)% 10.88% 12.55%
Fidelity Asset Manager (September 6, 1989)............ (6.09)% 10.71% 10.20%
Fidelity Index 500 (August 27, 1992).................. 1.04% -- 7.26%
Scudder Bond (July 16, 1985).......................... (4.79)% 7.79% 8.12%
Quest for Value Equity (August 1, 1988)............... 3.83% 11.13% 12.43%
Quest for Value Small Cap (August 1, 1988)............ (1.00)% 13.97% 14.02%
Quest for Value Managed (August 1, 1988).............. 2.63% 13.61% 16.21%
Dreyfus Zero Coupon 2000 (August 31, 1990)............ (3.91)% -- 10.55%
</TABLE>
OTHER TOTAL RETURN
From time to time, sales literature or advertisements may also quote average
annual total returns that do not reflect the Surrender Charge. These are
calculated in exactly the same way as average annual total returns described
above, except that the ending redeemable value of the hypothetical account for
the period is replaced with an ending value for the period that does not take
into account any charges on amounts surrendered or withdrawn. Such information
is as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE 1-YEAR FOR THE 5-YEAR FROM DATE OF INCEPTION
PERIOD ENDED PERIOD ENDED OF FUND PORTFOLIO
SUBACCOUNT 12/31/94 12/31/94 TO 12/31/94
- ---------- -------------- -------------- ----------------------
<S> <C> <C> <C>
Growth............................................... 0.68% 5.71% 9.15%
Money Market......................................... 2.06% 2.90% 4.03%
Bond................................................. (7.21)% 4.50% 5.27%
Managed.............................................. (3.48)% 4.44% 5.63%
Aggressive Growth.................................... (1.68)% 11.48% 10.53%
International........................................ (1.43)% -- 5.25%
Fidelity High Income................................. (3.21)% 12.20% 9.14%
Fidelity Equity-Income............................... 5.27% 8.71% 9.18%
Fidelity Growth...................................... (1.70)% 9.07% 10.78%
Fidelity Asset Manager............................... (7.68)% 8.91% 8.42%
Fidelity Index 500................................... (0.66)% -- 5.49%
Scudder Bond......................................... (6.40)% 6.02% 6.39%
Quest for Value Equity............................... 2.07% 9.31% 10.60%
Quest for Value Small Cap............................ (2.68)% 12.11% 12.18%
Quest for Value Managed.............................. 0.89% 11.75% 14.34%
Dreyfus Zero Coupon 2000............................. (5.54)% -- 8.65%
</TABLE>
S-6
<PAGE>
Provident Mutual may disclose Cumulative Total Returns in conjunction with
the standard formats described above. The Cumulative Total Returns will be
calculated using the following formula:
CTR = (ERV/P) - 1
Where:
CTR = the Cumulative Total Return net of Subaccount recurring charges for
the period.
ERV = the ending redeemable value of the hypothetical investment at the
end of the period.
P = a hypothetical single payment of $1,000.
EFFECT OF THE ADMINISTRATION FEE ON PERFORMANCE DATA
The Contract provides for a $30 Annual Administration Fee to be deducted
annually at the end of each Contract Year, from the Subaccounts and the
Guaranteed Account based on the proportion that the value of each such account
bears to the total Contract Account Value. For purposes of reflecting the
administration fee in yield and total return quotations, the annual charge is
converted into a per-dollar per-day charge based on the average contract value
in the Variable Account of all Contracts on the last day of the period for
which quotations are provided. The per-dollar per-day average charge will then
be adjusted to reflect the basis upon which the particular quotation is
calculated.
TERMINATION OF PARTICIPATION AGREEMENTS
The participation agreements pursuant to which the Funds sell their shares to
the Variable Account contain varying provisions regarding termination. The
following summarizes those provisions:
Market Street Fund, Inc. This agreement provides for termination: (1) on one
year's advance notice by any party; (2) at Provident Mutual's option if shares
of the Fund are not reasonably available to meet the requirements of the
contracts; (3) at the option of the Fund or Provident Mutual if certain
enforcement proceedings are instituted against the other; (4) upon vote of the
Owners of Contracts to substitute shares of another mutual fund; (5) at
Provident Mutual's option if the Fund ceases to qualify as a regulated
investment company under the Code or fails to meet the diversification
requirements thereunder; (6) at the option of Provident Mutual or the Fund upon
a determination that an irreconcilable material conflict exists between owners
of variable insurance products of all the separate accounts or the interests of
participating insurance companies investing in the Fund; (7) at the option of
Provident Mutual if it has withdrawn the Variable Account's investment in the
Fund; or (8) at the option of any party upon another party's material breach of
any provision of the agreement.
Variable Insurance Products Fund and Variable Insurance Products Fund
II. These agreements provide for termination: (1) on six months' advance notice
by any party; (2) at Provident Mutual's option if shares of the Fund are not
reasonably available to meet the requirements of the Contracts; (3) at
Provident Mutual'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 fails to meet the
diversification requirements thereunder; (4) at the option of the Fund or its
principal underwriter if it determines that Provident Mutual has suffered
material adverse changes in its business or financial conditions or is the
subject of material adverse publicity; (5) at the option of Provident Mutual if
the Fund has suffered material adverse changes in its business or financial
condition or is the subject of material adverse publicity; or (6) at the option
of the Fund or its principal underwriter if Provident Mutual decides to make
another mutual fund available as a funding vehicle for its Contracts.
S-7
<PAGE>
Scudder Variable Life Investment Fund. This agreement provides for
termination: (1) one hundred twenty days after the renegotiation date if the
Fund and Provident Mutual fail within sixty days after such renegotiation date
to agree to continue or amend the agreement; (2) at the option of Provident
Mutual or the Fund if no shares of the Fund are owned by Provident Mutual, the
Variable Account, an affiliated insurance company or a separate account of such
affiliated insurance company; (3) upon determination that an irreconcilable
conflict exists between the interests of owners of the Contracts and variable
insurance products of all separate accounts or the interests of participating
insurance companies investing in the Fund.
Quest for Value Accumulation Trust. This agreement provides for termination:
(1) on one year's advance notice by any party; (2) at Provident Mutual's option
if shares of the Fund are not reasonably available to meet the requirements of
the Contracts; (3) at the option of the Fund or Provident Mutual if certain
enforcement proceedings are instituted against the other; (4) upon vote of the
owners of contracts to substitute shares of another mutual fund; (5) at
Provident Mutual's option if the Fund ceases to qualify as a regulated
investment company under the Code or fails to meet the diversification
requirements thereunder; (6) at the option of Provident Mutual or the Fund upon
a determination that an irreconcilable material conflict exists between owners
of variable insurance products of all the separate accounts or the interests of
participating insurance companies investing in the Fund; (7) at the option of
Provident Mutual if it has withdrawn the Variable Account's investment in the
Fund; (8) at the option of any party upon another party's material breach of
any provision of the agreement; or (9) at Provident Mutual's option if it
determines that the Fund or its principal underwriter has suffered a material
adverse change in its business, operations or financial condition or is the
subject of material adverse publicity.
Dreyfus Variable Investment Fund. This agreement provides for termination:
(a) on 180 days' notice by Provident Mutual or the Fund; (b) at Provident
Mutual's option if shares of the Fund are not reasonably available to meet the
requirements of the contracts; (c) at the option of Provident Mutual or the
Fund if certain enforcement proceedings are instituted against the other; (d)
at the option of the Fund if it determines that Provident Mutual has suffered a
material adverse change in its business or financial condition or is the
subject of material adverse publicity; (e) upon termination of the Investment
Advisory Agreement between the Fund and Dreyfus; (f) in the event the Fund's
shares are not registered, issued or sold in accordance with applicable laws;
(g) at the option of the Fund upon a determination that it is no longer
advisable and in the interests of shareholders to continue the agreement; (h)
at the option of the Fund if the contracts cease to qualify as annuity
contracts under the Code; (i) at the option of either party upon another's
breach of any material provision of the agreement; (j) at the option of the
Fund, if the contracts are not registered, issued or sold in accordance with
applicable law; or (k) upon assignment of the agreement.
