<PAGE> 1
PART A
INFORMATION REQUIRED TO BE IN THE PROSPECTUS
<PAGE> 2
INTERESTS IN INDIVIDUAL FLEXIBLE PREMIUM
DEFERRED VARIABLE ANNUITY CONTRACTS
Issued by
PROVIDENT MUTUAL VARIABLE ANNUITY
SEPARATE ACCOUNT
and
PROVIDENT MUTUAL LIFE INSURANCE COMPANY
<TABLE>
<S> <C>
SERVICE CENTER CORPORATE HEADQUARTERS
300 CONTINENTAL DRIVE 1000 CHESTERBROOK BLVD.
NEWARK, DELAWARE 19713 BERWYN, PENNSYLVANIA 19312
</TABLE>
PHONE: 1-800-688-5177
PROSPECTUS
May 1, 2000
This prospectus describes an individual flexible premium deferred variable
annuity contract ("Contract") issued by Provident Mutual Life Insurance Company.
This prospectus provides information that a prospective owner should know before
investing in the Contract.
You can allocate your Contract's values to:
-- Provident Mutual Variable Annuity Separate Account (the "Variable
Account"), which invests in the portfolios listed on this page; or
-- the Guaranteed Account, which credits a specified rate of interest.
A prospectus for each of the portfolios available through the Variable Account
(the "Portfolios") must accompany this prospectus. Please read these documents
before investing and save them for future reference.
To learn more about the Contract, you should read the Statement of Additional
Information ("SAI") dated May 1, 2000. For a free copy of the SAI, please call
or write to us at our Service Center.
The SAI has been filed with the Securities and Exchange Commission ("SEC") and
is incorporated by reference into this prospectus. The Table of Contents for the
SAI appears on page 42 of this prospectus. The SEC maintains an Internet website
(http://www.sec.gov) that contains the SAI and other information.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PLEASE NOTE THAT THE CONTRACT AND THE PORTFOLIOS:
-- ARE NOT GUARANTEED TO ACHIEVE THEIR GOALS;
-- ARE NOT FEDERALLY INSURED;
-- ARE NOT ENDORSED BY ANY BANK OR GOVERNMENT AGENCY; AND
-- ARE SUBJECT TO RISKS, INCLUDING LOSS OF THE AMOUNT INVESTED.
It may not be advantageous to replace existing insurance with the Contract.
The following Portfolios are available:
-- MARKET STREET FUND, INC.
All Pro Large Cap Growth Portfolio
All Pro Large Cap Value Portfolio
All Pro Small Cap Growth Portfolio
All Pro Small Cap Value Portfolio
Equity 500 Index Portfolio
International Portfolio
Growth Portfolio
Aggressive Growth Portfolio
Managed Portfolio
Bond Portfolio
Money Market Portfolio
-- SCUDDER VARIABLE LIFE INVESTMENT FUND
Bond Portfolio
Growth and Income Portfolio
International Portfolio
-- OCC ACCUMULATION TRUST
Equity Portfolio
Managed Portfolio
Small Cap Portfolio
-- DREYFUS VARIABLE INVESTMENT FUND
Growth and Income Portfolio
Zero Coupon 2000 Portfolio
-- THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
Socially Responsible Portfolio
-- FEDERATED INSURANCE SERIES
Fund for U.S. Government Securities II
Portfolio
Utility Fund II Portfolio
-- STRONG VARIABLE INSURANCE FUNDS, INC.
Strong Mid Cap Growth Fund II
-- STRONG OPPORTUNITY FUND II, INC.
Strong Opportunity Fund II
-- VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond Portfolio
Worldwide Emerging Markets Portfolio
Worldwide Hard Assets Portfolio
Worldwide Real Estate Portfolio
-- VARIABLE INSURANCE PRODUCTS FUND
Equity-Income Portfolio
Growth Portfolio
High Income Portfolio
-- VARIABLE INSURANCE PRODUCTS FUND II
Asset Manager Portfolio
Contrafund(R) Portfolio
<PAGE> 3
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GLOSSARY.............................. 1
TABLE OF EXPENSES..................... 3
CONTRACT SUMMARY...................... 9
The Contract........................ 9
Charges and Deductions.............. 10
Annuity Provisions.................. 11
Federal Tax Status.................. 11
PMLIC, THE VARIABLE ACCOUNT AND THE
PORTFOLIOS.......................... 12
Provident Mutual Life Insurance
Company (PMLIC).................. 12
Provident Mutual Variable Annuity
Separate Account (Variable
Account)......................... 12
The Funds........................... 13
Resolving Material Conflicts........ 21
Addition, Deletion or Substitution
of Investments................... 21
DESCRIPTION OF ANNUITY CONTRACT....... 22
Purchasing a Contract............... 22
Cancellation (Free-Look) Period..... 22
Premiums............................ 22
Allocation of Net Premiums.......... 22
Variable Account Value.............. 23
Transfer Privilege.................. 24
Dollar Cost Averaging............... 25
Withdrawals and Surrender........... 26
Death Benefit Before Maturity
Date............................. 27
Proceeds on Maturity Date........... 28
Payments............................ 29
Modification........................ 29
Reports to Contract Owners.......... 29
Contract Inquiries.................. 29
THE GUARANTEED ACCOUNT................ 29
Minimum Guaranteed and Current
Interest Rates................... 30
Calculation of Guaranteed Account
Value............................ 30
Transfers from Guaranteed Account... 30
Payment Deferral.................... 31
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CHARGES AND DEDUCTIONS................ 31
Surrender Charge (Contingent
Deferred Sales Charge)........... 31
Administrative Charges.............. 32
Mortality and Expense Risk Charge... 32
Investment Advisory Fees and Other
Expenses of the Portfolios....... 32
Premium Taxes....................... 33
Other Taxes......................... 33
PAYMENT OPTIONS....................... 33
Election of Payment Options......... 33
Description of Payment Options...... 33
YIELDS AND TOTAL RETURNS.............. 34
FEDERAL TAX STATUS.................... 36
Introduction........................ 36
Tax Status of the Contracts......... 36
Taxation of Annuities -- In
General.......................... 37
Taxation of Non-Qualified
Contracts........................ 37
Taxation of Qualified Contracts..... 38
Withholding......................... 39
Possible Changes in Taxation........ 39
Other Tax Consequences.............. 39
DISTRIBUTION OF CONTRACTS............. 40
LEGAL PROCEEDINGS..................... 40
VOTING PORTFOLIO SHARES............... 40
FINANCIAL STATEMENTS.................. 41
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS................... 42
APPENDIX A -- FINANCIAL HIGHLIGHTS.... A-1
</TABLE>
i
<PAGE> 4
GLOSSARY
- --------------------------------------------------------------------------------
ACCUMULATION UNIT
A unit of measure used to calculate Subaccount Value.
ANNUITANT
The person whose life determines the annuity payments payable under the Contract
and whose death determines the death benefit.
APPLICATION
The application you must complete to purchase a Contract plus all forms required
by us or applicable law.
BENEFICIARY
The person to whom we pay the death benefit upon the death of the Owner or the
Annuitant. If the Contract has joint Owners, then the surviving joint Owner is
the Beneficiary.
CANCELLATION (FREE-LOOK) PERIOD
The period described in this prospectus during which the Owner may return this
Contract for a refund.
CODE
The Internal Revenue Code of 1986, as amended.
CONTRACT
The individual flexible premium deferred variable annuity contract issued by us
and offered in this prospectus.
CONTRACT ACCOUNT VALUE
The sum of the Variable Account Value and the Guaranteed Account Value.
CONTRACT ANNIVERSARY
The same date in each Contract Year as the Contract Date.
CONTRACT DATE
The date as of which we issue the Contract and upon which the Contract becomes
effective. The Contract Date is used to determine Contract Years and Contract
Anniversaries.
CONTRACT YEAR
A twelve-month period beginning on the Contract Date or on a Contract
Anniversary.
FUND
Any mutual fund in which a Subaccount invests.
GENERAL ACCOUNT
The assets that belong to us other than those assets allocated to the Variable
Account or any of our other separate accounts.
GUARANTEED ACCOUNT
An account that is part of our General Account and is not part of, or dependent
upon, the investment performance of the Variable Account.
GUARANTEED ACCOUNT VALUE
The Net Premiums allocated and amounts transferred to the Guaranteed Account,
plus interest credited to the Guaranteed Account, minus amounts deducted,
transferred, or withdrawn from the Guaranteed Account.
MATURITY DATE
The date as of which the Contract Account Value is applied to a Payment Option
(or, if you elect to receive a lump sum, the date as of which you will receive
the Surrender Value). The latest possible Maturity Date is normally the later of
the Contract Anniversary nearest the Annuitant's age 85, or 10 years after the
Contract Date. Notwithstanding the Maturity Date, Qualified Contracts may
require that distributions begin at an earlier date.
MONEY MARKET SUBACCOUNT
The Subaccount that holds shares of the Money Market Portfolio of Market Street
Fund, Inc.
NET ASSET VALUE PER SHARE
The value per share of any Portfolio on any Valuation Day. The method of
computing the Net Asset Value Per Share is described in the prospectus for a
Portfolio.
NET PREMIUM
The premium you pay less any premium tax deducted from the premium.
NON-QUALIFIED CONTRACT
A Contract that is not a Qualified Contract.
NOTICE
A request or notice in writing or otherwise in a form satisfactory to us that is
signed by you and received at our Service Center. You may obtain the necessary
form by calling us at (800) 688-5177.
1
<PAGE> 5
OWNER (YOU, YOUR)
The person who owns the Contract. The Owner is entitled to exercise all rights
and privileges provided in the Contract. Provisions relating to action by the
Owner mean, in the case of joint Owners, both Owners acting jointly. Joint
Owners must be spouses.
PAYEE
The person entitled to receive annuity payments under the Contract. The
designation of a Payee other than the Annuitant requires our consent.
PAYMENT OPTION
One of the annuity payment options available under the Contract.
PORTFOLIO
An investment portfolio of a Fund.
PMLIC (WE, OUR, US)
Provident Mutual Life Insurance Company.
QUALIFIED CONTRACT
A Contract issued in connection with retirement plans that qualify for special
federal income tax treatment under the Code.
RIDER
An amendment, addition, or endorsement to the Contract that changes the terms of
the Contract by: (1) expanding Contract benefits; (2) restricting Contract
benefits: or (3) excluding certain conditions from the Contract's coverage. A
Rider that is added to the Contract becomes part of the Contract.
SEC
The U.S. Securities and Exchange Commission.
SERVICE CENTER
Our technology and service office at 300 Continental Drive, Newark, Delaware
19713.
SUBACCOUNT
A subdivision of the Variable Account.
SUBACCOUNT VALUE
Before the Maturity Date, the amount equal to that part of any Net Premium
allocated to a Subaccount plus any amounts transferred to that Subaccount as
adjusted by any interest income, dividends, net capital gains or losses,
realized or unrealized, and decreased by withdrawals (including any applicable
Surrender Charges and premium tax charges), other charges and any amounts
transferred out of that Subaccount.
SURRENDER CHARGE
A charge that we deduct if a withdrawal or surrender occurs during the first six
Contract Years. This charge is sometimes called a "contingent deferred sales
charge."
SURRENDER VALUE
The Contract Account Value less: (1) any applicable Surrender Charge, (2)
premium tax charges not previously deducted, and (3) the annual administration
fee, if applicable.
TRANSFER PROCESSING FEE
The fee we charge for additional Subaccount amounts transferred after the
twelfth transfer of Subaccount amounts within one Contract Year.
VALUATION DAY
For each Subaccount, each day that the New York Stock Exchange is open for
business and on days when trading of shares within a Subaccount is sufficient to
affect materially the value of the Subaccount.
VALUATION PERIOD
The period beginning at the close of business on one Valuation Day (usually 4:00
p.m. Eastern Time) and continuing to the close of business on the next Valuation
Day.
VARIABLE ACCOUNT
Providentmutual Variable Annuity Separate Account.
VARIABLE ACCOUNT VALUE
The sum of all Subaccount Values.
2
<PAGE> 6
TABLE OF EXPENSES
The following information regarding expenses assumes that the entire
Contract Account Value is in the Variable Account.
CONTRACT OWNER TRANSACTION EXPENSES
<TABLE>
<S> <C> <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)................. 0.15%
----
Total Variable Account
Annual Expenses............................ 1.40%
</TABLE>
<TABLE>
<CAPTION>
ALL PRO ALL PRO ALL PRO ALL PRO
LARGE CAP LARGE CAP SMALL CAP SMALL CAP EQUITY 500
GROWTH VALUE GROWTH VALUE INDEX
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
MARKET STREET FUND, INC. ("MARKET STREET
FUND") ANNUAL EXPENSES
(as a percentage of average net assets)
Management Fees
(Investment Advisory Fees)................. 0.70% 0.70% 0.90% 0.90% 0.24%
Other Expenses (after reimbursement)(3)...... 0.19% 0.21% 0.21% 0.30% 0.04%
---- ---- ---- ---- ----
Total Fund Annual Expenses (after
reimbursement)(4).......................... 0.89% 0.91% 1.11% 1.20% 0.28%
</TABLE>
<TABLE>
<CAPTION>
AGGRESSIVE MONEY
INTERNATIONAL GROWTH GROWTH MANAGED BOND MARKET
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
MARKET STREET FUND, INC. ANNUAL EXPENSES
(as a percentage of average net assets)
Management Fees
(Investment Advisory Fees)................. 0.75% 0.32% 0.41% 0.40% 0.35% 0.25%
Other Expenses (after reimbursement)......... 0.23% 0.16% 0.16% 0.17% 0.17% 0.15%
---- ---- ---- ---- ---- ----
Total Fund Annual Expenses (after
reimbursement)(4).......................... 0.98% 0.48% 0.57% 0.57% 0.52% 0.40%
</TABLE>
3
<PAGE> 7
<TABLE>
<CAPTION>
GROWTH
AND
BOND INCOME INTERNATIONAL
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- -------------
<S> <C> <C> <C>
SCUDDER VARIABLE LIFE INVESTMENT FUND
("SCUDDER FUND") ANNUAL EXPENSES(5)
(as a percentage of average net assets)
Management Fees
(Investment Advisory Fees)................. 0.48% 0.48% 0.85%
Other Expenses............................... 0.09% 0.07% 0.18%
---- ---- ----
Total Fund Annual Expenses................... 0.57% 0.55% 1.03%
</TABLE>
<TABLE>
<CAPTION>
SMALL
EQUITY MANAGED CAP
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ---------
<S> <C> <C> <C>
OCC ACCUMULATION TRUST ("OCC TRUST") ANNUAL
EXPENSES(5)
(as a percentage of average net assets)
Management Fees
(Investment Advisory Fees)................. 0.80% 0.77% 0.80%
Other Expenses............................... 0.11% 0.06% 0.09%
---- ---- ----
Total Fund Annual Expenses................... 0.91% 0.83% 0.89%
</TABLE>
<TABLE>
<CAPTION>
GROWTH ZERO
AND COUPON
INCOME 2000
PORTFOLIO PORTFOLIO
--------- ---------
<S> <C> <C>
DREYFUS VARIABLE INVESTMENT FUND ("DREYFUS
FUND") ANNUAL EXPENSES(5)
(as a percentage of average net assets)
Management Fees
(Investment Advisory Fees)................. 0.75% 0.45%
Other Expenses............................... 0.04% 0.19%
---- ----
Total Fund Annual Expenses................... 0.79% 0.64%
</TABLE>
<TABLE>
<CAPTION>
SOCIALLY
RESPONSIBLE
PORTFOLIO
-----------
<S> <C>
THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND,
INC. ("DREYFUS SOCIALLY RESPONSIBLE FUND")
ANNUAL EXPENSES(5)
(as a percentage of average net assets)
Management Fees
(Investment Advisory Fees)................. 0.75%
Other Expenses............................... 0.04%
----
Total Fund Annual Expenses................... 0.79%
</TABLE>
<TABLE>
<CAPTION>
FUND FOR U.S.
GOVERNMENT UTILITY
SECURITIES II FUND II
PORTFOLIO PORTFOLIO
------------- ---------
<S> <C> <C>
FEDERATED INSURANCE SERIES ("FEDERATED
SERIES") ANNUAL EXPENSES(5)
(as a percentage of average net assets)
Management Fees
(Investment Advisory Fees)................. 0.60% 0.75%
Other Expenses............................... 0.24% 0.19%
---- ----
Total Fund Annual Expenses................... 0.84% 0.94%
</TABLE>
4
<PAGE> 8
<TABLE>
<CAPTION>
MID CAP
GROWTH
FUND II
PORTFOLIO
-----------
<S> <C> <C> <C> <C>
STRONG VARIABLE INSURANCE FUND
("STRONG FUND") ANNUAL EXPENSES(5)
(as a percentage of average net assets)
Management Fees
(Investment Advisory Fees)................. 1.00%
Other Expenses (after reimbursement)......... 0.15%
----
Total Fund Annual Expenses
(after reimbursement)(4)................... 1.15%
</TABLE>
<TABLE>
<CAPTION>
OPPORTUNITY
FUND II
PORTFOLIO
-----------
<S> <C> <C> <C> <C>
STRONG OPPORTUNITY FUND II, INC.
("STRONG OPPORTUNITY FUND") ANNUAL
EXPENSES(5)
(as a percentage of average net assets)
Management Fees
(Investment Advisory Fees)................. 1.00%
Other Expenses (after reimbursement)......... 0.14%
----
Total Fund Annual Expenses
(after reimbursement)(4)................... 1.14%
</TABLE>
<TABLE>
<CAPTION>
WORLDWIDE WORLDWIDE WORLDWIDE
WORLDWIDE EMERGING HARD REAL
BOND MARKETS ASSETS ESTATE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
VAN ECK WORLDWIDE INSURANCE TRUST
("VAN ECK TRUST") ANNUAL EXPENSES(5)
(as a percentage of average net assets)
Management Fees
(Investment Advisory Fees)................. 1.00% 1.00% 1.00% 1.00%
Other Expenses (after reimbursement)......... 0.22% 0.34% 0.26% 0.44%
---- ---- ---- ----
Total Fund Annual Expenses (after
reimbursement)(4).......................... 1.22% 1.34% 1.26% 1.44%
</TABLE>
<TABLE>
<CAPTION>
EQUITY- HIGH
INCOME GROWTH INCOME
PORTFOLIO PORTFOLIO PORTFOLIO
----------- --------- ---------
<S> <C> <C> <C> <C>
VARIABLE INSURANCE PRODUCTS FUND ("VIP FUND")
ANNUAL EXPENSES(5)
(as a percentage of average net assets)
Management Fees
(Investment Advisory Fees)................. 0.48% 0.58% 0.58%
Other Expenses (after reimbursement)......... 0.08% 0.07% 0.11%
---- ---- ----
Total Fund Annual Expenses (after
reimbursement)(4).......................... 0.56% 0.65% 0.69%
</TABLE>
5
<PAGE> 9
<TABLE>
<CAPTION>
ASSET
MANAGER CONTRAFUND(R)
PORTFOLIO PORTFOLIO
--------- -------------
<S> <C> <C>
VARIABLE INSURANCE PRODUCTS FUND II ("VIP II
FUND") ANNUAL EXPENSES(5)
(as a percentage of average net assets)
Management Fees
(Investment Advisory Fees)................. 0.53% 0.58%
Other Expenses (after reimbursement)......... 0.09% 0.07%
---- ----
Total Fund Annual Expenses (after
reimbursement)(4).......................... 0.62% 0.65%
</TABLE>
Premium taxes may be applicable, depending on the laws of your state.
The above Table of Expenses is intended to assist you in understanding the
costs and expenses that you will bear, directly or indirectly. Except as stated
in the footnotes below, the table reflects expenses of the Variable Account and
the Funds for the 1999 calendar year. For a more complete description of costs
and expenses, see "Charges and Deductions" and the prospectuses of each
Portfolio.
- ---------------
(1) A Contingent Deferred Sales Charge (also called 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 premiums received 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 that Contract Year. (See
"Surrender Charge.")
(2) Asset-based administration charge.
(3) Since the Equity 500 Index Portfolio has recently commenced operations,
"Other Expenses" is based on estimated amounts the Portfolio expects to pay
during the current calendar year. This estimate anticipates an expense
reimbursement or fee waiver arrangement for year 2000. Absent this
arrangement, estimated Total Fund Annual Expenses would be 0.39%.
(4) For certain Portfolios, expenses were reimbursed or fees waived during
1999. It is anticipated that expense reimbursement and fee waiver
arrangements will continue past the current year. Absent the expense
reimbursement, Total Fund Annual Expenses would have been 1.21% for the
Market Street Fund All Pro Small Cap Value Portfolio, 1.17% for the Strong
Mid Cap Growth Fund II Portfolio, 3.23% for the Van Eck Worldwide Real
Estate Portfolio, 0.57% for the VIP Fund Equity-Income Portfolio, 0.66% for
the VIP Fund Growth Portfolio, 0.63% for the VIP II Fund Asset Manager
Portfolio, and 0.67% for the VIP II Fund Contrafund(R) Portfolio. Similar
expense reimbursement 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 1999 for these Portfolios because the level of actual
expenses and fees did not exceed the thresholds at which the reimbursement
and waiver arrangements would have become operative.
(5) The fee and expense information regarding the Funds was provided by the
Funds and has not been independently verified by PMLIC. The Market Street
Fund is affiliated with PMLIC. None of the other Funds is affiliated with
PMLIC.
6
<PAGE> 10
EXAMPLES
You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets:
1. If you surrender your Contract at the end of the applicable time period:
<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Market Street All Pro Large Cap Growth............... $87.35 $118.35 $156.22 $288.97
Market Street All Pro Large Cap Value................ 87.53 118.93 157.20 290.94
Market Street All Pro Small Cap Growth............... 89.41 124.67 166.90 310.37
Market Street All Pro Small Cap Value................ 90.26 127.24 171.24 319.00
Market Street Equity 500 Index....................... 81.61 100.70 126.12 227.19
Market Street International.......................... 88.19 120.94 160.60 297.78
Market Street Growth................................. 83.49 106.51 136.07 247.85
Market Street Aggressive Growth...................... 84.34 109.12 140.52 257.02
Market Street Managed................................ 84.34 109.12 140.52 257.02
Market Street Bond................................... 83.87 107.67 138.05 251.93
Market Street Money Market........................... 82.74 104.19 132.10 239.64
Scudder Bond......................................... 84.34 109.12 140.52 257.02
Scudder Growth and Income............................ 84.15 108.54 139.54 254.99
Scudder International................................ 88.66 122.38 163.03 302.64
OCC Equity........................................... 87.53 118.93 157.20 290.94
OCC Managed.......................................... 86.78 116.63 153.30 283.06
OCC Small Cap........................................ 87.35 118.35 156.22 288.97
Dreyfus Growth and Income............................ 86.41 115.48 151.34 279.09
Dreyfus Zero Coupon 2000............................. 85.00 111.15 143.98 264.09
Dreyfus Socially Responsible ........................ 86.41 115.48 151.34 279.09
Federated Fund for U.S. Government Securities II..... 86.88 116.92 153.78 284.04
Federated Utility Fund II............................ 87.82 119.79 158.66 293.88
Strong Mid Cap Growth Fund II........................ 89.79 125.81 168.83 314.22
Strong Opportunity Fund II........................... 89.70 125.53 168.35 313.26
Van Eck Worldwide Bond............................... 90.45 127.81 172.20 320.90
Van Eck Worldwide Emerging Mkts...................... 91.58 131.24 177.95 332.26
Van Eck Worldwide Hard Assets........................ 90.82 128.96 174.12 324.71
Van Eck Worldwide Real Estate........................ 92.52 134.09 182.73 341.63
Fidelity Equity-Income............................... 84.24 108.83 140.03 256.00
Fidelity Growth...................................... 85.09 111.43 144.47 265.10
Fidelity High Income................................. 85.47 112.59 146.44 269.12
Fidelity Asset Manager............................... 84.81 110.57 142.99 262.08
Fidelity Contrafund(R)............................... 85.09 111.43 144.47 265.10
</TABLE>
2. If you do not surrender your Contract at the end of the applicable time
period:
<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Market Street All Pro Large Cap Growth................ $25.90 $79.59 $135.89 $288.97
Market Street All Pro Large Cap Value................. 26.10 80.19 136.89 290.94
Market Street All Pro Small Cap Growth................ 28.10 86.16 146.79 310.37
Market Street All Pro Small Cap Value................. 29.00 88.84 151.22 319.00
Market Street Equity 500 Index........................ 19.80 61.21 105.16 227.19
Market Street International........................... 26.80 82.28 140.36 297.78
Market Street Growth.................................. 21.80 67.26 115.32 247.85
Market Street Aggressive Growth....................... 22.70 69.98 119.87 257.02
</TABLE>
7
<PAGE> 11
<TABLE>
<CAPTION>
SUBACCOUNT 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Market Street Managed................................. $22.70 $69.98 $119.87 $257.02
Market Street Bond.................................... 22.20 68.47 117.35 251.93
Market Street Money Market............................ 21.00 64.84 111.27 239.64
Scudder Bond.......................................... 22.70 69.98 119.87 257.02
Scudder Growth and Income............................. 22.50 69.37 118.86 254.99
Scudder International................................. 27.30 83.77 142.84 302.64
OCC Equity............................................ 26.10 80.19 136.89 290.94
OCC Managed........................................... 25.30 77.79 132.91 283.06
OCC Small Cap......................................... 25.90 79.59 135.89 288.97
Dreyfus Growth and Income............................. 24.90 76.59 130.91 279.09
Dreyfus Zero Coupon 2000.............................. 23.40 72.08 123.39 264.09
Dreyfus Socially Responsible.......................... 24.90 76.59 130.91 279.09
Federated Fund for U.S. Government Securities II...... 25.40 78.09 133.40 284.04
Federated Utility Fund II............................. 26.40 81.08 138.38 293.88
Strong Mid Cap Growth Fund II......................... 28.50 87.35 148.76 314.22
Strong Opportunity Fund II............................ 28.40 87.05 148.27 313.26
Van Eck Worldwide Bond................................ 29.20 89.43 152.20 320.90
Van Eck Worldwide Emerging Markets.................... 30.40 93.00 158.08 332.26
Van Eck Worldwide Hard Assets......................... 29.60 90.62 154.16 324.71
Van Eck Worldwide Real Estate......................... 31.40 95.96 162.95 341.63
Fidelity Equity-Income................................ 22.60 69.67 119.36 256.00
Fidelity Growth....................................... 23.50 72.38 123.89 265.10
Fidelity High Income.................................. 23.90 73.59 125.90 269.12
Fidelity Asset Manager................................ 23.20 71.48 122.39 262.08
Fidelity Contrafund(R)................................ 23.50 72.38 123.89 265.10
</TABLE>
The above Examples provided above assume no transfer charges or premium
taxes have been assessed. The Examples also assume that the Annual
Administration Fee is $30 and that the estimated average Contract Account Value
per Contract is $10,000, which translates the Annual Administration Fee into an
assumed 0.30% 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 LESS THAN THOSE SHOWN. THE ASSUMED
5% ANNUAL RETURN IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE MORE OR LESS THAN THE ASSUMED
AMOUNT.
8
<PAGE> 12
CONTRACT SUMMARY
- --------------------------------------------------------------------------------
THIS SECTION IS A SUMMARY OF SOME OF THE MORE IMPORTANT POINTS THAT YOU
SHOULD KNOW AND CONSIDER BEFORE PURCHASING A CONTRACT. WE DISCUSS EACH OF THESE
TOPICS IN GREATER DETAIL LATER IN THIS PROSPECTUS.
THE CONTRACT
- - PURCHASING A CONTRACT. The Contract is an individual flexible premium
deferred variable annuity. The Contract allows you to invest on a tax-deferred
basis for your retirement or other long-term purposes. We may sell Contracts in
connection with retirement plans which qualify for special tax treatment
(Qualified Contracts), as well as Contracts which do not qualify for special tax
treatment (Non-Qualified Contracts).
To purchase a Contract, you must submit an Application and pay the minimum
initial premium. We do not begin to make annuity payments until the Maturity
Date. For more information about how to purchase a Contract, see "Description of
an Annuity Contract -- Purchasing a Contract."
- - CANCELLATION (FREE-LOOK) PERIOD. You have the right to return the Contract
within 10 days (or any longer period required by the laws of your state) after
you receive it. If you return the Contract within the Cancellation Period, we
will return a refund amount to you. The amount we return is:
-- the amount of premiums paid (including any Contract fees and charges),
minus
-- any amounts allocated to the Variable Account
plus
-- the Variable Account Value on the date of termination.
- - PREMIUMS. We require a minimum initial premium of $2,000. For Qualified
Contracts, as an alternative to the minimum initial premium, you may commit to
pay premiums of $100 per month during the first Contract Year. You may pay
subsequent premiums at any time. For Non-Qualified Contracts, the minimum
subsequent premium is $100. For Qualified Contracts, the minimum subsequent
premium is $50. You may also select a planned periodic premium schedule, which
specifies each planned premium amount and payment frequency.
- - ALLOCATION OF NET PREMIUMS. We will allocate Net Premiums under a Contract as
designated by you to one or more of the Subaccounts or to the Guaranteed
Account, or to both.
We invest the assets of each Subaccount solely in a corresponding Portfolio.
Your Contract Account Value (except for the Guaranteed Account Value) will vary
according to the investment performance of the Portfolios in which your chosen
Subaccounts invest. We credit interest to amounts in the Guaranteed Account at a
guaranteed minimum rate of 3% per year or, if we choose, at a higher current
interest rate.
- - TRANSFERS. Before the Maturity Date, you 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. Each
transfer must be at least $500 or the entire amount in the Subaccount or
Guaranteed Account, if less. After twelve transfers during a Contract Year, we
deduct a Transfer Processing Fee of $25 for each additional transfer during that
Contract Year. We only allow one transfer out of the Guaranteed Account each
Contract Year. You must make this transfer within 30 days of the Contract
Anniversary. We limit the amount that you can transfer from the Guaranteed
Account to 25% or less of the Guaranteed Account Value on the date of the
transfer, unless the balance after transfer is less than $500, in which case the
entire amount will be transferred.
- - WITHDRAWALS. At any time before the earlier of the death of the Annuitant or
the Maturity Date, you may withdraw part of the Surrender Value, subject to
certain limitations.
9
<PAGE> 13
- - SURRENDER. Upon Notice received at our Service Center on or before the
earlier of the death of the Annuitant or the Maturity Date, you may surrender
the Contract in full and receive its Surrender Value. This Notice must include
the proper form which you may obtain by contacting our Service Center.
- - DEATH BENEFIT. If the Annuitant dies before the Maturity Date, we will pay
the Beneficiary a death benefit. During the first six Contract Years, the death
benefit equals the greater of:
-- premiums paid less any amounts withdrawn (including applicable Surrender
Charges), or
-- the Contract Account Value on the date we receive due proof of the
Annuitant's death.
After the end of the sixth Contract Year, the death benefit equals the greatest
of:
-- the Contract Account Value as of the end of the sixth Contract Year less
subsequent amounts withdrawn, or
-- the Contract Account Value on the date we receive due proof of the
Annuitant's death, or
-- premiums paid less any amounts withdrawn (including applicable Surrender
Charges).
If an Owner dies before the Maturity Date, we must generally distribute the
Contract Account Value (or, if the deceased Owner is also the Annuitant, the
death benefit) to the Beneficiary within five years after the date of 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 death.
- - STEP-UP RIDER. A Step-up Rider provides a guaranteed minimum death benefit if
the Annuitant dies before the Maturity Date. The Step-up Rider is automatically
included for Contracts issued in states that permit the Rider for those
Contracts with an Annuitant who is age 0-70. The guaranteed minimum death
benefit initially equals the Contract Account Value as of the sixth Contract
Anniversary. We will reset or "step-up" the guaranteed minimum death benefit to
the Contract Account Value, if greater, on the next six year Contract
Anniversary. This "step-up" continues until the Contract Anniversary on or
before the Annuitant's 85th birthday. We will also increase the proceeds upon
death by an amount equal to aggregate premiums paid since the last Contract
Anniversary. In the event of a withdrawal at any time, we reduce the guaranteed
minimum death benefit by the same percentage that the withdrawal reduces the
Contract Account Value. At no time will the death benefit proceeds be less than
either:
-- the Contract Account Value on the date we receive due proof of the
Annuitant's death, or
-- the sum of premiums paid, less any withdrawals (including applicable
Surrender Charges).
CHARGES AND DEDUCTIONS
$ SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE). We do not deduct any
charge for sales expenses from premiums. However, if you surrender your Contract
or make certain withdrawals before the sixth Contract Anniversary, we will
deduct a Surrender Charge from the amount surrendered or withdrawn.
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 is the total Surrender Charge on any Contract in
excess of 8 1/2% of the total premiums received under the Contract.
During each Contract Year after the first Contract Year, you may, subject to
certain restrictions, make up to two withdrawals totaling not more than 10% of
the Contract Account Value (as of the beginning of a Contract Year) free of the
Surrender Charge.
$ ANNUAL ADMINISTRATION FEE. On each Contract Anniversary prior to and
including the Maturity Date, we deduct an Annual Administration Fee of $30 from
the Contract Account Value. We also deduct this charge on the Maturity Date if
it is not a Contract Anniversary and upon surrender if the surrender occurs at
any time other than on a Contract Anniversary.
10
<PAGE> 14
$ ASSET-BASED ADMINISTRATION CHARGE. We deduct a daily administration charge to
compensate us for certain expenses we incur in administration of the Contracts.
On or prior to the Maturity Date, we deduct the charge from the assets of the
Variable Account at an annual rate of 0.15%.
$ TRANSFER PROCESSING FEE. The first twelve transfers of amounts in the
Subaccounts each Contract Year are free. We assess a $25 transfer charge for
each additional transfer during a Contract Year.
$ MORTALITY AND EXPENSE RISK CHARGE. We deduct a daily Mortality and Expense
Risk Charge to compensate us for assuming certain mortality and expense risks.
On or prior to the Maturity Date, we deduct the charge 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).