SAFEKEEPING OF ACCOUNT ASSETS
Provident Mutual holds the title to the assets of the Variable Account. The
assets are kept physically segregated and held separate and apart from the
Company's General Account assets and from the assets in any other separate
account.
Records are maintained of all purchases and redemptions of Portfolio shares
held by each of the Subaccounts.
The officers and employees of Provident Mutual are covered by an insurance
company blanket bond issued by National Union Fire Insurance Company of
Pittsburgh, PA to Provident Mutual in the amount of ten million dollars. The
bond insures against dishonest and fraudulent acts of officers and employees.
S-8
<PAGE>
STATE REGULATIONS
Provident Mutual 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 Contract
form has been filed with, and where required approved by, insurance officials
in each jurisdiction where the Contracts are sold. Provident Mutual is required
to submit annual statements of its operations, including financial statements,
to the insurance departments of the various jurisdictions in which it does
business for the purposes of determining solvency and compliance with local
insurance laws and regulations.
RECORDS AND REPORTS
Provident Mutual will maintain all records and accounts relating to the
Variable Account. As presently required by the Investment Company Act of 1940
and regulations promulgated thereunder, reports containing such information as
may be required under the Act or by any other applicable law or regulation will
be sent to Contract Owners semi-annually at the last address known to the
Company.
LEGAL MATTERS
All matters relating to Pennsylvania law pertaining to the Contracts,
including the validity of the Contracts and Provident Mutual's authority to
issue the Contracts, have been passed upon by Linda E. Senker, Esquire,
Associate General Counsel for Provident Mutual. Sutherland, Asbill & Brennan of
Washington, D.C. has provided advice on certain matters relating to the Federal
securities laws.
EXPERTS
The statements of financial condition for Provident Mutual as of December 31,
1994 and 1993 and the related statements of operations, changes in unassigned
surplus and cash flows for each of the three years in the period ended December
31, 1994 and the audited statement of assets and liabilities of the Variable
Account as of December 31, 1994 and the related statements of operations and
changes in net assets for the period October 1, 1993 (date of inception) to
December 31, 1993 which are included in this Statement of Additional
Information and in the registration statement have been audited by Coopers &
Lybrand as set forth in their report included herein, and are included herein
in reliance upon such report and upon the authority of such firm as experts in
accounting and auditing.
OTHER INFORMATION
A registration statement has been filed with the SEC under the Securities Act
of 1933 as amended, with respect to the Contracts discussed in this Statement
of Additional Information. Not all the information set forth in the
registration statement, amendments and exhibits thereto has been included in
this Statement of Additional Information. Statements contained in this
Statement of Additional Information concerning the content of the Contracts and
other legal instruments are intended to be summaries. For a complete statement
of the terms of these documents, reference should be made to the instruments
filed with the SEC at 450 Fifth Street, N.W., Washington, DC 20549.
S-9
<PAGE>
FINANCIAL STATEMENTS
This Statement of Additional Information contains the audited statements of
assets and liabilities of the Variable Account as of December 31, 1994 and the
related statements of operations and changes in net assets for the period ended
December 31, 1994 and for the period October 1, 1993 (date of inception) to
December 31, 1993. Coopers & Lybrand serves as independent accountants for the
Variable Account.
Provident Mutual's statements of financial condition as of December 31, 1994
and 1993 and the related statements of operations, changes in unassigned
surplus and cash flows for each of the three years in the period ended December
31, 1994, which are included in this Statement of Additional Information,
should be considered only as bearing on Provident Mutual's ability to meet its
obligations under the Contracts. They should not be considered as bearing on
the investment performance of the assets held in the Variable Account.
S-10
<PAGE>
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account of Provident Mutual Life
Insurance Company
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Contractowners and Board of Directors of
Provident Mutual Life
Insurance Company
Philadelphia,
Pennsylvania
We have audited the accompanying statements of assets and liabilities of the
Provident Mutual Variable Annuity Separate Account (comprising the sixteen
subaccounts) as of December 31, 1994, and the related statements of operations
and changes in net assets for the year then ended and for the period October 1,
1993 (Date of Inception) to December 31, 1993. These financial statements are
the responsibility of the management of the Variable Annuity Separate Account.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of shares owned as of December 31, 1994 with
the transfer agents. 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
Annuity Separate Account as of December 31, 1994, and the results of its
operations and the changes in its net assets for the year then ended and for
the period October 1, 1993 (Date of Inception) to December 31, 1993 in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 15, 1995
F-2
<PAGE>
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account of Provident Mutual Life
Insurance Company
Statements of Assets and Liabilities, December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY AGGRESSIVE
GROWTH MARKET BOND MANAGED GROWTH INTERNATIONAL
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investment in the Market
Street Fund, Inc., at
market value:
Growth Portfolio....... $468,311
Money Market Portfolio. $148,959
Bond Portfolio......... $131,800
Managed Portfolio...... $306,246
Aggressive Growth
Portfolio............. $112,968
International
Portfolio............. $280,747
Dividends receivable.... 1,065
Receivable from
Provident Mutual Life
Insurance Company...... 142,094
-------- -------- -------- -------- -------- --------
Total Assets............ 468,311 292,118 131,800 306,246 112,968 280,747
-------- -------- -------- -------- -------- --------
LIABILITIES
Payable to Provident
Mutual Life Insurance
Company................ 256 39 25 88 143
-------- -------- -------- -------- -------- --------
NET ASSETS.............. $468,055 $292,118 $131,761 $306,221 $112,880 $280,604
======== ======== ======== ======== ======== ========
Held for the benefit of
contractowners......... $442,432 $266,076 $108,553 $281,628 $ 86,277 $253,659
Attributable to
Provident Mutual Life
Insurance Company...... 25,623 26,042 23,208 24,593 26,603 26,945
-------- -------- -------- -------- -------- --------
$468,055 $292,118 $131,761 $306,221 $112,880 $280,604
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account of Provident Mutual Life
Insurance Company
Statements of Assets and Liabilities, December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIDELITY FIDELITY FIDELITY
HIGH EQUITY- FIDELITY ASSET FIDELITY
INCOME INCOME GROWTH MANAGER INDEX 500
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in the
Variable Insurance
Products Fund, at
market value:
High Income Portfolio.. $36,588
Equity-Income
Portfolio............. $197,252
Growth Portfolio....... $103,463
Investment in the
Variable Insurance
Products Fund II, at
market value:
Asset Manager
Portfolio............. $109,993
Index 500 Portfolio.... $31,749
------- -------- -------- -------- -------
TOTAL ASSETS............ 36,588 197,252 103,463 109,993 31,749
------- -------- -------- -------- -------
LIABILITIES
Payable to Provident
Mutual Life Insurance
Company................ 24 175 131 80 12
------- -------- -------- -------- -------
NET ASSETS.............. $36,564 $197,077 $103,332 $109,913 $31,737
======= ======== ======== ======== =======
Held for the benefit of
contractowners......... $11,859 $172,376 $ 77,760 $ 85,716 $ 6,755
Attributable to
Provident Mutual Life
Insurance Company...... 24,705 24,701 25,572 24,197 24,982
------- -------- -------- -------- -------
$36,564 $197,077 $103,332 $109,913 $31,737
======= ======== ======== ======== =======
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account of Provident Mutual Life
Insurance Company
Statements of Assets and Liabilities, December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
QUEST FOR QUEST FOR
QUEST FOR VALUE VALUE SCUDDER DREYFUS ZERO
VALUE EQUITY SMALL CAP MANAGED BOND COUPON 2000
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in the Quest
for Value Accumulation
Trust, at market value:
Equity Portfolio....... $59,340
Small Cap Portfolio.... $101,797
Managed Portfolio...... $79,655
Investment in the
Scudder Variable Life
Investment Fund, at
market value:
Bond Portfolio......... $33,403
Investment in the
Dreyfus Variable
Investment Fund, at
market value:
Zero Coupon 2000
Portfolio............. $25,004
------- -------- ------- ------- -------
Total Assets............ 59,340 101,797 79,655 33,403 25,004
------- -------- ------- ------- -------
LIABILITIES
Payable to Provident
Mutual Life Insurance
Company................ 42 126 66 13
------- -------- ------- ------- -------
NET ASSETS.............. $59,298 $101,671 $79,589 $33,390 $25,004
======= ======== ======= ======= =======
Held for the benefit of
contractowners......... $34,476 $ 76,773 $55,020 $ 8,274
Attributable to
Provident Mutual Life
Insurance Company...... 24,822 24,898 24,569 25,116 $25,004
------- -------- ------- ------- -------
$59,298 $101,671 $79,589 $33,390 $25,004
======= ======== ======= ======= =======
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account 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
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends............... $5,803 $3,825 $ 3,466 $ 5,326 $ 77
EXPENSES
Mortality and expense
risks.................. 2,476 976 520 1,600 $ 473 1,299
------ ------ ------- ------- ------ -------
Net investment income
(loss)................. 3,327 2,849 2,946 3,726 (473) (1,222)
------ ------ ------- ------- ------ -------
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Realized gain
distributions
reinvested............. 18 599 1,134 536
Net realized gain (loss)
from redemption of
investment shares...... 1,399 (3,342) (3,190) 1,177 2,328
------ ------ ------- ------- ------ -------
Net realized gain (loss)
on investments......... 1,417 (2,743) (2,056) 1,177 2,864
------ ------ ------- ------- ------ -------
Net unrealized
appreciation
(depreciation) of
investments:
Beginning of year...... 37 (613) (261) 1,546 1,783
End of year............ (473) (3,196) (3,260) 4,363 (6,428)
------ ------ ------- ------- ------ -------
Net unrealized
appreciation
(depreciation) during
the year............... (510) (2,583) (2,999) 2,817 (8,211)
------ ------ ------- ------- ------ -------
Net realized and
unrealized gain (loss)
on investments......... 907 (5,326) (5,055) 3,994 (5,347)
------ ------ ------- ------- ------ -------
Net increase (decrease)
in net assets resulting
from operations........ $4,234 $2,849 $(2,380) $(1,329) $3,521 $(6,569)
====== ====== ======= ======= ====== =======
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account of Provident Mutual Life
Insurance Company
Statements of Operations For the Year Ended December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIDELITY FIDELITY FIDELITY
HIGH EQUITY- FIDELITY ASSET FIDELITY
INCOME INCOME GROWTH MANAGER INDEX 500
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends............... $ 758
EXPENSES
Mortality and expense
risks.................. $ 24 175 $ 131 $ 80 $12
----- ----- ------ ------- ---
Net investment income
(loss)................. (24) 583 (131) (80) (12)
----- ----- ------ ------- ---
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss)
from redemption of
investment shares...... (121) (139) 62 1
----- ----- ------ ------- ---
Net realized gain (loss)
on investments......... (121) (139) 62 1
----- ----- ------ ------- ---
Net unrealized
appreciation
(depreciation) of
investments:
Beginning of year......
End of year............ (199) (505) 2,214 (1,913) $61
----- ----- ------ ------- ---
Net unrealized
appreciation
(depreciation) during
the year............... (199) (505) 2,214 (1,913) 61
----- ----- ------ ------- ---
Net realized and
unrealized gain (loss)
on investments......... (320) (644) 2,276 (1,912) 61
----- ----- ------ ------- ---
Net increase (decrease)
in net assets resulting
from operations........ $(344) $ (61) $2,145 $(1,992) $49
===== ===== ====== ======= ===
</TABLE>
See accompanying notes to financial statements
F-7
<PAGE>
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account of Provident Mutual Life
Insurance Company
Statements of Operations For the Year Ended December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
QUEST FOR QUEST FOR
QUEST FOR VALUE VALUE SCUDDER DREYFUS ZERO
VALUE EQUITY SMALL CAP MANAGED BOND COUPON 2000
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends............... $ 401 $ 544
EXPENSES
Mortality and expense
risks.................. $ 42 $ 126 $ 66 13
----- ------ ----- ----- -----
Net investment income
(loss)................. (42) (126) (66) 388 544
----- ------ ----- ----- -----
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss)
from redemption of
investment shares...... (49) 22 (27)
----- ------ ----- ----- -----
Net realized gain (loss)
on investments......... (49) 22 (27)
----- ------ ----- ----- -----
Net unrealized
appreciation
(depreciation) of
investments:
Beginning of year......
End of year............ (210) 2,741 (738) (183) (540)
----- ------ ----- ----- -----
Net unrealized
appreciation
(depreciation) during
the year............... (210) 2,741 (738) (183) (540)
----- ------ ----- ----- -----
Net realized and
unrealized gain (loss)
on investments......... (210) 2,692 (716) (210) (540)
----- ------ ----- ----- -----
Net increase (decrease)
in net assets resulting
from operations........ $(252) $2,566 $(782) $ 178 $ 4
===== ====== ===== ===== =====
</TABLE>
See accompanying notes to financial statements
F-8
<PAGE>
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account of Provident Mutual Life
Insurance Company
Statements of Operations for the Period October 1, 1993 (Date of Inception ) to
December 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY AGGRESSIVE
GROWTH MARKET BOND MANAGED GROWTH INTERNATIONAL
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends............... $177 $162 $ 323 $191
---- ---- ----- ---- ------ ------
Net investment income.. 177 162 323 191
---- ---- ----- ---- ------ ------
NET UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net unrealized
appreciation
(depreciation) of
investments:
Beginning of period....
End of period.......... 37 (613) (261) $1,546 $1,783
---- ---- ----- ---- ------ ------
Net unrealized
appreciation
(depreciation) during
the period............. 37 (613) (261) 1,546 1,783
---- ---- ----- ---- ------ ------
Net increase in net
assets resulting from
operations............ $214 $162 $(290) $(70) $1,546 $1,783
==== ==== ===== ==== ====== ======
</TABLE>
See accompanying notes to financial statements
F-9
<PAGE>
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account 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
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income
(loss)................. $ 3,327 $ 2,849 $ 2,946 $ 3,726 $ (473) $ (1,222)
Net realized gain (loss)
on investments......... 1,417 (2,743) (2,056) 1,177 2,864
Net unrealized
appreciation
(depreciation) of
investments during the
year................... (510) (2,583) (2,999) 2,817 (8,211)
-------- ----------- -------- -------- -------- --------
Net increase (decrease)
in net assets from
operations............. 4,234 2,849 (2,380) (1,329) 3,521 (6,569)
-------- ----------- -------- -------- -------- --------
FROM VARIABLE ANNUITY
CONTRACT TRANSACTIONS
Contractowners' net
payments............... 7,776 1,952,633 16,865 (2,100) 8,376
Surrenders and
forfeitures............ (3,290) (1,311) (6,507) (48) (2,670)
Transfers between
investment portfolios.. 434,121 (1,688,526) 110,742 272,262 84,961 254,684
-------- ----------- -------- -------- -------- --------
Net increase in net
assets derived from
contract transactions.. 438,607 264,107 109,431 282,620 82,813 260,390
-------- ----------- -------- -------- -------- --------
Total increase in net
assets................. 442,841 266,956 107,051 281,291 86,334 253,821
NET ASSETS
Beginning of year...... 25,214 25,162 24,710 24,930 26,546 26,783
-------- ----------- -------- -------- -------- --------
End of year............ $468,055 $ 292,118 $131,761 $306,221 $112,880 $280,604
======== =========== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements
F-10
<PAGE>
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account of Provident Mutual Life
Insurance Company
Statements of Changes in Net Assets For the Year Ended December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIDELITY FIDELITY FIDELITY
HIGH EQUITY- FIDELITY ASSET FIDELITY
INCOME INCOME GROWTH MANAGER INDEX 500
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income
(loss)................. $ (24) $ 583 $ (131) $ (80) $ (12)
Net realized gain (loss)
on investments......... (121) (139) 62 1
Net unrealized
appreciation
(depreciation) of
investments during the
year................... (199) (505) 2,214 (1,913) 61
------- -------- -------- -------- -------
Net increase (decrease)
in net assets from
operations............. (344) (61) 2,145 (1,992) 49
------- -------- -------- -------- -------
FROM VARIABLE ANNUITY
CONTRACT TRANSACTIONS
Contractowners' net
payments............... 200 200 101 40
Transfers between
investment portfolios.. 11,708 171,938 76,086 86,865 6,688
------- -------- -------- -------- -------
Net increase in net
assets derived from
contract transactions.. 11,908 172,138 76,187 86,905 6,688
------- -------- -------- -------- -------
Capital contribution
from Provident Mutual
Life Insurance Company. 25,000 25,000 25,000 25,000 25,000
------- -------- -------- -------- -------
Total increase in net
assets................. 36,564 197,077 103,332 109,913 31,737
NET ASSETS
Beginning of year......