$ INVESTMENT ADVISORY FEES AND OTHER EXPENSES OF THE PORTFOLIOS. The investment
experience of each Subaccount reflects the investment experience of the shares
of the Portfolio which it holds. The investment experience of each Portfolio, in
turn, reflects its investment advisory fees and other expenses. Please read the
prospectus for each Portfolio for details.
$ PREMIUM TAXES. If state or other premium taxes apply to a Contract, we deduct
these taxes either:
-- from premiums as they are received, or
-- from the Contract Account Value, upon a withdrawal from or surrender
of the Contract, upon application of the Contract Account Value to a
Payment Option or upon payment of a death benefit.
ANNUITY PROVISIONS
- - MATURITY DATE. We will apply the Contract Account Value to a Payment Option
on the Maturity Date. You may instead elect to receive the Surrender Value on
the Maturity Date.
- - PAYMENT OPTIONS. The Contract offers three Payment Options. The amount of the
payments under them does not vary with the Variable Account's performance. They
are:
-- Life Annuity,
-- Life Annuity with 10 Years Guaranteed, and
-- Alternate Income Option.
In addition, instead of choosing one of the Payment Options listed above,
you may elect to receive payments in any other manner that is acceptable to us
and permissible under applicable law.
FEDERAL TAX STATUS
Generally, a distribution (including a surrender, withdrawal, or death
benefit payment) may result in federal income tax liability. In certain
circumstances, a penalty tax may apply.
WE OFFER OTHER VARIABLE ANNUITIES THAT HAVE DIFFERENT DEATH BENEFITS,
FEATURES, AND OPTIONAL PROGRAMS. THESE OTHER ANNUITIES HAVE DIFFERENT CHARGES
THAT WOULD AFFECT SUBACCOUNT PERFORMANCE AND CONTRACT ACCOUNT VALUE. PLEASE
CONTACT OUR SERVICE CENTER TO OBTAIN MORE INFORMATION ABOUT THESE ANNUITIES.
11
<PAGE> 15
PMLIC, THE VARIABLE ACCOUNT AND THE PORTFOLIOS
PROVIDENT MUTUAL LIFE INSURANCE COMPANY (PMLIC)
We are organized as a mutual life insurance company and are the issuer of
the Contract. We were chartered by the Commonwealth of Pennsylvania in 1865. We
are currently licensed to transact life insurance business in all states and the
District of Columbia and Puerto Rico. At the end of 1999, we had total assets of
approximately $9.2 billion.
We are subject to regulation by the Insurance Department of the
Commonwealth of Pennsylvania as well as by the insurance departments of all
other states and jurisdictions in which we do business. We submit annual
statements on our operations and finances to insurance officials in these 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.
We are a member of the Insurance Marketplace Standards Association
("IMSA"). IMSA members subscribe to a set of ethical standards involving the
sales and service of individually sold life insurance and annuities. As a member
of IMSA, we may use the IMSA logo and language in advertisements.
PROVIDENT MUTUAL VARIABLE ANNUITY SEPARATE ACCOUNT (VARIABLE ACCOUNT)
The Provident Mutual Variable Annuity Separate Account is a separate
investment account that we maintain. The Variable Account was established by our
Board of Directors on October 19, 1992 under Pennsylvania law. We established
the Variable Account to support the investment options under the Contract and
other variable annuities. We have caused the Variable Account to be registered
with the SEC as a unit investment trust under the Investment Company Act of 1940
(the "1940 Act"). This registration does not involve supervision by the SEC of
the management or investment policies or practices of the Variable Account.
We own the assets of the Variable Account. These assets, however, are
legally separate from our other assets and are not part of our 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 we conduct. We may transfer to
our 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 Account Value allocated to the Variable
Account under the Contracts).
The Variable Account currently has thirty-three Subaccounts, all of which
are available under the Contract. They are: All Pro Large Cap Growth; All Pro
Large Cap Value; All Pro Small Cap Growth; All Pro Small Cap Value; Equity 500
Index; International; Growth; Aggressive Growth; Managed; Bond; Money Market;
Scudder Bond; Scudder Growth and Income; Scudder International; OCC Equity; OCC
Managed; OCC Small Cap; Dreyfus Growth and Income; Dreyfus Zero Coupon 2000;
Dreyfus Socially Responsible; Federated Fund for U.S. Government Securities II;
Federated Utility Fund II; Strong Mid-Cap Growth Fund II; Strong Opportunity
Fund II; Van Eck Worldwide Bond; Van Eck Worldwide Emerging Markets; Van Eck
Worldwide Hard Assets; Van Eck Worldwide Real Estate; Fidelity Equity-Income;
Fidelity Growth; Fidelity High Income; Fidelity Asset Manager; and Fidelity
Contrafund(R). The assets of each Subaccount are invested exclusively in shares
of a corresponding Portfolio of a designated Fund.
The income, gains, or losses, realized or unrealized, on 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 of PMLIC. The
assets of each Subaccount may not be charged with liabilities arising out of any
other business of PMLIC. PMLIC may accumulate in the Variable Account the charge
for mortality expense and expense risks, gains and losses, and investment
results applicable to those assets that are in excess of net assets supporting
the Contracts.
12
<PAGE> 16
THE FUNDS
The Variable Account currently invests in Portfolios of various series-type
Funds, eleven of which are available under the Contracts; Market Street Fund;
Scudder Fund; OCC Trust; Dreyfus Fund; Dreyfus Socially Responsible Fund;
Federated Series; Strong Fund; Strong Opportunity Fund; Van Eck Trust; VIP Fund;
and VIP II Fund. Each of the Funds is registered with the SEC under the 1940 Act
as an open-end investment company. The SEC does not, however, supervise the
management or the investment practices and policies of the Funds.
The assets of each Portfolio are separate from the assets of the other
Portfolios, and each Portfolio has separate investment objectives and policies.
Each Portfolio, therefore, operates as a separate investment Portfolio and the
investment performance of one Portfolio has no effect on the investment
performance of any other Portfolio. 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 us. The
termination provisions of these agreements vary. A summary of the termination
provisions may be found in the SAI. If a participation agreement is terminated,
the Variable Account will no longer be able to purchase additional shares of
that Fund. In that event, you will not be able to allocate Contract Account
Values or premium payments to Subaccounts investing in Portfolios of that Fund.
In certain circumstances a Fund or a Portfolio may also refuse to sell its
shares to the Variable Account for other reasons. If a Fund or a Portfolio
refuses to sell its shares to the Variable Account, we will not be able to honor
your request to allocate your Contract Account Value 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. Before choosing Subaccounts, you should carefully
read the individual prospectuses for the Funds along with this prospectus.
Some of the Portfolios available under the Contract present greater
investment risks than other Portfolios because they invest in high yield
securities (commonly known as junk bonds), foreign securities, small company
stocks or other types of investments that present speculative risks. You should
read the risk disclosure in the prospectuses for the Portfolios and be sure that
your investment choice is appropriate in light of your investment goals.
MARKET STREET FUND
The All Pro Large Cap Growth, All Pro Large Cap Value, All Pro Small Cap
Growth, All Pro Small Cap Value, Equity 500 Index, International, Growth,
Aggressive Growth, Managed, Bond, and Money Market Subaccounts invest in shares
of the Market Street Fund. This Fund currently issues eleven "series" or classes
of shares, each of which represents interests in a separate Portfolio that
corresponds to a Subaccount. Shares of each Portfolio currently are purchased
and redeemed by the corresponding Subaccount. Shares of the All Pro Portfolios
may not be currently available for sale in all states. If they are not yet
available in your state, you may not allocate premiums to them until such time
as they are available.
13
<PAGE> 17
The investment objectives/policies of the Market Street Fund Portfolios are
summarized below.
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVES/POLICIES
--------- ------------------------------
<S> <C>
ALL PRO LARGE CAP GROWTH - Seeks to achieve long-term capital appreciation by
investing primarily in equity securities of companies among
the 750 largest by market capitalization at the time of
purchase that the subadvisers believe show potential for
growth in future earnings.
ALL PRO LARGE CAP VALUE - Seeks to provide long-term capital appreciation by
investing primarily in undervalued equity securities of
companies among the 750 largest by market capitalization
at the time of purchase that the subadvisers believe offer
above-average potential for growth in future earnings.
ALL PRO SMALL CAP GROWTH - Seeks to achieve long-term capital appreciation by
investing primarily in equity securities of companies
included in the Wilshire 5000 Equity Index at the time of
purchase that the subadvisers believe show potential for
growth in future earnings.
ALL PRO SMALL CAP VALUE - Seeks to provide long-term capital appreciation by
investing primarily in undervalued equity securities of
companies included in the Wilshire 5000 Equity Index at
the time of purchase that the subadvisers believe offer
above-average potential for growth in future earnings.
EQUITY 500 INDEX - Seeks to provide long-term capital appreciation by
investing primarily in common stocks included in the
Standard & Poor's 500 Composite Stock Price Index.
INTERNATIONAL - Seeks long-term growth of capital primarily through
investments in a diversified portfolio of marketable equity
securities of established foreign companies.
GROWTH - Seeks intermediate and long-term growth of capital by
investing in common stocks of companies that the adviser
believes offer above-average intermediate and long-term
growth potential. Current income is a secondary
consideration.
AGGRESSIVE GROWTH - Seeks to achieve a high level of long-term capital
appreciation by investing in securities of a diverse group
of smaller emerging companies.
MANAGED - 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 of these securities.
BOND - Seeks to generate a high level of current income
consistent with prudent investment risk by investing in a
diversified portfolio of marketable debt securities.
MONEY MARKET - Seeks to provide maximum current income consistent with
capital preservation and liquidity by investing in
high-quality money market instruments.
</TABLE>
Market Street Investment Management Company ("MSIM") serves as investment
adviser for the All Pro Portfolios. MSIM uses a "manager of managers" approach
for the All Pro Portfolios under which
14
<PAGE> 18
MSIM allocates each Portfolio's assets among one or more "specialist" investment
subadvisers. The subadvisers for the All Pro Portfolios are as follows:
<TABLE>
<CAPTION>
PORTFOLIO SUBADVISERS
--------- -----------
<S> <C>
ALL PRO LARGE CAP GROWTH Cohen Klingenstein & Marks, Inc.
Geewax Terker & Co.
ALL PRO LARGE CAP VALUE Equinox Capital Management, Inc.
Mellon Equity Associates
Sanford C. Bernstein Company, Inc.
ALL PRO SMALL CAP GROWTH Standish Ayer & Wood
Husic Capital Management
ALL PRO SMALL CAP VALUE Reams Asset Management Company, LLC
Sterling Capital Management Company
</TABLE>
MSIM also serves as investment adviser for the Equity 500 Index Portfolio
and the International Portfolio. MSIM has employed State Street Global Advisers
("State Street") to provide investment subadvisory services in connection with
the Equity 500 Index Portfolio. MSIM has employed The Boston Company Asset
Management, Inc. ("Boston Company") to provide investment subadvisory services
in connection with the International Portfolio.
With respect to the Equity 500 Index Portfolio:
"Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard & Poor's 500",
and "500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use by PMLIC and its affiliates and subsidiaries. The Contract
is not sponsored, endorsed, sold or promoted by Standard & Poor's and
Standard & Poor's makes no representation regarding the advisability of
investing in the Contract. See "Standard & Poor's" in the SAI which sets
forth certain additional disclaimers and limitations of liabilities on
behalf of S&P.
The Growth, Aggressive Growth, Managed, Bond, and Money Market Portfolios
of Market Street Fund are advised by Sentinel Advisors Company (SAC).
In addition to the fee for the investment advisory services that is
described in the Market Street Fund prospectus, each Portfolio of the Market
Street Fund pays its own expenses generally, including brokerage costs,
administrative costs, custodial costs, and legal, accounting and printing costs.
However, PMLIC has entered into an agreement with the Market Street Fund whereby
it will reimburse each Portfolio for all ordinary operating expenses, excluding
advisory fees, in excess of an annual rate of 0.40% of the average daily net
assets of each Portfolio, except the Equity 500 Index Portfolio and the
International Portfolio. PMLIC will reimburse the Equity 500 Index Portfolio and
the International Portfolio for all ordinary operating expenses, excluding
advisory fees, in excess of an annual rate of 0.04% and 0.75%, respectively. It
is anticipated that this agreement will continue. If it is terminated, Portfolio
expenses may increase.
Each of the advisers and subadvisers discussed above is registered with the
SEC as an investment adviser under the Investment Advisers Act.
SCUDDER VARIABLE LIFE INVESTMENT FUND
The Scudder Bond Subaccount, Scudder Growth and Income Subaccount, and
Scudder International Subaccount invest in shares of corresponding Portfolios of
the Scudder Fund. The Scudder Fund is designed to provide an investment vehicle
for variable annuity contracts and variable life insurance policies.
15
<PAGE> 19
The Scudder Fund has seven Portfolios. Only the Bond Portfolio, Growth and
Income Portfolio, and International Portfolio are available under the Contracts.
Their investment objectives/policies are summarized below:
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVES/POLICIES
--------- ------------------------------
<S> <C>
BOND - Seeks to provide a high-level income consistent with a
high quality portfolio of debt securities. It
accomplishes this by using a flexible investment program
that emphasizes high-grade bonds.
GROWTH AND INCOME - Seeks long-term growth of capital, current income, and
growth of income. This Portfolio primarily invests in
common stocks, preferred stocks, and securities
convertible to common stocks.
INTERNATIONAL - Seeks long-term growth of capital primarily through
diversified holdings of marketable foreign equity
investments. The Portfolio invests in common stocks of
established companies listed on foreign exchanges.
</TABLE>
Scudder Kemper Investments, Inc., an investment adviser registered with the
SEC under the Investment Advisers Act, manages daily investments and business
affairs of the Scudder Fund.
OCC ACCUMULATION TRUST
The OCC Equity Subaccount, OCC Small Cap Subaccount, and OCC Managed
Subaccount invest in shares of corresponding portfolios of the OCC Trust. Shares
of the OCC Trust are sold to separate accounts of life insurance companies
established to fund variable annuity contracts.
The OCC Trust currently has seven Portfolios. Only the Equity Portfolio,
Managed Portfolio, and Small Cap Portfolio are available for investment under
the Contracts. Their investment objectives/policies are summarized below:
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVES/POLICIES
--------- ------------------------------
<S> <C>
EQUITY - Seeks long-term capital appreciation through investment
in a diversified portfolio consisting primarily of equity
securities selected on the basis of a value-oriented
approach to investing.
MANAGED - Seeks 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.
SMALL CAP - Seeks capital appreciation through investment in a
diversified portfolio consisting primarily of equity
securities of companies with market capitalizations of
under $1 billion.
</TABLE>
The OCC Trust receives investment advice with respect to each of its
Portfolios from OpCap Advisors, a subsidiary of Oppenheimer Capital. Oppenheimer
Capital is a subsidiary of PIMCO Advisors L.P. OpCap Advisors is registered as
an investment adviser under the Investment Advisers Act.
DREYFUS VARIABLE INVESTMENT FUND AND THE DREYFUS SOCIALLY RESPONSIBLE GROWTH
FUND, INC.
The Dreyfus Growth and Income Subaccount and the Dreyfus Zero Coupon 2000
Subaccount invest in shares of corresponding Portfolios of the Dreyfus Fund. The
Dreyfus Socially Responsible Subaccount invests in shares of the Dreyfus
Socially Responsible Fund. These Funds are intended to be funding vehicles for
variable annuity contracts and variable life insurance policies offered by the
separate accounts of various life insurance companies.
16
<PAGE> 20
The investment objectives/policies of these Funds are summarized below:
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVES/POLICIES
--------- ------------------------------
<S> <C>
GROWTH AND INCOME - Seeks long-term capital growth, current income and growth
of income consistent with reasonable investment risk. To
pursue this goal, it invests in stocks, bonds and money
market instruments of domestic and foreign issuers.
ZERO COUPON 2000 - Seeks as high an investment return as is consistent with
the preservation of capital. This Portfolio invests
primarily in debt obligations issued by the U.S.
government and its agencies and instrumentalities that
have been stripped of their unmatured interest coupons,
and interest coupons that have been stripped from these
debt obligations. This Portfolio will invest at least 65%
of its assets in zero coupon securities which will mature
on or about December 31, 2000.
SOCIALLY - The Fund seeks to provide capital growth, with current
RESPONSIBLE income as a secondary goal. To pursue these goals, the Fund
invests primarily in the common stock of companies that,
in the opinion of the Fund's management, meet traditional
investment standards and conduct their business in a
manner that contributes to the enhancement of the quality
of life in America.
</TABLE>
The Dreyfus Corporation ("Dreyfus") serves as investment adviser to these
Portfolios and Fund. NCM Capital Management Group, Inc. ("NCM"), serves as
subadviser to the Dreyfus Socially Responsible Portfolio and provides day-to-day
management of its securities holdings. Dreyfus and NCM are registered as
investment advisers under the Investment Advisers Act.
FEDERATED INSURANCE SERIES
The Federated Fund for U.S. Government Securities II Subaccount and the
Federated Utility Fund II Subaccount invest in shares of corresponding
Portfolios of the Federated Series. The Federated 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.
The Federated Series currently consists of twelve Portfolios. The Fund for
U.S. Government Securities II Portfolio and Utility Fund II Portfolio are
available under the Contracts. Their investment objectives/policies are
summarized below:
PORTFOLIO INVESTMENT OBJECTIVES/POLICIES
FUND FOR U.S. GOVERNMENT
SECURITIES II - Seeks to provide current income. This
Portfolio invests primarily in securities
which are guaranteed as to payment of
principal and interest by the U.S.
Government, its agencies, or
instrumentalities.
UTILITY FUND II - Seeks to achieve high current income and
moderate capital appreciation. This Portfolio
invests primarily in equity and debt
securities of utility companies.
Federated Investment Management Company ("Federated") serves as adviser to
these Portfolios. Federated Global Investment Management Corp. ("Federated
Global") serves as subadviser to the Utility Fund II. Federated and Federated
Global are registered investment advisers under the Investment Advisers Act.
17
<PAGE> 21
STRONG VARIABLE INSURANCE FUNDS, INC.
The Strong Mid Cap Growth Fund II Subaccount invests in shares of a
corresponding Portfolio of the Strong Fund. Strong Fund offers insurance
companies a selection of investment vehicles for variable annuity contracts and
variable life insurance policies.
Strong Fund issues a number of "series" or classes of shares, each of which
represents an interest in a separate investment portfolio within the Strong
Fund. One of the series is available for investment under the Contract: Strong
Mid Cap Growth Fund II.
The investment objectives/policies of this Portfolio are summarized below:
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVES/POLICIES
--------- ------------------------------
<S> <C>
STRONG MID CAP GROWTH FUND II - Seeks capital growth by investing at least 65% of its
assets in stocks of medium-capitalization companies that
the Portfolio's managers believe have favorable
prospects for accelerating growth of earnings, but are
selling at reasonable valuations based on earnings,
cash flow, or asset value.
</TABLE>
Strong Mid Cap Growth Fund II is managed by Strong Capital Management, Inc.
This adviser is registered with the SEC as an investment adviser under the
Investment Advisers Act.
STRONG OPPORTUNITY FUND II, INC.
The Strong Opportunity Fund II Subaccount invests in shares of a
corresponding Portfolio of the Strong Opportunity Fund. Strong Opportunity Fund
offers insurance companies a selection of investment vehicles for variable
annuity contracts and variable life insurance policies.
The investment objectives/policies of the Strong Opportunity Fund II are
summarized below:
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT OBJECTIVES/POLICIES
--------- ------------------------------
<S> <C>
STRONG OPPORTUNITY FUND II - Seeks capital growth by investing primarily in stocks
of medium-capitalization companies that the Portfolio's
managers believe are underpriced, yet have attractive
growth prospects.
</TABLE>
Strong Opportunity Fund II is managed by Strong Capital Management, Inc.
VAN ECK WORLDWIDE INSURANCE TRUST
The Van Eck Worldwide Bond, Van Eck Worldwide Emerging Markets, Van Eck
Worldwide Hard Assets, and Van Eck Worldwide Real Estate Subaccounts of the
Variable Account invest in shares of the corresponding Portfolios of the Van Eck
Trust.
The investment objectives/policies of the Portfolios of Van Eck Trust are
summarized below:
PORTFOLIO INVESTMENT OBJECTIVES/POLICIES
WORLDWIDE BOND - Seeks high total return through a flexible
policy of investing globally, primarily in
debt securities. Total return consists of
current income and capital appreciation. This
Portfolio attempts to achieve its investment
objective by taking advantage of investment
opportunities in the United States as well as
in other countries throughout the world where
opportunities may be more rewarding and may
emphasize either component of total return.
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WORLDWIDE EMERGING
MARKETS - Seeks long-term capital appreciation by
investing primarily in equity securities in
emerging markets around the world.
WORLDWIDE HARD ASSETS - Seeks long-term capital appreciation by
investing globally, primarily in "Hard Assets
Securities." Hard Assets Securities include
equity securities of Hard Asset Companies and
securities, including structured notes, whose
value is linked to the price of a Hard Asset
commodity or a commodity index. Hard Asset
Companies include companies that are directly
or indirectly engaged to a significant extent
in the exploration, development, production,
or distribution of one or more of the
following (together, Hard Assets): (a)
precious metals, (b) ferrous and non-ferrous
metals, (c) gas, petroleum, petrochemicals,
or other hydrocarbons, (d) forest products,
(e) real estate, and (f) other basic
non-agricultural commodities. Income is a
secondary consideration.
WORLDWIDE REAL ESTATE - Seeks to maximize total return by investing
primarily in equity securities of domestic
and foreign companies which are principally
engaged in the real estate industry or which
own significant real estate assets.
The investment adviser for the Van Eck Worldwide Bond, Worldwide Hard
Assets, and Worldwide Real Estate Portfolios is Van Eck Associates Corporation
("Van Eck Associates"). The investment adviser for the Van Eck Worldwide
Emerging Markets Portfolio is Van Eck Global Asset Management (Asia) Limited, a
wholly-owned investment adviser subsidiary of Van Eck Associates. Each of these
advisers is registered with the SEC as an investment adviser under the
Investment Advisers Act.
VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND II
The Fidelity Equity-Income Subaccount, Fidelity Growth Subaccount, and
Fidelity High Income Subaccount invest in shares of corresponding Portfolios of
the VIP Fund. The Fidelity Asset Manager Subaccount and Fidelity Contrafund(R)
Subaccount invest in shares of corresponding Portfolios of the VIP II Fund. The
VIP Fund and the VIP II Fund each offer insurance companies a selection of
investment vehicles for variable annuity contracts and variable life insurance
policies.
The VIP Fund and the VIP II Fund issue a number of "series" or classes of
shares, each of which represents an interest in a separate Portfolio within the
VIP Fund or VIP II Fund. Three of the VIP Fund series are available for
investment under the Contract: VIP Equity-Income Portfolio; VIP Growth
Portfolio; and VIP High Income Portfolio. Two of the VIP II Fund Series are
available for investment under the Contract: VIP II Asset Manager Portfolio and
VIP II Contrafund(R) Portfolio.
The investment objectives/policies of these Portfolios are summarized
below:
PORTFOLIO INVESTMENT OBJECTIVES/POLICIES
VIP EQUITY-INCOME - 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 & Poor's 500 Composite Stock Price
Index.
VIP GROWTH - 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
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<PAGE> 23
also be found in other types of securities,
including bonds and preferred stocks.
VIP HIGH INCOME - 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.
VIP II ASSET MANAGER - Seeks to obtain high total return with
reduced risk over the long-term by allocating
assets among stocks, bonds, and short-term
money market instruments.
VIP II CONTRAFUND(R) - Seeks capital appreciation by investing in
securities of companies where value is not
fully recognized by the public.
The Portfolios of the VIP Fund and VIP II Fund 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"). FMR (U.K.) and FMR Far East provide research and investment
recommendations with respect to companies based outside the United States. FMR
(U.K.) primarily focuses on companies based in Europe; FMR Far East focuses
primarily on companies based in Asia and the Pacific Basin.
Each of these advisers is registered with the SEC as an investment adviser
under the Investment Advisers Act.
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 of these Portfolios 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.
THERE IS NO ASSURANCE THAT ANY OF THE PORTFOLIOS WILL ACHIEVE ITS STATED
OBJECTIVE.
You should read the prospectuses for the Portfolios carefully before
investing. You can find more detailed information about the Portfolios'
investment objectives, policies and restrictions, expenses, investment advisory
services, charges, and investment risks in the current prospectus for each Fund
which accompanies this prospectus and the current SAI for each Fund.
Certain Portfolios have investment objectives and policies similar to other
investment portfolios or mutual funds managed by the same investment adviser or
manager. The investment results of the Portfolios may be higher or lower than
those of such other investment portfolios or mutual funds. We do not guarantee
or make any representation that the investment results of any Portfolio will be
comparable to that of any other investment portfolio or mutual fund, even those
with the same investment adviser or manager.
Some of the investment portfolios described in the prospectuses for the
Funds are not available with the Contracts. We cannot guarantee that each
Portfolio will always be available for the Contracts. In the unlikely event that
a Portfolio is not available, we will do everything reasonably practicable to
secure the availability of a comparable Portfolio. Shares of each Portfolio are
purchased and redeemed at net asset value, without a sales charge.
We may receive compensation from the investment adviser or a Fund (or
affiliates thereof) in connection with administration, distribution, or other
services provided with respect to the Funds and their availability through the
Contracts. The amount of this compensation is based upon a percentage of the
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<PAGE> 24
assets of the Fund attributable to the Contracts and other contracts issued by
us. These percentages differ, and some advisers (or affiliates) may pay us more
than others.
RESOLVING MATERIAL CONFLICTS
The Funds are used as investment vehicles for variable life insurance
policies and variable annuity contracts issued by PMLIC and Providentmutual Life
and Annuity Company of America ("PLACA"), a wholly-owned subsidiary of PMLIC, as
well as other insurance companies offering variable life and annuity contracts.
In addition, certain Funds available with the Contract may sell shares to
retirement plans qualifying under section 401 of the Code. As a result, there is
a possibility that a material conflict may arise between the interests of owners
of variable life or variable annuity contracts, generally, or certain classes of
owners, and the interests of the retirement plans or participants in retirement
plans.
We currently do not foresee any disadvantages to Owners resulting from the
Funds selling shares in connection with products other than the Contracts or to
retirement plans. However, there is a possibility that a material conflict may
arise between Owners whose Contract Account Values are allocated to the Variable
Account and other investors in the Portfolios, including retirement plans and
the owners of variable life insurance policies and variable annuity contracts
issued by other insurance companies. In the event of a material conflict, we
will take any necessary steps, including removing the Portfolio as an investment
option within the Variable Account, to resolve the matter. The Funds' Boards of
Directors are also responsible for monitoring events in order to identify any
material conflicts that possibly may arise and determine what action, if any,
should be taken in response to any conflicts. You should read the Portfolios'
prospectuses for more information.
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
We reserve the right, subject to applicable law, to make additions to,
deletions from, or substitutions for the Portfolios available within the
Variable Account. If the shares of any Portfolio are no longer available for
investment, or for any other appropriate reason, we may redeem the shares, if
any, of that Portfolio and substitute shares of another registered open-end
management company. The substituted fund or portfolio may have different fees
and expenses. Substitution may be made with respect to existing investments or
the investment of future premiums, or both. We 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.
Furthermore, we may close Subaccounts to allocations of premiums or
Contract Account Value, or both, at any time in our sole discretion. The Funds,
which sell their shares to the Subaccounts pursuant to participation agreements,
also may terminate these agreements and discontinue offering their shares to the
Subaccounts.
We also reserve the right to establish additional Subaccounts, each of
which would invest in shares corresponding to an existing or new Portfolio.
Subject to applicable law and any required SEC approval, we may, in our 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 Owners on a basis to be determined
by us.
If any of these substitutions or changes are made, we may by appropriate
endorsement change the Contract to reflect the substitution or change. If we
deem it to be in the best interest of Owners and Annuitants, 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, deregistered under the 1940
Act if registration is no longer required, or combined with our other separate
accounts.
21
<PAGE> 25
DESCRIPTION OF ANNUITY CONTRACT
PURCHASING A CONTRACT
To purchase a Contract, you must submit a completed Application with an
initial premium payment to us at our Service Center. You may send the
Application and initial premium to us through any licensed representative who is
appointed by us and who is also a registered representative of 1717 Capital
Management Company ("1717"), the principal underwriter for the Contract (as well
as for other variable contracts). You may also send the Application and initial
premium to us through a broker-dealer that has a selling agreement with respect
to the Contract.
We may sell a Contract in connection with retirement plans. These
retirement plans may, or may not, qualify for special tax treatment under the
Code. See "Federal Tax Status -- Taxation of Qualified Contracts" for important
information about purchasing a Qualified Contract.
CANCELLATION (FREE-LOOK) PERIOD
The Contract provides for an initial Cancellation Period. You have the
right to return the Contract within 10 days (or any longer period required by
the laws of your state) after you receive it. When we receive the returned
Contract at our Service Center, it will be canceled and we will refund to the
Owner an amount equal to the sum of: (a) the difference between the premiums you
paid, including any Contract fees and charges, and the amounts, if any,
allocated to the Variable Account under the Contract; and (b) the Variable
Account Value on the date of termination.
PREMIUMS
We require a minimum initial premium of $2,000. For Qualified Contracts, as
an alternative to the minimum initial premium, you may commit to paying $100 per
month during the first Contract Year. You may pay subsequent premiums under the
Contract at any time during the Annuitant's lifetime before the Maturity Date.
Any subsequent premium payment must be at least $100 each for Non-Qualified
Contracts and $50 each for Qualified Contracts.
In your Application, you may select a planned periodic premium schedule
based on a periodic billing mode of annual, semi-annual, or quarterly payment.
You will receive a premium reminder notice at the specified interval. You may
change the planned periodic premium frequency and amount. Also, under the
automatic payment plan, you may select a monthly payment schedule under which
premium payments will be automatically deducted from a bank account or other
source rather than being "billed."
ALLOCATION OF NET PREMIUMS
We must receive a complete Application with all relevant information and
payment of the initial premium in order to process the Application at our
Service Center. If the Application is complete, we will allocate the initial Net
Premium among the Subaccounts and Guaranteed Account in accordance with your
instructions in the Application as of a date not later than two business days
after we receive the completed Application at our Service Center.
If we receive an incomplete Application, we may retain the initial premium
payment and contact you in order to complete the Application. If the Application
is not completed within five business days of our receipt, we will explain the
reason for the processing delay and the premium payment will be returned to you
unless you consent to our retaining the premium payment until the Application is
completed. When the Application is complete, we will allocate the initial Net
Premium within two business days.
You should designate in the Application how the initial Net Premium is to
be allocated among the Subaccounts and the Guaranteed Account. Any subsequent
Net Premium is allocated at the end of the Valuation Period in which the
subsequent premium is received by us in the same manner, unless the allocation
percentages are changed. Premiums are allocated in accordance with the
allocation schedule in effect at the time the premium payment is received.
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<PAGE> 26
Subaccount Values will vary with the investment experience of the
Subaccounts, and you bear the entire investment risk. You should periodically
review your allocation schedule for Net Premiums in light of market conditions
and your overall financial objectives.
VARIABLE ACCOUNT VALUE
The Variable Account Value reflects the investment experience of the
Subaccounts selected by you, any Net Premium payments, any withdrawals, any
surrenders, any transfers, and any charges relating to the Subaccounts. There is
no guaranteed minimum Variable Account Value, and, because the Variable Account
Value on any future date depends upon a number of variables, it cannot be
predicted.
Calculation of Variable Account Value. The Variable Account Value is
determined on each Valuation Day. This value is the aggregate of the values
attributable to the Contract in each of the Subaccounts, determined for each
Subaccount by multiplying the Subaccount's Accumulation Unit value on the
relevant Valuation Day by the number of Subaccount Accumulation Units allocated
to the Contract, as described below.
Accumulation Units. For each Subaccount, Net Premiums allocated to a
Subaccount and amounts transferred to a Subaccount are converted into
Accumulation Units. The number of Accumulation Units credited to a Contract is
determined by dividing the dollar amount directed to each Subaccount by the
value of the Accumulation Unit for that Subaccount for the Valuation Day as of
which the allocation or transfer is made. Allocations and transfers to a
Subaccount increase the number of Accumulation Units of that Subaccount credited
to a Contract.
Certain events reduce the number of Accumulation Units of a Subaccount
credited to a Contract. Withdrawals or transfers from a Subaccount result in the
cancellation of an appropriate number of Accumulation Units of that Subaccount,
as do surrender of the Contract, payment of a death benefit, the application of
Variable Account Value to a Payment Option on the Maturity Date, and the
deduction of the annual administration fee or other charges. Accumulation Units
are canceled as of the end of the Valuation Period in which we receive Notice
regarding the event.
The Accumulation Unit value for each Subaccount was arbitrarily set when
the Subaccount began operations. Thereafter, the Accumulation Unit value at the
end of every Valuation Day is the Accumulation Unit value at the end of the
previous Valuation Day multiplied by the net investment factor, as described
below. The Subaccount Value for a Contract is determined on any day by
multiplying the number of Accumulation Units of that Subaccount attributable to
the Contract by the Accumulation Unit value for that Subaccount.
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 we 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
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<PAGE> 27
(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, you may request a transfer of all or a part of
the amount in a Subaccount to another Subaccount or to the Guaranteed Account,
or transfer a part of an amount in the Guaranteed Account to one or more
Subaccounts, subject to the restrictions below. The minimum transfer amount must
be the lesser of $500 or the entire Subaccount Value or the Guaranteed Account
Value. A transfer request that would reduce the amount in a Subaccount or the
Guaranteed Account below $500 is treated as a transfer request for the entire
amount in that Subaccount or the Guaranteed Account.
Transfers are made as of the day we receive Notice requesting the transfer.
There is no limit on the number of transfers which can be made between
Subaccounts or from a Subaccount to the Guaranteed Account. Only one transfer,
however, may be made from the Guaranteed Account each Contract Year. (See
"Transfers from Guaranteed Account.") 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 request is considered to be one transfer, regardless of the number
of Subaccounts or the Guaranteed Account affected by the transfer. The Transfer
Processing Fee will be deducted from the amount being transferred.