------- -------- -------- -------- -------
End of year............ $36,564 $197,077 $103,332 $109,913 $31,737
======= ======== ======== ======== =======
</TABLE>
See accompanying notes to financial statements
F-11
<PAGE>
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account of Provident Mutual Life
Insurance Company
Statements of Changes in Net Assets For the Year Ended December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
QUEST FOR QUEST FOR
QUEST FOR VALUE VALUE SCUDDER DREYFUS ZERO
VALUE EQUITY SMALL CAP MANAGED BOND COUPON 2000
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income
(loss)................. $ (42) $ (126) $ (66) $ 388 $ 544
Net realized gain (loss)
on investments......... (49) 22 (27)
Net unrealized
appreciation
(depreciation) of
investments during the
year................... (210) 2,741 (738) (183) (540)
------- -------- ------- ------- -------
Net increase (decrease)
in net assets from
operations............. (252) 2,566 (782) 178 4
------- -------- ------- ------- -------
FROM VARIABLE ANNUITY
CONTRACT TRANSACTIONS
Contractowners' net
payments............... 402 403
Transfers between
investment portfolios.. 34,148 74,105 54,968 8,212
------- -------- ------- ------- -------
Net increase in net
assets derived from
contract transactions.. 34,550 74,105 55,371 8,212
------- -------- ------- ------- -------
Capital contribution
from Provident Mutual
Life Insurance Company. 25,000 25,000 25,000 25,000 25,000
------- -------- ------- ------- -------
Total increase in net
assets................. 59,298 101,671 79,589 33,390 25,004
NET ASSETS
Beginning of year......
------- -------- ------- ------- -------
End of year............ $59,298 $101,671 $79,589 $33,390 $25,004
======= ======== ======= ======= =======
</TABLE>
See accompanying notes to financial statements
F-12
<PAGE>
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account of Provident Mutual Life
Insurance Company
Statements of Changes in Net Assets for the Period October 1, 1993 (Date of
Inception)
to December 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY AGGRESSIVE
GROWTH MARKET BOND MANAGED GROWTH INTERNATIONAL
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income $ 177 $ 162 $ 323 $ 191
Net unrealized
appreciation
(depreciation) of
investments during the
period................. 37 (613) (261) $ 1,546 $ 1,783
------- ------- ------- ------- ------- -------
Net increase (decrease)
in net assets from
operations............. 214 162 (290) (70) 1,546 1,783
------- ------- ------- ------- ------- -------
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................ 25,214 25,162 24,710 24,930 26,546 26,783
NET ASSETS
Beginning of period....
------- ------- ------- ------- ------- -------
End of period.......... $25,214 $25,162 $24,710 $24,930 $26,546 $26,783
======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements
F-13
<PAGE>
- -------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account of Provident Mutual
Life Insurance Company
Notes to Financial Statements
- -------------------------------------------------------------------------------
1. ORGANIZATION
The Provident Mutual Variable Annuity Separate Account (Separate Account) was
established on October 19, 1992 by Provident Mutual Life Insurance Company
(Provident Mutual) under the provisions of Pennsylvania law. The Separate
Account is an investment account to which net proceeds from individual
flexible premium deferred variable annuity contracts (the Contracts) are
allocated until maturity or termination of the Contracts.
Provident Mutual has structured the Separate Account into unit investment
trust form registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended. The Separate Account is comprised
of sixteen Subaccounts: the Growth, Money Market, Bond, Managed, Aggressive
Growth and International Subaccounts invest in the corresponding portfolios of
the Market Street Fund, Inc.; the Fidelity High Income, Fidelity Equity-Income
and Fidelity Growth Subaccounts invest in the corresponding portfolios of the
Variable Insurance Products Fund; the Fidelity Asset Manager and Fidelity
Index 500 Subaccounts invest in the corresponding portfolios of the Variable
Insurance Products Fund II; the Quest for Value Equity, Quest for Value Small
Cap and Quest for Value Managed Subaccounts invest in the corresponding
portfolios of the Quest for Value Accumulation Trust; the Scudder Bond
Subaccount invests in the Bond Portfolio of the Scudder Variable Life
Investment Fund; and the Dreyfus Zero Coupon 2000 Subaccount invests in the
Zero Coupon 2000 Portfolio of the Dreyfus Variable Investment Fund.
The Growth, Money Market, Bond, Managed, Aggressive Growth and International
Subaccounts are available to owners of a Market Street VIP contract. All
sixteen Subaccounts are available to owners of a Market Street VIP/2 contract.
Net premiums from the Contracts are allocated to the Subaccounts in accordance
with contractowner instructions and are recorded as variable annuity contract
transactions in the statements of changes in net assets. Such amounts are used
to provide money to pay contract values under the Contracts (Note 4). The
Separate Account's assets are the property of Provident Mutual.
Transfers between investment portfolios include transfers between the
Subaccounts 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 Account 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.
F-14
<PAGE>
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The Provident Mutual Variable Annuity Separate Account of Provident Mutual Life
Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 Account are included in the Federal income tax
return of Provident Mutual. Under the provisions of the Contracts, Provident
Mutual has the right to charge the Separate Account for Federal income tax
attributable to the Separate Account. No charge is currently being made against
the Separate Account for such tax.
3. INVESTMENTS
At December 31, 1994, the investments of the respective Subaccounts are as
follows:
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
SHARES COST MARKET VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Market Street Fund, Inc.:
Growth Portfolio................................. 33,451 $468,784 $468,311
Money Market Portfolio........................... 148,959 $148,959 $148,959
Bond Portfolio................................... 13,546 $134,996 $131,800
Managed Portfolio................................ 25,649 $309,506 $306,246
Aggressive Growth Portfolio...................... 7,312 $108,605 $112,968
International Portfolio.......................... 24,140 $287,175 $280,747
Variable Insurance Products Fund:
High Income Portfolio............................ 3,400 $36,787 $36,588
Equity-Income Portfolio.......................... 12,850 $197,757 $197,252
Growth Portfolio................................. 4,770 $101,249 $103,463
Variable Insurance Products Fund II:
Asset Manager Portfolio.......................... 7,976 $111,906 $109,993
Index 500 Portfolio.............................. 565 $31,688 $31,749
Quest for Value Accumulation Trust:
Equity Portfolio................................. 3,275 $59,550 $59,340
Small Cap Portfolio.............................. 5,857 $99,056 $101,797
Managed Portfolio................................ 3,824 $80,393 $79,655
Scudder Variable Life Investment Fund:
Bond Portfolio................................... 5,155 $33,586 $33,403
Dreyfus Variable Investment Fund:
Zero Coupon 2000 Portfolio....................... 2,195 $25,544 $25,004
</TABLE>
F-15
<PAGE>
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The Provident Mutual Variable Annuity Separate Account of Provident Mutual Life
Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS, CONTINUED
During the years ended December 31, 1994 and 1993, transactions in investment
shares were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET STREET FUND, INC.
- --------------------------------------------------------------------------------------
GROWTH PORTFOLIO MONEY MARKET PORTFOLIO BOND PORTFOLIO
- --------------------------------------------------------------------------------------
1994 1993 1994 1993 1994 1993
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased........ 39,805 1,776 1,710,083 25,000 12,751 2,176
Shares received from
reinvestment of:
Dividends.............. 418 13 2,816 106 349 28
Capital gain
distributions......... 1 56
-------- ------- ------------- --------- -------- -------
Total shares acquired... 40,224 1,789 1,712,899 25,106 13,156 2,204
Total shares redeemed... (8,562) (1,589,046) (1,814)
-------- ------- ------------- --------- -------- -------
Net increase in shares
owned.................. 31,662 1,789 123,853 25,106 11,342 2,204
Shares owned, beginning
of year................ 1,789 25,106 2,204
-------- ------- ------------- --------- -------- -------
Shares owned, end of
year................... 33,451 1,789 148,959 25,106 13,546 2,204
======== ======= ============= ========= ======== =======
Cost of shares acquired. $562,343 $25,177 $ 1,712,899 $ 25,106 $130,514 $25,323
======== ======= ============= ========= ======== =======
Cost of shares redeemed. $118,736 $ 1,589,046 $ 20,841
======== ======= ============= ========= ======== =======
</TABLE>
F-16
<PAGE>
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The Provident Mutual Variable Annuity Separate Account of Provident Mutual Life
Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET STREET FUND, INC.
- -----------------------------------------------------------------------------------
AGGRESSIVE GROWTH INTERNATIONAL
MANAGED PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------
1994 1993 1994 1993 1994 1993
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased........ 27,114 1,865 8,622 1,718 32,119 2,256
Shares received from
reinvestment of:
Dividends.............. 446 14 7
Capital gain
distributions......... 90 46
--------- -------- --------- -------- -------- -------
Total shares acquired... 27,650 1,879 8,622 1,718 32,172 2,256
Total shares redeemed... (3,880) (3,028) (10,288)
--------- -------- --------- -------- -------- -------
Net increase in shares
owned.................. 23,770 1,879 5,594 1,718 21,884 2,256
Shares owned, beginning
of year................ 1,879 1,718 2,256
--------- -------- --------- -------- -------- -------
Shares owned, end of
year................... 25,649 1,879 7,312 1,718 24,140 2,256
========= ======== ========= ======== ======== =======
Cost of shares acquired. $ 333,840 $ 25,191 $ 128,628 $ 25,000 $381,808 $25,000
========= ======== ========= ======== ======== =======
Cost of shares redeemed. $ 49,525 $ 45,023 $119,633
========= ======== ========= ======== ======== =======
</TABLE>
F-17
<PAGE>
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The Provident Mutual Variable Annuity Separate Account of Provident Mutual Life
Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VARIABLE INSURANCE VARIABLE INSURANCE
PRODUCTS FUND PRODUCTS FUND II
- -----------------------------------------------------------------------------------
HIGH EQUITY- ASSET
INCOME INCOME GROWTH MANAGER INDEX 500
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------
1994 1994 1994 1994 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shares purchased............. 3,865 13,124 4,858 8,109 565
Shares received from
reinvestment of dividends... 49
------- -------- -------- -------- -------
Total shares acquired........ 3,865 13,173 4,858 8,109 565
Total shares redeemed........ (465) (323) (88) (133)
------- -------- -------- -------- -------
Net increase in shares owned. 3,400 12,850 4,770 7,976 565
Shares owned, beginning of
year........................
------- -------- -------- -------- -------
Shares owned, end of year.... 3,400 12,850 4,770 7,976 565
======= ======== ======== ======== =======
Cost of shares acquired...... $41,846 $202,796 $103,111 $113,801 $31,688
======= ======== ======== ======== =======
Cost of shares redeemed...... $ 5,059 $ 5,039 $ 1,862 $ 1,895
======= ======== ======== ======== =======
</TABLE>
F-18
<PAGE>
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The Provident Mutual Variable Annuity Separate Account of Provident Mutual Life
Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SCUDDER DREYFUS
VARIABLE LIFE VARIABLE
QUEST FOR VALUE INVESTMENT INVESTMENT
ACCUMULATION TRUST FUND FUND
- -------------------------------------------------------------------------------------
EQUITY SMALL CAP MANAGED BOND ZERO COUPON
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO 2000 PORTFOLIO
- -------------------------------------------------------------------------------------
1994 1994 1994 1994 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shares purchased........ 3,275 5,968 3,914 5,289 2,149
Shares received from
reinvestment of
dividends.............. 62 46
------- -------- ------- ------- -------
Total shares acquired... 3,275 5,968 3,914 5,351 2,195
Total shares redeemed... (111) (90) (196)
------- -------- ------- ------- -------
Net increase in shares
owned.................. 3,275 5,857 3,824 5,155 2,195
Shares owned, beginning
of year................
------- -------- ------- ------- -------
Shares owned, end of
year................... 3,275 5,857 3,824 5,155 2,195
======= ======== ======= ======= =======
Cost of shares acquired. $59,550 $100,991 $82,304 $34,872 $25,544
======= ======== ======= ======= =======
Cost of shares redeemed. $ 1,935 $ 1,911 $ 1,286
======= ======== ======= ======= =======
</TABLE>
F-19
<PAGE>
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The Provident Mutual Variable Annuity Separate Account of Provident Mutual Life
Insurance Company
Notes to Financial Statements -- concluded
- --------------------------------------------------------------------------------
4. RELATED PARTY TRANSACTIONS
Certain deductions are made from the Subaccounts and/or the premiums by
Provident Mutual. The deductions may include (1) surrender charges, (2)
administration fees, (3) transfer processing fees, (4) mortality and expense
risk charges and (5) premium taxes.
There are no sales expenses deducted from premiums at the time the premiums are
paid. If a contract has not been in force for six full years, upon surrender or
for certain withdrawals, a surrender charge is deducted from the proceeds.
However, subject to certain restrictions, up to 10% of the contract account
value as of the beginning of a contract year may be surrendered or withdrawn
free of surrender charges. There were no surrenders in the 1993 period.
An annual administrative fee of $30 is deducted from the contract account value
on each contract anniversary date beginning one year from the issue date of the
contract. In addition, to compensate for costs associated with administration
of the Market Street VIP/2 contracts, Provident Mutual deducts a daily asset-
based administration charge from the assets of the Separate Account equal to an
annual rate of .15%. This daily asset-based administration charge is reported
in the mortality and expense risk charges in the statements of operations.
During any given contract year, the first four transfers by Market Street VIP
contractowners and the first twelve transfers by Market Street VIP/2
contractowners of amounts in the Subaccounts are free of charge. A fee of $25
is assessed for each additional transfer. No transfer fees were incurred during
1994 or 1993.
The Separate Account is charged a daily mortality and expense risk charge at an
annual rate of 1.20% for the Market Street VIP contracts and 1.25% for the
Market Street VIP/2 contracts. Provident Mutual reserves the right to increase
this charge for the Market Street VIP contracts, but in no event will it be
greater than 1.25%.
State premium taxes, when applicable, will be deducted depending upon when such
taxes are paid to the taxing authority. The premium taxes are deducted either
from premiums as they are received or from the proceeds upon withdrawal from or
surrender of the contract or upon application of the proceeds to a payment
option.