Telephone Transfers. We may accept telephone instructions from you or an
authorized third party regarding transfers, dollar cost averaging, and automatic
asset rebalancing, subject to the following conditions:
1. You must complete and sign our telephone request form and send it to us.
You also may authorize us in the Application or by Notice to act upon
transfer instructions given by telephone.
2. You may designate in the telephone request form a third party to act on
your behalf in making telephone requests.
We reserve the right to suspend telephone transfer privileges at any time,
for any class of Contracts, for any reason.
We will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The procedures we 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.
If we follow reasonable procedures, we will not be liable for any losses due to
unauthorized or fraudulent instructions. We, however, may be liable for losses
if we do not follow reasonable procedures.
Automatic Asset Rebalancing. You may elect Automatic Asset Rebalancing,
which authorizes periodic transfers of amounts among the Subaccounts in order to
achieve a particular percentage allocation among Subaccounts. The percentage
allocations must be in whole numbers and amounts may be allocated only among the
Subaccounts. No amounts will be transferred to or from the Guaranteed Account as
a part of Automatic Asset Rebalancing. For example, if your premium allocation
is 20% to the Guaranteed Account, 30% to Subaccount A, and 50% to Subaccount B,
the rebalancing will allocate the values in the Subaccounts as 37.5% to
Subaccount A and 62.5% to Subaccount B. The percentage allocation of your
Contract Account Value for rebalancing is based on your premium allocation
instructions in effect at the time of rebalancing. Any premium allocation
instructions that you give us that differ from your then current premium
allocation instructions are treated as a request to change your premium
allocation instructions. You should note, however, that a request to transfer
amounts among Subaccounts by Notice
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or telephone as described above is not treated as a new premium allocation
instruction for these purposes, and will not affect future allocations pursuant
to Automatic Asset Rebalancing.
Once elected, Automatic Asset Rebalancing begins at the beginning of the
calendar quarter following the calendar quarter during which you make the
election. You may change or terminate Automatic Asset Rebalancing by written
instruction to us, or by telephone if you have previously authorized us to take
telephone instructions. Automatic Asset Rebalancing transfers do not count as
one of the 12 free transfers available during any Contract Year. We reserve the
right to suspend Automatic Asset Rebalancing at any time, for any class of
Contracts, for any reason upon written notice to you.
Advance Orders of Transfers. You may elect to request transfers of amounts
from a Subaccount to the Money Market Subaccount in advance of the time you want
the transfers executed. To make this election, you must submit a written Advance
Order form to our Service Center specifying a percentage amount of change in
Subaccount Value at which shares in the specified Subaccount should be sold and
the proceeds transferred to the Money Market Subaccount. After you have
submitted the written Advance Order form, you may place or cancel an Advance
Order by calling our Service Center. We measure the percentage change in a
Subaccount Value by reference to the net investment factor for the specified
Subaccount, as measured using the Accumulation Unit value as of the Valuation
Period next ended after receipt of the Advance Order at the Service Center. We
execute the transfer when the Accumulation Unit value for that Subaccount
increases or decreases by at least the percentage specified by you.
Once received at the Service Center, an Advance Order remains in effect
until cancelled or superseded by a subsequent Advance Order for a transfer out
of the same Subaccount. We do not currently assess a charge for Advance Orders,
but reserve the right to charge for this service. In addition, we may terminate
the Advance Order privilege or change its terms at any time by providing written
notice to you at least 15 days in advance of the termination or modification.
DOLLAR COST AVERAGING
The Dollar Cost Averaging program enables you to systematically and
automatically transfer, on a monthly basis, specified dollar amounts from a
designated Subaccount to other Subaccounts. By allocating specified dollar
amounts periodically rather than at one time, you may be less susceptible to the
impact of market fluctuations. We, however, make no guarantee that Dollar Cost
Averaging will result in a profit or protect against loss.
You may elect Dollar Cost Averaging for a period from 6 to 36 months. To
qualify for Dollar Cost Averaging, the following minimum amount must be
allocated to your designated Subaccount: 6 months -- $3,000; 12
months -- $6,000; 18 months -- $9,000; 24 months -- $12,000; 30
months -- $15,000; 36 months -- $18,000. At least $500 must be transferred from
the designated Subaccount each month. The amount required to be allocated to the
designated Subaccount can be made as an initial or subsequent investment or by
transferring amounts into the designated Subaccount from the other Subaccounts
or from the Guaranteed Account (which may be subject to certain restrictions).
(See "Transfers from Guaranteed Account.")
You may participate in this program by completing the authorization on the
Application or at any time after the Contract is issued by properly completing
an election form and returning it to us by the beginning of the month. You must
also verify that the required minimum amount is in the designated Subaccount.
Dollar Cost Averaging transfers may not commence until the later of (1) 30 days
after the Contract Date and (2) five days after the end of the Cancellation
Period.
After you make the election, transfers from a Subaccount will be processed
monthly until the number of designated transfers have been completed, the value
of the Subaccount is completely depleted, or you instruct us 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 the Transfer
Processing Fee. We reserve the right to discontinue offering automatic transfers
upon 30 days' written notice to you.
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WITHDRAWALS AND SURRENDER
Withdrawals. At any time before the earlier of the death of the Annuitant
or the Maturity Date, you may withdraw part of the Surrender Value. With
Qualified Contracts, the terms of the related retirement plan may impose
additional withdrawal restrictions on participants. For information regarding
these additional restrictions, you should consult your plan administrator.
The minimum amount which may be withdrawn under a Contract is $500; the
maximum amount is that which would leave a Surrender Value of not less than
$2,000. We will treat a withdrawal request which would reduce the amount in a
Subaccount or in the Guaranteed Account below $500 as a request for full
withdrawal of the amount in that Subaccount or the Guaranteed Account. We will
withdraw the amount requested by you from the Contract Account Value as of the
day Notice for the withdrawal is received at our Service Center. Any applicable
Surrender Charge is deducted from the remaining Contract Account Value. (See
"Surrender Charge.")
You may specify the amount to be withdrawn from certain Subaccounts or the
Guaranteed Account for the withdrawal. If you do not so specify or if the amount
in the designated Subaccounts or Guaranteed Account is inadequate to comply with
the request, the withdrawal is made from each Subaccount and the Guaranteed
Account based on the proportion that the value in such account bears to the
Contract Account Value immediately before the withdrawal.
A withdrawal may have adverse federal income tax consequences. (See
"Federal Tax Status.")
Systematic Withdrawals. Through the Systematic Withdrawal Plan, you may
pre-authorize a periodic exercise of the withdrawal right described in the
Contract. You may elect the plan at the time of your Application by completing
the authorization on the Application form and making a minimum initial premium
payment of $15,000. After the Contract is issued, you may elect the plan by
properly completing the election form if the Contract Account Value is at least
$15,000. Certain federal income tax consequences may apply to systematic
withdrawals from the Contract. You should, therefore, consult with your tax
adviser before participating in the Systematic Withdrawal Plan.
Under the Systematic Withdrawal Plan, you can instruct us to withdraw a
level dollar amount from the Contract on a monthly or quarterly basis.
Withdrawals begin on the monthly or quarterly date following our receipt of the
request. The minimum withdrawal is $100 monthly or $300 quarterly. The maximum
amount which you can withdraw under the plan in a Contract Year without a
Surrender Charge is 10% of the Contract Account Value as of the beginning of the
year or 10% of the premiums paid in the first Contract Year if elected at the
time of Application. We will notify you if the total amount to be withdrawn in a
Contract Year exceeds 10% of the Contract Account Value as of the beginning of
that year. Unless you instruct us to reduce the withdrawal amount for that year
so that it does not exceed the 10% limit, we will continue to process
withdrawals for the designated amount. Once the amount of the withdrawals
exceeds the 10% limit, we will deduct the applicable Surrender Charge from the
remaining Contract Account Value. (See "Surrender Charge.")
We will pay you the amount requested each month or quarter and make
withdrawals from the Subaccounts and the Guaranteed Account based on the
proportion that the value in each Subaccount and Guaranteed Account bears to the
Contract Account Value immediately prior to the withdrawal.
As stated, withdrawals under the Systematic Withdrawal Plan that do not
exceed 10% of the Contract Account Value as of the beginning of such Contract
Year are not subject to a Surrender Charge. Notwithstanding any other Surrender
Charge rules (see "Surrender Charge"), 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.
You may discontinue systematic withdrawals at any time upon Notice to us.
We reserve the right to discontinue offering systematic withdrawals upon 30
days' notice to you.
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Charitable Remainder Trust Rider. You may elect a Charitable Remainder
Trust Rider, which combines: (1) an extended Maturity Date to the Contract
Anniversary nearest the Annuitant's age 100, unless a lump sum payment of
Surrender Value is elected; and (2) a revised Surrender Charge/ withdrawal
provision. A Charitable Remainder Trust Rider allows income to be distributed
and the payment of trustee fees and charges. The Rider only applies the
appropriate Surrender Charge to withdrawals or surrenders during a Contract Year
that exceed the greater of: (1) 10% of the Contract Account Value as of the
beginning of the Contract Year; or (2) any amounts in excess of the total
premiums paid. There is no limit on the number of withdrawals occurring in any
Contract Year.
Surrender. At any time before the earlier of the death of the Annuitant or
the Maturity Date, you may request a surrender of the Contract for its Surrender
Value. (See "Surrender Charge.") The surrender request must be on the proper
form which you can request from our Service Center. The proceeds paid to you
will equal the Surrender Value less any withholding or premium taxes. The
Surrender Value will be determined on the date Notice of surrender and the
Contract are received at our Service Center. The Surrender Value will be paid in
a lump sum unless you request payment under a Payment Option. A surrender may
have adverse federal income tax consequences. (See "Federal Tax Status.")
Restrictions on Distributions from Certain Contracts. There are certain
restrictions on surrenders of and withdrawals from Contracts used as funding
vehicles for Section 403(b) retirement plans. Section 403(b)(11) of the Code
restricts the distribution under Section 403(b) annuity contracts of: (1)
elective contributions made in years beginning after December 31, 1988; (2)
earnings on those contributions; and (3) earnings in those 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 described in (2) and (3) above may not be
distributed in the case of hardship.
In the case of other types of Qualified Contracts, federal tax law imposes
other restrictions on the form and manner in which benefits may be paid.
Likewise, the terms of retirement plans funded by Qualified Contracts also may
impose restrictions on the ability of participants to take distributions from
the Contracts.
Contract Termination. We may end your Contract and pay the Surrender Value
to you 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, are less than
$2,000.
We will mail you a notice of our intention to end your Contract at least
six months in advance. The Contract will automatically terminate on the date
specified in the notice, unless we receive an additional premium payment before
the termination date specified in the notice. This additional premium payment
must be equal to at least the minimum additional amount required by us.
DEATH BENEFIT BEFORE MATURITY DATE
We will deduct any applicable premium tax from the proceeds described
below, unless we have already deducted the tax from the premiums when paid.
Death of Annuitant. If the Annuitant dies before the Maturity Date, we
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: (1) the
premiums paid, less any withdrawals (including applicable Surrender Charges); or
(2) the Contract Account Value on the date we receive 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
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2. the Contract Account Value on the date we receive due proof of the
Annuitant's death; or
3. the premiums paid, less any withdrawals (including applicable
Surrender Charges).
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.
There is no death benefit payable if the Annuitant dies after the Maturity
Date.
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 the 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 the 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 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.
Step-up Rider. The Step-up Rider is automatically included for Contracts
issued in states that permit the Rider for these Contracts with an Annuitant who
is age 0-70. The Step-up Rider provides a guaranteed minimum death benefit equal
to the Contract Account Value as of the six year Contract Anniversary and is
reset every six years to the Contract Account Value on the next six year
Contract Anniversary, if greater. This reset continues until the six year
Contract Anniversary on or before the Annuitant's 85th birthday. Premiums paid
between the six year Contract Anniversaries are also included in the death
benefit proceeds. A reduction in the guaranteed minimum death benefit for any
withdrawal will be based on the proportion of the withdrawal to the Contract
Account Value. At no time will the death benefit proceeds be less than either
the Contract Account Value on the date we receive due proof of the Annuitant's
death or the sum of premiums paid, less any withdrawals, including applicable
Surrender Charges.
PROCEEDS ON MATURITY DATE
Subject to our approval and state law you select the Maturity Date.
Contract Account Value is applied to purchase a Payment Option as of the
Maturity Date. If a lump sum payment is elected on the Maturity Date, the
proceeds will equal the Surrender Value on the Maturity Date. In the event that
you do not select a Payment Option, Contract Account Value is applied under the
Life Annuity with Ten Year Certain Payment Option. (See "Payment Options.")
You may change the Maturity Date subject to these limitations:
1. Notice is received at our Service Center at least 30 days before the
current Maturity Date;
2. The new Maturity Date is at least 30 days after we receive the change
request; and
3. The new Maturity Date is not later than the later of the Contract
Anniversary nearest the Annuitant's age 85 or 10 years after the
Contract Date.
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PAYMENTS
Any withdrawal, the Surrender Value, or death benefit will usually be paid
within seven calendar days of receipt of written request or receipt and filing
of due proof of death. Payments may be postponed, however, 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;
2. the SEC permits by an order the postponement for the protection of
Owners; 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, we have the right to defer
payment until such check or draft has been honored.
We have the right to defer payment of any withdrawal, surrender, or
transfer from the Guaranteed Account for up to six months from the date of
receipt of Notice for a withdrawal, surrender, or transfer. If payment is not
made within 30 days after our receipt of documentation necessary to complete the
transaction, or any shorter period required by a particular jurisdiction,
interest will be added to the amount paid from the date of receipt of
documentation at an annual rate of 3% or such higher rate required for a
particular state.
MODIFICATION
Upon notice to you, we may modify the Contract, if a modification:
1. is necessary so that the Contract, our operations, or the operations of
the Variable Account comply with applicable laws or regulations; or
2. is necessary to assure the continued qualification of the Contract under
the 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 other Subaccounts and/or Guaranteed Account options.
In the event of a modification, we will make appropriate endorsement to the
Contract.
REPORTS TO CONTRACT OWNERS
At least quarterly, we will mail to you, at your last known address of
record, a report containing the Contract Account Value and Surrender Value of
the Contract and any further information required by applicable law or
regulation.
CONTRACT INQUIRIES
Inquiries regarding a Contract may be made by writing to us at our Service
Center.
THE GUARANTEED ACCOUNT
You may allocate some or all of the Net Premiums and transfer some or all
of the amounts in the Subaccounts to the Guaranteed Account, which is part of
our General Account. The Guaranteed Account pays interest at declared rates that
are guaranteed for each calendar year and must be at least 3%. The principal,
after deductions, is also guaranteed. Our General Account supports our 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 our General Account has been registered as an investment
company under the 1940 Act. Neither our General Account, the Guaranteed Account,
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nor any interests therein are generally subject to regulation under these laws.
The disclosures relating to these accounts which are included in this prospectus
are for your information and have not been reviewed by the SEC. These
disclosures, however, 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 our General Account, we assume the risk of
investment gain or loss on this amount. All assets in the General Account are
subject to our 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%. We intend to credit the Guaranteed Account
Value with current rates in excess of this minimum guarantee, but we are not
obligated to do so. These current interest rates are influenced by, but do not
necessarily correspond to, prevailing general market interest rates. Since we
anticipate changing the current interest rate in our discretion from time to
time, different allocations to the Guaranteed Account Value will be credited
with different current interest rates. The interest rate credited to each amount
allocated or transferred to the Guaranteed Account will apply to the end of the
calendar year in which an amount is received or transferred. At the end of the
calendar year, we will determine a new current interest rate on the amount and
any 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 this amount and any 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 effective annual interest rate of 3% will be
determined in our sole discretion. You assume the risk that interest credited
may not exceed the guaranteed minimum rate.
For purposes of crediting interest and deducting charges, the Guaranteed
Account uses a last-in, first-out method (i.e., LIFO) of accounting for
allocations of Net Premium Payments and for transfers of Contract Account Value.
We reserve the right to change the method of crediting interest from time
to time, provided that the changes do not have the effect of reducing the
minimum guaranteed effective annual interest rate below 3% or shorten the period
for which the interest rate applies to less than a calendar year (except for the
year in which an amount is received or transferred).
CALCULATION OF GUARANTEED ACCOUNT VALUE
The Guaranteed Account Value at any time is equal to amounts you allocate
or transfer to the Guaranteed Account plus interest credited on these amounts,
minus amounts deducted, transferred, or withdrawn from the Guaranteed Account.
TRANSFERS FROM GUARANTEED ACCOUNT
Within 30 days before or after any Contract Anniversary, you may make one
transfer 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.
Subject to the next paragraph, if Notice for such transfer is received before a
Contract Anniversary, the transfer will be made as of the Contract Anniversary;
if Notice for a Transfer is received within 30 days after the Contract
Anniversary, the transfer will be made as of the date we receive Notice at our
Service Center.
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PAYMENT DEFERRAL
We may defer payment of any withdrawal, cash surrender, or transfer from
the Guaranteed Account for up to six months from the date of our receipt of the
Notice for withdrawal, surrender, or transfer.
CHARGES AND DEDUCTIONS
SURRENDER CHARGE (CONTINGENT DEFERRED SALES CHARGE)
General. We do not deduct a charge for sales expense from premiums at the
time they are paid. Within certain time limits described below, however, 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. If the Surrender Charge is insufficient to cover
sales expenses, the loss will be borne by us; conversely, if the amount of the
Surrender Charge is more than our sales expenses, the excess will be retained by
us. We do not currently believe that the Surrender Charges will cover the
expected costs of distributing the Contracts. Any shortfall will be made up from
our general assets, which may include proceeds derived from mortality and
expense risk charges.
Charges for Withdrawal 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>
We do not deduct a Surrender Charge 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 premiums received under that Contract.
If the Contract is surrendered, the applicable Surrender Charge will be
deducted from the Contract Account Value in determining the Surrender Value. For
a withdrawal, any applicable Surrender Charge will be deducted from the Contract
Account Value. If the requested amount is withdrawn from the Guaranteed Account
and one or more of the Subaccounts, or is withdrawn from more than one
Subaccount, then the Surrender Charge will be deducted from each Subaccount
and/or from the Guaranteed Account based on the percentage of the withdrawal
amount deducted from each Subaccount and/or from the Guaranteed Account.
However, where such a withdrawal request would reduce the amount in a Subaccount
or the Guaranteed Account below $500 and is therefore treated as a withdrawal of
the entire amount of Contract Account Value in the Subaccount or the Guaranteed
Account, then the Surrender Charge that otherwise would be allocated to that
account will be deducted from the amount withdrawn.
Free Withdrawal Amount Charge. Subject to certain restrictions, you may
withdraw or surrender up to 10% of the Contract Account Value as of the
beginning of a Contract Year within that Contract Year without a Surrender
Charge. 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, the otherwise applicable Surrender Charge will not be applied to the first
and second withdrawals during a Contract Year to the
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extent that the amount withdrawn is not in excess of 10% of the Contract Account
Value as of the beginning of that Contract Year. This right is not cumulative
from Contract Year to Contract Year. If the Contract is surrendered and there
have been no prior withdrawals during that 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.
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. If a surrender is made during a Contract Year in which one or
no withdrawals have been made, you 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 that Contract Year without
imposition of the Surrender 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 a Contract or on the Maturity
Date (other than on a Contract Anniversary), we deduct from the Contract Account
Value an Annual Administration Fee of $30 for our administrative expenses
relating to the Contract. The charge is deducted from each Subaccount and the
Guaranteed Account based on the proportion that the value in each account bears
to the total Contract Account Value. No Annual Administration Fee is payable
during the annuity period.
Asset-Based Administration Charge. To compensate us for costs associated
with administration of the Contracts, prior to the Maturity Date we deduct a
daily asset-based administration charge from the assets of the Variable Account
equal to an annual rate of 0.15%.
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 Notice of transfer is considered to be one transfer, regardless of the
number of Subaccounts or accounts affected by the transfer. The Transfer
Processing Fee will be deducted from the amount being transferred. We do not
expect a profit from this fee.
MORTALITY AND EXPENSE RISK CHARGE
To compensate us for assuming mortality and expense risks, prior to the
Maturity Date we deduct a daily Mortality and Expense Risk Charge from the
assets of the Variable Account. We 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 we assume is that Annuitants may live for a longer
period of time than estimated when the guarantees in a Contract are 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 we assume
also includes a guarantee to pay a death benefit if the Annuitant dies before
the Maturity Date. The expense risk we assume is the risk that the Surrender
Charges, Administration Fees, and Transfer Processing Fees may be insufficient
to cover our actual expenses. If there are any profits from fees and charges
deducted under the Contract, including but not limited to mortality and expense
risk charges, these profits could be used to finance the distribution of the
Contracts.
INVESTMENT ADVISORY FEES AND OTHER EXPENSES OF THE PORTFOLIOS
Because the Variable Account purchases shares of the Portfolios, the
performance of each Subaccount reflects the deduction of investment advisory
fees and other expenses incurred by the Portfolios. For each Portfolio, an
investment adviser is paid a fee that is a percentage of a Portfolio's average
daily net assets, and thus the actual fee paid depends on the size of the
Portfolio. Each Portfolio also pays most or all of its operating expenses. See
the accompanying current prospectuses for the Portfolios for further details.
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PREMIUM TAXES
Various states and other governmental entities levy a premium tax on
annuity contracts issued by insurance companies. Premium tax rates are subject
to change from time to time by legislative and other governmental action. In
addition, other governmental units within a state may levy these 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 the taxes are paid to the taxing authority, either (1) from premiums as
they are received, or (2) from the Contract proceeds upon withdrawal or
surrender, application of the proceeds to a Payment Option, or payment of death
benefit proceeds.
OTHER TAXES
Currently, we do not make a charge against the Variable Account for
federal, state or local taxes. We 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 us. 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 that time the Contract Account
Value will be applied to purchase a Payment Option, unless you elect to receive
the Surrender Value in a single sum. If your election of a Payment Option has
not been filed at our Service Center by the Maturity Date, the proceeds will be
paid as a life annuity under Option B, described below.
Before the Maturity Date, you can have the Surrender Value applied under a
Payment Option. In addition, a Beneficiary can have the death benefit applied
under a Payment Option, unless you have already selected a Payment Option for
the Beneficiary. Any premium tax applicable will be deducted from the Surrender
Value or the Contract Account Value at the time payments commence.
Your 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. We also reserve the right to require satisfactory evidence of the
identity, birth date, and sex of any Annuitant, and satisfactory evidence that
any Annuitant is still alive. Before making each annuity payment under a
life-contingent Payment Option, we reserve the right to require satisfactory
evidence that any Annuitant is still alive.
The available Payment Options are described below. 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 PAYMENT OPTIONS
A Payment 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 our consent. 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 Notice.
Notice must be filed with our Service Center.
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
the period.
In addition, instead of choosing one of the Payment Options listed below,
you may elect to receive payments in any other manner that is acceptable to us
and is permissible under applicable law.
DESCRIPTION OF PAYMENT OPTIONS
Option A -- Life Annuity Option. Under this Payment Option, payments are
made in equal amounts each month during the Payee's lifetime with payments
ceasing with the last payment prior to the death of
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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.
Option B -- Life Annuity Option with 10 Years Guaranteed. Under this
Payment Option, payments are made 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 this present value will 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 either Option A or Option B based upon 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 is
determined from the nearest birthday at the due date of the first payment.
Alternate Income Option. Instead of the above Payment Options, the
Contract Account Value, Surrender Value, or death benefit, as applicable, may be
settled under an Alternate Income Option based on our single premium immediate
annuity rates in effect at the time of settlement. These rates will be adjusted
so that 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 receipt
of one additional payment. This return is 4% higher than our standard immediate
annuity rates.
YIELDS AND TOTAL RETURNS
From time to time, we may advertise or include in sales literature
historical performance data, including yields, effective yields, standard annual
total returns and non-standard measures of performance 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 SAI.
Effective yields and total returns for a Subaccount are based on the
investment performance of the corresponding Portfolio. A Portfolio's performance
reflects the Portfolio's expenses. See the prospectuses for the Funds.
The yield of the Money Market Subaccount refers to the annualized
investment 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 returns for these periods are
provided. For periods prior to the date a Subaccount commenced operations,
performance information for Contracts funded by that Subaccount may also be
calculated based on the performance of the corresponding
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<PAGE> 38
Portfolio and the assumption that the Subaccount was in existence for the same
periods as those indicated for the Portfolio, with the current level of Contract
charges.
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 versions described above, total return performance
information computed on other versions may be used in advertisements and sales
literature. Average total return information may be presented, computed on the
same basis as described above, except deductions will not include the Surrender
Charge. Total return information will be higher when the Surrender Charge is
excluded than when it is included. We also may disclose, with and without
deductions for the Surrender Charge, cumulative total return information.
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 performance data, please refer to the
SAI.
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
Variable Annuity Research Data Service ("VARDS") are independent services which
monitor and rank the performance of variable annuity issuers in 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 these 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 Composite Index of 500 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 sources of performance comparison.
We 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
The following summary provides a general description of the federal income
tax considerations associated with the Contract and does not purport to be
complete or to cover all tax situations. This discussion is not intended as tax
advice. You should consult your tax adviser for more complete information. This
discussion is based upon our understanding of the present federal income tax
laws. No representation is made as to the likelihood of continuation of the
present federal income tax laws or how they may be interpreted by the Internal
Revenue Service (the "IRS").
The Contract may be purchased on a tax-qualified basis or on a
non-tax-qualified basis. Qualified Contracts are designed for use by individuals
whose premium payments consist solely of proceeds from and/or contributions
under retirement plans that are intended to qualify as plans entitled to special
income tax treatment under sections 401(a), 403(b), 408 or 408A of the Code. The
ultimate effect of federal income taxes on the amounts held under a Contract, or
annuity payments, depends on the type of retirement plan, on the tax and
employment status of the individual concerned, and on our 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. Some retirement plans are subject to distribution and other
requirements that are not incorporated into our Contract administration
procedures. Owners, participants, Beneficiaries, and Payees are responsible for
determining that contributions, distributions, and other transactions with
respect to the Contracts comply with applicable law. Therefore, purchasers of
Qualified Contracts should seek tax advice regarding the suitability of a
Contract for their situation. 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 CONTRACTS
Diversification Requirements. The Code requires that the investments of
the Variable Account be "adequately diversified" in order for the Contract to be
treated as an annuity contract for federal income tax purposes. It is intended
that the Variable Account, through the Funds, will satisfy these diversification
requirements.
Owner Control. In certain circumstances, owners of variable annuity
contracts have been considered for federal income tax purposes to be the owners
of the assets of the variable account supporting their contracts because of
their ability to exercise investment control over those assets. When this is the
case, the contract owners have been currently taxed on income and gains
attributable to the variable account assets. There is little guidance in this
area, and some features of the Contracts, such as the flexibility of an Owner to
allocate premium payments and transfer Contract Account Value, have not been
explicitly addressed in published rulings. While we believe that the Contract
does not give Owners investment control over Variable Account assets, we reserve
the right to modify the Contract as necessary to prevent an Owner from being
treated as the owner of the Variable Account assets supporting the Contract.
Required Distributions. In order to be treated as an annuity contract for
federal income tax purposes, the Code requires any Non-Qualified Contract to
contain certain provisions specifying how the Owner's interest in the Contract
will be distributed in the event of the Owner's death. The Non-Qualified
Contracts contain provisions that are intended to comply with these Code
requirements, although no regulations interpreting these requirements have yet
been issued. We intend to review these provisions and modify them if necessary
to assure that they comply with the applicable requirements when such
requirements are clarified by regulation or otherwise.
Other rules may apply to Qualified Contracts.
36
<PAGE> 40
The following discussion assumes that the Contracts will qualify as annuity
contracts for federal income tax purposes.
TAXATION OF ANNUITIES -- IN GENERAL
We believe that if an Owner is a natural person, the Owner will not be
taxed on increases in the value of a Contract until a distribution occurs or
until annuity payments begin. (For these purposes, an 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 retirement generally is treated as a
distribution.)
TAXATION OF NON-QUALIFIED CONTRACTS
Non-Natural Person. The Owner of a 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" (generally, the premiums or
other consideration paid for 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 tax adviser. The following discussion
generally applies to Contracts owned by natural persons.
Withdrawals and Surrenders. When a withdrawal from a Non-Qualified
Contract occurs, the amount received will be treated as ordinary income subject
to tax up to an amount equal to the excess (if any) of the Contract Account
Value immediately before the distribution over the Owner's investment in the
Contract at that time. In the case of a surrender under a Non-Qualified
Contract, the amount received generally will be taxable only to the extent it
exceeds the Owner's investment in the Contract.
Penalty Tax on Certain Withdrawals and Surrenders. In the case of a
distribution from a Non-Qualified Contract, there may be imposed a federal tax
penalty equal to ten percent of the amount treated as income. In general,
however, there is no penalty on distributions:
- made on or after the taxpayer reaches age 59 1/2;
- made on or after the death of an Owner;
- attributable to the taxpayer's becoming disabled; or
- made as part of a series of substantially equal periodic payments for the
life (or life expectancy) of the taxpayer.
Other exceptions may be applicable under certain circumstances and special
rules may be applicable in connection with the exceptions enumerated above. A
tax adviser should be consulted with regard to exceptions from the penalty tax.
Annuity Payments. Although tax consequences may vary depending on the
Payment Option elected under a Contract, a portion of each annuity payment is
generally not taxed and the remainder is taxed as ordinary income. The
non-taxable portion of an annuity payment is generally determined in a manner
that is designed to allow an Owner to recover his or her investment in the
Contract ratably on a tax-free basis over the expected stream of annuity
payments, as determined when annuity payments start. Once an investment in the
Contract has been fully recovered, however, the full amount of each annuity
payment is subject to tax as ordinary income.
Taxation of Death Benefit Proceeds. Amounts may be distributed from a
Contract because of the Owner's or Annuitant's death. Generally, these amounts
are includible in the income of the recipient as follows: (1) if distributed in
a lump sum, the amounts are taxed in the same manner as a surrender of the
Contract; or (2) if distributed under a Payment Option, the amounts are taxed in
the same way as annuity payments.
Transfers, Assignments or Exchanges of a Contract. A transfer or
assignment of ownership of a Contract, the designation of an Annuitant, the
selection of certain Maturity Dates, or the exchange of a Contract may result in
tax consequences to an Owner that are not discussed here. An Owner
37
<PAGE> 41
contemplating any transfer, assignment, or exchange should consult a tax adviser
as to these tax consequences.
Multiple Contracts. All annuity contracts that are issued by PMLIC (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 the
Owner's income when a taxable distribution occurs.
TAXATION OF QUALIFIED CONTRACTS
The Contracts are designed for use with several types of qualified
retirement 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. Special favorable tax treatment may be available for certain types
of contributions and distributions. Adverse tax consequences may result from
contributions in excess of specified limits; distributions prior to age 59 1/2
(subject to certain exceptions); distributions that do not conform to specified
commencement and minimum distribution rules; and in other specified
circumstances. Therefore, no attempt is made to provide more than general
information about the use of the Contracts with qualified retirement plans.
Owners, Annuitants, Beneficiaries, and Payees 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 we are not bound by the terms and conditions of
any plan to the extent these terms and conditions contradict the Contract.
The Owner may wish to consult a tax adviser regarding the use of the
Contract within a qualified retirement plan or in connection with other employee
benefit plans or arrangements that receive favorable tax treatment, since many
plans or arrangements provide the same type of tax deferral as provided by the
Contract. The Contract provides a number of extra benefits and features not
provided by employee benefit plans or arrangements alone, although there are
costs and expenses under the Contract related to these benefits and features.
Owners should carefully consider these benefits and features in relation to
their costs as they apply to the Owner's particular situation.
Distributions. Annuity payments under a Qualified Contract are generally
taxed in a manner similar to a Non-Qualified Contract. When a withdrawal from a
Qualified Contract occurs, a pro rata portion of the amount received is taxable,
generally based on the relationship between the Owner's investment in the
Contract and the participant's total accrued benefit balance under the
retirement plan. For Qualified Contracts, however, the investment in the
Contracts will generally be zero unless nondeductible contributions have
previously been made to the relevant qualified plan or employer contributions or
investment earnings have been previously includible in income of the employee.
Brief descriptions follow of different types of qualified retirement plans
that may be used in connection with a Contract. We will endorse the Contract as
necessary to conform it to the requirements of a plan.
Corporate and Self-Employed Pension and Profit Sharing Plans. Section
401(a) of the Code permits corporate employers to establish various types of
retirement plans for employees, and permits self-employed individuals to
establish these plans for themselves and their employees. These retirement plans
may permit the purchase of Contracts to accumulate retirement savings under the
plans. Adverse tax or other legal consequences to the plan, to the participant,
or to both may result if a Contract is assigned or transferred to any individual
as a means to provide benefit payments, unless the plan complies with all
applicable legal requirements prior to transfer of the Contract. Employers
intending to use the Contract with such plans should seek competent tax advice.
Individual Retirement Annuities. Section 408(b) of the Code permits
eligible individuals to contribute to an individual retirement program known as
an "Individual Retirement Annuity" or "IRA." There may be legal limitations on
the amount of the premiums or contributions under the IRA, the deductible amount
of the contribution, the persons who may be eligible, and the time when
distributions commence. Also, distributions from certain other types of
qualified retirement plans may be "rolled over"
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<PAGE> 42
or transferred on a tax-deferred basis into an IRA. There are significant
restrictions on rollover or transfer contributions from savings incentive match
plans for employees (SIMPLE), which allow certain small employers to make
contributions to IRAs on behalf of their employees. Employers may also establish
simplified employee pension (SEP) plans to make IRA contributions on behalf of
their employees. The Code may impose additional restrictions on IRAs.
Roth IRAs. Effective January 1, 1998, section 408A of the Code has
permitted certain eligible individuals to contribute to a Roth IRA.