F-20
<PAGE>
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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, 1994 and 1993, and the related
statements of operations, changes in surplus and cash flows for each of the
three years in the period ended December 31, 1994. 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, 1994 and 1993, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1994, 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.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for investment valuation reserves and adopted an interest
maintenance reserve in 1992.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 6, 1995
F-21
<PAGE>
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Provident Mutual Life Insurance Company
Statements of Financial Condition
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
- -------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
ADMITTED ASSETS
Bonds................................................... $2,257,935 $1,565,475
Preferred stocks........................................ 16,831 21,350
Common stocks........................................... 9,651 14,729
Investments in unconsolidated subsidiaries.............. 36,993 35,138
Investment in real estate............................... 41,398 66,108
Real estate occupied by the company..................... 28,912 13,150
Policy loans............................................ 369,373 359,523
Mortgage loans.......................................... 664,663 655,260
Other long-term investments............................. 41,750 46,466
Cash and short-term investments......................... 55,973 45,642
---------- ----------
Total cash and invested assets....................... 3,523,479 2,822,841
Premiums due and deferred............................... 69,388 64,262
Investment income due and accrued....................... 66,807 54,764
Other assets............................................ 13,253 13,047
Separate account assets................................. 969,112 890,295
---------- ----------
Total admitted assets................................ $4,642,039 $3,845,209
========== ==========
LIABILITIES
Aggregate policy and claim reserves..................... $2,978,388 $2,390,187
Policyowners dividends payable.......................... 63,502 60,644
Other policyowners obligations.......................... 169,120 152,279
Other liabilities....................................... 153,632 98,515
Asset valuation reserve................................. 40,596 40,791
Interest maintenance reserve............................ 8,071 12,402
Separate account liabilities............................ 960,360 882,421
---------- ----------
Total liabilities.................................... 4,373,669 3,637,239
---------- ----------
SURPLUS
Unassigned surplus...................................... 263,212 203,069
Contingency reserve..................................... 5,158 4,901
---------- ----------
Total surplus........................................ 268,370 207,970
---------- ----------
Total liabilities and surplus........................ $4,642,039 $3,845,209
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE>
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Provident Mutual Life Insurance Company
Statements of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1994 1993 1992
- -------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME
Premium and annuity income...................... $677,740 $607,421 $515,896
Net investment income........................... 230,542 218,150 182,445
Other income.................................... 14,044 15,811 15,447
-------- -------- --------
Total income................................. 922,326 841,382 713,788
-------- -------- --------
BENEFITS AND EXPENSES
Life, accident and health, and other policy
benefits....................................... 561,967 532,488 405,993
Increase in aggregate policy reserves........... 84,628 81,537 92,795
Transfers to (from) separate accounts, net...... 20,951 (27,551) (12,361)
-------- -------- --------
667,546 586,474 486,427
-------- -------- --------
Commissions..................................... 37,563 34,513 32,316
General insurance expenses...................... 106,175 97,477 87,621
Insurance taxes, licenses and fees.............. 13,775 12,547 10,468
Federal income taxes............................ 18,668 21,531 15,139
-------- -------- --------
Total benefits and expenses.................. 843,727 752,542 631,971
-------- -------- --------
Net income before dividends to policyowners
and realized capital losses................. 78,599 88,840 81,817
Dividends to policyowners....................... 57,288 60,388 61,029
-------- -------- --------
Net income before realized capital losses.... 21,311 28,452 20,788
Realized capital losses, net of tax............. (7,227) (8,694) (2,057)
-------- -------- --------
Net income..................................... $ 14,084 $ 19,758 $ 18,731
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
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Provident Mutual Life Insurance Company
Statements of Changes in Surplus for the Years Ended
December 31, 1994, 1993 and 1992
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SURPLUS
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C>
Balance, January 1, 1992......................................... $183,995
Net income....................................................... 18,731
Net unrealized capital loss on investments....................... (6,830)
Increase in asset valuation reserve.............................. (5,325)
Other changes, net of increase in non-admitted assets............ 750
--------
Balance, December 31, 1992....................................... 191,321
Net income....................................................... 19,758
Net unrealized capital loss on investments....................... (1,340)
Increase in asset valuation reserve.............................. (3,868)
Other changes, net of increase 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
Decrease in asset valuation reserve.............................. 195
Other changes, net of decrease in non-admitted assets............ 3,285
--------
Balance, December 31, 1994....................................... $268,370
========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1993 1992
- -------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH PROVIDED
Net cash provided by operations:
Premiums and annuity considerations..... $ 657,954 $ 595,275 $ 502,709
Other deposits received................. 12,604 14,880 14,709
Allowances and reserve adjustments re-
ceived on reinsurance.................. 7,508 1,252 1,267
Investment income received, net of ex-
penses................................. 231,401 210,533 182,572
Other income received................... 9,196 2,051 3,191
Life, accident and health claims paid... (67,241) (78,411) (45,621)
Surrender benefits paid................. (279,727) (223,730) (168,525)
Other benefits paid to policyowners..... (209,564) (220,065) (191,849)
Commissions, insurance expenses and
other taxes paid....................... (167,698) (144,628) (129,289)
Funds transferred (from) to separate ac-
counts................................. 13,142 (20,700) 54,201
Dividends paid to policyowners.......... (62,700) (67,196) (62,713)
Federal income taxes paid............... (15,950) (15,369) (1,260)
Net decrease in policy loans and premium
notes.................................. 19,047 18,268 12,772
---------- ----------- ----------
Net cash provided by operations....... 147,972 72,160 172,164
---------- ----------- ----------
Investments sold, matured or repaid:
Bonds................................... 327,229 922,024 478,212
Stocks.................................. 18,407 19,229 30,786
Mortgage loans.......................... 90,777 78,218 56,593
Real estate and other invested assets... 39,933 26,118 10,457
---------- ----------- ----------
Total investments sold, matured or re-
paid................................. 476,346 1,045,589 576,048
---------- ----------- ----------
Cash and short-term investments of merged
companies................................ 18,591 18,613 --
Other cash provided....................... 11,056 6,360 10,030
---------- ----------- ----------
Total cash provided................... 653,965 1,142,722 758,242
---------- ----------- ----------
CASH APPLIED
Cost of investments acquired:
Bonds................................... 526,143 1,070,410 600,954
Stocks.................................. 9,855 17,201 22,346
Mortgage loans.......................... 81,787 58,226 83,127
Real estate and other invested assets... 20,218 16,557 13,525
---------- ----------- ----------
Total investments acquired............ 638,003 1,162,394 719,952
Other cash applied........................ 5,631 4,433 6,920
---------- ----------- ----------
Total cash applied.................... 643,634 1,166,827 726,872
---------- ----------- ----------
Net change in cash and short-term in-
vestments............................ 10,331 (24,105) 31,370
Cash and short-term investments:
Beginning of year....................... 45,642 69,747 38,377
---------- ----------- ----------
End of year............................. $ 55,973 $ 45,642 $ 69,747
========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
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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. Operations include the sale of individual traditional and
variable life insurance products, annuities, and a variety of pension products.
The Company's wholly-owned subsidiaries are Providentmutual Life and Annuity
Company of America (PLACA), Provident Mutual International Life Insurance
Company (PMILIC, formerly Continental American Life Insurance Company of
Delaware) and Providentmutual Holding Company (PHC).
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. At that time, Provident
Mutual changed its name from Provident Mutual Life Insurance Company of
Philadelphia.
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>
YEAR ENDED
DECEMBER 31,
TEN MONTHS ENDED -----------------
OCTOBER 31, 1994 1993 1992
---------------- -------- --------
<S> <C> <C> <C>
Statement of Operations Data:
Revenues, excl. capital gains (losses)..... $ 78,802 $105,397 $112,873
======== ======== ========
Net income (loss).......................... $ (8,889) $ 5,543 $ 7,702
======== ======== ========
<CAPTION>
DECEMBER 31,
-----------------
OCTOBER 31, 1994 1993 1992
---------------- -------- --------
<S> <C> <C> <C>
Statement of Financial Condition Data:
Assets..................................... $630,917 $627,157 $594,133
Liabilities................................ 585,807 574,776 544,803
-------- -------- --------
Surplus.................................... $ 45,110 $ 52,381 $ 49,330
======== ======== ========
</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 balance sheet at December 31,
1993 reflects the Company's assets and surplus combined with those of CALIC
adjusted for intercompany gains and intangible assets. 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 for the year ended December 31, 1993 includes the
activity of CALIC since January 31, 1993, the date of the merger. The balance
sheet at December 31, 1992 and statement of operations for the year ended
December 31, 1992 have not been restated to reflect the merger.
F-26
<PAGE>
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Organization, continued
PLACA specializes primarily in the development and sale of various annuity
products and sells certain traditional products, also sold by Provident Mutual,
through a personal producing general agency sales force.
PMILIC's business consists of life insurance assumed from its parent.
PHC is a downstream holding company whose major subsidiary is Sigma American
Corporation (Sigma). On February 28, 1993, pursuant to a plan of merger, the
Company combined the ProvidentMutual Family of Funds of Sigma with the fund
group of a third party. A joint venture general partnership was formed by both
companies to provide investment advisory, mutual fund distribution, trust and
administrative services to the merged group of mutual funds and other parties.
Sigma and its subsidiaries contributed their rights under service and advisory
contracts with the ProvidentMutual Family of Funds to the joint venture
partnerships. No gain or loss was recorded on this transaction.
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. Certain prior year amounts have been reclassified to conform
with the current year presentation.
In January 1995, the Financial Accounting Standards 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), that should be applied to those contracts that meet
the conditions in SFAS 120. SFAS 120 is effective for financial statements
issued for fiscal years beginning after December 15, 1995.
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.
On the effective date, financial statements of mutual life insurance companies
prepared on the basis of statutory accounting principles will no longer be
considered to be in conformity with generally accepted accounting principles.
The effects of implementing SFAS 120 and SOP 95-1 are not quantifiable at this
time.
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.
F-27
<PAGE>
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Invested Assets, continued
Common stocks are carried at market value. The cost of common stocks was
$12,936 and $13,828 at December 31, 1994 and 1993, 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.
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 $9,080 and
$11,177 at December 31, 1994 and 1993, respectively.
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
At January 1, 1992, the mandatory securities valuation reserve (MSVR) was
eliminated and replaced by the asset valuation reserve (AVR). An interest
maintenance reserve (IMR) was also established. The AVR is designed to mitigate
the effect of valuation and credit-related losses on surplus. The 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.
Voluntary contributions totalling $4,133 and $8,400 have been included in the
AVR in addition to the amounts required in 1994 and 1993, respectively.
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 $33,877 and $27,406 at December 31, 1994 and 1993,
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%.
F-28
<PAGE>
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Policy Reserves, continued
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 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, 1994 and
1993, the Company had guaranteed the payment of $10,000 in policyowner
dividends payable in 1995 and 1994, 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.
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.
F-29
<PAGE>
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
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, 1994 and 1993:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
--------------------- ---------------------
FAIR STATEMENT FAIR STATEMENT
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Bonds.............................. $2,152,129 $2,257,935 $1,660,274 $1,565,475
Common stock....................... $9,651 $9,651 $14,729 $14,729
Redeemable preferred stocks........ $4,834 $4,870 $6,732 $5,888
Nonredeemable preferred stocks..... $11,004 $11,961 $15,166 $15,462
Commercial mortgage loans.......... $669,737 $663,146 $716,635 $653,386
Residential mortgage loans......... $1,506 $1,517 $2,090 $1,874
LIABILITIES FOR INVESTMENT-TYPE IN-
SURANCE CONTRACTS
Guaranteed interest contracts...... $378,462 $387,898 $411,085 $395,262
Group annuities.................... $853,590 $899,353 $846,300 $849,581
Supplementary contracts without
life contingencies................ $27,683 $27,695 $25,435 $25,297
Individual annuities............... $463,797 $467,678 $213,159 $213,806
</TABLE>
The underlying investment risk of the Company's variable life and variable
annuity contracts is assumed by the owner. These reserve liabilities are
included in the separate accounts and 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
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 were 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.
F-30
<PAGE>
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
2. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
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 $387,112 and $378,444,
respectively, at December 31, 1994 and $396,397 and $409,674, respectively, at
December 31, 1993.
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, 1994 and 1993 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-------------------------------------------
GROSS GROSS
STATEMENT UNREALIZED UNREALIZED ESTIMATED
VALUE GAINS LOSSES FAIR 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........ 4,870 89 125 4,834
---------- ------- -------- ----------
Total.......................... $2,262,805 $19,323 $125,165 $2,156,963
========== ======= ======== ==========
</TABLE>
F-31
<PAGE>
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. DEBT SECURITIES AND REDEEMABLE PREFERRED STOCKS, CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-------------------------------------------
GROSS GROSS
STATEMENT UNREALIZED UNREALIZED ESTIMATED
VALUE GAINS LOSSES FAIR VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies......... $ 35,536 $ 1,153 $1,431 $ 35,258
Obligations of states and political
subdivisions...................... 26,156 1,946 -- 28,102
Debt securities issued by foreign
governments....................... 22,220 929 336 22,813
Corporate securities including
mortgage-backed securities........ 1,481,563 100,143 7,605 1,574,101
---------- -------- ------ ----------
Subtotal--bonds................ 1,565,475 104,171 9,372 1,660,274
Redeemable preferred stocks........ 5,888 881 37 6,732
---------- -------- ------ ----------
Total.......................... $1,571,363 $105,052 $9,409 $1,667,006
========== ======== ====== ==========
</TABLE>
The statement value and estimated fair value of debt securities and redeemable
preferred stocks at December 31, 1994, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
STATEMENT ESTIMATED
VALUE FAIR VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less.................................. $ 34,612 $ 34,519
Due after one year through five years.................... 390,654 387,445
Due after five years through ten years................... 836,273 801,435
Due after ten years...................................... 996,396 928,730
---------- ----------
Subtotal--bonds...................................... 2,257,935 2,152,129
Redeemable preferred stocks.............................. 4,870 4,834
---------- ----------
Total................................................ $2,262,805 $2,156,963
========== ==========
</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
1994, 1993 and 1992 were $327,229, $922,024 and $478,212, respectively. Gross
gains of $6,513, $15,803 and $7,485 and gross losses of $11,334, $5,088 and
$2,339 were realized on those sales in 1994, 1993 and 1992, respectively.
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, NET INCOME OTHER SURPLUS DECEMBER 31,
1993 (LOSS) TRANSACTIONS 1994
------------ ---------- ------------------ ------------
<S> <C> <C> <C> <C>
Provident Mutual
International Life
Insurance Company...... $ 1,521 $ 141 $(25) $ 1,637
Providentmutual Holding
Company................ 5,029 577 368 5,974
Providentmutual Life and
Annuity Company of
America................ 28,588 726 68 29,382
------- ------ ---- -------
$35,138 $1,444 $411 $36,993
======= ====== ==== =======
</TABLE>
F-32
<PAGE>
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
4. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES, CONTINUED
The Company's unconsolidated subsidiaries had combined assets of $520,846 and
$438,786 and liabilities of $483,853 and $403,648 at December 31, 1994 and
1993, 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. In December 1993, the Company received a return of capital of
$4,033 from PHC. In addition, the Company contributed $8,000 of capital to
PLACA in June 1993.
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 $2,151, $2,374 and $1,907 in 1994, 1993 and
1992, respectively. The Company's funding policy is to contribute annually the
maximum amount deductible for Federal income tax purposes.
Effective January 1, 1993, CALIC's defined benefit and 401(k) savings plans
were merged into the corresponding plans of the Company.
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,
-----------------
1994 1993
-------- --------
<S> <C> <C>
Actuarial present value of accumulated plan benefits at 8%:
Vested..................................................... $ 58,549 $ 56,742
Nonvested.................................................. 1,941 1,325
-------- --------
$ 60,490 $ 58,067
======== ========
Net assets available for benefits.......................... $106,456 $110,023
======== ========
</TABLE>
Effective January 1, 1995, the Covenant Life Insurance Company Pension Plan
will be merged into the Company's defined benefit plan. The actuarial present
value of accumulated plan benefits at 7.5% as of 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 $3,411, $2,829 and
$2,807 in 1994, 1993 and 1992, respectively. At December 31, 1994 and 1993, the
actuarially determined accrued liability of the unfunded plans was $10,130 and
$7,824, 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.