Contributions to a Roth IRA, which are subject to certain limitations, are not
deductible, and must be made in cash or as a rollover or transfer from another
Roth IRA or other IRA. A rollover from or conversion of an IRA to a Roth IRA may
be subject to tax, and other special rules may apply. Generally, income on
undistributed amounts accumulated under Roth IRAs is exempt from federal income
tax. "Qualified distributions" from a Roth IRA, as well as distributions which
are the return of the owner's contributions to the Roth IRA, are also not
subject to tax. "Qualified distributions" are distributions that satisfy a
five-year holding period and are made: (1) after the owner reaches age 59 1/2;
(2) to the beneficiary of the owner after the owner's death; (3) on account of
the owner's disability; or (4) to pay for first-time home-buying expenses.
Federal income tax, as well as a 10% penalty tax, will generally apply to
distributions that are not "qualified distributions."
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 premium payments made, within certain limits, on a Contract
that will provide an annuity for the employee's retirement. These premium
payments may be subject to FICA (social security) tax.
The following amounts may not be distributed from Code section 403(b)
annuity contracts prior to the employee's death, attainment of age 59 1/2,
separation from service, disability, or financial hardship: (1) elective
contributions made in years beginning after December 31, 1988; (2) earnings on
those contributions; and (3) earnings in such years on amounts held as of the
last year beginning before January 1, 1989. In addition, earnings on elective
contributions may not be distributed in the case of hardship.
WITHHOLDING
Distributions from a Contract generally are subject to withholding for the
Owner's federal income tax liability. The withholding rate varies according to
the type of distribution and the Owner's tax status. The Owner will be provided
the opportunity to elect not to have tax withheld from distributions.
"Eligible rollover distributions" from section 401(a) plans and section
403(b) tax-sheltered annuities are subject to a mandatory federal income tax
withholding of 20%. Generally, an eligible rollover distribution is the taxable
portion of any distribution from these plans, except for certain distributions
such as minimum distributions required by the Code, distributions paid in the
form of an annuity, and certain hardship withdrawals. The 20% withholding does
not apply, however, if the Owner chooses a "direct rollover" from the plan to
another section 401(a) or section 403(b) plan (as applicable) or to an IRA.
POSSIBLE CHANGES IN TAXATION
Although the likelihood of legislative change is uncertain, there is always
the possibility that the tax treatment of the Contract could change by
legislation or other means. It is also possible that any change could be
retroactive (that is, effective prior to the date of the change). A tax adviser
should be consulted with respect to legislative developments and their effect on
the Contract.
OTHER TAX CONSEQUENCES
As noted above, the foregoing comments about the federal tax consequences
under the Contract 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 our understanding of
current law, and the law may change. Federal estate and state and local estate,
inheritance, and other tax
39
<PAGE> 43
consequences of ownership or receipt of distributions under a Contract depend on
the individual circumstances of each Owner or recipient of the distribution. A
tax adviser should be consulted for further information.
DISTRIBUTION OF CONTRACTS
The Contracts are offered to the public on a continuous basis. Although we
do not anticipate discontinuing the offering of the Contracts, we reserve the
right to do so. Applications for Contracts are solicited by agents who are
licensed by applicable state insurance authorities and authorized by us to sell
the Contracts, and who are registered representatives of 1717 or other
broker/dealers. 1717 is a wholly-owned indirect subsidiary of PMLIC and is
registered with the SEC under the Securities Exchange Act of 1934 as a
broker-dealer. 1717 is also a member of the National Association of Securities
Dealers, Inc.
1717 acts as the principal underwriter, as defined in the 1940 Act, of the
Contracts pursuant to an Underwriting Agreement between 1717 and ourselves. 1717
is not obligated to sell any specific number of Contracts. 1717'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 that have a selling
agreement with 1717 or have a selling agreement with another broker-dealer that
has a selling agreement with 1717. 1717 receives the full commissions on
Contracts sold by its registered representatives. Nonaffiliated broker-dealers
receive full commissions on Contracts sold by their registered representatives,
less a nominal charge by 1717 for expenses incurred. The commissions paid are no
greater than 7% of premiums.
Compensation may be paid in the form of non-cash compensation, subject to
applicable regulatory requirements. In some circumstances and to the extent
permitted by applicable regulatory requirements, 1717 may reimburse certain
sales and marketing expenses or pay other forms of special compensation to
selling broker-dealers.
LEGAL PROCEEDINGS
PMLIC and its subsidiaries, like other life insurance companies, are from
time to time involved in lawsuits, including class action lawsuits. In some
lawsuits involving insurers, substantial damages have been sought and/or
material settlement payments have been made. Although the outcome of any
litigation cannot be predicted with certainty, PMLIC believes that at the
present time there are not pending or threatened lawsuits that are reasonably
likely to have a material adverse impact on PMLIC or the Variable Account.
VOTING PORTFOLIO SHARES
Even though we are the legal owner of the Portfolio shares held in the
Subaccounts, and have the right to vote on all matters submitted to shareholders
of the Portfolios, we will vote the shares as Owners instruct, so long as
required by law.
We will calculate the number of votes you may vote separately for each
Subaccount. This amount may include fractional votes. The number of votes
attributable to a Subaccount will be determined by applying your percentage
interest, if any, in a particular Subaccount to the total number of votes
attributable to that Subaccount. You hold this voting interest in each
Subaccount to which the Variable Account Value is allocated. Your voting
interest terminates on the Maturity Date or surrender of the Contract.
The number of votes of a Portfolio you may vote will be determined as of
the record date. Before a vote of a Portfolio's shareholders occurs, you will
receive voting materials. We will ask you to instruct us on how to vote and to
return your proxy to us in a timely manner. You will have the right to instruct
us on the number of Portfolio shares that corresponds to the amount of Contract
Account Value you have in that Portfolio (as of a date set by the Portfolio).
40
<PAGE> 44
If we do not receive voting instructions from you on time, we will vote
your shares in the same proportion as the timely voting instructions we receive
from other Owners. Should federal securities laws, regulations, or
interpretations change, we may elect to vote Portfolio shares in our own right.
If required by state insurance officials, or if permitted under federal
regulation, under certain circumstances we may disregard certain Owner voting
instructions. If we disregard voting instructions, we will send you a summary in
the next annual report to Owners advising you of the action and the reasons we
took such action.
Portfolio shares held by us in a Subaccount as to which Owners do not have
a voting interest will be voted in proportion to the voting instructions we
receive from Owners with respect to the shares they do vote. If you instruct us
to abstain on any item to be voted upon, we will apply your abstention
instruction on a pro rata basis to reduce the votes eligible to be cast by us.
FINANCIAL STATEMENTS
Our audited statements of financial condition as of December 31, 1999 and
1998, and the related statements of operations, equity, and cash flows for each
of the three years in the period ended December 31, 1999, as well as the Report
of Independent Accountants, are contained in the SAI. The audited statements of
assets and liabilities for the Variable Account as of December 31, 1999, and the
related statements of operations for the year then ended and the statements of
changes in net assets for each of the two years in the period then ended, are
also included in the SAI.
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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
Dividends.............................................. S-2
Calculation of Yields and Total Returns..................... S-2
Money Market Subaccount Yields......................... S-3
Other Subaccount Yields................................ S-4
Average Annual Total Returns........................... S-4
Other Total Returns.................................... S-7
Effect of the Administration Fee on Performance Data... S-10
Termination of Participation Agreements..................... S-10
Standard & Poor's........................................... S-12
Safekeeping of Account Assets............................... S-13
State Regulation............................................ S-13
Records and Reports......................................... S-14
Legal Matters............................................... S-14
Experts..................................................... S-14
Other Information........................................... S-14
Financial Statements........................................ S-14
</TABLE>
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APPENDIX A
FINANCIAL HIGHLIGHTS
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 SAI under the caption "Financial Statements."
The table below sets forth certain information regarding the Subaccounts as
of December 31, 1999. As of December 31, 1999, the Strong MidCap Growth Fund II
Subaccount and Strong Opportunity Fund II Subaccount had not commenced
operations. Accordingly, condensed financial information was not available for
these Subaccounts.
<TABLE>
<CAPTION>
UNIT VALUE NUMBER OF UNITS UNIT VALUE NUMBER OF UNITS UNIT VALUE
AS OF OUTSTANDING AS OF AS OF OUTSTANDING AS OF AS OF
SUBACCOUNT 12/31/99 12/31/99 12/31/98 12/31/98 12/31/97
---------- ---------- ----------------- ---------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
Market Street All Pro Large Cap Growth.......... 721.62 578.67 583.02 11.63
Market Street All Pro Large Cap Value........... 490.76 240.50 490.39 12.01
Market Street All Pro Small Cap Growth.......... 919.80 1,113.77 485.44 10.62
Market Street All Pro Small Cap Value........... 370.54 414.03 408.65 11.18
Market Street Equity 500 (formerly Fidelity
Index 500)..................................... 1,636.75 91,709.23 1,377.32 61,689.14 1,088.42
Market Street International..................... 975.06 2,632.79 764.54 3,016.56 704.02
Market Street Growth............................ 1,082.22 4,976.70 1,065.67 4,945.24 950.55
Market Street Aggressive Growth................. 1,014.50 1,324.09 887.21 1,174.22 833.15
Market Street Managed........................... 861.32 1,622.04 866.94 1,696.49 781.27
Market Street Bond.............................. 608.19 1,954.03 637.92 1,670.46 597.74
Market Street Money Market...................... 618.73 5,897.24 598.06 8,576.56 575.95
Scudder Bond.................................... 610.50 2,050.25 1,181.96 3,477.76 1,071.54
Scudder Growth and Income....................... 1,006.14 4,012.23 724.89 3,315.72 808.05
Scudder International........................... 1,140.30 2,554.87 1,117.54 7,153.80 1,057.94
OCC Equity...................................... 1,195.14 3,231.31 625.13 1,577.09 594.92
OCC Managed..................................... 1,157.06 6,570.75 748.08 1,695.38 641.18
OCC Small Cap................................... 701.71 2,876.90 962.07 4,042.74 913.35
Dreyfus Growth and Income....................... 1,124.52 2,476.05 975.63 2,289.14 884.85
Dreyfus Zero Coupon 2000........................ 621.94 1,531.37 614.21 1,318.02 580.67
Dreyfus Socially Responsible.................... 1,503.98 2,839.23 1,172.49 1,330.85 918.99
Federated U.S. Government Securities II......... 606.11 912.27 618.36 1,067.47 582.47
Federated Utility Fund II....................... 890.32 593.40 886.67 470.16 789.26
Van Eck Worldwide Bond.......................... 535.14 73.04 588.75 2.93
Van Eck Worldwide Emerging Markets.............. 587.10 681.71 297.26 0.00
Van Eck Worldwide Hard Assets................... 411.96 25.94 345.27 1.27
Van Eck Worldwide Real Estate................... 411.36 244.75 425.72 0.00
Fidelity -- Equity-Income....................... 1,168.00 11,605.83 1,113.96 11,763.02 1,011.99
Fidelity -- Growth.............................. 1,688.61 11,262.12 1,245.95 7,706.38 905.80
Fidelity -- High Income......................... 792.88 4,604.56 4743.43 4,385.78 788.02
Fidelity -- Asset Manager....................... 948.86 2,581.36 866.16 2,408.49 763.46
Fidelity -- Contrafund(R)....................... 1,382.01 6,104.21 1,127.92 3,848.82 879.99
<CAPTION>
NUMBER OF UNITS UNIT VALUE NUMBER OF UNITS UNIT VALUE
OUTSTANDING AS OF AS OF OUTSTANDING AS OF AS OF
SUBACCOUNT 12/31/97 12/31/96 12/31/96 12/31/95
---------- ----------------- ---------- ----------------- ----------
<S> <C> <C> <C> <C>
Market Street All Pro Large Cap Growth..........
Market Street All Pro Large Cap Value...........
Market Street All Pro Small Cap Growth..........
Market Street All Pro Small Cap Value...........
Market Street Equity 500 (formerly Fidelity
Index 500)..................................... 48,054.18 831.78 27,336.06 686.84
Market Street International..................... 3,125.55 651.04 2,617.73 595.43
Market Street Growth............................ 3,848.31 775.34 2,631.88 657.63
Market Street Aggressive Growth................. 769.36 697.07 507.30 584.65
Market Street Managed........................... 1,443.37 653.55 1,070.67 592.07
Market Street Bond.............................. 993.30 553.59 730.75 545.35
Market Street Money Market...................... 6,625.22 554.47 5,296.64 534.58
Scudder Bond.................................... 3,150.90 858.13 2,175.67 705.50
Scudder Growth and Income....................... 2,961.17 670.35 2,106.40 572.66
Scudder International........................... 6,369.66 877.27 4,119.48 724.69
OCC Equity...................................... 1,073.80 553.18 756.19 545.82
OCC Managed..................................... 1,239.16 596.09 313.71 --
OCC Small Cap................................... 2,118.10 709.94 705.75 --
Dreyfus Growth and Income....................... 1,799.35 772.15 895.01 --
Dreyfus Zero Coupon 2000........................ 712.24 550.29 553.93 544.02
Dreyfus Socially Responsible.................... 506.81 725.61 137.32 --
Federated U.S. Government Securities II......... 317.09 544.01 88.34 --
Federated Utility Fund II....................... 304.63 632.04 116.78 --
Van Eck Worldwide Bond..........................
Van Eck Worldwide Emerging Markets..............
Van Eck Worldwide Hard Assets...................
Van Eck Worldwide Real Estate...................
Fidelity -- Equity-Income....................... 9,404.06 801.08 6,996.28 710.92
Fidelity -- Growth.............................. 6,516.65 743.89 5,412.35 657.74
Fidelity -- High Income......................... 3,296.95 679.15 2,498.16 604.03
Fidelity -- Asset Manager....................... 2,055.09 641.70 1,277.53 567.88
Fidelity -- Contrafund(R)....................... 2,353.16 718.85 997.07 --
<CAPTION>
NUMBER OF UNITS UNIT VALUE NUMBER OF UNITS
OUTSTANDING AS OF AS OF OUTSTANDING AS OF
SUBACCOUNT 12/31/95 12/31/94 12/31/94
---------- ----------------- ---------- -----------------
<S> <C> <C> <C>
Market Street All Pro Large Cap Growth..........
Market Street All Pro Large Cap Value...........
Market Street All Pro Small Cap Growth..........
Market Street All Pro Small Cap Value...........
Market Street Equity 500 (formerly Fidelity
Index 500)..................................... 10,498.25 507.68 3,571.24
Market Street International..................... 1,329.83 528.22 190.49
Market Street Growth............................ 1,246.84 511.45 298.94
Market Street Aggressive Growth................. 376.84 522.44 98.84
Market Street Managed........................... 272.65 482.84 67.77
Market Street Bond.............................. 366.16 459.55 134.18
Market Street Money Market...................... 3,510.81 513.30 453.09
Scudder Bond.................................... 995.33 468.40 17.66
Scudder Growth and Income....................... 733.25 515.26 66.91
Scudder International........................... 1,152.25 503.97 152.34
OCC Equity...................................... 175.27 504.88 108.98
OCC Managed..................................... -- -- --
OCC Small Cap................................... -- -- --
Dreyfus Growth and Income....................... -- -- --
Dreyfus Zero Coupon 2000........................ 202.47 467.73 0.00
Dreyfus Socially Responsible.................... -- -- --
Federated U.S. Government Securities II......... -- -- --
Federated Utility Fund II....................... -- -- --
Van Eck Worldwide Bond..........................
Van Eck Worldwide Emerging Markets..............
Van Eck Worldwide Hard Assets...................
Van Eck Worldwide Real Estate...................
Fidelity -- Equity-Income....................... 2,625.21 533.64 308.68
Fidelity -- Growth.............................. 2,143.41 492.73 173.34
Fidelity -- High Income......................... 1,393.43 507.88 23.35
Fidelity -- Asset Manager....................... 566.68 492.38 174.09
Fidelity -- Contrafund(R)....................... -- 507.68 13.31
</TABLE>
A-1
<PAGE> 47
PROVIDENT MUTUAL VARIABLE ANNUITY SEPARATE ACCOUNT
(REGISTRANT)
PROVIDENT MUTUAL LIFE INSURANCE COMPANY
(DEPOSITOR)
1000 CHESTERBROOK BOULEVARD
BERWYN, PENNSYLVANIA 19312
(610) 407-1717
SERVICE CENTER: 300 CONTINENTAL DRIVE, NEWARK, DELAWARE 19713
1-800-688-5177
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CONTRACT
This Statement of Additional Information ("SAI") contains additional
information regarding the individual flexible premium deferred variable annuity
contract (the "Contract") offered by Provident Mutual Life Insurance Company
("PMLIC"). This SAI is not a prospectus, and should be read together with the
prospectus for the Contract dated May 1, 2000 and the prospectuses for Market
Street Fund, Inc.; Scudder Variable Life Investment Fund; OCC Accumulation
Trust; Dreyfus Variable Investment Fund; Dreyfus Socially Responsible Growth
Fund; Federated Insurance Series; Strong Variable Insurance Funds, Inc.; Strong
Opportunity Fund II, Inc.; Van Eck Worldwide Insurance Trust; Variable Insurance
Products Fund, and Variable Insurance Products Fund II. You may obtain a copy of
these prospectuses by writing or calling us at our address or phone number shown
above. Capitalized terms in this SAI have the same meanings as in the prospectus
for the Contract.
The date of this Statement of Additional Information is May 1, 2000.
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS*
<TABLE>
<S> <C>
ADDITIONAL CONTRACT PROVISIONS (22-29)...................... S-2
The Contract........................................... S-2
Incontestability....................................... S-2
Misstatement of Age or Sex............................. S-2
Dividends.............................................. S-2
CALCULATION OF YIELDS AND TOTAL RETURNS (34)................ S-2
Money Market Subaccount Yields......................... S-3
Other Subaccount Yields................................ S-4
Average Annual Total Returns........................... S-4
Other Total Returns.................................... S-7
Effect of the Administration Fee on Performance Data... S-10
TERMINATION OF PARTICIPATION AGREEMENTS..................... S-10
STANDARD & POOR'S........................................... S-12
SAFEKEEPING OF ACCOUNT ASSETS............................... S-13
STATE REGULATION............................................ S-13
RECORDS AND REPORTS......................................... S-14
LEGAL MATTERS (40).......................................... S-14
EXPERTS..................................................... S-14
OTHER INFORMATION........................................... S-14
FINANCIAL STATEMENTS........................................ S-14
FINANCIAL STATEMENTS INDEX (Appendix A)..................... F-1
</TABLE>
- ---------------
* Numbers in parentheses refer to corresponding pages of the prospectus for the
Contract.
<PAGE> 48
ADDITIONAL CONTRACT PROVISIONS
THE CONTRACT
The entire contract between you and us is made up of the Contract and your
Application. The statements made in the Application are deemed representations
and not warranties. We cannot use any statement in defense of a claim or to void
a Contract unless it is contained in the Application and a copy of the
Application is attached to the Contract at issue.
INCONTESTABILITY
We 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, we will pay the
amount which the proceeds would have purchased at the correct age and sex.
If we make an overpayment 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 we make an underpayment 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. We 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, we do not expect to
credit dividends to it. If a dividend is credited, it will be paid to you in
cash.
CALCULATION OF YIELDS AND TOTAL RETURNS
From time to time, we may disclose historical performance data for the
Subaccounts including yields, effective yields, annual total returns, and other
measures of performance. This performance data will be computed, or accompanied
by performance data computed, in accordance with SEC standards.
Because of the charges and deductions imposed under a Contract, performance
data for the Subaccounts will be lower than performance data for their
corresponding Portfolios. The performance of a Subaccount will be affected by
expense reimbursements and fee waivers applicable to their corresponding
Portfolios. Without these reimbursements and waivers, performance would be
lower. In addition, 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. Premium taxes currently range from 0% to 4.0% of the
premium depending on the state in which the Contract is sold.
The Funds have provided all performance information for the Portfolios,
including the Portfolio total value information used to calculate the total
returns of the Subaccounts for periods prior to the inception of the
Subaccounts. Market Street Fund is affiliated with PMLIC. None of the other
Funds is affiliated with PMLIC. While PMLIC has no reason to doubt the accuracy
of the figures provided by these non-affiliated Funds, PMLIC does not represent
that they are true and complete, and disclaims all responsibility for these
figures.
PERFORMANCE FOR ANY GIVEN PAST PERIOD IS NOT AN INDICATION OR
REPRESENTATION OF FUTURE PERFORMANCE. THE PERFORMANCE OF EACH SUBACCOUNT WILL
FLUCTUATE ON A DAILY BASIS.
S-2
<PAGE> 49
MONEY MARKET SUBACCOUNT YIELDS
From time to time, sales literature or advertisements 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 or income other than investing income 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 and exclusive of income other than investment
income) at the end of the seven-day period in the value of a hypothetical
account under a Contract having a balance of one Accumulation Unit in the Money
Market Subaccount at the beginning of the period, dividing the 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 investment
income of 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 Annual 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 (exclusive of realized gains or losses on
the sale of securities and unrealized appreciation and depreciation
and exclusive of income other than investment income) for the
seven-day period attributable to a hypothetical account having a
balance of one Accumulation Unit in the Money Market Subaccount.
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 (exclusive of realized gains and losses
on the sale of securities and unrealized appreciation and
depreciation and exclusive of income other than investment income)
for the seven-day period attributable to a hypothetical account
having a balance of one Accumulation Unit in the Money Market
Subaccount.
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.
The Money Market Subaccount's yield is affected by changes in interest
rates on money market securities, the 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.
S-3
<PAGE> 50
Yield calculations do not take into account the Surrender Charge under the
Contract, which ranges from 6% during the first Contract Year to 1% during the
sixth Contract Year on amounts surrendered or withdrawn under the Contract.
The current yield and effective yield for the Money Market Subaccount for
the seven days ended December 31, 1999 were 3.81% and 3.88%, respectively.
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 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.
The yield is computed by dividing: (1) the net investment income of the
Portfolio attributable to the Subaccount's Accumulation Units less Subaccount
expenses for the period; by (2) the maximum offering price per Accumulation Unit
on the last day of the period times the daily average number of Accumulation
Units outstanding for the period. This number is then compounded for a six-month
period and multiplied 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 the Variable Account Value 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 investment income of the Portfolio for the 30-day or one-month
period attributable to the Subaccount's Accumulation Units.
ES = expenses of the Subaccount for the 30-day or one-month period.
U = the average number of Accumulation Units outstanding.
UV = the unit value at the close of the last day in the 30-day or
one-month period.
A Subaccount's yield is affected by changes in interest rates, the average
portfolio maturity of a portfolio, the types and quality of portfolio securities
held by the Portfolio, and a Portfolio's operating expenses.
Yield calculations do not take into account the Surrender Charge under the
Contract, which ranges from 6% during the first Contract Year to 1% during the
sixth Contract Year on amounts surrendered or withdrawn under the Contract.
AVERAGE ANNUAL TOTAL RETURNS
From time to time, sales literature or advertisements may also quote
average annual total returns for one or more of the Subaccounts for various
periods of time.
Until a Subaccount has been in operation for 10 years, PMLIC will 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 return for the
Market Street Fund International, Growth, Aggressive Growth, Managed, Bond, and
Money Market Subaccounts may include information for the
S-4
<PAGE> 51
period before any contracts were registered under the Securities Act of 1933
from the inception of these Subaccounts (April 14, 1992 to December 31, 1992),
with the level of Contract charges currently in effect.
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 normally be for the most recent calendar quarter, 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 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 Annual Administration Fee is $30 per year per Contract deducted
at the end of each Contract Year. For purposes of calculating average annual
total return, an average administration fee per dollar of the Variable Account
Value is used to determine the amount of the charge attributable to the
Subaccount for the period. 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 during the
first six Contract years. The total return will then be calculated according to
the following formula:
TR = ((ERV/P)1/N) - 1
Where:
TR = the average annual total return
ERV = the ending redeemable value (net of Subaccount recurring charges and
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.
Based on the foregoing calculations, average annual total return
information for the Subaccounts is as follows:
<TABLE>
<CAPTION>
FOR THE 10-YEAR PERIOD
ENDED 12/31/99
FOR THE 1-YEAR FOR THE 5-YEAR (OR DATE OF
PERIOD ENDED PERIOD ENDED INCEPTION IF LESS
SUBACCOUNT (INCEPTION DATE OF SUBACCOUNT) 12/31/99 12/31/99 THAN 10 YEARS)
- ----------------------------------------- -------------- -------------- ----------------------
<S> <C> <C> <C>
MARKET STREET FUND, INC.
All Pro Large Cap Growth (June 4, 1998)...... 16.06% 25.54%
All Pro Large Cap Value (June 4, 1998)....... (6.21)% (2.57)%
All Pro Small Cap Growth (June 4, 1998)...... 77.83% 51.00%
All Pro Small Cap Value (June 4, 1998)....... (15.05)% (16.89)%
Equity 500 Index(1) (October 3, 1994)........ 13.20% 26.03% 17.61%
International (October 1, 1993).............. 21.51% 12.65% 11.10%
Growth (October 1, 1993)..................... (3.30)% 15.80% 12.86%
Aggressive Growth (October 1, 1993).......... 8.92% 13.81% 11.80%
Managed (October 1, 1993).................... (5.41)% 11.88% 8.84%
Bond (October 1, 1993)....................... (9.24)% 5.33% 2.89%
Money Market (October 1, 1993)............... (1.49)% 3.36% 3.22%
</TABLE>
S-5
<PAGE> 52
<TABLE>
<CAPTION>
FOR THE 10-YEAR PERIOD
ENDED 12/31/99
FOR THE 1-YEAR FOR THE 5-YEAR (OR DATE OF
PERIOD ENDED PERIOD ENDED INCEPTION IF LESS
SUBACCOUNT (INCEPTION DATE OF SUBACCOUNT) 12/31/99 12/31/99 THAN 10 YEARS)
- ----------------------------------------- -------------- -------------- ----------------------
<S> <C> <C> <C>
SCUDDER VARIABLE LIFE INVESTMENT FUND
Bond (October 10, 1994)...................... (7.02)% 5.01% 4.82%
Growth and Income (May 1, 1996).............. (0.41)% 12.51%
International (May 1, 1996).................. 45.28% 20.10%
OCC ACCUMULATION TRUST
Equity (October 3, 1994)..................... (3.72)% 17.96% 16.88%
Managed (October 3, 1994).................... (1.41)% 17.67% 16.39%
Small Cap (October 3, 1994).................. (7.84)% 6.42% 6.08%
DREYFUS VARIABLE INVESTMENT FUND
Growth and Income (May 1, 1996).............. 9.79% 11.63%
Zero Coupon 2000 (October 3, 1994)........... (3.58)% 5.43% 5.14%
DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
Socially Responsible (May 1, 1996)........... 22.21% 24.36%
FEDERATED INSURANCE SERIES
Fund for U.S. Government Securities II (April
30, 1996)................................. (6.68)% 3.16%
Utility Fund II (May 1, 1996)................ (4.39)% 11.51%
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond (May 1, 1998)................. (13.48)% (3.88)%
Worldwide Emerging Markets (May 1, 1998)..... 88.33% 10.44%
Worldwide Hard Assets (May 1, 1998).......... 13.66% (14.57)%
Worldwide Real Estate (May 1, 1998).......... (8.01)% (13.82)%
VARIABLE INSURANCE PRODUCTS FUND
Equity-Income (October 3, 1994).............. (0.15)% 16.59% 15.50%
Growth (October 3, 1994)..................... 29.14% 27.59% 26.72%
High Income (October 3, 1994)................ 1.57% 8.91% 8.15%
VARIABLE INSURANCE PRODUCTS FUND II
Asset Manager (October 3, 1994).............. 4.33% 13.64% 12.23%
Contrafund(R) (May 1, 1996).................. 16.73% 22.03%
</TABLE>
- ---------------
(1) As of February 7, 2000, shares of the Market Street Equity 500 Index
Portfolio were substituted for shares of the Variable Insurance Products
Fund II Index 500 Portfolio.
From time to time, sales literature or advertisements may also quote
average annual total returns for periods prior to the date a Subaccount
commenced operations. This 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.
S-6
<PAGE> 53
Based on the performance of the Portfolios and these assumptions average
annual total return information is as follows:
<TABLE>
<CAPTION>
FOR THE 10-YEAR PERIOD
ENDED 12/31/99
FOR THE 1-YEAR FOR THE 5-YEAR (OR DATE OF
PERIOD ENDED PERIOD ENDED INCEPTION IF LESS
SUBACCOUNT (INCEPTION DATE OF PORTFOLIO) 12/31/99 12/31/99 THAN 10 YEARS)
- ---------------------------------------- -------------- -------------- ----------------------
<S> <C> <C> <C>
MARKET STREET FUND, INC.
All Pro Large Cap Growth (May 4, 1998)....... 16.06% 21.13%
All Pro Large Cap Value (May 4, 1998)........ (6.21)% (4.13)%
All Pro Small Cap Growth (May 4, 1998)....... 77.83% 40.31%
All Pro Small Cap Value (May 4, 1998)........ (15.05)% (19.17)%
International (November 1, 1991)............. 21.51% 12.65% 9.93%
Growth (December 12, 1985)................... (3.30)% 15.80% 10.84%
Aggressive Growth (May 1, 1989).............. 8.92% 13.81% 12.86%
Managed (December 12, 1985).................. (5.41)% 11.88% 8.29%
Bond (December 12, 1985)..................... (9.24)% 5.33% 5.47%
Money Market (December 12, 1985)............. (1.49)% 3.36% 3.28%
SCUDDER VARIABLE LIFE INVESTMENT FUND
Bond (July 17, 1985)......................... (7.02)% 5.01% 5.69%
Growth and Income (May 2, 1994).............. (0.41)% 16.90% 15.56%
International (May 1, 1987).................. 45.28% 18.50% 11.56%
OCC ACCUMULATION TRUST
Equity (September 15, 1994).................. (3.72)% 17.96% 16.34%
Managed (September 15, 1994)................. (1.41)% 17.67% 15.58%
Small Cap (September 15, 1994)............... (7.84)% 6.42% 6.01%
DREYFUS VARIABLE INVESTMENT FUND
Growth and Income (May 2, 1994).............. 9.79% 22.24% 18.93%
Zero Coupon 2000 (August 31, 1990)........... (3.58)% 5.43% 7.11%
DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
Socially Responsible (October 7, 1993)....... 22.21% 26.53% 22.29%
FEDERATED INSURANCE SERIES
Fund for U.S. Government Securities II (March
29, 1994)................................. (6.68)% 3.75% 3.48%
Utility Fund II (February 10, 1994).......... (4.39)% 13.29% 10.26%
STRONG VARIABLE INSURANCE FUNDS, INC.
Strong Mid Cap Growth Fund II (December 31,
1996)..................................... 80.14% 43.85%
STRONG OPPORTUNITY FUND II, INC.
Strong Opportunity Fund II (May 8, 1992)..... 25.94% 21.23% 19.28%
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond (September 1, 1989)........... (13.48)% 3.15% 3.77%
Worldwide Emerging Markets (December 27,
1995)..................................... 88.33% 7.24%
Worldwide Hard Assets (September 1, 1989).... 13.66% (0.40)% 1.36%
Worldwide Real Estate (June 23, 1997)........ (8.01)% (0.78)%
VARIABLE INSURANCE PRODUCTS FUND
Equity-Income (October 9, 1986).............. (0.15)% 16.59% 12.80%
Growth (October 9, 1986)..................... 29.14% 27.59% 18.21%
High Income (September 19, 1985)............. 1.57% 8.91% 10.76%
VARIABLE INSURANCE PRODUCTS FUND II
Asset Manager (September 6, 1989)............ 4.33% 13.64% 11.46%
Contrafund(R) (January 3, 1995).............. 16.73% 25.40%
</TABLE>
OTHER TOTAL RETURNS
From time to time, sales literature or advertisements may also quote
average annual total returns that do not reflect the Surrender Charge. 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 the Surrender Charge on amounts surrendered or withdrawn.
S-7
<PAGE> 54
Based on this method of calculation, average annual total return
information for the Subaccounts is as follows:
<TABLE>
<CAPTION>
FOR THE 10-YEAR PERIOD
ENDED 12/31/99
FOR THE 1-YEAR FOR THE 5-YEAR (OR DATE OF
PERIOD ENDED PERIOD ENDED INCEPTION IF LESS
SUBACCOUNT (INCEPTION DATE OF SUBACCOUNT) 12/31/99 12/31/99 THAN 10 YEARS)
- ----------------------------------------- -------------- -------------- ----------------------
<S> <C> <C> <C>
MARKET STREET FUND, INC.
All Pro Large Cap Growth (June 4, 1998)...... 23.47% 29.28%
All Pro Large Cap Value (June 4, 1998)....... (0.22)% 0.34%
All Pro Small Cap Growth (June 4, 1998)...... 89.18% 55.50%
All Pro Small Cap Value (June 4, 1998)....... (9.63)% (14.41)%
Equity 500 Index(1) (October 3, 1994)........ 18.54% 26.26% 17.82%
International (October 1, 1993).............. 27.24% 12.86% 11.10%
Growth (October 1, 1993)..................... 1.25% 16.01% 12.86%
Aggressive Growth (October 1, 1993).......... 14.05% 14.02% 11.80%
Managed (October 1, 1993).................... (0.95)% 12.08% 8.84%
Bond (October 1, 1993)....................... (4.96)% 5.52% 2.89%
Money Market (October 1, 1993)............... 3.16% 3.55% 3.22%
SCUDDER VARIABLE LIFE INVESTMENT FUND
Bond (October 10, 1994)...................... (2.64)% 5.20% 5.00%
Growth and Income (May 1, 1996).............. 4.28% 13.36%
International (May 1, 1996).................. 52.13% 21.00%
OCC ACCUMULATION TRUST
Equity (October 3, 1994)..................... 0.82% 18.17% 17.08%
Managed (October 3, 1994).................... 3.24% 17.89% 16.59%
Small Cap (October 3, 1994).................. (3.50)% 6.61% 6.27%
DREYFUS VARIABLE INVESTMENT FUND
Growth and Income (May 1, 1996).............. 14.96% 12.47%
Zero Coupon 2000 (October 3, 1994)........... 0.96% 5.62% 5.32%
DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
Socially Responsible (May 1, 1996)........... 27.97% 25.30%
FEDERATED INSURANCE SERIES
Fund for U.S. Government Securities II
(April 30, 1996).......................... (2.28)% 3.94%
Utility Fund II (May 1, 1996)................ 0.11% 12.35%
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond (May 1, 1998)................. (9.40)% (1.17)%
Worldwide Emerging Markets (May 1, 1998)..... 97.21% 13.55%
Worldwide Hard Assets (May 1, 1998).......... 19.02% (12.16)%
Worldwide Real Estate (May 1, 1998).......... (3.67)% (11.39)%
VARIABLE INSURANCE PRODUCTS FUND
Equity-Income (October 3, 1994).............. 4.55% 16.80% 15.70%
Growth (October 3, 1994)..................... 35.23% 27.82% 26.94%
High Income (October 3, 1994)................ 6.35% 9.11% 8.34%
VARIABLE INSURANCE PRODUCTS FUND II
Asset Manager (October 3, 1994).............. 9.25% 13.84% 12.43%
Contrafund(R) (May 1, 1996).................. 22.23% 22.95%
</TABLE>
- ---------------
(1) As of February 7, 2000, shares of the Market Street Equity 500 Index
Portfolio were substituted for shares of the Variable Insurance Products
Fund II Index 500 Portfolio.
S-8
<PAGE> 55
Based on the foregoing method of calculation, average amount total return
information is as follows assuming that the Subaccounts were in existence during
the same period as those indicated for the Portfolios.
<TABLE>
<CAPTION>
FOR THE 10-YEAR PERIOD
ENDED 12/31/99
FOR THE 1-YEAR FOR THE 5-YEAR (OR DATE OF
PERIOD ENDED PERIOD ENDED INCEPTION IF LESS
SUBACCOUNT (INCEPTION DATE OF PORTFOLIO) 12/31/99 12/31/99 THAN 10 YEARS)
- ---------------------------------------- -------------- -------------- ----------------------
<S> <C> <C> <C>
MARKET STREET FUND, INC.
All Pro Large Cap Growth (May 4, 1998)....... 23.47% 24.54%
All Pro Large Cap Value (May 4, 1998)........ (0.22)% (1.42)%
All Pro Small Cap Growth (May 4, 1998)....... 89.18% 44.26%
All Pro Small Cap Value (May 4, 1998)........ (9.63)% (16.89)%
International (November 1, 1991)............. 27.24% 12.86% 9.93%
Growth (December 12, 1985)................... 1.25% 16.01% 10.84%
Aggressive Growth (May 1, 1989).............. 14.05% 14.02% 12.86%
Managed (December 12, 1985).................. (0.95)% 12.08% 8.29%
Bond (December 12, 1985)..................... (4.96)% 5.52% 5.08%
Money Market (December 12, 1985)............. 3.16% 3.55% 3.28%
SCUDDER VARIABLE LIFE INVESTMENT FUND
Bond (July 17, 1985)......................... (2.64)% 5.20% 5.69%
Growth and Income (May 2, 1994).............. 4.28% 17.11% 15.75%
International (May 1, 1987).................. 52.13% 18.71% 11.56%
OCC ACCUMULATION TRUST
Equity (September 15, 1994).................. 0.82% 18.17% 16.54%
Managed (September 15, 1994)................. 3.24% 17.89% 15.78%
Small Cap (September 15, 1994)............... (3.50)% 6.61% 6.19%
DREYFUS VARIABLE INVESTMENT FUND
Growth and Income (May 2, 1994).............. 14.96% 19.12%
Zero Coupon 2000 (August 31, 1990)........... 0.96% 5.62% 7.11%
DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
Socially Responsible (October 7, 1993)....... 27.97% 26.76% 22.29%
FEDERATED INSURANCE SERIES
Fund for U.S. Government Securities II (March
29, 1994)................................. (2.28)% 3.94% 3.64%
Utility Fund II (February 10, 1994).......... 0.11% 13.49% 10.43%
STRONG VARIABLE INSURANCE FUNDS, INC.
Strong Mid Cap Growth Fund II (December 31,
1996)..................................... 87.14% 44.81%
STRONG OPPORTUNITY FUND II, INC.
Strong Opportunity Fund II (May 8, 1992)..... 32.94% 21.60% 19.32%
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond (September 1, 1989)........... (9.40)% 3.34% 3.77%
Worldwide Emerging Markets
(December 27, 1995)....................... 97.21% 7.69%
Worldwide Hard Assets (September 1, 1989).... 19.02% (0.22)% 1.36%
Worldwide Real Estate (June 23, 1997)........ (3.67)% 0.67%
VARIABLE INSURANCE PRODUCTS FUND
Equity-Income (October 9, 1986).............. 4.55% 16.80% 12.80%
Growth (October 9, 1986)..................... 35.23% 27.82% 18.21%
High Income (September 19, 1985)............. 6.35% 9.11% 10.76%
</TABLE>
S-9
<PAGE> 56
<TABLE>
<CAPTION>
FOR THE 10-YEAR PERIOD
ENDED 12/31/99
FOR THE 1-YEAR FOR THE 5-YEAR (OR DATE OF
PERIOD ENDED PERIOD ENDED INCEPTION IF LESS
SUBACCOUNT (INCEPTION DATE OF PORTFOLIO) 12/31/99 12/31/99 THAN 10 YEARS)
- ---------------------------------------- -------------- -------------- ----------------------
<S> <C> <C> <C>
VARIABLE INSURANCE PRODUCTS FUND II
Asset Manager (September 6, 1989)............ 9.25% 13.84% 11.46%
Contrafund(R) (January 3, 1995).............. 22.23% 25.86%
</TABLE>
We may also 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 for the period.
ERV = the ending redeemable value (net of Subaccount recurring charges) of
the hypothetical account at the end of the period.
P = a hypothetical initial 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 account bears
to the total Contract Account Value. For purposes of reflecting the Annual
Administration Fee in yield and total return quotations, this annual charge is
converted into a per-dollar per-day charge based on a Contract Account Value in
the Variable Account of $10,000 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 written notice by any party; (2) at our option if shares of
all Portfolios are not reasonably available to meet the requirements of the
Policies; (3) at the option of the Fund or us if certain enforcement proceedings
are instituted against the other; (4) at the option of the Fund or us upon
receipt of regulatory approvals and/or the vote of the Policy owners to
substitute shares of another mutual fund; (5) at the option of the Fund or us
upon a determination by the Fund's directors that an irreconcilable material
conflict exists between all policy owners of variable insurance products of all
separate accounts or the interests of participating insurance companies
investing in the Fund; (6) at our option if we have withdrawn an Account's
investment in the Fund; (7) at our option if the Fund ceases to qualify as a
regulated investment company under the Code or fails to meet the diversification
requirements thereunder; or (8) at the option of any party upon another party's
material breach of any provision of the agreement.
Scudder Variable Life Investment Fund. This agreement provides for
termination: (1) one hundred twenty days after the renegotiation date if the
Fund and we fail within sixty days after the renegotiation date to agree to
continue or amend the agreement; (2) at our option or the Fund's option if no
shares of the Fund are owned by us, the Variable Account, an affiliated
insurance company or a separate account of an 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.
S-10
<PAGE> 57
OCC Accumulation Trust. This agreement provides for termination: (1) on
one (1) year's advance written notice by any party; (2) at our option if shares
of the Portfolios are not reasonably available to meet the requirements of the
Contracts; (3) at the option of the Fund or us if certain enforcement
proceedings are instituted against the other; (4) at the option of the Fund or
us upon receipt of any necessary regulatory approvals and/or the vote of
contract owners to substitute shares of another mutual fund; (5) at the option
of the Fund or us upon a determination that an irreconcilable material conflict
exists between all contract owners of variable products of all separate accounts
or the interest of participating insurance companies investing in the Fund; (6)
at our option if the Fund ceases to qualify as a regulated investment company
under the Code or fails to meet the diversification requirements thereunder; (7)
at our option if the Fund is unable to adjust its investments to comply with
applicable state insurance laws or regulations; (8) at the option of any party
upon another party's material breach of any provision of the agreement; (9) at
our option or the Fund's option upon determination that the other party has
suffered a material adverse change in its business, operations, or financial
condition or is the subject of material adverse publicity; or (10) at the Fund's
option in the event any of the Contracts are not issued or sold in accordance
with applicable law.
Dreyfus Variable Investment Fund. This agreement provides for termination:
(1) on 180 days' notice by the Fund or us; (2) at our 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 us if certain enforcement proceedings are
instituted against the other; (4) at the option of the Fund if it determines
that we have suffered a material adverse change in our business or financial
condition or we are the subject of material adverse publicity; (5) upon
termination of the Investment Advisory Agreement between the Fund and Dreyfus;
(6) in the event the Fund's shares are not registered, issued or sold in
accordance with applicable laws; (7) 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; (8) at the option of the Fund if the
Contracts cease to qualify as annuity contracts or life insurance policies under
the Code; (9) at the option of either party upon the other's breach of any
material provision of the agreement; (10) at the option of the Fund, if the
Contracts are not registered, issued or sold in accordance with applicable law;
or (11) upon assignment of the agreement.
Federated Insurance Series. This agreement provides for termination: (1)
on 180 days' notice by the Fund or us; (2) at our option if shares of the
Portfolios are not reasonably available to meet the requirements of the
Contracts; (3) at the option of the Fund or us if certain enforcement
proceedings are instituted against the other; (4) upon the vote of Owners having
an interest in a Subaccount investing in a Portfolio to substitute shares of
another investment company for corresponding shares of the Portfolio of the
Fund; (5) in the event the Fund's shares are not registered, issued or sold in
accordance with applicable law; (6) at the option of the Fund or us upon a
determination that an irreconcilable conflict exists between owners of variable
insurance products of all separate accounts and the interests of participating
insurance companies investing in the Fund; and (7) at our option if the Fund or
a Portfolio ceases to qualify as a regulated investment company under the Code
or fails to meet the diversification requirements thereunder.
Strong Variable Insurance Funds, Inc. This agreement provides for
termination: (1) on six (6) months prior written notice by any party; (2) at the
Adviser's, Funds', or Distributor's option upon a determination that we have
suffered a material adverse change in our business, operations, financial
condition, or prospects or are the subject of material adverse publicity; (3) at
the Adviser's, Funds', or Distributor's option if any of the Contracts are not
registered, issued, or sold in accordance with applicable law or such law
precludes the use of Fund shares as the underlying investment media of the
Contracts issued or to be issued by us; (4) at our option if any of a Fund's
shares are not registered, issued, or sold in accordance with applicable law or
such law precludes the use of such shares as the underlying investment media of
the Contracts issued or to be issued; (5) at our option if the Funds cease to
qualify as regulated investment companies under the Code or if we reasonably
believe that the Funds may fail to so qualify; (6) at our option if a Fund fails
to meet the diversification requirements specified in the Code; (7) at our
party's option upon 30 days written notice in the event of a material breach of
the agreement; (8) at any party's option if certain enforcement proceedings are
instituted against another party; (9) at any
S-11
<PAGE> 58
party's option if the agreement is assigned without the other parties' written
consent; or (10) as is required by law, order or instruction of a court,
regulatory body, or self-regulatory organization with jurisdiction over the
terminating party.
Van Eck Worldwide Insurance Trust. This agreement provides for
termination: (1) by Van Eck Trust, Van Eck Trust's Distributor or us upon six
months prior written notice; (2) at our option if Fund shares are not available
for any reason to meet the requirements of Contracts as determined by us and
reasonable advance notice of election to terminate is furnished by us; (3) at
the option of the Fund, its principal underwriter or us, upon institution of
formal proceedings against the broker-dealer marketing the Contracts, the
Variable Account, the Fund or us by any regulatory body; (4) upon our decision,
in accordance with regulations of the SEC, to substitute Fund shares with the
shares of another fund selected to serve as the underlying investment medium on
60 days' written notice; (5) upon assignment of the agreement unless made with
the written consent of each other party; (6) in the event Fund shares are not
registered, issued or sold in conformance with Federal law or Federal law
precludes the use of Fund shares as an underlying investment medium of Contracts
issued or to be issued by us; (7) at our option by written notice to the Fund
and its principal underwriter with respect to any Portfolio in the event that
the Portfolio fails to meet specified diversification requirements or if we
reasonably believe that the Portfolio may fail to meet those requirements; (8)
at our option by written notice to the Fund and its principal underwriter, if we
determine, in our sole judgment exercised in good faith, that the Fund or its
principal underwriter has suffered a material adverse change in its business,
operations, financial condition or prospects since the date of the agreement or
is the subject of material adverse publicity; or (9) at the option of the Fund
or its principal underwriter by written notice to us, if the Fund or its
principal underwriter determines, in its sole judgment exercised in good faith,
that the Fund or its underwriter has suffered a material adverse change in its
business operations, financial condition or prospects since the date of the
agreement or is the subject of material adverse publicity.
Variable Insurance Products Fund II. This agreement provides for
termination: (1) on sixty (60) days advance written notice by any party; (2) at
our option if shares of the Fund are not reasonably available to meet the
requirements of the Contracts; (3) at our 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 we have suffered material
adverse changes in our business, operations, financial condition, or prospects
or we are the subject of material adverse publicity; (5) at our option if the
Fund has suffered material adverse changes in its business, operations,
financial condition, or prospects or is the subject of material adverse
publicity; or (6) at the option of the Fund or its principal underwriter if we
determine that shares of the Fund are reasonably available to meet the
requirements of the Contracts; (7) at our option if certain enforcement
proceedings are instituted against the Fund or its principal underwriter; or (8)
at our option if the Fund or its principal underwriter is in material breach of
the agreement.
Should an agreement between a Fund and ourselves terminate, the Subaccounts
which invest in that Fund will not be able to purchase additional shares of that
Fund. In that event, Owners will no longer be able to allocate cash values or
Net Premiums to Subaccounts investing in Portfolios of that Fund.
Additionally, in certain circumstances a Fund or a Portfolio may refuse to
sell its shares to a Subaccount even though its participation agreement with us
has not been terminated. Should a Fund or Portfolio decide not to sell its
shares to the Variable Account, we will not be able to honor requests by Owners
to allocate cash values or Net Premiums to Subaccounts investing in shares of
that Fund or Portfolio.
STANDARD & POOR'S
"Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard & Poor's 500",
and "500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use by PMLIC and its affiliates and
S-12
<PAGE> 59
subsidiaries. The Contract is not sponsored, endorsed, sold or promoted by
Standard & Poor's, and Standard & Poor's makes no representation regarding the
advisability of investing in the Contract .
S&P makes no representation or warranty, express or implied, to the Owners
of the Contracts and the Equity 500 Index Portfolio or any member of the public
regarding the advisability of investing in securities generally, or in the
Contracts and the Equity 500 Index Portfolio particularly, or the ability of the
S&P 500 Index to track general stock market performance. S&P's only relationship
to PMLIC and Market Street is the licensing of certain trademarks and trade
names of S&P and of the S&P 500 Index which is determined, composed, and
calculated by S&P without regard to PMLIC, Market Street, the Owners of the
Contracts, or the Equity 500 Index Portfolio. S&P has no obligation to take the
needs of PMLIC, Market Street, the Owners of the Contracts or the Equity 500
Index Portfolio into consideration in determining, composing or calculating the
S&P 500 Index. S&P is not responsible for and has not participated in the
determination of the prices and amount of the Contracts or the Equity 500 Index
Portfolio or the timing of the issuance or sale of the Contracts or the Equity
500 Index Portfolio or in the determination or calculation of the equation by
which the Contracts or the Equity 500 Index Portfolio are to be converted into
cash. S&P has no obligation or liability in connection with the administration,
marketing, or trading of the Contracts or the Equity 500 Index Portfolio.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED. AS TO RESULTS TO BE OBTAINED BY PMLIC, MARKET STREET, OWNERS OF THE
CONTRACTS AND THE EQUITY 500 INDEX PORTFOLIO, OR ANY OTHER PERSON OR ENTITY FROM
THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS
OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR
ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT
SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.
SAFEKEEPING OF ACCOUNT ASSETS
We hold the title to the assets of the Variable Account. The assets in the
Variable Account are legally segregated from 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.
Our officers and employees are covered by a financial institution bond
issued by Aetna Casualty and Surety Company to PMLIC with limits of $10 million
per occurrence and $20 million in the aggregate. The bond insures against
dishonest and fraudulent acts of officers and employees.
STATE REGULATION
We are subject to regulation and supervision by the Insurance Department of
the Commonwealth of Pennsylvania, which periodically examines our affairs. We
are also subject to the insurance laws and regulations of all jurisdictions
where we are 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. We are required to submit annual
statements of our operations, including financial statements, to the insurance
departments of the various jurisdictions in which we do business for the
purposes of determining solvency and compliance with local insurance laws and
regulations.
S-13
<PAGE> 60
RECORDS AND REPORTS
We will maintain all records and accounts relating to the Variable Account.
As presently required by the 1940 Act and the regulations thereunder, reports
containing information required under the Act or any other applicable law or
regulation, will be sent to Owners semi-annually at their last known address.
LEGAL MATTERS
James G. Potter, Jr., Esquire, General Counsel and Secretary of PMLIC, has
provided advice on certain matters relating to the laws of Pennsylvania
regarding the Contracts and our issuance of the Contracts. Drinker Biddle &
Reath LLP, of Philadelphia, PA has provided advice on certain matters relating
to the federal securities laws.
EXPERTS
The financial statements listed on page F-1 have been included in this SAI,
which is a part of the registration statement, in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
OTHER INFORMATION
A registration statement has been filed with the SEC under the Securities
Act of 1933, as amended, with respect to the Contracts. Not all the information
set forth in the registration statement and the amendments and exhibits thereto
has been included in this SAI. Statements contained in the prospectus and this
SAI 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.
FINANCIAL STATEMENTS
This SAI contains the audited statements of assets and liabilities of the
Variable Account as of December 31, 1999 and the related statements of
operations for the year then ended and the statements of changes in net assets
for each of the two years in the period then ended. PricewaterhouseCoopers LLP,
2400 Eleven Penn Center, Philadelphia, PA 19103, serves as independent
accountant for the Variable Annuity Separate Account.
Our statements of financial condition as of December 31, 1999 and 1998 and
the related statements of operations, equity, and cash flows for each of the
three years in the period ended December 31, 1999, which are included in this
SAI, should be considered only as bearing on our ability to meet our obligations
under the Contracts. They should not be considered as bearing on the investment
performance of the assets held in the Variable Account.
S-14
<PAGE> 61
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Provident Mutual Variable Annuity Separate Account
Report of Independent Accountants......................... F-2
Statements of Assets and Liabilities, December 31, 1999... F-3
Statements of Operations for the Year Ended December 31,
1999................................................... F-10
Statements of Changes in Net Assets for the Year Ended
December 31, 1999...................................... F-15
Statements of Changes in Net Assets for the Year Ended
December 31, 1998...................................... F-21
Notes to Financial Statements............................. F-27
Provident Mutual Life Insurance Company and Subsidiaries
Report of Independent Accountants......................... F-44
Consolidated Statements of Financial Condition, December
31, 1999 and 1998...................................... F-45
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998, and 1997...................... F-46
Consolidated Statements of Equity for the Years Ended
December 31, 1999, 1998, and 1997...................... F-47
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998, and 1997...................... F-48
Notes to Consolidated Financial Statements................ F-49
</TABLE>
F-1
<PAGE> 62
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Report of Independent Accountants
- --------------------------------------------------------------------------------
To the Contractholders and
Board of Directors of
Provident Mutual Life Insurance Company:
In our opinion, the accompanying statements of assets and liabilities of the
Provident Mutual Variable Annuity Separate Account (comprising thirty-one
subaccounts, hereafter collectively referred to as the "Separate Account") and
the related statements of operations and of changes in net assets present
fairly, in all material respects, the financial position of the Separate Account
at December 31, 1999, the results of its operations for the year then ended and
the changes in its net assets for each of the two years in the period then
ended, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the management of
the Separate Account; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities owned at December 31, 1999 by
correspondence with the transfer agents, provide a reasonable basis for the
opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
February 23, 2000
F-2
<PAGE> 63
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Statements of Assets and Liabilities, December 31, 1999
- --------------------------------------------------------------------------------
<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........................... $5,548,353
Money Market Portfolio..................... $3,645,573
Bond Portfolio............................. $1,221,430
Managed Portfolio.......................... $1,485,268
Aggressive Growth Portfolio................ $1,405,114
International Portfolio.................... $2,653,348
Dividends receivable......................... 18,156
Receivable from Provident Mutual Life
Insurance Company.......................... 42,292
---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS................................... $5,548,353 $3,706,021 $1,221,430 $1,485,268 $1,405,114 $2,653,348
========== ========== ========== ========== ========== ==========
Held for the benefit of contractholders...... $5,489,274 $3,651,558 $1,188,429 $1,438,216 $1,350,310 $2,591,954
Attributable to Provident Mutual Life
Insurance Company.......................... 59,079 54,463 33,001 47,052 54,804 61,394
---------- ---------- ---------- ---------- ---------- ----------
$5,548,353 $3,706,021 $1,221,430 $1,485,268 $1,405,114 $2,653,348
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE> 64
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Statements of Assets and Liabilities, December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ALL PRO LARGE ALL PRO LARGE ALL PRO SMALL ALL PRO SMALL
CAP GROWTH CAP VALUE CAP GROWTH CAP VALUE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investment in the Market Street Fund, Inc., at market value:
All Pro Large Cap Growth Portfolio........................ $452,524
All Pro Large Cap Value Portfolio......................... $143,172
All Pro Small Cap Growth Portfolio........................ $1,069,142
All Pro Small Cap Value Portfolio......................... $173,618
-------- -------- ---------- --------
NET ASSETS.................................................. $452,524 $143,172 $1,069,142 $173,618
======== ======== ========== ========
Held for the benefit of contractholders..................... $417,582 $118,028 $1,024,444 $153,418
Attributable to Provident Mutual Life Insurance Company..... 34,942 25,144 44,698 20,200
-------- -------- ---------- --------
$452,524 $143,172 $1,069,142 $173,618
======== ======== ========== ========
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE> 65
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Statements of Assets and Liabilities, December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIDELITY FIDELITY FIDELITY
HIGH EQUITY- FIDELITY ASSET FIDELITY FIDELITY
INCOME INCOME GROWTH MANAGER INDEX 500 CONTRAFUND(R)
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investment in the Variable Insurance Products
Fund, at market value:
High Income Portfolio....................... $3,692,947
Equity-Income Portfolio..................... $13,617,284
Growth Portfolio............................ $19,077,038
Investment in the Variable Insurance Products
Fund II, at market value:
Asset Manager Portfolio..................... $2,498,294
Index 500 Portfolio......................... $18,309,379
Contrafund(R) Portfolio..................... $8,494,701
---------- ----------- ----------- ---------- ----------- ----------
NET ASSETS.................................... $3,692,947 $13,617,284 $19,077,038 $2,498,294 $18,309,379 $8,494,701
========== =========== =========== ========== =========== ==========
Held for the benefit of contractholders....... $3,650,856 $13,555,631 $19,017,361 $2,449,345 $18,262,306 $8,436,069
Attributable to Provident Mutual Life
Insurance Company........................... 42,091 61,653 59,677 48,949 47,073 58,632
---------- ----------- ----------- ---------- ----------- ----------
$3,692,947 $13,617,284 $19,077,038 $2,498,294 $18,309,379 $8,494,701
========== =========== =========== ========== =========== ==========
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE> 66
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Statements of Assets and Liabilities, December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SCUDDER
GROWTH
OCC OCC OCC SCUDDER AND SCUDDER
EQUITY SMALL CAP MANAGED BOND INCOME INTERNATIONAL
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investment in the OCC Accumulation Trust,
at market value:
Equity Portfolio........................ $3,892,824
Small Cap Portfolio..................... $2,056,452
Managed Portfolio....................... $7,636,015
Investment in the Scudder Variable Life
Investment Fund, at market value:
Bond Portfolio.......................... $1,287,441
Growth and Income Portfolio............. $4,082,829
International Portfolio................. $2,967,978
---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS................................ $3,892,824 $2,056,452 $7,636,015 $1,287,441 $4,082,829 $2,967,978
========== ========== ========== ========== ========== ==========
Held for the benefit of contractholders... $3,861,872 $2,018,745 $7,602,776 $1,251,666 $4,036,884 $2,913,304
Attributable to Provident Mutual Life
Insurance Company....................... 30,952 37,707 33,239 35,775 45,945 54,674
---------- ---------- ---------- ---------- ---------- ----------
$3,892,824 $2,056,452 $7,636,015 $1,287,441 $4,082,829 $2,967,978
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE> 67
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Statements of Assets and Liabilities, December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DREYFUS FEDERATED
GROWTH DREYFUS FUND FOR U.S.
DREYFUS ZERO AND SOCIALLY GOVERNMENT FEDERATED
COUPON 2000 INCOME RESPONSIBLE SECURITIES II UTILITY FUND II
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investment in the Dreyfus Variable Investment
Fund, at market value:
Zero Coupon 2000 Portfolio...................... $988,196
Growth and Income Portfolio..................... $2,827,367
Investment in the Dreyfus Socially Responsible
Growth Fund, Inc., at market value:
Socially Responsible Portfolio.................. $4,331,170
Investment in the Federated Insurance Series, at
market value:
Fund for U.S. Government Securities II
Portfolio..................................... $583,540
Utility Fund II Portfolio....................... $568,274
-------- ---------- ---------- -------- --------
NET ASSETS........................................ $988,196 $2,827,367 $4,331,170 $583,540 $568,274
======== ========== ========== ======== ========
Held for the benefit of contractholders........... $952,413 $2,784,365 $4,270,142 $552,935 $528,318
Attributable to Provident Mutual Life Insurance
Company......................................... 35,783 43,002 61,028 30,605 39,956
-------- ---------- ---------- -------- --------
$988,196 $2,827,367 $4,331,170 $583,540 $568,274
======== ========== ========== ======== ========
</TABLE>
See accompanying notes to financial statements
F-7
<PAGE> 68
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Statements of Assets and Liabilities, December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VAN ECK
VAN ECK VAN ECK WORLDWIDE VAN ECK
WORLDWIDE WORLDWIDE EMERGING WORLDWIDE
BOND HARD ASSETS MARKETS REAL ESTATE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investment in the Van Eck Worldwide Insurance Trust Fund, at
market value:
Van Eck Worldwide Bond Portfolio.......................... $39,098
Van Eck Worldwide Hard Assets Portfolio................... $50,885
Van Eck Worldwide Emerging Markets Portfolio.............. $502,560
Van Eck Worldwide Real Estate Portfolio................... $121,734
------- ------- -------- --------
NET ASSETS.................................................. $39,098 $50,885 $502,560 $121,734
======= ======= ======== ========
Held for the benefit of contractholders..................... $13,883 $30,075 $400,234 $100,679
Attributable to Provident Mutual Life Insurance Company..... 25,215 20,810 102,326 21,055
------- ------- -------- --------
$39,098 $50,885 $502,560 $121,734
======= ======= ======== ========
</TABLE>
See accompanying notes to financial statements
F-8
<PAGE> 69
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Statements of Operations for the Year Ended December 31, 1999
- --------------------------------------------------------------------------------
<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....................................... $ 18,752 $207,862 $ 15,129 $ 11,502 $ 5,701 $ 27,808
EXPENSES
Mortality and expense risks..................... 81,718 60,321 16,140 20,878 16,550 33,129
--------- -------- -------- --------- -------- --------
Net investment (loss) income.................... (62,966) 147,541 (1,011) (9,376) (10,849) (5,321)
--------- -------- -------- --------- -------- --------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Realized gain distributions reinvested.......... 109,541 11,887 78,439 141,385 142,673
Net realized gain from redemption of investment
shares........................................ 170,031 1,364 56,384 28,445 85,300
--------- -------- -------- --------- -------- --------
Net realized gain on investments................ 279,572 13,251 134,823 169,830 227,973
--------- -------- -------- --------- -------- --------
Net unrealized appreciation (depreciation) of
investments:
Beginning of year............................. 490,770 39,647 230,301 113,092 120,601
End of year................................... 366,255 (26,280) 96,137 141,874 507,592
--------- -------- -------- --------- -------- --------
Net unrealized (depreciation) appreciation
during the year............................... (124,515) (65,927) (134,164) 28,782 386,991
--------- -------- -------- --------- -------- --------
Net realized and unrealized gain (loss) on
investments................................... 155,057 (52,676) 659 198,612 614,964
--------- -------- -------- --------- -------- --------
Net increase (decrease) in net assets resulting
from operations............................... $ 92,091 $147,541 $(53,687) $ (8,717) $187,763 $609,643
========= ======== ======== ========= ======== ========
</TABLE>
See accompanying notes to financial statements
F-9
<PAGE> 70
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Statements of Operations for the Year Ended December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ALL PRO ALL PRO ALL PRO ALL PRO
LARGE LARGE SMALL SMALL
CAP GROWTH CAP VALUE CAP GROWTH CAP VALUE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends................................................... $ 7 $ 206 $ 56
EXPENSES
Mortality and expense risks................................. 1,649 531 $ 2,152 598
------- ------- -------- -------
Net investment loss......................................... (1,642) (325) (2,152) (542)
------- ------- -------- -------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Realized gain distributions reinvested
Net realized gain (loss) from redemption of investment
shares.................................................... 4,539 41 19,546 (297)
------- ------- -------- -------
Net realized gain (loss) on investments..................... 4,539 41 19,546 (297)
------- ------- -------- -------
Net unrealized appreciation (depreciation) of investments:
Beginning of year......................................... 4,123 196 (1,162) (2,990)
End of year............................................... 41,840 (2,853) 239,727 (3,568)
------- ------- -------- -------
Net unrealized appreciation (depreciation) during the
year...................................................... 37,717 (3,049) 240,889 (578)
------- ------- -------- -------
Net realized and unrealized gain (loss) on investments...... 42,256 (3,008) 260,435 (875)
------- ------- -------- -------
Net increase (decrease) in net assets resulting from
operations................................................ $40,614 $(3,333) $258,283 $(1,417)
======= ======= ======== =======
</TABLE>
See accompanying notes to financial statements
F-10
<PAGE> 71
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Statements of Operations for the Year Ended December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIDELITY FIDELITY
HIGH FIDELITY FIDELITY ASSET FIDELITY FIDELITY
INCOME EQUITY-INCOME GROWTH MANAGER INDEX 500 CONTRAFUND(R)
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends..................................... $ 306,366 $ 194,652 $ 18,029 $ 71,219 $ 127,582 $ 23,553
EXPENSES
Mortality and expense risks................... 48,818 191,354 187,129 31,147 213,820 85,824
--------- ---------- ---------- -------- ---------- ----------
Net investment income (loss).................. 257,548 3,298 (169,100) 40,072 (86,238) (62,271)
--------- ---------- ---------- -------- ---------- ----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Realized gain distributions reinvested........ 11,453 430,283 1,133,559 90,211 86,574 172,725
Net realized (loss) gain from redemption of
investment shares........................... (10,501) 548,669 567,204 33,440 938,259 226,467
--------- ---------- ---------- -------- ---------- ----------
Net realized gain on investments.............. 952 978,952 1,700,763 123,651 1,024,833 399,192
--------- ---------- ---------- -------- ---------- ----------
Net unrealized (depreciation) appreciation of
investments:
Beginning of year........................... (210,228) 2,080,228 2,636,305 209,636 2,599,106 926,957
End of year................................. (247,327) 1,742,712 5,557,683 261,352 4,388,265 1,971,093
--------- ---------- ---------- -------- ---------- ----------
Net unrealized (depreciation) appreciation
during the year............................. (37,099) (337,516) 2,921,378 51,716 1,789,159 1,044,136
--------- ---------- ---------- -------- ---------- ----------
Net realized and unrealized (loss) gain on
investments................................. (36,147) 641,436 4,622,141 175,367 2,813,992 1,443,328
--------- ---------- ---------- -------- ---------- ----------
Net increase in net assets resulting from
operations.................................. $ 221,401 $ 644,734 $4,453,041 $215,439 $2,727,754 $1,381,057
========= ========== ========== ======== ========== ==========
</TABLE>
See accompanying notes to financial statements
F-11
<PAGE> 72
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Statements of Operations for the Year Ended December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SCUDDER
GROWTH
OCC OCC OCC SCUDDER AND SCUDDER
EQUITY SMALL CAP MANAGED BOND INCOME INTERNATIONAL
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends....................................... $ 39,352 $ 15,143 $ 112,486 $ 33,689 $ 43,712 $ 1,990
EXPENSES
Mortality and expense risks..................... 57,536 29,437 105,827 15,557 53,346 23,623
--------- --------- ---------- -------- --------- --------
Net investment (loss) income.................... (18,184) (14,294) 6,659 18,132 (9,634) (21,633)
--------- --------- ---------- -------- --------- --------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Realized gain distributions reinvested.......... 179,208 252,414 17,361 270,635 148,278
Net realized gain (loss) from redemption of
investment shares............................. 236,421 33,145 410,527 (2,545) 111,635 32,764
--------- --------- ---------- -------- --------- --------
Net realized gain on investments................ 415,629 33,145 662,941 14,816 382,270 181,042
--------- --------- ---------- -------- --------- --------
Net unrealized appreciation (depreciation) of
investments:
Beginning of year............................. 745,843 8,992 1,198,746 11,092 81,742 38,107
End of year................................... 403,295 (101,504) 790,614 (45,798) (118,928) 754,148
--------- --------- ---------- -------- --------- --------
Net unrealized (depreciation) appreciation
during the year............................... (342,548) (110,496) (408,132) (56,890) (200,670) 716,041
--------- --------- ---------- -------- --------- --------
Net realized and unrealized gain (loss) on
investments................................... 73,081 (77,351) 254,809 (42,074) 181,600 897,083
--------- --------- ---------- -------- --------- --------
Net increase (decrease) in net assets resulting
from operations............................... $ 54,897 $ (91,645) $ 261,468 $(23,942) $ 171,966 $875,450
========= ========= ========== ======== ========= ========
</TABLE>
See accompanying notes to financial statements
F-12
<PAGE> 73
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Statements of Operations for the Year Ended December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DREYFUS FEDERATED
DREYFUS GROWTH DREYFUS FUND FOR U.S.