F-33
<PAGE>
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
5. BENEFIT PLANS, CONTINUED
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 for retirees and fully eligible or vested employees over
20 years. The transition obligation was $31,681 at January 1, 1993. Plan assets
totalled $5,801 at January 1, 1993.
Net postretirement benefit costs for the years ended December 31, 1994 and 1993
were $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, 1994 and 1993, the unfunded postretirement benefit obligation
for retirees and other fully eligible or vested plan participants was $33,321
and $37,482, respectively. The obligation at December 31, 1994 includes $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
$3,609 and $3,704, respectively. The discount rate used in determining the
accumulated postretirement benefit obligation was 7.5%, and the health care
cost trend rate was 10%, 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, 1994 by $2,111 and the estimated
eligibility cost and interest cost components of net periodic postretirement
benefit cost for 1994 by $157.
In January 1991, the Company established a retiree health account under the
provisions of Section 401(h) of the Internal Revenue Code. In December 1994,
the Company transferred $1,600 of excess assets from the defined benefit
pension plan to pay for 1994 qualified retiree health benefits. An additional
transfer of excess assets in the amount of $1,384 was made in December 1993 to
pay for 1993 qualified retiree health benefits. In December 1992, $1,600 of
excess assets were transferred to pay for 1992 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, 1994 are as follows:
<TABLE>
<S> <C>
Reserves
Subject to discretionary withdrawal--with adjustment:
--with market value adjustment..................................... $ 955,245
--at book value less surrender charges............................. 141,461
----------
Subtotal......................................................... 1,096,706
Subject to discretionary withdrawal--without adjustment:
--at book value (minimal or no charge or adjustment)............... 777,828
Not subject to discretionary withdrawal provision.................... 458,014
----------
Total annuity actuarial reserves and deposit liabilities (gross)..... 2,332,548
Less: reinsurance.................................................. 357,521
----------
Total annuity actuarial reserves and deposit liabilities (net)... $1,975,027
==========
</TABLE>
The amounts above are included in the statement of financial condition as life
insurance and annuity reserves totalling $1,235,059 and separate account
liabilities totalling $739,968.
F-34
<PAGE>
- --------------------------------------------------------------------------------
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, 1994:
Life insurance in force......... $27,633,503 $8,803,212 $536,150 $19,366,441
=========== ========== ======== ===========
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
=========== ========== ======== ===========
December 31, 1992:
Life insurance in force......... $19,750,353 $6,027,791 $109,380 $13,831,942
=========== ========== ======== ===========
Premiums........................ $ 527,776 $ 12,726 $ 846 $ 515,896
=========== ========== ======== ===========
Reserves........................ $ 2,210,369 $ 285,908 $ 1,233 $ 1,925,694
=========== ========== ======== ===========
</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 $99,888 and $278,573, respectively, at December 31, 1994, $24,413
and $193,039, respectively, at December 31, 1993, and $19,420 and $183,990,
respectively, at December 31, 1992.
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 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, 1994 and
1993.
Approximately $235,712 and $133,489 of PLACA's life insurance in force was
assumed by the Company under reinsurance agreements at December 31, 1994 and
1993, respectively.
The Company remains contingently liable with respect to ceded insurance should
any reinsurer be unable to meet its contractual obligations.
F-35
<PAGE>
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
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 $158, $5,755 and
$4,395 for the years ended December 31, 1994, 1993 and 1992, respectively, and
includes the following components:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------ -------
<S> <C> <C> <C>
Gross current year equity tax expense................. $ 6,375 $6,175 $ 6,000
Subsidiary equity tax allocation...................... (550) (420) (1,605)
True down of 1992 equity tax.......................... (5,667) -- --
------- ------ -------
$ 158 $5,755 $ 4,395
======= ====== =======
</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>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Federal income tax at statutory rate................. $13,994 $17,495 $12,214
Equity tax........................................... 158 5,755 4,395
Nontaxable intercompany dividends.................... -- -- (2,550)
Specified policy acquisition costs................... 4,804 4,624 4,253
Difference between statutory and tax reserves........ 1,215 (57) (679)
Policyholder dividends............................... (1,798) (5,918) (454)
Other................................................ 295 (368) (2,040)
------- ------- -------
Provision for Federal income tax from operations..... $18,668 $21,531 $15,139
======= ======= =======
</TABLE>
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 the present are still open. The Company has contested certain issues
arising from the IRS examination of the tax returns for years 1983 through
1985. 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, 1994 and 1993 totaled
approximately $134,097 and $152,305, 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
$9,457, $9,740 and $8,897 for the years ended December 31, 1994, 1993 and 1992,
respectively.
F-36
<PAGE>
- --------------------------------------------------------------------------------
Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
9. RELATED PARTY TRANSACTIONS, CONTINUED
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 1995 and
2000. Most of the leases contain renewal and purchase options based on
prevailing fair market values.
Future minimum rent payments required under non-cancelable operating leases in
effect at December 31, 1994, and which have initial or remaining terms of one
year or more, are summarized as follows:
<TABLE>
<S> <C>
Year ending December 31:
1995.......................................................... $11,705
1996.......................................................... 10,084
1997.......................................................... 8,234
1998.......................................................... 7,200
1999.......................................................... 863
Thereafter.................................................... 16
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Total minimum payments required............................. $38,102
=======
</TABLE>
Rent expense for the years ended December 31, 1994, 1993 and 1992 relating to
these leases amounted to $17,180, $16,732 and $17,105, 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, call options written, 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, 1994, the Company had outstanding mortgage loan, real estate
and limited partnership commitments of approximately $24,374. The mortgage loan
commitments, which expire through December 1996, were issued during 1994 at
interest rates consistent with rates applicable on December 31, 1994. 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.
F-37
<PAGE>
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Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
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10. COMMITMENTS AND CONTINGENCIES, CONTINUED
Financial Instruments With Off-Balance-Sheet Risk, continued
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.
Derivative products 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 had closed out hedge
positions consisting of 2,253 treasury futures contracts with a dollar value of
$225,300 in 1994, 711 treasury futures contracts with a dollar value of $71,100
in 1993 and 971 treasury futures contracts with a dollar value of $97,100 in
1992. The approximate net gains generated from the hedge positions were $1,121,
$439 and $81 for the years ended December 31, 1994, 1993 and 1992,
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 each of December 31, 1994 and December 31, 1993,
respectively. The average unexpired term of the swaps outstanding was 1.75
years as of December 31, 1994.
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. At December 31, 1994,
securities valued at $5,750 were on loan with collateral equalling 105% of the
market value of the securities lent.
Investment Portfolio Credit Risk
Bonds
The Company's bond investment portfolio is predominately comprised of
investment grade securities. At December 31, 1994 and 1993, approximately
$92,026 and $92,662, respectively, in debt security investments (4.0% and
5.9%, 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, 1994 and 1993 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, 1994 and 1993, delinquent mortgage loans (i.e., loans where
payments on principal and/or interest are over 90 days past due) totalled
$11,571 and $9,836, respectively, or 1.7% and 1.5%, respectively, of the
mortgage loan portfolio.
F-38
<PAGE>
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Provident Mutual Life Insurance Company
Notes to Financial Statements -- concluded
- --------------------------------------------------------------------------------
10. COMMITMENTS AND CONTINGENCIES, CONTINUED
Investment Portfolio Credit Risk, continued
Mortgage Loans, continued
The Company had loans outstanding in the following states where principal
balances in the aggregate exceeded 20% of the Company's surplus:
California Pennsylvania Virginia
Lines of Credit
The Company has approximately $42,000 of available unused lines of credit at
December 31, 1994.
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 $2,174, $1,442 and $1,328 in
1994, 1993 and 1992, respectively. Of those amounts, $1,653, $700 and $744 in
1994, 1993 and 1992, respectively, are creditable against future years' premium
taxes.
F-39