ZERO AND SOCIALLY GOVERNMENT FEDERATED
COUPON 2000 INCOME RESPONSIBLE SECURITIES II UTILITY FUND II
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends............................................ $ 48,075 $ 15,987 $ 522 $ 25,465 $ 12,463
EXPENSES
Mortality and expense risks.......................... 12,069 35,000 35,631 8,065 6,717
-------- -------- -------- -------- --------
Net investment income (loss)......................... 36,006 (19,013) (35,109) 17,400 5,746
-------- -------- -------- -------- --------
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Realized gain distributions reinvested............... 84,180 140,525 5,007 24,685
Net realized gain (loss) from redemption of
investment shares.................................. 968 77,002 83,324 (5,719) 19,905
-------- -------- -------- -------- --------
Net realized gain (loss) on investments.............. 968 161,182 223,849 (712) 44,590
-------- -------- -------- -------- --------
Net unrealized appreciation (depreciation) of
investments:
Beginning of year.................................. 8,315 164,023 239,249 11,654 55,982
End of year........................................ (16,440) 392,369 801,002 (15,544) 8,871
-------- -------- -------- -------- --------
Net unrealized (depreciation) appreciation during the
year............................................... (24,755) 228,346 561,753 (27,198) (47,111)
-------- -------- -------- -------- --------
Net realized and unrealized (loss) gain on
investments........................................ (23,787) 389,528 785,602 (27,910) (2,521)
-------- -------- -------- -------- --------
Net increase (decrease) in net assets resulting from
operations......................................... $ 12,219 $370,515 $750,493 $(10,510) $ 3,225
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements
F-13
<PAGE> 74
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Statements of Operations for the Year Ended December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VAN ECK VAN ECK VAN ECK
VAN ECK WORLDWIDE WORLDWIDE WORLDWIDE
WORLDWIDE HARD EMERGING REAL
BOND ASSETS MARKETS ESTATE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends................................................... $ 1,122 $ 268 $ 450
EXPENSES
Mortality and expense risks................................. 68 48 $ 1,041 677
------- ------- -------- -------
Net investment gain (loss).................................. 1,054 220 (1,041) (227)
------- ------- -------- -------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain distributions reinvested...................... 501
Net realized (loss) gain from redemption of investment
shares.................................................... (32) (348) 2,361 (103)
------- ------- -------- -------
Net realized gain (loss) on investments..................... 469 (348) 2,361 (103)
------- ------- -------- -------
Net unrealized appreciation (depreciation) of investments:
Beginning of year......................................... 2,362 (7,844) (8,952) (3,514)
End of year............................................... (1,745) (2,481) 145,977 (3,610)
------- ------- -------- -------
Net unrealized (depreciation) appreciation during the
year...................................................... (4,107) 5,363 154,929 (96)
------- ------- -------- -------
Net realized and unrealized (loss) gain on investments...... (3,638) 5,015 157,290 (199)
------- ------- -------- -------
Net (decrease) increase in net assets resulting from
operations................................................ $(2,584) $ 5,235 $156,249 $ (426)
======= ======= ======== =======
</TABLE>
See accompanying notes to financial statements
F-14
<PAGE> 75
- --------------------------------------------------------------------------------
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, 1999
- --------------------------------------------------------------------------------
<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 (loss) income.............. $ (62,966) $ 147,541 $ (1,011) $ (9,376) $ (10,849) $ (5,321)
Net realized gain on investments.......... 279,572 13,251 134,823 169,830 227,973
Net unrealized (depreciation) appreciation
of investments during the year.......... (124,515) (65,927) (134,164) 28,782 386,991
---------- ----------- ---------- ---------- ---------- ----------
Net increase (decrease) in net assets from
operations.............................. 92,091 147,541 (53,687) (8,717) 187,763 609,643
---------- ----------- ---------- ---------- ---------- ----------
FROM VARIABLE ANNUITY CONTRACT
TRANSACTIONS
Contractholders' net premiums............. 560,003 2,096,239 180,934 130,584 165,119 114,170
Administrative charges.................... (3,162) (2,086) (516) (690) (830) (1,343)
Surrenders and forfeitures................ (597,035) (379,089) (41,715) (92,636) (103,693) (201,664)
Transfers between investment portfolios... (75,007) (3,317,565) 59,500 (96,489) 60,342 (285,279)
Net (withdrawals) repayments due to policy
loans................................... (2,342) (22,865) (1,130) (4,941) 122
Withdrawals due to death benefits......... (9,503) (39,538) (21,761) (2,778) (21,654)
---------- ----------- ---------- ---------- ---------- ----------
Net (decrease) increase in net assets
derived from contract transactions...... (127,046) (1,664,904) 175,312 (66,950) 120,938 (395,648)
---------- ----------- ---------- ---------- ---------- ----------
Total (decrease) increase in net assets... (34,955) (1,517,363) 121,625 (75,667) 308,701 213,995
NET ASSETS
Beginning of year....................... 5,583,308 5,223,384 1,099,805 1,560,935 1,096,413 2,439,353
---------- ----------- ---------- ---------- ---------- ----------
End of year............................. $5,548,353 $ 3,706,021 $1,221,430 $1,485,268 $1,405,114 $2,653,348
========== =========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements
F-15
<PAGE> 76
- --------------------------------------------------------------------------------
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, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ALL PRO ALL PRO ALL PRO ALL PRO
LARGE LARGE SMALL SMALL
CAP GROWTH CAP VALUE CAP GROWTH CAP VALUE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment loss........................................ $ (1,642) $ (325) $ (2,152) $ (542)
Net realized gain (loss) on investments.................... 4,539 41 19,546 (297)
Net unrealized appreciation (depreciation) of investments
during the year.......................................... 37,717 (3,049) 240,889 (578)
-------- -------- ---------- --------
Net increase (decrease) in net assets from operations...... 40,614 (3,333) 258,283 (1,417)
-------- -------- ---------- --------
FROM VARIABLE ANNUITY CONTRACT TRANSACTIONS
Contractholders' net premiums.............................. 122,789 60,153 236,687 80,519
Administrative charges..................................... (69) (22) (77) (24)
Surrenders and forfeitures................................. (6,267) (4,034) (8,973) (830)
Transfers between investment portfolios.................... 260,860 59,740 555,991 68,884
Net withdrawals due to policy loans........................ (1,085)
-------- -------- ---------- --------
Net increase in net assets derived from contract
transactions............................................. 377,313 115,837 782,543 148,549
-------- -------- ---------- --------
Total increase in net assets............................. 417,927 112,504 1,040,826 147,132
NET ASSETS
Beginning of year........................................ 34,597 30,668 28,316 26,486
-------- -------- ---------- --------
End of year.............................................. $452,524 $143,172 $1,069,142 $173,618
======== ======== ========== ========
</TABLE>
See accompanying notes to financial statements
F-16
<PAGE> 77
- --------------------------------------------------------------------------------
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, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIDELITY FIDELITY
HIGH FIDELITY FIDELITY ASSET FIDELITY FIDELITY
INCOME EQUITY-INCOME GROWTH MANAGER INDEX 500 CONTRAFUND(R)
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss)................ $ 257,548 $ 3,298 $ (169,100) $ 40,072 $ (86,238) $ (62,271)
Net realized gain on investments............ 952 978,952 1,700,763 123,651 1,024,833 399,192
Net unrealized (depreciation) appreciation
of investments during the year............ (37,099) (337,516) 2,921,378 51,716 1,789,159 1,044,136
---------- ----------- ----------- ---------- ----------- ----------
Net increase in net assets from
operations................................ 221,401 644,734 4,453,041 215,439 2,727,754 1,381,057
---------- ----------- ----------- ---------- ----------- ----------
FROM VARIABLE ANNUITY CONTRACT TRANSACTIONS
Contractholders' net premiums............... 295,340 1,531,851 3,217,705 322,280 3,381,620 1,817,676
Administrative charges...................... (1,600) (6,625) (6,865) (1,364) (8,232) (3,908)
Surrenders and forfeitures.................. (178,356) (892,383) (764,685) (71,473) (633,321) (382,852)
Transfers between investment portfolios..... 63,717 (793,776) 2,551,645 (96,203) 436,064 1,315,262
Net repayments (withdrawals) due to policy
loans..................................... 81 (9,913) (12,429) (1,707) (38,329) (20,783)
Withdrawals due to death benefits........... (6,604) (18,044) (6,581)
---------- ----------- ----------- ---------- ----------- ----------
Net increase (decrease) in net assets
derived from contract transactions........ 172,578 (188,890) 4,978,790 151,533 3,137,802 2,725,395
---------- ----------- ----------- ---------- ----------- ----------
Total increase in net assets................ 393,979 455,844 9,431,831 366,972 5,865,556 4,106,452
NET ASSETS
Beginning of year......................... 3,298,968 13,161,440 9,645,207 2,131,322 12,443,823 4,388,249
---------- ----------- ----------- ---------- ----------- ----------
End of year............................... $3,692,947 $13,617,284 $19,077,038 $2,498,294 $18,309,379 $8,494,701
========== =========== =========== ========== =========== ==========
</TABLE>
See accompanying notes to financial statements
F-17
<PAGE> 78
- --------------------------------------------------------------------------------
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, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SCUDDER
GROWTH
OCC OCC OCC SCUDDER AND SCUDDER
EQUITY SMALL CAP MANAGED BOND INCOME INTERNATIONAL
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment (loss) income.............. $ (18,184) $ (14,294) $ 6,659 $ 18,132 $ (9,634) $ (21,633)
Net realized gain on investments.......... 415,629 33,145 662,941 14,816 382,270 181,042
Net unrealized (depreciation) appreciation
of investments during the year.......... (342,548) (110,496) (408,132) (56,890) (200,670) 716,041
---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net assets from
operations.............................. 54,897 (91,645) 261,468 (23,942) 171,966 875,450
---------- ---------- ---------- ---------- ---------- ----------
FROM VARIABLE ANNUITY CONTRACT
TRANSACTIONS
Contractholders' net premiums............. 332,753 189,648 902,782 327,883 609,354 343,609
Administrative charges.................... (2,475) (1,248) (4,570) (556) (2,328) (698)
Surrenders and forfeitures................ (269,999) (115,433) (611,002) (71,404) (122,236) (67,591)
Transfers between investment portfolios... (361,293) (360,882) (879,974) 51,236 (493,130) 517,788
Net withdrawals due to policy loans....... (2,143) (406) (1,983) (9,311) (4,614)
Withdrawals due to death benefits......... (1,822) (3,690) (59,065) (15,639) (3,084)
---------- ---------- ---------- ---------- ---------- ----------
Net increase in net assets derived from
contract transactions................... (302,836) (293,748) (652,235) 289,537 (20,735) 788,494
---------- ---------- ---------- ---------- ---------- ----------
Total (decrease) increase in net assets... (247,939) (385,393) (390,767) 265,595 151,231 1,663,944
NET ASSETS
Beginning of year....................... 4,140,763 2,441,845 8,026,782 1,021,846 3,931,598 1,304,034
---------- ---------- ---------- ---------- ---------- ----------
End of year............................. $3,892,824 $2,056,452 $7,636,015 $1,287,441 $4,082,829 $2,967,978
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements
F-18
<PAGE> 79
- --------------------------------------------------------------------------------
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, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DREYFUS FEDERATED
DREYFUS GROWTH DREYFUS FUND FOR U.S.
ZERO AND SOCIALLY GOVERNMENT FEDERATED
COUPON 2000 INCOME RESPONSIBLE SECURITIES II UTILITY FUND II
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss).................... $ 36,006 $ (19,013) $ (35,109) $ 17,400 $ 5,746
Net realized gain (loss) on investments......... 968 161,182 223,849 (712) 44,590
Net unrealized (depreciation) appreciation of
investments during the year................... (24,755) 228,346 561,753 (27,198) (47,111)
-------- ---------- ---------- --------- --------
Net increase (depreciation) in net assets from
operations.................................... 12,219 370,515 750,493 (10,510) 3,225
-------- ---------- ---------- --------- --------
FROM VARIABLE ANNUITY CONTRACT TRANSACTIONS
Contractholders' net premiums................... 202,123 557,401 1,383,627 129,648 152,859
Administrative charges.......................... (383) (1,717) (1,458) (192) (238)
Surrenders and forfeitures...................... (53,367) (137,537) (70,890) (29,205) (25,651)
Transfers between investment portfolios......... (8,902) (220,093) 683,515 (197,265) (15,212)
Net repayments (withdrawals) due to policy
loans......................................... 111 (11,140) (11,918) (3,542)
Withdrawals due to death benefits............... (7,919) (9,287)
-------- ---------- ---------- --------- --------
Net increase (decrease) in net assets derived
from contract transactions.................... 131,663 186,914 1,973,589 (97,014) 108,216
-------- ---------- ---------- --------- --------
Total increase (decrease) in net assets......... 143,882 557,429 2,724,082 (107,524) 111,441
NET ASSETS
Beginning of year............................. 844,314 2,269,938 1,607,088 691,064 456,833
-------- ---------- ---------- --------- --------
End of year................................... $988,196 $2,827,367 $4,331,170 $ 583,540 $568,274
======== ========== ========== ========= ========
</TABLE>
See accompanying notes to financial statements
F-19
<PAGE> 80
- --------------------------------------------------------------------------------
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, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VAN ECK VAN ECK VAN ECK
VAN ECK WORLDWIDE WORLDWIDE WORLDWIDE
WORLDWIDE HARD EMERGING REAL
BOND ASSETS MARKETS ESTATE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment gain (loss).................................. $ 1,054 $ 220 $ (1,041) $ (227)
Net realized gain (loss) on investments..................... 469 (348) 2,361 (103)
Net unrealized (depreciation) appreciation of investments
during the year........................................... (4,107) 5,363 154,929 (96)
------- ------- -------- --------
Net (decrease) increase in net assets from operations....... (2,584) 5,235 156,249 (426)
------- ------- -------- --------
FROM VARIABLE ANNUITY CONTRACT TRANSACTIONS
Contractholders' net premiums............................... 12,169 16,077 124,629 46,472
Administrative charges...................................... (3) (2) (19) (8)
Surrenders and forfeitures.................................. (902) (20,708)
Transfers between investment portfolios..................... 1,340 13,057 192,476 55,344
Net withdrawals due to policy loans......................... (1,108) (1,115) (1,134)
------- ------- -------- --------
Net increase in net assets derived from contract
transactions.............................................. 12,604 28,024 295,263 100,674
------- ------- -------- --------
Total increase in net assets................................ 10,020 33,259 451,512 100,248
NET ASSETS
Beginning of year......................................... 29,078 17,626 51,048 21,486
------- ------- -------- --------
End of year............................................... $39,098 $50,885 $502,560 $121,734
======= ======= ======== ========
</TABLE>
See accompanying notes to financial statements
F-20
<PAGE> 81
- --------------------------------------------------------------------------------
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, 1998
- --------------------------------------------------------------------------------
<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)............. $ 6,003 $ 174,943 $ 33,080 $ 25,236 $ (5,888) $ (15,824)
Net realized gain on investments......... 626,657 6,763 100,441 84,995 195,145
Net unrealized appreciation
(depreciation) of investments during
the year............................... (105,838) 15,681 21,187 (22,750) 4,651
---------- ------------ ---------- ---------- ---------- ----------
Net increase in net assets from
operations............................. 526,822 174,943 55,524 146,864 56,357 183,972
---------- ------------ ---------- ---------- ---------- ----------
FROM VARIABLE ANNUITY CONTRACT
TRANSACTIONS
Contractholders' net premiums............ 409,270 18,155,739 96,183 28,840 122,786 87,721
Administrative charges................... (2,529) (1,545) (312) (636) (671) (1,337)
Surrenders and forfeitures............... (143,430) (109,166) (18,309) (83,242) (49,485) (104,525)
Transfers between investment
portfolios............................. 816,742 (16,901,412) 341,325 238,069 272,846 (65,222)
---------- ------------ ---------- ---------- ---------- ----------
Net increase (decrease) in net assets
derived from contract transactions..... 1,080,053 1,143,616 418,887 183,031 345,476 (83,363)
---------- ------------ ---------- ---------- ---------- ----------
Capital contribution from Provident
Mutual Life Insurance Company.......... 45,000
---------- ------------ ---------- ---------- ---------- ----------
Total increase in net assets............. 1,606,875 1,363,559 474,411 329,895 401,833 100,609
NET ASSETS
Beginning of year...................... 3,976,433 3,859,825 625,394 1,231,040 694,580 2,338,744
---------- ------------ ---------- ---------- ---------- ----------
End of year............................ $5,583,308 $ 5,223,384 $1,099,805 $1,560,935 $1,096,413 $2,439,353
========== ============ ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements
F-21
<PAGE> 82
- --------------------------------------------------------------------------------
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, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ALL PRO ALL PRO ALL PRO ALL PRO
LARGE LARGE SMALL SMALL
CAP GROWTH CAP VALUE CAP GROWTH CAP VALUE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment loss........................................ $ (30) $ (29) $ (21) $ (20)
Net realized gain (loss) on investments.................... 3 (4)
Net unrealized appreciation (depreciation) of investments
during the year.......................................... 4,123 196 (1,162) (2,990)
------- ------- ------- -------
Net increase (decrease) in net assets from operations...... 4,096 167 (1,183) (3,014)
------- ------- ------- -------
FROM VARIABLE ANNUITY CONTRACT TRANSACTIONS
Transfers between investment portfolios.................... 5,501 5,501 4,499 4,500
------- ------- ------- -------
Net increase in net assets derived from contract
transactions............................................. 5,501 5,501 4,499 4,500
------- ------- ------- -------
Capital contribution from Provident Mutual Life Insurance
Company.................................................. 25,000 25,000 25,000 25,000
------- ------- ------- -------
Total increase in net assets............................. 34,597 30,668 28,316 26,486
NET ASSETS
Beginning of year........................................ -- -- -- --
------- ------- ------- -------
End of year.............................................. $34,597 $30,668 $28,316 $26,486
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements
F-22
<PAGE> 83
- --------------------------------------------------------------------------------
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, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIDELITY FIDELITY
HIGH FIDELITY FIDELITY ASSET FIDELITY FIDELITY
INCOME EQUITY-INCOME GROWTH MANAGER INDEX 500 CONTRAFUND(R)
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss)................. $ 146,005 $ (23,945) $ (70,051) $ 25,892 $ (49,151) $ (26,479)
Net realized gain on investments............. 121,863 646,714 903,340 176,669 616,682 208,384
Net unrealized appreciation (depreciation) of
investments during the year................ (497,683) 405,299 1,602,439 32,068 1,486,279 616,547
---------- ----------- ---------- ---------- ----------- ----------
Net increase (decrease) in net assets from
operations................................. (2,815) 1,028,068 2,435,728 234,629 2,053,810 798,452
---------- ----------- ---------- ---------- ----------- ----------
FROM VARIABLE ANNUITY CONTRACT TRANSACTIONS
Contractholders' net premiums................ 164,774 643,873 478,671 80,846 1,154,032 331,019
Administrative charges....................... (1,408) (5,427) (4,663) (1,160) (4,629) (1,862)
Surrenders and forfeitures................... (92,923) (423,087) (224,051) (69,817) (246,981) (187,746)
Transfers between investment portfolios...... 820,132 2,351,433 1,036,134 278,804 3,415,028 1,342,290
---------- ----------- ---------- ---------- ----------- ----------
Net increase in net assets derived from
contract transactions...................... 890,575 2,566,792 1,286,091 288,673 4,317,450 1,483,701
---------- ----------- ---------- ---------- ----------- ----------
Return of capital to Provident Mutual Life
Insurance Company.......................... (30,000) (35,000)
---------- ----------- ---------- ---------- ----------- ----------
Total increase in net assets................. 660,760 3,594,860 3,691,819 523,302 6,336,260 2,282,153
NET ASSETS
Beginning of year.......................... 2,638,208 9,566,580 5,953,388 1,608,020 6,107,563 2,106,096
---------- ----------- ---------- ---------- ----------- ----------
End of year................................ $3,298,968 $13,161,440 $9,645,207 $2,131,322 $12,443,823 $4,388,249
========== =========== ========== ========== =========== ==========
</TABLE>
See accompanying notes to financial statements
F-23
<PAGE> 84
- --------------------------------------------------------------------------------
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, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SCUDDER
GROWTH
OCC OCC OCC SCUDDER AND SCUDDER
EQUITY SMALL CAP MANAGED BOND INCOME INTERNATIONAL
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss).............. $ (16,712) $ (25,721) $ (51,716) $ 39,944 $ 23,590 $ (48)
Net realized gain on investments.......... 350,835 114,777 401,125 16,222 250,642 92,512
Net unrealized appreciation (depreciation)
of investments during the year.......... 13,501 (377,438) 11,395 (9,889) (185,097) 18,198
---------- ---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net assets from
operations.............................. 347,624 (288,382) 360,804 46,277 89,135 110,662
---------- ---------- ---------- ---------- ---------- ----------
FROM VARIABLE ANNUITY CONTRACT
TRANSACTIONS
Contractholders' net premiums............. 181,536 163,923 363,379 88,377 296,169 52,293
Administrative charges.................... (2,254) (1,277) (4,325) (365) (1,525) (500)
Surrenders and forfeitures................ (114,897) (69,213) (252,893) (48,990) (130,521) (41,347)
Transfers between investment portfolios... 328,705 201,890 793,832 264,247 1,706,458 359,320
---------- ---------- ---------- ---------- ---------- ----------
Net increase in net assets derived from
contract transactions................... 393,090 295,323 899,993 303,269 1,870,581 369,766
---------- ---------- ---------- ---------- ---------- ----------
Return of capital to Provident Mutual Life
Insurance Company....................... (30,000) (25,000)
---------- ---------- ---------- ---------- ---------- ----------
Total increase in net assets.............. 710,714 6,941 1,235,797 349,546 1,959,716 480,428
NET ASSETS
Beginning of year....................... 3,430,049 2,434,904 6,790,985 672,300 1,971,882 823,606
---------- ---------- ---------- ---------- ---------- ----------
End of year............................. $4,140,763 $2,441,845 $8,026,782 $1,021,846 $3,931,598 $1,304,034
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements
F-24
<PAGE> 85
- --------------------------------------------------------------------------------
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, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DREYFUS FEDERATED
DREYFUS GROWTH DREYFUS FUND FOR U.S.
ZERO AND SOCIALLY GOVERNMENT FEDERATED
COUPON 2000 INCOME RESPONSIBLE SECURITIES II UTILITY FUND II
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss).................... $ 29,778 $ (7,616) $ (11,460) $ 126 $ (1,534)
Net realized gain on investments................ 4,222 23,894 73,433 18,688 34,131
Net unrealized appreciation of investments
during the year............................... 6,867 158,841 193,754 4,676 11,768
-------- ---------- ---------- -------- --------
Net increase in net assets from operations...... 40,867 175,119 255,727 23,490 44,365
-------- ---------- ---------- -------- --------
FROM VARIABLE ANNUITY CONTRACT TRANSACTIONS
Contractholders' net premiums................... 110,869 292,636 178,167 51,718 22,192
Administrative charges.......................... (281) (1,360) (500) (140) (116)
Surrenders and forfeitures...................... (39,302) (116,934) (13,302) (4,926) (3,478)
Transfers between investment portfolios......... 286,195 296,217 685,541 407,646 118,486
-------- ---------- ---------- -------- --------
Net increase in net assets derived from contract
transactions.................................. 357,481 470,559 849,906 454,298 137,084
-------- ---------- ---------- -------- --------
Total increase in net assets.................... 398,348 645,678 1,105,633 477,788 181,449
NET ASSETS
Beginning of year............................. 445,966 1,624,260 501,455 213,276 275,384
-------- ---------- ---------- -------- --------
End of year................................... $844,314 $2,269,938 $1,607,088 $691,064 $456,833
======== ========== ========== ======== ========
</TABLE>
See accompanying notes to financial statements
F-25
<PAGE> 86
- --------------------------------------------------------------------------------
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, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VAN ECK VAN ECK VAN ECK
VAN ECK WORLDWIDE WORLDWIDE WORLDWIDE
WORLDWIDE HARD EMERGING REAL
BOND ASSETS MARKETS ESTATE
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FROM OPERATIONS
Net investment loss......................................... $ (4)
Net realized gain (loss) on investments
Net unrealized appreciation (depreciation) of investments
during the year........................................... 2,362 $(7,844) $(8,952) $(3,514)
------- ------- ------- -------
Net increase (decrease) in net assets from operations....... 2,358 (7,844) (8,952) (3,514)
------- ------- ------- -------
FROM VARIABLE ANNUITY CONTRACT TRANSACTIONS
Transfers between investment portfolios..................... 1,720 470
------- ------- ------- -------
Net increase in net assets derived from contract
transactions.............................................. 1,720 470
------- ------- ------- -------
Capital contribution from Provident Mutual Life Insurance
Company................................................... 25,000 25,000 60,000 25,000
------- ------- ------- -------
Total increase in net assets................................ 29,078 17,626 51,048 21,486
NET ASSETS
Beginning of year......................................... -- -- -- --
------- ------- ------- -------
End of year............................................... $29,078 $17,626 $51,048 $21,486
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements
F-26
<PAGE> 87
- --------------------------------------------------------------------------------
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.
The Contracts are distributed principally through career agents and
brokers.
Provident Mutual has structured the Separate Account as a unit investment
trust registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended. The Separate Account is comprised of
thirty-one Subaccounts: the Growth, Money Market, Bond, Managed, Aggressive
Growth, International, All Pro Large Cap Growth, All Pro Large Cap Value, All
Pro Small Cap Growth and All Pro Small Cap Value 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, Fidelity Index 500 and Fidelity Contrafund(R) Subaccounts invest
in the corresponding portfolios of the Variable Insurance Products Fund II; the
OCC Equity, OCC Small Cap and OCC Managed Subaccounts invest in the
corresponding portfolios of the OCC Accumulation Trust; the Scudder Bond,
Scudder Growth and Income and Scudder International Subaccounts invest in the
corresponding portfolios of the Scudder Variable Life Investment Fund; the
Dreyfus Zero Coupon 2000 and Dreyfus Growth and Income Subaccounts invest in the
corresponding portfolios of the Dreyfus Variable Investment Fund; the Dreyfus
Socially Responsible Subaccount invests in the Dreyfus Socially Responsible
Growth Fund, Inc.; the Federated Fund for U.S. Government Securities II and
Federated Utility Fund II Subaccounts invest in the corresponding portfolios of
the Federated Insurance Series; and the Van Eck Worldwide Bond, Van Eck
Worldwide Hard Assets, Van Eck Worldwide Emerging Markets and Van Eck Worldwide
Real Estate Subaccounts invest in the corresponding portfolios of the Van Eck
Worldwide Insurance Trust.
The Growth, Money Market, Bond, Managed, Aggressive Growth and
International Subaccounts are available to owners of a Market Street VIP
contract. All thirty-one 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 contractholder 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.
F-27
<PAGE> 88
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
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 exdividend date.
Realized Gains and Losses:
Realized gains and losses on sales of investment shares are determined
using the specific identification basis for financial reporting and income tax
purposes.
Federal Income Taxes:
The operations of the Separate 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.
Estimates:
The preparation of the accompanying financial statements required
management to make estimates and assumptions that affect the reported values of
assets and liabilities and the reported amounts from operations and contract
transactions during the period. Actual results could differ from those
estimates.
F-28
<PAGE> 89
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS
At December 31, 1999, 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........................................ 292,944 $5,182,098 $5,548,353
Money Market Portfolio.................................. 3,645,573 $3,645,573 $3,645,573
Bond Portfolio.......................................... 115,447 $1,247,710 $1,221,430
Managed Portfolio....................................... 88,461 $1,389,131 $1,485,268
Aggressive Growth Portfolio............................. 63,956 $1,263,240 $1,405,114
International Portfolio................................. 159,074 $2,145,756 $2,653,348
All Pro Large Cap Growth Portfolio...................... 30,638 $410,684 $452,524
All Pro Large Cap Value Portfolio....................... 14,346 $146,025 $143,172
All Pro Small Cap Growth Portfolio...................... 56,779 $829,415 $1,069,142
All Pro Small Cap Value Portfolio....................... 22,935 $177,186 $173,618
Variable Insurance Products Fund:
High Income Portfolio................................... 326,521 $3,940,274 $3,692,947
Equity-Income Portfolio................................. 529,649 $11,874,572 $13,617,284
Growth Portfolio........................................ 347,297 $13,519,355 $19,077,038
Variable Insurance Products Fund II:
Asset Manager Portfolio................................. 133,813 $2,236,942 $2,498,294
Index 500 Portfolio..................................... 109,368 $13,921,114 $18,309,379
Contrafund(R) Portfolio................................. 291,413 $6,523,608 $8,494,701
OCC Accumulation Trust:
Equity Portfolio........................................ 103,643 $3,489,529 $3,892,824
Small Cap Portfolio..................................... 91,317 $2,157,956 $2,056,452
Managed Portfolio....................................... 174,937 $6,845,401 $7,636,015
Scudder Variable Life Investment Fund:
Bond Portfolio.......................................... 198,373 $1,333,239 $1,287,441
Growth and Income Portfolio............................. 372,521 $4,201,757 $4,082,829
International Portfolio................................. 145,918 $2,213,830 $2,967,978
Dreyfus Variable Investment Fund:
Zero Coupon 2000 Portfolio.............................. 81,199 $1,004,636 $988,196
Growth and Income Portfolio............................. 110,964 $2,434,998 $2,827,367
Dreyfus Socially Responsible Growth Fund, Inc.:
Socially Responsible Portfolio.......................... 110,857 $3,530,168 $4,331,170
Federated Insurance Series:
Fund for U.S. Government Securities II Portfolio........ 55,259 $599,084 $583,540
Utility Fund II Portfolio............................... 39,601 $559,403 $568,274
Van Eck Worldwide Insurance Trust:
Van Eck Worldwide Bond Portfolio........................ 3,657 $40,843 $39,098
Van Eck Worldwide Hard Assets Portfolio................. 4,643 $53,366 $50,885
Van Eck Worldwide Emerging Market Portfolio............. 35,243 $356,583 $502,560
Van Eck Worldwide Real Estate Portfolio................. 13,304 $125,344 $121,734
</TABLE>
F-29
<PAGE> 90
- --------------------------------------------------------------------------------
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, 1999, 1998 and 1997, transactions in
investment shares were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET STREET FUND, INC.
- -----------------------------------------------------------------------------------------------------------------------------
GROWTH PORTFOLIO MONEY MARKET PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased........................... 48,015 102,982 61,002 4,425,749 12,844,343 15,940,030
Shares received from reinvestment of:
Dividends................................ 1,012 3,261 3,548 211,855 200,484 143,780
Capital gain distributions............... 5,908 32,114 17,059
---------- ---------- ---------- ----------- ------------ ------------
Total shares acquired...................... 54,935 138,357 81,609 4,637,604 13,044,827 16,083,810
Total shares redeemed...................... (58,660) (46,027) (6,693) (6,340,270) (11,419,454) (14,891,923)
---------- ---------- ---------- ----------- ------------ ------------
Net (decrease) increase in shares owned.... (3,725) 92,330 74,916 (1,702,666) 1,625,373 1,191,887
Shares owned, beginning of year............ 296,669 204,339 129,423 5,348,239 3,722,866 2,530,979
---------- ---------- ---------- ----------- ------------ ------------
Shares owned, end of year.................. 292,944 296,669 204,339 3,645,573 5,348,239 3,722,866
========== ========== ========== =========== ============ ============
Cost of shares acquired.................... $1,033,511 $2,405,362 $1,429,486 $ 4,637,604 $ 13,044,828 $ 16,083,810
========== ========== ========== =========== ============ ============
Cost of shares redeemed.................... $ 943,951 $ 692,649 $ 94,931 $ 6,340,270 $ 11,419,455 $ 14,891,923
========== ========== ========== =========== ============ ============
</TABLE>
F-30
<PAGE> 91
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET STREET FUND, INC.
- --------------------------------------------------------------------------------------------------------------------------
BOND PORTFOLIO MANAGED PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased......................................... 33,538 47,550 19,000 11,541 19,640 17,915
Shares received from reinvestment of:
Dividends.............................................. 1,390 4,004 2,225 688 2,647 2,162
Capital gain distributions............................. 1,093 8 4,691 3,700 457
-------- -------- -------- -------- -------- --------
Total shares acquired.................................... 36,021 51,562 21,225 16,920 25,987 20,534
Total shares redeemed.................................... (18,596) (10,498) (8,140) (16,747) (9,858) (5,076)
-------- -------- -------- -------- -------- --------
Net increase in shares owned............................. 17,425 41,064 13,085 173 16,129 15,458
Shares owned, beginning of year.......................... 98,022 56,958 43,873 88,288 72,159 56,701
-------- -------- -------- -------- -------- --------
Shares owned, end of year................................ 115,447 98,022 56,958 88,461 88,288 72,159
======== ======== ======== ======== ======== ========
Cost of shares acquired.................................. $383,396 $569,677 $225,160 $285,896 $433,277 $321,786
======== ======== ======== ======== ======== ========
Cost of shares redeemed.................................. $195,844 $110,947 $ 79,578 $227,399 $124,569 $ 61,098
======== ======== ======== ======== ======== ========
</TABLE>
F-31
<PAGE> 92
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET STREET FUND, INC.
- --------------------------------------------------------------------------------------------------------------------------
AGGRESSIVE GROWTH PORTFOLIO INTERNATIONAL PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased......................................... 21,992 25,361 11,411 33,096 32,621 46,827
Shares received from reinvestment of:
Dividends.............................................. 303 278 208 2,123 1,297 1,249
Capital gain distributions............................. 7,524 2,655 41 10,891 12,810 9,779
-------- -------- -------- -------- -------- --------
Total shares acquired.................................... 29,819 28,294 11,660 46,110 46,728 57,855
Total shares redeemed.................................... (15,905) (9,553) (1,843) (63,163) (42,441) (23,007)
-------- -------- -------- -------- -------- --------
Net increase (decrease) in shares owned.................. 13,914 18,741 9,817 (17,053) 4,287 34,848
Shares owned, beginning of year.......................... 50,042 31,301 21,484 176,127 171,840 136,992
-------- -------- -------- -------- -------- --------
Shares owned, end of year................................ 63,956 50,042 31,301 159,074 176,127 171,840
======== ======== ======== ======== ======== ========
Cost of shares acquired.................................. $557,618 $582,394 $231,280 $631,331 $622,021 $782,785
======== ======== ======== ======== ======== ========
Cost of shares redeemed.................................. $277,699 $157,811 $ 29,360 $804,327 $526,063 $270,894
======== ======== ======== ======== ======== ========
</TABLE>
F-32
<PAGE> 93
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET STREET FUND, INC.
- -----------------------------------------------------------------------------------------------------------------------------
ALL PRO ALL PRO ALL PRO ALL PRO
LARGE CAP LARGE CAP SMALL CAP SMALL CAP
GROWTH VALUE GROWTH VALUE
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares purchased.......................... 36,452 2,942 12,669 3,101 60,308 2,891 19,858 3,213
Shares received from reinvestment of:
Dividends............................... 1 21 7
Capital gain distributions..............
-------- ------- -------- ------- -------- ------- -------- -------
Total shares acquired..................... 36,453 2,942 12,690 3,101 60,308 2,891 19,865 3,213
Total shares redeemed..................... (8,754) (3) (1,442) (3) (6,418) (2) (140) (3)
-------- ------- -------- ------- -------- ------- -------- -------
Net increase in shares owned.............. 27,699 2,939 11,248 3,098 53,890 2,889 19,725 3,210
Shares owned, beginning of year........... 2,939 3,098 2,889 3,210
-------- ------- -------- ------- -------- ------- -------- -------
Shares owned, end of year................. 30,638 2,939 14,346 3,098 56,779 2,889 22,935 3,210
======== ======= ======== ======= ======== ======= ======== =======
Cost of shares acquired................... $486,518 $30,501 $129,910 $30,501 $869,278 $29,500 $149,035 $29,500
======== ======= ======== ======= ======== ======= ======== =======
Cost of shares redeemed................... $106,308 $ 27 $ 14,357 $ 29 $ 69,341 $ 22 $ 1,325 $ 24
======== ======= ======== ======= ======== ======= ======== =======
</TABLE>
F-33
<PAGE> 94
- --------------------------------------------------------------------------------
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 PRODUCTS FUND
- ---------------------------------------------------------------------------------------------------
HIGH INCOME PORTFOLIO EQUITY-INCOME PORTFOLIO
- ---------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased.......... 41,251 109,166 66,009 60,926 130,125 123,211
Shares received from
reinvestment of:
Dividends................ 28,315 15,265 10,958 8,186 5,799 5,015
Capital gain
distributions.......... 1,059 9,700 1,354 18,094 20,637 25,217
-------- ---------- -------- ---------- ---------- ----------
Total shares acquired..... 70,625 134,131 78,321 87,206 156,561 153,443
Total shares redeemed..... (30,224) (42,283) (22,280) (75,316) (32,813) (27,745)
-------- ---------- -------- ---------- ---------- ----------
Net increase in shares
owned.................... 40,401 91,848 56,041 11,890 123,748 125,698
Shares owned, beginning of
year..................... 286,120 194,272 138,231 517,759 394,011 268,313
-------- ---------- -------- ---------- ---------- ----------
Shares owned, end of
year..................... 326,521 286,120 194,272 529,649 517,759 394,011
======== ========== ======== ========== ========== ==========
Cost of shares acquired... $780,176 $1,652,525 $982,034 $2,184,033 $3,796,380 $3,282,492
======== ========== ======== ========== ========== ==========
Cost of shares redeemed... $349,098 $ 494,082 $245,748 $1,390,673 $ 606,819 $ 487,914
======== ========== ======== ========== ========== ==========
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND
- -------------------------- ------------------------------------
GROWTH PORTFOLIO
- -------------------------- ------------------------------------
1999 1998 1997
- -------------------------- ------------------------------------
<S> <C> <C> <C>
Shares purchased.......... 136,144 43,794 38,162
Shares received from
reinvestment of:
Dividends................ 432 910 884
Capital gain
distributions.......... 27,210 23,805 3,957
---------- ---------- ----------
Total shares acquired..... 163,786 68,509 43,003
Total shares redeemed..... (31,448) (14,019) (13,124)
---------- ---------- ----------
Net increase in shares
owned.................... 132,338 54,490 29,879
Shares owned, beginning of
year..................... 214,959 160,469 130,590
---------- ---------- ----------
Shares owned, end of
year..................... 347,297 214,959 160,469
========== ========== ==========
Cost of shares acquired... $7,410,779 $2,516,413 $1,433,785
========== ========== ==========
Cost of shares redeemed... $ 900,326 $ 427,033 $ 392,711
========== ========== ==========
</TABLE>
F-34
<PAGE> 95
- --------------------------------------------------------------------------------
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 PRODUCTS FUND II
- ---------------------------------------------------------------------------------------------------
ASSET MANAGER PORTFOLIO INDEX 500 PORTFOLIO
- ---------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased............ 23,021 25,098 35,383 33,241 43,613 29,044
Shares received from
reinvestment of:
Dividends.................. 4,219 3,130 2,148 911 651 319
Capital gain
distributions............ 5,344 9,388 5,388 618 1,506 646
-------- -------- -------- ---------- ---------- ----------
Total shares acquired....... 32,584 37,616 42,919 34,770 45,770 30,009
Total shares redeemed....... (16,135) (9,537) (3,970) (13,500) (11,064) (3,452)
-------- -------- -------- ---------- ---------- ----------
Net increase in shares
owned...................... 16,449 28,079 38,949 21,270 34,706 26,557
Shares owned, beginning of
year....................... 117,364 89,285 50,336 88,098 53,392 26,835
-------- -------- -------- ---------- ---------- ----------
Shares owned, end of year... 133,813 117,364 89,285 109,368 88,098 53,392
======== ======== ======== ========== ========== ==========
Cost of shares acquired..... $562,804 $629,153 $714,524 $5,192,904 $5,707,647 $3,128,140
======== ======== ======== ========== ========== ==========
Cost of shares redeemed..... $247,548 $137,919 $ 55,323 $1,116,507 $ 857,666 $ 254,455
======== ======== ======== ========== ========== ==========
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND II
- ---------------------------- ------------------------------------
CONTRAFUND(R) PORTFOLIO
- ---------------------------- ------------------------------------
1999 1998 1997
- ---------------------------- ------------------------------------
<S> <C> <C> <C>
Shares purchased............ 127,220 86,578 66,945
Shares received from
reinvestment of:
Dividends.................. 984 774 446
Capital gain
distributions............ 7,215 5,697 1,177
---------- ---------- ----------
Total shares acquired....... 135,419 93,049 68,568
Total shares redeemed....... (23,558) (19,119) (7,939)
---------- ---------- ----------
Net increase in shares
owned...................... 111,861 73,930 60,629
Shares owned, beginning of
year....................... 179,552 105,622 44,993
---------- ---------- ----------
Shares owned, end of year... 291,413 179,552 105,622
========== ========== ==========
Cost of shares acquired..... $3,444,427 $1,941,714 $1,231,237
========== ========== ==========
Cost of shares redeemed..... $ 382,111 $ 276,108 $ 114,819
========== ========== ==========
</TABLE>
F-35
<PAGE> 96
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OCC ACCUMULATION TRUST
- ---------------------------------------------------------------------------------------------------------------------------------
EQUITY PORTFOLIO SMALL CAP PORTFOLIO MANAGED PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shares purchased..... 10,637 23,423 34,467 13,003 24,374 30,085 18,850 31,523 62,513
Shares received from
reinvestment of:
Dividends.......... 1,106 1,019 618 728 303 404 2,771 1,241 1,265
Capital gain
distributions.... 5,036 4,400 2,202 3,309 2,847 6,219 4,964 3,886
-------- ---------- ---------- -------- -------- -------- ---------- ---------- ----------
Total shares
acquired........... 16,779 28,842 37,287 13,731 27,986 33,336 27,840 37,728 67,664
Total shares
redeemed........... (20,132) (15,768) (6,858) (28,122) (14,614) (4,974) (36,414) (14,457) (8,399)
-------- ---------- ---------- -------- -------- -------- ---------- ---------- ----------
Net (decrease)
increase in shares
owned.............. (3,353) 13,074 30,429 (14,391) 13,372 28,362 (8,574) 23,271 59,265
Shares owned,
beginning of
year............... 106,996 93,922 63,493 105,708 92,336 63,974 183,511 160,240 100,975
-------- ---------- ---------- -------- -------- -------- ---------- ---------- ----------
Shares owned, end of
year............... 103,643 106,996 93,922 91,317 105,708 92,336 174,937 183,511 160,240
======== ========== ========== ======== ======== ======== ========== ========== ==========
Cost of shares
acquired........... $623,480 $1,085,567 $1,193,237 $306,580 $681,891 $806,239 $1,177,394 $1,652,686 $2,630,801
======== ========== ========== ======== ======== ======== ========== ========== ==========
Cost of shares
redeemed........... $528,871 $ 388,354 $ 157,748 $581,477 $297,512 $ 98,639 $1,160,029 $ 428,284 $ 229,304
======== ========== ========== ======== ======== ======== ========== ========== ==========
</TABLE>
F-36
<PAGE> 97
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SCUDDER VARIABLE LIFE INVESTMENT FUND
- ---------------------------------------------------------------------------------------------------------------------------------
BOND PORTFOLIO GROWTH AND INCOME PORTFOLIO INTERNATIONAL PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shares purchased....... 81,043 100,463 43,001 73,363 197,684 119,224 72,337 61,504 44,838
Shares received from
reinvestment of:
Dividends............ 5,029 7,610 4,111 3,953 5,978 2,596 140 1,124 339
Capital gain
distributions...... 2,634 374 207 23,761 13,652 3,056 10,413 7,392 177
-------- -------- -------- ---------- ---------- ---------- ---------- -------- --------
Total shares
acquired............. 88,706 108,447 47,319 101,077 217,314 124,876 82,890 70,020 45,354
Total shares
redeemed............. (38,857) (57,783) (16,152) (78,966) (38,671) (9,613) (26,535) (38,827) (3,111)
-------- -------- -------- ---------- ---------- ---------- ---------- -------- --------
Net increase in shares
owned................ 49,849 50,664 31,167 22,111 178,643 115,263 56,355 31,193 42,243
Shares owned, beginning
of year.............. 148,524 97,860 66,693 350,410 171,767 56,504 89,563 58,370 16,127
-------- -------- -------- ---------- ---------- ---------- ---------- -------- --------
Shares owned, end of
year................. 198,373 148,524 97,860 372,521 350,410 171,767 145,918 89,563 58,370
======== ======== ======== ========== ========== ========== ========== ======== ========
Cost of shares
acquired............. $583,489 $741,377 $317,678 $1,117,946 $2,474,783 $1,299,585 $1,330,256 $979,973 $641,233
======== ======== ======== ========== ========== ========== ========== ======== ========
Cost of shares
redeemed............. $261,004 $381,942 $113,948 $ 766,045 $ 329,970 $ 79,839 $ 382,353 $517,743 $ 38,453
======== ======== ======== ========== ========== ========== ========== ======== ========
</TABLE>
F-37
<PAGE> 98
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DREYFUS VARIABLE INVESTMENT FUND
- ---------------------------------------------------------------------------------------------------------------------------
ZERO COUPON 2000 PORTFOLIO GROWTH AND INCOME PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased........................................ 24,832 51,358 17,242 26,714 40,811 46,348
Shares received from reinvestment of:
Dividends............................................. 3,914 3,167 1,598 678 883 770
Capital gain distributions............................ 337 3,335 1,365 5,183
-------- -------- -------- -------- -------- ----------
Total shares acquired................................... 28,746 54,525 19,177 30,727 43,059 52,301
Total shares redeemed................................... (15,092) (23,237) (10,183) (20,070) (20,917) (11,039)
-------- -------- -------- -------- -------- ----------
Net increase in shares owned............................ 13,654 31,288 8,994 10,657 22,142 41,262
Shares owned, beginning of year......................... 67,545 36,257 27,263 100,307 78,165 36,903
-------- -------- -------- -------- -------- ----------
Shares owned, end of year............................... 81,199 67,545 36,257 110,964 100,307 78,165
======== ======== ======== ======== ======== ==========
Cost of shares acquired................................. $354,160 $676,052 $235,127 $728,486 $931,244 $1,077,698
======== ======== ======== ======== ======== ==========
Cost of shares redeemed................................. $185,523 $284,571 $129,221 $399,403 $444,407 $ 222,255
======== ======== ======== ======== ======== ==========
</TABLE>
F-38
<PAGE> 99
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DREYFUS SOCIALLY RESPONSIBLE
GROWTH FUND, INC.
- ----------------------------------------------------------------------------------------------
SOCIALLY RESPONSIBLE PORTFOLIO
- ----------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares purchased............................................ 62,370 31,900 14,428
Shares received from reinvestment of:
Dividends................................................. 14 80 71
Capital gain distributions................................ 3,617 1,859 552
---------- -------- --------
Total shares acquired....................................... 66,001 33,839 15,051
Total shares redeemed....................................... (6,852) (2,213) (1,325)
---------- -------- --------
Net increase in shares owned................................ 59,149 31,626 13,726
Shares owned, beginning of year............................. 51,708 20,082 6,356
---------- -------- --------
Shares owned, end of year................................... 110,857 51,708 20,082
========== ======== ========
Cost of shares acquired..................................... $2,307,801 $954,849 $354,771
========== ======== ========
Cost of shares redeemed..................................... $ 145,472 $ 42,970 $ 24,774
========== ======== ========
</TABLE>
F-39
<PAGE> 100
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FEDERATED INSURANCE SERIES
- --------------------------------------------------------------------------------------------------------------------------
FUND FOR U.S. GOVERNMENT
SECURITIES II PORTFOLIO UTILITY FUND II PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased......................................... 23,556 66,759 12,659 16,717 14,494 12,273
Shares received from reinvestment of:
Dividends.............................................. 2,403 528 334 923 195 298
Capital gain distributions............................. 472 23 1,827 1,189 291
-------- -------- -------- -------- -------- --------
Total shares acquired.................................... 26,431 67,310 12,993 19,467 15,878 12,862
Total shares redeemed.................................... (33,151) (25,566) (133) (9,783) (5,232) (2,180)
-------- -------- -------- -------- -------- --------
Net (decrease) increase in shares owned.................. (6,720) 41,744 12,860 9,684 10,646 10,682
Shares owned, beginning of year.......................... 61,979 20,235 7,375 29,917 19,271 8,589
-------- -------- -------- -------- -------- --------
Shares owned, end of year................................ 55,259 61,979 20,235 39,601 29,917 19,271
======== ======== ======== ======== ======== ========
Cost of shares acquired.................................. $280,749 $736,176 $133,638 $276,443 $227,305 $160,307
======== ======== ======== ======== ======== ========
Cost of shares redeemed.................................. $361,075 $263,064 $ 1,319 $117,891 $ 57,624 $ 23,820
======== ======== ======== ======== ======== ========
</TABLE>
F-40
<PAGE> 101
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
3. INVESTMENTS, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VAN ECK WORLDWIDE INSURANCE TRUST
- -----------------------------------------------------------------------------------------------------------------------------
VAN ECK VAN ECK VAN ECK
VAN ECK WORLDWIDE WORLDWIDE WORLDWIDE
WORLDWIDE HARD ASSETS EMERGING MARKET REAL ESTATE
BOND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shares purchased............................ 1,238 2,368 2,814 1,916 31,645 7,170 11,073 2,252
Shares received from reinvestment of:
Dividends................................. 97 30 49
Capital gain distributions................ 44
------- ------- ------- ------- -------- ------- -------- -------
Total shares acquired....................... 1,379 2,368 2,844 1,916 31,645 7,170 11,122 2,252
Total shares redeemed....................... (90) (117) (3,572) (70)
------- ------- ------- ------- -------- ------- -------- -------
Net increase in shares owned................ 1,289 2,368 2,727 1,916 28,073 7,170 11,052 2,252
Shares owned, beginning of year............. 2,368 1,916 7,170 2,252
------- ------- ------- ------- -------- ------- -------- -------
Shares owned, end of year................... 3,657 2,368 4,643 1,916 35,243 7,170 13,304 2,252
======= ======= ======= ======= ======== ======= ======== =======
Cost of shares acquired..................... $15,132 $26,717 $29,469 $25,472 $331,111 $60,000 $101,119 $25,000
======= ======= ======= ======= ======== ======= ======== =======
Cost of shares redeemed..................... $ 1,005 $ 1 $ 1,573 $ 2 $ 34,528 $ 775
======= ======= ======= ======= ======== ======= ======== =======
</TABLE>
F-41
<PAGE> 102
- --------------------------------------------------------------------------------
The Provident Mutual Variable Annuity Separate Account
of Provident Mutual Life Insurance Company
Notes to Financial Statements -- continued
- --------------------------------------------------------------------------------
4. RELATED PARTY TRANSACTIONS
Certain deductions are made by Provident Mutual from the Subaccounts and/or
the premiums. The deductions may include (1) surrender charges, (2)
administration fees, (3) transfer processing fees, (4) mortality and expense
risk charges and (5) premium taxes. Premiums adjusted for these deductions are
recorded as net premiums in the statements of changes in net assets. See
original policy documents for specific charges assessed.
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.
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 contractholders and the first twelve transfers by Market Street VIP/2
contractholders 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
the years ended December 31, 1999 and 1998.
The Contracts provide for an initial free-look period. If a contract is
cancelled within certain time constraints, the contractholder will receive a
refund equal to the contract account value plus reimbursements of certain
deductions previously made under the contract. Where state law requires a
minimum refund equal to gross premiums paid, the refund will instead equal the
gross premiums paid on the contract and will not reflect investment experience.
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 on a prospective basis 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-42
<PAGE> 103
PROVIDENT MUTUAL
LIFE INSURANCE COMPANY
AND SUBSIDIARIES
REPORT ON AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, 1997
<PAGE> 104
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Provident Mutual Life Insurance Company:
In our opinion, the accompanying consolidated statements of financial
condition and related consolidated statements of operations, of equity and of
cash flows present fairly, in all material respects, the financial position of
Provident Mutual Life Insurance Company and Subsidiaries at December 31, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. 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 of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
February 7, 2000
F-44
<PAGE> 105
PROVIDENT MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available for sale, at market (cost:
1999 -- $2,904,087; 1998 -- $2,924,713)............... $2,765,156 $3,030,942
Held to maturity, at amortized cost (market:
1999 -- $323,318; 1998 -- $405,108)................... 323,753 379,184
Equity securities, at market (cost: 1999 -- $19,050;
1998 -- $30,317)....................................... 20,326 29,420
Mortgage loans............................................ 559,818 641,568
Real estate............................................... 26,982 39,468
Policy loans and premium notes............................ 366,046 362,381
Other invested assets..................................... 22,850 9,428
---------- ----------
Total investments................................. 4,084,931 4,492,391
Cash and cash equivalents................................... 60,253 81,405
Premiums due................................................ 11,477 11,754
Investment income due and accrued........................... 74,629 75,729
Deferred policy acquisition costs........................... 850,689 705,183
Reinsurance recoverable..................................... 155,871 152,831
Separate account assets..................................... 3,891,828 3,115,352
Other assets................................................ 92,266 73,716
---------- ----------
Total assets...................................... $9,221,944 $8,708,361
========== ==========
LIABILITIES
Policy liabilities:
Future policyholder benefits.............................. $4,028,813 $4,243,117
Policyholder funds........................................ 146,685 146,948
Policyholder dividends payable............................ 34,738 33,428
Other policy obligations.................................. 20,259 18,321
---------- ----------
Total policy liabilities.......................... 4,230,495 4,441,814
Expenses payable............................................ 28,763 29,670
Taxes payable............................................... 6,497 6,308
Federal income taxes payable:
Current................................................... 32,239 30,721
Deferred.................................................. 26,679 57,790
Separate account liabilities................................ 3,861,305 3,088,933
Other liabilities........................................... 85,022 118,002
---------- ----------
Total liabilities................................. 8,271,000 7,773,238
---------- ----------
COMMITMENTS AND CONTINGENCIES -- NOTE 10
EQUITY
Retained earnings........................................... 995,150 901,158
Accumulated other comprehensive income:
Net unrealized (depreciation) appreciation on
securities............................................. (44,206) 33,965
---------- ----------
Total equity...................................... 950,944 935,123
---------- ----------
Total liabilities and equity...................... $9,221,944 $8,708,361
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-45
<PAGE> 106
PROVIDENT MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Premiums................................................... $197,454 $206,376 $220,952
Policy and contract charges................................ 156,463 126,282 106,449
Net investment income...................................... 332,576 352,690 331,524
Other income............................................... 62,611 55,596 47,520
Net realized (losses) gains on investments................. (2,037) 6,780 2,360
-------- -------- --------
Total revenues................................... 747,067 747,724 708,805
-------- -------- --------
BENEFITS AND EXPENSES
Policy and contract benefits............................... 224,797 226,802 234,117
Change in future policyholder benefits..................... 112,118 138,001 122,463
Operating expenses......................................... 75,567 82,290 82,310
Amortization of deferred policy acquisition costs.......... 80,420 72,926 73,582
Policyholder dividends..................................... 67,595 65,648 65,736
Noninsurance commissions and expenses...................... 44,951 35,649 24,962
-------- -------- --------
Total benefits and expenses...................... 605,448 621,316 603,170
-------- -------- --------
Income before income taxes....................... 141,619 126,408 105,635
-------- -------- --------
Income tax expense (benefit):
Current.................................................. 36,646 46,953 35,971
Deferred................................................. 10,981 (8,085) 2,613
-------- -------- --------
Total income tax expense......................... 47,627 38,868 38,584
-------- -------- --------
Net income....................................... $ 93,992 $ 87,540 $ 67,051
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-46
<PAGE> 107
PROVIDENT MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NET
UNREALIZED
APPRECIATION
RETAINED (DEPRECIATION) TOTAL
EARNINGS ON SECURITIES EQUITY
-------- -------------- --------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1997.............................. $746,567 $ 10,710 $757,277
--------
Comprehensive income
Net income............................................ 67,051 -- 67,051
Other comprehensive income, net of tax:
Change in unrealized appreciation (depreciation) on
securities....................................... -- 19,954..... 19,954
--------
Total comprehensive income.............................. 87,005
-------- -------- --------
BALANCE AT DECEMBER 31, 1997............................ 813,618 30,664 844,282
--------
Comprehensive income
Net income............................................ 87,540 -- 87,540
Other comprehensive income, net of tax:
Change in unrealized appreciation (depreciation) on
securities....................................... -- 3,301 3,301
--------
Total comprehensive income.............................. 90,841
-------- -------- --------
BALANCE AT DECEMBER 31, 1998............................ 901,158 33,965 935,123
--------
Comprehensive income
Net income............................................ 93,992 -- 93,992
Other comprehensive income, net of tax:
Change in unrealized appreciation (depreciation) on
securities....................................... -- (78,171) (78,171)
--------
Total comprehensive income.............................. 15,821
-------- -------- --------
BALANCE AT DECEMBER 31, 1999............................ $995,150 $(44,206) $950,944
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-47
<PAGE> 108
PROVIDENT MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 93,992 $ 87,540 $ 67,051
Adjustments to reconcile net income to net cash provided by
operating activities:
Interest credited to variable universal life and
investment products..................................... 105,104 124,693 108,773
Amortization of deferred policy acquisition costs......... 80,420 72,926 73,582
Capitalization of deferred policy acquisition costs....... (124,056) (140,052) (127,593)
Deferred Federal income taxes............................. 10,981 (8,085) 2,613
Depreciation, amortization and accretion.................. (1,672) (701) 4,309
Net realized losses (gains) on investments................ 2,037 (6,780) (2,360)
Change in investment income due and accrued............... 1,100 (1,732) 215
Change in premiums due.................................... 277 1,206 146
Change in reinsurance recoverable......................... (3,040) 346,657 30,838
Change in policy liabilities and other policyholders'
funds of traditional life products...................... (57,179) (342,412) (44,638)
Change in other liabilities............................... (32,980) 20,595 17,172
Change in current Federal income taxes payable............ 1,518 (8,393) 3,786
Other, net................................................ (15,852) 4,262 (21,206)
----------- ----------- ---------
Net cash provided by operating activities............... 60,650 149,724 112,688
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investments:
Available for sale securities............................. 190,688 290,037 370,224
Held to maturity securities............................... -- 4,806 --
Equity securities......................................... 12,860 27,543 8,288
Real estate............................................... 17,988 27,740 17,347
Other invested assets..................................... 6,052 25,080 7,424
Proceeds from maturities of investments:
Available for sale securities............................. 332,182 348,101 207,455
Held to maturity securities............................... 58,716 76,483 96,045
Mortgage loans............................................ 154,440 121,076 99,673
Purchases of investments:
Available for sale securities............................. (510,808) (922,201) (705,348)
Held to maturity securities............................... (1,083) (23,624) (21,721)
Equity securities......................................... (74) (32,339) (7,052)
Mortgage loans............................................ (78,572) (107,728) (54,659)
Real estate............................................... (1,730) (856) (1,823)
Other invested assets..................................... (18,633) (11,342) (1,807)
Contributions of separate account seed money................ (1,774) (20,826) --
Withdrawals of separate account seed money.................. -- 1,954 29
Policy loans and premium notes, net......................... (3,665) (3,711) (148)
----------- ----------- ---------
Net cash provided by (used in) investing activities..... 156,587 (199,807) 13,927
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Variable universal life and investment product deposits..... 827,800 1,228,552 836,694
Variable universal life and investment product
withdrawals............................................... (1,066,189) (1,107,827) (994,120)
----------- ----------- ---------
Net cash (used in) provided by financing activities..... (238,389) 120,725 (157,426)
----------- ----------- ---------
Net change in cash and cash equivalents................. (21,152) 70,642 (30,811)
Cash and cash equivalents, beginning of year................ 81,405 10,763 41,574
----------- ----------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 60,253 $ 81,405 $ 10,763
=========== =========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for income taxes................ $ 38,821 $ 54,863 $ 31,805
=========== =========== =========
Foreclosure of mortgage loans............................. $ 5,394 $ 8,848 $ 1,744
=========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-48
<PAGE> 109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Provident Mutual Life Insurance Company (Provident Mutual) is organized as
a mutual life insurance company.
Provident Mutual's wholly-owned subsidiaries are Providentmutual Life and
Annuity Company of America (PLACA), Provident Mutual International Life
Insurance Company (PMILIC) and Providentmutual Holding Company (PHC) and, in
aggregate, are defined as the "Company."
On October 13, 1998, the Board of Directors of Provident Mutual unanimously
approved and adopted a Plan of Conversion (Plan) to reorganize Provident Mutual
Life Insurance Company, utilizing a mutual holding company structure.
The Insurance Department of the Commonwealth of Pennsylvania reviewed the
Plan and rendered its Decision and Order approving the Plan, subject to certain
conditions, on November 6, 1998.
A Special Meeting of policyholders to consider and vote upon the Plan was
held on February 9, 1999. Approximately 90% of the voting policyholders approved
the Plan.
Subsequent to the Special Meeting, a group of dissident policyholders filed
a lawsuit to block the Plan. On February 11, 1999, a Philadelphia Common Pleas
Court judge issued an order granting a preliminary injunction blocking the Plan
until the Court conducted a hearing. The Company continued to provide
information to the Court at hearings held on March 16, 1999 and June 22, 1999.
On September 16, 1999, the judge issued a permanent injunction blocking the Plan
until certain additional disclosures were made.
On October 29, 1999, the Company announced that it was abandoning the Plan
due to practical barriers to completing all of the required steps before the
December 31, 1999 deadline mandated in the Pennsylvania Insurance Department's
order approving the Plan.
The Company sells individual variable and traditional life insurance
products and a variety of individual and group annuity products and maintains a
block of direct response-marketed life and health insurance products. The
Company distributes its products through a variety of distribution channels,
principally career agents, personal producing general agents and brokers. The
Company is licensed to operate in 50 states, Puerto Rico and the District of
Columbia, each of which has regulatory oversight. Sales in 15 states accounted
for 81% of the Company's sales for the year ended December 31, 1999. For many of
the life and annuity products, the insurance departments of the states in which
the Company conducts business must approve products and policy forms in advance
of sales. In addition, selected benefit elements and policy provisions are
determined by statutes and regulations in each of these states.
PLACA specializes primarily in the development and sale of various annuity
products and sells certain variable and traditional life products, also sold by
Provident Mutual, through a personal producing general agency sales force.
PMILIC's business consists of life insurance assumed from Provident Mutual.
PHC is a downstream holding company with two major subsidiaries: Sigma
American Corporation (Sigma) and 1717 Capital Management Company (1717CMC).
Sigma is a general partner in a joint venture that provides investment advisory,
mutual fund distribution, trust and administrative services to a group of mutual
funds and other parties. 1717CMC is a full-service broker/dealer, operating on a
fully disclosed basis, engaged in the distribution of investment company shares,
general securities, and other securities and services. 1717CMC is the principal
distributor of variable life insurance policies and variable annuity contracts
issued by both Provident Mutual and PLACA.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Provident
Mutual and its wholly-owned subsidiaries. Intercompany transactions have been
eliminated. The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States (GAAP). Certain prior year amounts have been reclassified
F-49
<PAGE> 110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to conform with the current year presentation, including short-term investments
reclassified as cash and cash equivalents.
Various entities within the Company prepare financial statements for filing
with regulatory authorities in conformity with the accounting practices
prescribed or permitted by the Insurance Departments of the Commonwealth of
Pennsylvania and the State of Delaware (SAP). Practices under SAP vary from GAAP
primarily with respect to the deferral and subsequent amortization of policy
acquisition costs, the valuation of policy reserves, the accounting for deferred
taxes, the accrual of postretirement benefits, the inclusion of statutory asset
valuation and interest maintenance reserves and the establishment of investment
valuation allowances.
Statutory net income was $82.1 million, $70.8 million and $58.4 million for
the years ended December 31, 1999, 1998 and 1997, respectively. Statutory
surplus was $434.2 million and $382.4 million as of December 31, 1999 and 1998,
respectively. During 1998, the Company adopted the accounting requirements of
the National Association of Insurance Commissioners' codification of statutory
accounting principles. The effect of this reduced surplus by $46.8 million.
The preparation of the accompanying consolidated financial statements
required management to make estimates and assumptions that affect the reported
values of assets and liabilities and the reported amounts of revenues and
expenses. Actual results could differ from those estimates.
The Company is subject to interest rate risk to the extent its investment
portfolio cash flows are not matched to its insurance liabilities. Management
believes it manages this risk through modeling of the cash flows under
reasonable scenarios.
INVESTED ASSETS
Fixed maturity securities (bonds) which may be sold are designated as
"available for sale" and are reported at market value. Unrealized
appreciation/depreciation on these securities is recorded directly in equity,
net of related Federal income taxes and amortization of deferred policy
acquisition costs. Fixed maturity securities that the Company has the intent and
ability to hold to maturity are designated as "held to maturity" and are
reported at amortized cost.
Equity securities (common and preferred stocks) are reported at market
value. Unrealized appreciation/depreciation on these securities is recorded
directly in equity, net of related Federal income taxes and amortization of
deferred policy acquisition costs.
Fixed maturity and equity securities that have experienced an other than
temporary decline in value are written down to fair value by a charge to
realized losses. This fair value becomes the new cost basis of the particular
security.
Mortgage loans are carried at unpaid principal balances, less impairment
reserves. For mortgage loans considered impaired, a specific reserve is
established. A general reserve is also established for probable losses arising
from the portfolio but not attributable to specific loans. Mortgage loans are
considered impaired when it is probable that the Company will be unable to
collect amounts due according to the contractual terms of the loan agreement.
Upon impairment, a reserve is established for the difference between the unpaid
principal of the mortgage loan and its fair value. Fair value is based on either
the present value of expected future cash flows discounted at the mortgage
loan's effective interest rate or the fair value of the underlying collateral.
Changes in the reserve are credited (charged) to operations. Reserves totaled
$11.2 million and $10.7 million at December 31, 1999 and 1998, respectively.
Policy loans are reported at unpaid principal balances.
Real estate occupied by the Company is carried at cost less accumulated
depreciation. Foreclosed real estate is carried at the lower of cost or fair
market value, less encumbrances. The straight line method of depreciation is
used for real estate occupied by the Company.
Other invested assets consist primarily of real estate joint ventures
carried on the equity basis and limited partnerships carried at the lower of
cost or fair market value. The Company receives
F-50
<PAGE> 111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
preferred returns and interest on loans/capital advances made to the real estate
joint ventures.
Cash and cash equivalents include cash and all highly liquid investments
with a maturity of three months or less when purchased, reduced by the amount of
outstanding checks.
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, but not for income generation or speculative
purposes. Derivatives utilized by the Company are long and short positions on
United States Treasury notes and bond futures and certain interest rate swaps.
The net interest effect of futures transactions is settled on a daily
basis. Cash paid or received is recorded daily, along with a receivable/payable,
to settle the futures contract prior to the contract termination. The
receivable/payable is carried until the contract is terminated and the remaining
balance is included in either net investment income or realized gain or loss.
Upon termination of a futures contract that is identified to a specific
security, any gain or loss is deferred and amortized to net investment income
over the expected remaining life of the hedged security. If the futures contract
is not identified to a specific security, any gain or loss on termination is
reported as a realized gain or loss.
Interest rate swaps are settled on the contract date. Cash paid or received
is reported as an adjustment to net investment income.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This Statement requires that all
derivatives be recorded at fair value in the statement of financial condition as
either assets or liabilities. The accounting for changes in the fair value of a
derivative depends on its intended use and its resulting designation. This
Statement is effective for fiscal years beginning after June 15, 1999. In June
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of SFAS No. 133", which
changed the effective date of SFAS No. 133 to fiscal years beginning after June
15, 2000. The Company plans to adopt the provisions of SFAS No. 133 effective
January 1, 2001. The Company is currently reviewing SFAS No. 133 and has not yet
determined its impact on the consolidated financial statements.
Effective January 1, 1999, the Company adopted Statement of Position (SOP)
No. 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments". SOP 97-3 provides guidance for determining measurement and
recognition of a liability or an asset for insurance-related assessments. The
adoption of SOP 97-3 did not have a material effect on the results of operations
or the financial position of the Company.
BENEFIT RESERVES AND POLICYHOLDER CONTRACT DEPOSITS
Traditional Life Insurance Products
Traditional life insurance products include those contracts with fixed and
guaranteed premiums and benefits, and consist principally of whole life and term
insurance policies, limited-payment life insurance policies and certain
annuities with life contingencies. Most traditional life insurance policies are
participating. In addition to guaranteeing benefits, they pay dividends, as
declared annually by the Company based on experience.
Reserves on traditional life insurance products are calculated by using the
net level premium method. For participating traditional life insurance policies,
reserve assumptions are based on mortality rates consistent with those
underlying the cash values and investment rates consistent with the Company's
dividend practices. For most such policies, reserves are based on the 1958 or
1980 Commissioners' Standard Ordinary (CSO) mortality tables at interest rates
ranging from 3.5% to 4.5%.
Variable Life and Investment-Type Products
Variable life products include fixed premium variable life and flexible
premium variable universal life. Investment-type products consist
F-51
<PAGE> 112
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
primarily of guaranteed investment contracts (GICs) and single premium and
flexible premium annuity contracts.
Benefit reserves and policyholder contract deposits on these products are
determined following the retrospective deposit method and consist of policy
values that accrue to the benefit of the policyholder, before deduction of
surrender charges.
PREMIUMS, CHARGES AND BENEFITS
Traditional Life Insurance and Accident and Health Insurance Products
Premiums for individual life policies are recognized when due; premiums for
accident and health and all other policies are reported as earned
proportionately over their policy terms.
Benefit claims (including an estimated provision for claims incurred but
not reported), benefit reserve changes, and expenses (except those deferred) are
charged to income as incurred.
Variable Life and Investment-Type Products
Revenues for variable life and investment-type products consist of policy
charges for the cost of insurance, policy initiation, administration and
surrenders during the period. Premiums received and the accumulated value
portion of benefits paid are excluded from the amounts reported in the
consolidated statements of operations. Expenses include interest credited to
policy account balances and benefit payments made in excess of policy account
balances. Many of these policies are variable life or variable annuity policies,
in which investment performance credited to the account balance is based on the
investment performance of separate accounts chosen by the policyholder. For
other policies, the account balances were credited at interest rates which
ranged from 4.5% to 8.23%, in 1999.
Deferred Policy Acquisition Costs
The costs that vary with and are directly related to the production of new
business have been deferred to the extent deemed recoverable. Such costs include
commissions and certain costs of underwriting, policy issue and marketing.
Deferred policy acquisition costs on traditional participating life
insurance policies are amortized in proportion to the present value of expected
gross margins. Gross margins include margins from mortality, investments and
expenses, net of policyholder dividends. Expected gross margins are redetermined
regularly, based on actual experience and current assumptions of mortality,
persistency, expenses, and investment experience. The average investment yields,
before realized capital gains and losses, in the calculation of expected gross
margins were 8.0% for 1999, 8.25% for 1998 and 8.0% for 1997.
Deferred policy acquisition costs for variable life and investment-type
products are amortized in relation to the incidence of expected gross profits,
including realized investment gains and losses, over the expected lives of the
policies.
Deferred policy acquisition costs are subject to recoverability testing at
the time of policy issuance and loss recognition testing at the end of each
accounting period. The effect on the amortization of deferred policy acquisition
costs of revisions in estimated experience is reflected in earnings in the
period such estimates are revised. In addition, the effect on the deferred
acquisition cost asset that would result from the realization of unrealized
gains (losses) is recognized through an offset to Other Comprehensive Income as
of the balance sheet date.
CAPITAL GAINS AND LOSSES
Realized capital gains and losses on sales of investments are based upon
specific identification of the investments sold. A realized capital loss is
recorded at the time a decline in the value of an investment is determined to be
other than temporary.
POLICYHOLDER DIVIDENDS
Annually, the Board of Directors declares the amount of dividends to be
paid to participating policyholders in the following calendar year. Dividends
are earned by the policyholders ratably over the policy year. Dividends are
included in the accompanying consolidated financial statements as a liability
and as a charge to operations.
F-52
<PAGE> 113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 reflect segregated funds
administered and invested by the Company for the benefit of variable life
insurance policyholders, variable annuity contractholders and several of the
Company's retirement plans.
The contractholders/policyholders bear the investment risk on separate
account assets except in instances where the Company guarantees a fixed return
and on the Company's seed money. The separate account assets are carried at fair
value.
For guaranteed contracts, the separate account assets and liabilities are
carried at historical cost. The guaranteed contracts are maintained in a
separate account for statutory purposes. Due to the guaranteed return, this
separate account is included in the general account assets and liabilities for
GAAP purposes.
FEDERAL INCOME TAXES
Deferred income tax assets and liabilities have been recorded for temporary
differences between the reported amounts of assets and liabilities in the
accompanying consolidated financial statements and those in the Company's income
tax returns.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the fair values and carrying values of the
Company's financial instruments at December 31, 1999 and 1998 (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------- --------------------
FAIR CARRYING FAIR CARRYING
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities:
Available for sale...................... $2,765.2 $2,765.2 $3,030.9 $3,030.9
Held to maturity........................ $ 323.3 $ 323.8 $ 405.1 $ 379.2
Equity securities......................... $ 20.3 $ 20.3 $ 29.4 $ 29.4
Mortgage loans............................ $557.3... $ 559.8 $ 697.2 $ 641.6
LIABILITIES FOR INVESTMENT-TYPE INSURANCE
CONTRACTS
Guaranteed interest contracts............. $ 100.5 $ 100.6 $ 178.6 $ 172.3
Group annuities........................... $1,718.8 $1,740.9 $1,596.4 $1,595.9
Supplementary contracts without life
contingencies........................... $ 28.3 $ 28.6 $ 30.4 $ 29.8
Individual annuities...................... $2,028.9 $2,085.1 $1,907.1 $1,961.8
</TABLE>
The underlying investment risk of the Company's variable life and variable
annuity contracts is assumed by the policyholder. These reserve liabilities are
primarily reported in the separate accounts. The liabilities in the separate
accounts are recorded at amounts equal to the related assets at fair value.
Fair values for the Company's insurance contracts other than
investment-type contracts are not required to be disclosed under SFAS No. 107,
"Disclosures about Fair Value 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
F-53
<PAGE> 114
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contracts. The estimated fair value of all assets without a corresponding
revaluation of all liabilities associated with insurance contracts can be
misinterpreted.
The following notes summarize the major methods and assumptions used in
estimating the fair values of financial instruments:
INVESTMENT SECURITIES
Bonds, common stocks and preferred stocks are valued based upon quoted
market prices, where available. If quoted market prices are not available, as in
the case of private placements, fair values are based on quoted market prices of
comparable instruments (see Note 3).
MORTGAGE LOANS
Mortgage loans are valued using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality. For mortgage loans classified as nonperforming, the
fair value was set equal to the lesser of the unpaid principal balance or the
market value of the underlying property.
POLICY LOANS
Policy loans are issued with either fixed or variable interest rates,
depending upon the terms of the policies. For those loans with fixed rates, the
interest rates range from 5% 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 GIC 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 $102.0 million and $101.9 million, respectively, at December
31, 1999 and $172.5 million and $175.9 million, respectively, at December 31,
1998.
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.
POLICYHOLDER DIVIDENDS AND ACCUMULATIONS
The policyholders' dividend and accumulation liabilities will ultimately be
settled in cash, applied toward 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.
F-54
<PAGE> 115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. MARKETABLE SECURITIES
The amortized cost, gross unrealized gains and losses and estimated fair
value of investments in fixed maturity securities and equity securities as of
December 31, 1999 and 1998 are as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE FOR SALE COST GAINS LOSSES VALUE
- ------------------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
government corporations and agencies........... $ 46.9 $ .4 $ .7 $ 46.6
Obligations of states and political
subdivisions................................... 41.6 .6 .5 41.7
Debt securities issued by foreign governments.... 1.0 -- -- 1.0
Corporate securities............................. 2,556.7 20.8 151.4 2,426.1
Mortgage-backed securities....................... 257.9 2.1 10.2 249.8
-------- ------ ------ --------
Subtotal -- fixed maturities..................... 2,904.1 23.9 162.8 2,765.2
Equity securities................................ 19.0 2.6 1.3 20.3
-------- ------ ------ --------
Total....................................... $2,923.1 $ 26.5 $164.1 $2,785.5
======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
HELD TO MATURITY COST GAINS LOSSES VALUE
- ---------------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
government corporations and agencies........... $ 13.4 $ 3 $ -- $ 13.7
Obligations of states and political
subdivisions................................... 6.4 .2 .2 6.4
Debt securities issued by foreign governments.... 6.0 .2 -- 6.2
Corporate securities............................. 294.5 5.3 6.3 293.5
Mortgage-backed securities....................... 3.5 -- -- 3.5
-------- ------ ------ --------
Total....................................... $ 323.8 $ 6.0 $ 6.5 $ 323.3
======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
AVAILABLE FOR SALE COST GAINS LOSSES VALUE
- ------------------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
government corporations and agencies........... $ 41.7 $ 1.7 $ -- $ 43.4
Obligations of states and political
subdivisions................................... 57.8 2.9 -- 60.7
Debt securities issued by foreign governments.... 1.0 .1 -- 1.1
Corporate securities............................. 2,537.1 124.4 33.3 2,628.2
Mortgage-backed securities....................... 287.1 11.0 .6 297.5
-------- ------ ------ --------
Subtotal -- fixed maturities..................... 2,924.7 140.1 33.9 3,030.9
Equity securities................................ 30.3.... 1.8 2.7 29.4
-------- ------ ------ --------
Total....................................... $2,955.0 $141.9 $ 36.6 $3,060.3
======== ====== ====== ========
</TABLE>
F-55
<PAGE> 116
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
HELD TO MATURITY COST GAINS LOSSES VALUE
- ---------------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
government corporations and agencies........... $ 16.7 $ 1.5 $ -- $ 18.2
Obligations of states and political
subdivisions................................... 7.9 .7 .1 8.5
Debt securities issued by foreign governments.... 6.2 1.0 -- 7.2
Corporate securities............................. 339.6 22.4 .2 361.8
Mortgage-backed securities....................... 8.8 .6 -- 9.4
-------- ------ ------ --------
Total....................................... $ 379.2 $ 26.2 $ .3 $ 405.1
======== ====== ====== ========
</TABLE>
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1999, by contractual maturity, are as follows (in millions):
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
AVAILABLE FOR SALE COST FAIR VALUE
- ------------------ --------- ----------
<S> <C> <C>
Due in one year or less... $ 146.5 $ 146.8
Due after one year through
five years.............. 766.8 759.0
Due after five years
through ten years....... 687.2 660.2
Due after ten years 1,303.6 1,199.2
-------- --------
Total................ $2,904.1 $2,765.2
======== ========
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
HELD TO MATURITY COST FAIR VALUE
- ---------------- --------- ----------
<S> <C> <C>
Due in one year or less... $ 24.7 $ 24.8
Due after one year through
five years.............. 109.2 109.4
Due after five years
through ten years....... 110.8 112.7
Due after ten years....... 79.1 76.4
------ ------
Total................ $323.8 $323.3
====== ======
</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
contractual maturity.
Realized gains (losses) on investments for the years ended December 31,
1999, 1998 and 1997 are summarized as follows (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Fixed maturities......... $(9.0) $(9.2) $ 7.9
Equity securities........ 1.5 2.8 (3.8)
Mortgage loans........... -- .7 1.1
Real estate.............. (.6) 6.6 (2.2)
Other invested assets.... 6.1 8.9 (.6)
Other assets............. -- (3.0) --
----- ----- -----
Total............... $(2.0) $ 6.8 $ 2.4
===== ===== =====
</TABLE>
During 1998, the Company sold held to maturity securities with an amortized
cost of $5.6 million, resulting in a realized loss of $.8 million. The
securities were sold in response to significant deterioration in the
creditworthiness of the issuers.
Net unrealized (depreciation) appreciation on available for sale securities
as of December 31, 1999 and 1998 is summarized as follows (in millions):
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
Net unrealized (depreciation)
appreciation before
adjustments for the
following:................. $(137.6) $105.3
Amortization of deferred
policy acquisition
costs................... 69.6 (53.0)
Deferred Federal income
taxes................... 23.8 (18.3)
------- ------
Net unrealized (depreciation)
appreciation............... $ (44.2) $ 34.0
======= ======
</TABLE>
F-56
<PAGE> 117
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net investment income, by type of investment, is as follows for the years
ending December 31, 1999, 1998 and 1997 (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Gross investment
income:
Fixed maturities:
Available for
sale............. $222.9 $225.2 $201.2
Held to maturity.... 30.6 34.4 39.6
Equity securities..... .2 .5 .8
Mortgage loans........ 53.9 59.1 62.9
Real estate........... 5.3 6.6 10.7
Policy loans and
premium notes....... 23.9 24.2 23.4
Other invested
assets.............. 7.3 15.3 8.0
Cash and cash
equivalents......... 2.3 3.3 2.5
Other, net............ .1 -- (.2)
------ ------ ------
346.5 368.6 348.9
Less investment
expenses............ (13.9) (15.9) (17.4)
------ ------ ------
Net investment
income.............. $332.6 $352.7 $331.5
====== ====== ======
</TABLE>
On May 13, 1998, the Company purchased two structured notes at par value
totaling $55 million for settlement on June 2, 1998. The notes were acquired
from separate unaffiliated issuers and were categorized as available for sale.
The notes carried opposite interest rate characteristics and were reset on June
29, 1998 as a result of the 10-year USD swap rate being less than the trigger
rate of 6.14%. The notes were accounted for as separate notes in accordance with
the provisions of FASB Emerging Issues Task Force (EITF) Issue No. 96-12,
"Recognition of Interest Income and Balance Sheet Classification of Structured
Notes".
The note with a par value of $32 million and a stated coupon rate of 5.777%
was reset to a coupon rate of 11.554%. Interest earned on this note during 1998
was $.1 million for 27 days at 5.777% and $1.9 million for 185 days at 11.554%.
A note with a par value of $23 million and a stated coupon rate of 5.878%
was reset to a coupon rate of 0% and was sold on June 29, 1998 at a loss of
$10.6 million. Interest earned on this note during 1998 was $.1 million for 27
days at 5.878%.
The unrealized gain on the remaining note is $5.5 million at December 31,
1999. Interest earned on this note during 1999 was $3.7 million.
In November 1998, the EITF released Issue No. 98-15, "Structured Notes
Acquired for a Specified Investment Strategy", which requires that structured
notes transactions entered into after September 24, 1998 be accounted for as a
unit. If the Company had accounted for the notes as a unit, the realized loss of
$10.6 million would have been reversed and applied as an adjustment to the cost
of the remaining note. Interest earned for 1998 on both notes would have totaled
$1.5 million. Interest earned over the lives of the notes would be $8.7 million
less had the notes been accounted for as a unit.
4. MORTGAGE LOANS
The carrying value of impaired loans was $14.2 million and $33.9 million,
which are net of reserves of $3.2 million and $4.3 million as of December 31,
1999 and 1998, respectively.
A reconciliation of the reserve balance, including general reserves, for
mortgage loans for 1999 and 1998 is as follows (in millions):
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
BALANCE AT JANUARY 1......... $10.7 $13.1
Provision, net of
recoveries................. .5 (.6)
Releases due to
foreclosure................ -- (1.8)
----- -----
BALANCE AT DECEMBER 31....... $11.2 $10.7
===== =====
</TABLE>
The average recorded investment in impaired loans was $27.8 million and
$46.3 million during 1999 and 1998, respectively. Interest income recognized on
impaired loans during 1999, 1998 and 1997 was $1.7 million, $3.9 million and
$4.9 million, respectively. All interest income on impaired loans was recognized
on the cash basis.
F-57
<PAGE> 118
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. REAL ESTATE
Real estate holdings are as follows at December 31, 1999 and 1998 (in
millions):
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Occupied by the Company...... $19.2 $31.1
Foreclosed................... 7.8 8.2
Investment................... -- .2
----- -----
Total................... $27.0 $39.5
===== =====
</TABLE>
Depreciation expense was $1.0 million, $1.8 million and $3.0 million for
the years ended December 31, 1999, 1998 and 1997, respectively. Accumulated
depreciation for real estate totaled $4.5 million and $6.9 million at December
31, 1999 and 1998, respectively. Permanent impairment writedowns were $.9
million, $.5 million and $6.1 million for the years ended December 31, 1999,
1998 and 1997, respectively.
In December 1999, a real estate property occupied by the Company with a
carrying value of $12.3 million was sold, resulting in a gain of $.3 million.
6. DEFERRED POLICY ACQUISITION COSTS
A reconciliation of the deferred policy acquisition cost (DAC) asset for
1999, 1998 and 1997 is as follows (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
BALANCE AT JANUARY
1................... $705.2 $629.6 $602.6
Expenses deferred..... 124.1 140.1 127.6
Amortization of DAC... (80.4) (72.9) (73.6)
Effect on DAC from
unrealized losses
(gains)............. 101.8 8.4 (27.0)
------ ------ ------
BALANCE AT DECEMBER
31.................. $850.7 $705.2 $629.6
====== ====== ======
</TABLE>
7. BENEFIT PLANS
The Company maintains a qualified defined benefit pension plan and several
nonqualified defined benefit, supplemental executive retirement, excess benefit
and deferred compensation plans. In addition, the Company maintains other
postretirement benefit plans which include medical benefits for retirees and
their spouses (and Medicare part B reimbursement for certain retirees) and
retiree life insurance.
The following tables present a reconciliation of the changes in the plans'
benefit obligations and fair value of assets for the years ended December 31,
1999 and 1998, as well as, the funded status as of December 31, 1999 and 1998
(in millions):
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
---------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Net benefit obligation at beginning of year..... $116.7 $116.6 $ 28.4 $ 29.8
Service cost.................................... 3.7 4.5 .3 .5
Interest cost................................... 7.7 7.8 1.9 1.9
Plan participants' contributions................ -- -- .4 .1
Plan amendments................................. 1.4 .4 -- --
Actuarial (gain) loss........................... 4.0 (3.2) (4.2) (1.9)
Settlements..................................... (13.4) -- -- --
Gross benefits paid............................. (21.7) (9.4) (2.3) (2.1)
------ ------ ------ ------
Net benefit obligation at end of year........... 98.4 116.7 24.5 28.3
------ ------ ------ ------
</TABLE>
F-58
<PAGE> 119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
---------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of
year.......................................... 182.4 165.8 -- --
Actual return on plan assets.................... 26.6 26.8 -- --
Employer contributions.......................... -- -- 1.4 1.7
401(h) transfer................................. (1.4) (1.7) -- --
Gross benefits paid............................. (16.6) (8.5) (1.4) (1.7)
------ ------ ------ ------
Fair value of plan assets at end of year........ 191.0 182.4 -- --
------ ------ ------ ------
Funded status................................... 92.6 65.7 (24.5) (28.3)
Unrecognized actuarial gain..................... (53.9) (41.2) (20.0) (17.0)
Unrecognized prior service cost................. 4.9 3.9 6.1 6.5
Unrecognized net transition asset............... (11.7) (15.7) -- --
------ ------ ------ ------
Net amount recognized........................... $ 31.9 $ 12.7 $(38.4) $(38.8)
====== ====== ====== ======
</TABLE>
The following table presents the amounts recognized in the consolidated
statements of financial condition as of December 31, 1999 and 1998 (in
millions):
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
---------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Prepaid benefit cost............................ $ 42.6 $ 24.0 $ -- $ --
Accrued benefit liability....................... (10.7) (11.3) (38.4) (38.8)
Additional minimum liability.................... (.8) (1.8) -- --
Intangible asset................................ .8 1.8 -- --
------ ------ ------ ------
Net amount recognized........................... $ 31.9 $ 12.7 $(38.4) $(38.8)
====== ====== ====== ======
</TABLE>
The components of net periodic benefit (income) cost for the years ended
December 31, 1999, 1998 and 1997 are as follows (in millions):
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
-------------------------- ---------------------
1999 1998 1997 1999 1998 1997
------ ------ ------ ----- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost...................... $ 4.3 $ 4.5 $ 4.3 $ .3 $ .5 $ .5
Interest cost..................... 7.6 7.8 8.3 1.9 1.9 2.0
Expected return on assets......... (16.1) (14.6) (13.0) -- -- --
Amortization of:
Transition asset................ (1.9) (1.9) (1.9) -- -- --
Prior service cost.............. .3 .3 .3 .4 .4 .4
Actuarial (gain) loss........... (3.3) (.9) (.1) (1.1) (.9) (.8)
Settlement credit............... (5.8) -- -- -- -- --
------ ------ ------ ----- ---- ----
Net periodic benefit (income)
cost............................ $(14.9) $ (4.8) $ (2.1) $ 1.5 $1.9 $2.1
====== ====== ====== ===== ==== ====
</TABLE>
During 1999, in certain of the Company's defined benefit plans, lump-sum
cash payments elected by employees exceeded the sum of the periodic service cost
and interest cost of the related plans. The lump-sum amounts are reflected as
"settlements" in the change in benefit obligation table above. Because of this
circumstance, the Company amortized additional amounts of the unrecognized
actuarial gains and the unamortized transition asset, in accordance with SFAS
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits." Pretax income of $5.8
F-59
<PAGE> 120
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million resulted from additional amortization and is reflected as a "settlement
credit" in the pension benefits table above.
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $14.3 million, $10.4 million, and $0, respectively,
at December 31, 1999, and were $15.9 million, $13.1 million, and $0,
respectively, at December 31, 1998.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the medical plan. A 1% change in assumed health care cost
trend rates would have the following effects (in millions):
<TABLE>
<CAPTION>
1% INCREASE 1% DECREASE
----------- -----------
<S> <C> <C>
Effect on total of service and interest cost components of
net periodic postretirement benefit cost.................. $ .1 $ (.1)
Effect on the health care component of the accumulated
postretirement benefit obligation......................... $1.3 $(1.2)
</TABLE>
The following weighted-average assumptions were used in the measurement of
the Company's benefit obligations as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
PENSION
BENEFITS OTHER BENEFITS
------------ --------------
1999 1998 1999 1998
---- ---- ----- -----
<S> <C> <C> <C> <C>
Discount rate........................................... 7.75% 6.75% 7.75% 6.75%
Expected return on plan assets.......................... 9.0% 9.0% N/A N/A
Rate of compensation increase........................... 4.75% 4.75% 4.75% 4.75%
</TABLE>
Effective July 1, 1999, the Company increased its discount rate to 7.5%
from 6.75% at January 1, 1999. Effective December 31, 1999, the Company
increased its discount rate to 7.75%.
A 5.5% annual rate of increase in the cost of covered health care benefits
was assumed for 1999, decreasing to an ultimate trend of 5.1% in 2001.
In January 1991, the Company established a retiree health account under the
provisions of Section 401(h) of the Internal Revenue Code. In 1999, 1998 and
1997, the Company transferred $1.4 million, $1.7 million and $1.6 million of
excess assets from the defined benefit pension plan to pay for 1999, 1998 and
1997 qualified retiree health benefits, respectively.
The Company also provides a funded noncontributory defined contribution
plan that covers substantially all of its agents and a contributory defined
contribution plan qualified under section 401(k) of the Internal Revenue Code.
The pension cost of the defined contribution plans was $3.5 million, $3.4
million, and $3.4 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
F-60
<PAGE> 121
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. FEDERAL INCOME TAXES
The Company files a consolidated Federal income tax return with its life
insurance and non-insurance subsidiaries. The life companies' tax provisions
include an equity tax.
The provision for Federal income taxes from operations differs from the
normal relationship of Federal income tax to pretax income as follows (in
millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Federal income tax at
statutory rate..... $ 49.6 $44.2 $37.0
Current year equity
tax............. 9.0 6.3 8.8
True down of prior
years' equity
tax............. (10.0) (7.0) (8.0)
Tax settlement..... -- (4.7) --
Other.............. (1.0) .1 .8
------ ----- -----
Provision for Federal
income tax from
operations......... $ 47.6 $38.9 $38.6
====== ===== =====
</TABLE>
In 1998, the Company settled certain open tax years with the IRS, which
resulted in the reduction of income tax expense by $4.7 million.
Deferred income tax assets and liabilities reflect the income tax effects
of cumulative temporary differences between the reported values of assets and
liabilities for financial statement purposes and income tax return purposes.
Components of the Company's net deferred income tax liability are as follows at
December 31, 1999 and 1998 (in millions):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
DEFERRED TAX LIABILITY
Deferred policy acquisition
costs...................... $223.7 $214.2
Prepaid pension asset........ 15.3 8.4
Net unrealized gain on
available for sale
securities................. -- 18.3
------ ------
Total deferred tax
liability............. 239.0 240.9
------ ------
</TABLE>
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
DEFERRED TAX ASSET
Reserves..................... 145.1 145.8
Net unrealized loss on
available for sale
securities................. 23.8 --
Employee benefit accruals.... 19.0 18.2
Invested assets.............. 7.4 6.4
Policyholder dividends....... 8.7 8.2
Other........................ 8.3 4.5
------ ------
Total deferred tax
asset................. 212.3 183.1
------ ------
Net deferred tax liability... $ 26.7 $ 57.8
====== ======
</TABLE>
The Company's Federal income tax returns have been audited through 1995.
All years through 1985 are closed. Years 1986 through 1995 have been audited and
are closed with the exception of several issues for which claims for refund have
been filed. Years 1996 and subsequent remain open. In the opinion of management,
adequate provision has been made for the possible effect of potential
assessments related to prior years' taxes.
9. REINSURANCE
In the normal course of business, the Company assumes risks from and cedes
certain parts of its risks to other insurance companies. The primary purpose of
ceded reinsurance is to limit losses from large exposures. For life insurance,
the Company retains no more than $1.5 million on any single life.
Reinsurance contracts do not relieve the Company of its obligations to
policyholders. To the extent that reinsuring companies are later unable to meet
obligations under reinsurance agreements, the Company would be liable for these
obligations. The Company evaluates the financial condition of its reinsurers and
limits its exposure to any one reinsurer.
On January 1, 1998, the Company terminated its reinsurance agreement with
Metropolitan Life Insurance Company (Metropolitan). Prior to 1998, the Company
had ceded 65 percent of the premiums and reserves related to its single premium
deferred annuity (SPDA) product to Metropolitan. The Company recaptured $352.7
million in reserves and received cash totaling $343.7 million.
F-61
<PAGE> 122
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tables below highlight the amounts shown in the accompanying
consolidated financial statements which are net of reinsurance activity (in
millions):
<TABLE>
<CAPTION>
CEDED TO ASSUMED
GROSS OTHER FROM OTHER NET
AMOUNT COMPANIES COMPANIES AMOUNT
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999:
Life insurance in force............... $42,853.8 $9,866.6 $137.5 $33,124.7
========= ======== ====== =========
Premiums.............................. $ 209.5 $ 12.7 $ .7 $ 197.5
========= ======== ====== =========
Future policyholder benefits.......... $ 4,028.8 $ 155.9 $ 2.7 $ 3,875.6
========= ======== ====== =========
DECEMBER 31, 1998:
Life insurance in force............... $40,139.8 $8,550.4 $167.4 $31,756.8
========= ======== ====== =========
Premiums.............................. $ 217.1 $ 14.2 $ 3.5 $ 206.4
========= ======== ====== =========
Future policyholder benefits.......... $ 4,243.1 $ 152.8 $ 3.1 $ 4,093.4
========= ======== ====== =========
DECEMBER 31, 1997:
Life insurance in force............... $36,961.7 $7,549.1 $238.6 $29,651.2
========= ======== ====== =========
Premiums.............................. $ 232.7 $ 15.0 $ 3.2 $ 220.9
========= ======== ====== =========
Future policyholder benefits.......... $ 4,344.6 $ 499.5 $ 3.9 $ 3,849.0
========= ======== ====== =========
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space, data processing equipment and certain
other furniture and equipment under operating leases expiring on various dates
between 2000 and 2009. Most of the leases contain renewal and purchase options
based on prevailing fair market values.
Future minimum rental payments required and related sublease rentals
receivable under non-cancelable operating leases in effect at December 31, 1999,
and which have initial or remaining terms of one year or more, are summarized as
follows (in millions):
<TABLE>
<CAPTION>
SUBLEASE
RENTAL RENTALS
PAYMENTS RECEIVABLE
YEAR ENDING DECEMBER 31: -------- ----------
<S> <C> <C>
2000.................... $13.5 $ .5
2001.................... 11.3 .2
2002.................... 9.8 .1
2003.................... 7.5 --
2004.................... 5.4 --
Thereafter.............. 16.8 --
----- ----
Total.............. $64.3 $ .8
===== ====
</TABLE>
Total related rent expense was $11.2 million, $13.6 million and $12.7
million in 1999, 1998 and 1997, respectively, which was net of sublease income
of $.5 million, $2.6 million and $1.9 million in 1999, 1998 and 1997,
respectively.
During 1998, the Company recorded a charge to income for the amount of $3.0
million for the termination of a lease obligation for furniture and equipment.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its borrowers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include investment commitments related to its interests in
real estate and mortgage loans, financial guarantees of indebtedness, marketable
securities lending and interest rate futures contracts. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated statements of financial condition.
F-62
<PAGE> 123
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1999, the Company had outstanding mortgage loan, real
estate and limited partnership commitments of approximately $27.6 million. The
mortgage loan commitments, which expire through December 2000, totaled $23.0
million and were issued during 1999 at interest rates consistent with rates
applicable on December 31, 1999. As a result, the fair value of these
commitments approximates the face amount.
Derivatives are used for hedging existing bonds (including cash reserves)
against adverse price or interest rate movements and for fixing liability costs
at the time of product sales. The Company had no hedge activity in 1999. The
Company closed out hedge positions consisting of 939 treasury futures contracts
with a dollar value of $108.8 million in 1998 and 239 treasury futures contracts
with a dollar value of $25.2 million in 1997. There were no gains (losses)
generated from the hedge positions for the year ended December 31, 1999. The
approximate net gains (losses) generated from the hedge positions were $.1
million for the year ended December 31, 1998 and $(.1) million for the year
ended December 31, 1997. There were no open hedge positions at December 31, 1999
or 1998.
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 no swaps outstanding as of December 31, 1999 or 1998.
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. For bonds, cash collateral
totaling 105% of market value plus accrued interest is required. For equities,
cash collateral totaling 105% of market value is required. There were no
securities lending positions at December 31, 1999.
INVESTMENT PORTFOLIO CREDIT RISK
Bonds
The Company's bond investment portfolio is predominately comprised of
investment grade securities. At December 31, 1999 and 1998, approximately $266.6
million and $210.4 million, respectively, in debt security investments (8.3% and
6.4%, respectively, of the total debt security portfolio) were considered "below
investment grade." During 1999, the Company increased its allocation of assets
to "below investment grade" securities. Securities are classified as "below
investment grade" primarily by utilizing rating criteria established by
independent bond rating agencies.
Debt security investments with a carrying value at December 31, 1999 of
$3.6 million were non-income producing for the year ended December 31, 1999.
The Company had debt security investments in the financial services
industry at both December 31, 1999 and 1998 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.
There was one mortgage loan totaling $.1 million and two mortgage loans
totaling $3.7 million in which payments on principal and/or interest were over
90 days past due as of December 31, 1999 and 1998, respectively.
The Company had no loans outstanding in any state where principal balances
in the aggregate exceeded 20% of the Company's equity.
Lines of Credit
The Company has approximately $50 million of available and unused lines of
credit at December 31, 1999.
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, with respect to
sales practices, and as a result of the merger with
F-63
<PAGE> 124
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Covenant Life Insurance Company in 1994, which, in the opinion of management and
legal counsel, will not have a material adverse effect on the Company's
financial position or its results of operations.
In June 1999, the Company settled litigation involving the 1994 merger with
Covenant Life Insurance Company. The net settlement of $5.8 million had no
impact on current period operating results as the Company had previously
established reserves for such litigation.
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 consolidated
financial statements. Guaranty fund assessments totaled $.1 million, $2.2
million and $1.1 million in 1999, 1998 and 1997, respectively. Of those amounts,
$.1 million, $1.6 million and $.8 million in 1999, 1998 and 1997, respectively,
are creditable against future years' premium taxes.
11. COMPREHENSIVE INCOME
The components of other comprehensive income are as follows (in millions):
<TABLE>
<CAPTION>
TAX
BEFORE TAX (EXPENSE) NET OF TAX
AMOUNT BENEFIT AMOUNT
---------- --------- ----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999:
Unrealized appreciation (depreciation) on
securities....................................... $(122.3) $ 42.8 $(79.5)
Less: reclassification adjustment for losses
realized in net income........................... 2.0 (.7) 1.3
------- ------ ------
Net change in unrealized appreciation
(depreciation) on securities..................... $(120.3) $ 42.1 $(78.2)
======= ====== ======
YEAR ENDED DECEMBER 31, 1998:
Unrealized appreciation (depreciation) on
securities....................................... $ 11.9 $ (4.2) $ 7.7
Less: reclassification adjustment for gains
realized in net income........................... (6.8) 2.4 (4.4)
------- ------ ------
Net change in unrealized appreciation
(depreciation) on securities..................... $ 5.1 $ (1.8) $ 3.3
======= ====== ======
YEAR ENDED DECEMBER 31, 1997:
Unrealized appreciation (depreciation) on
securities....................................... $ 33.1 $(11.6) $ 21.5
Less: reclassification adjustment for gains
realized in net income........................... (2.4) .9 (1.5)
------- ------ ------
Net change in unrealized appreciation
(depreciation) on securities..................... $ 30.7 $(10.7) $ 20.0
======= ====== ======
</TABLE>
F-64
