<PAGE>
- --------------------------------------------------------------------------------
TO OUR VARIABLE ANNUITY CERTIFICATE HOLDERS:
It is my pleasure to present the Annual Reports of Penn Mutual Variable Annuity
Account III and Penn Series Funds, Inc. for the six month period ending June
30, 1995.
The six months of 1995 was as dramatically different from the first six
months of 1994 as anyone could have imagined. After last year's poor
performance in the stock market, and an equally dismal bond performance, this
year investors have been rewarded with exceptional returns in both areas. An
accommodating Federal Reserve, continuing strong economy and positive investor
sentiment have combined to push the Dow index to a new record high.
The recent lessons in volatility remind us of the risks, however, and the
need to adequately plan. Without a plan, short term swings--whether up or
down--may seem like trends, and prompt an investor to react to shorter term
events. While it is human nature to focus on the down turns more than the up,
one of the real risks in investing is not being in the market during these
positive periods. Because stock and bond market gains tend to be concentrated
in brief periods that are difficult to predict, much of the market's rewards
can be lost by standing on the sidelines waiting for a "safe" time to invest.
Market performance this year was a compelling example of this principle.
While INVESTMENT RETURNS for the period are attractive, the important measuring
stick for an individual is the INVESTOR'S RETURNS. You are well advised to draw
on the expertise of your representative in developing a well-designed
retirement investment program, and using that plan to guide you through the
short-term changes in the markets.
Your Optimizer certificate has many features that give you and your
representative the tools to manage this process effectively: a variety of fund
options with different investment profiles, professional expertise from a wide
cross-section of investment advisors, and product features that allow you to
design and manage your retirement investment program.
We encourage you, working with your representative, to use all of the tools
available to you through your OPTIMIZER certificate in pursuit of your
retirement savings goals. These tools include the experience of four highly
regarded investment advisors, and seven investment options.
Percentage changes in accumulation unit values of each of the variable
accounts offered under OPTIMIZER certificates for the six month period ending
June 30, 1995 are set forth in the accompanying table.
Management discussions of the performance of the funds are included in the
accompanying reports.
We at Penn Mutual thank you for the opportunity to serve your financial
needs. For more information on how Penn Mutual can help you, please contact
your sales representative.
Sincerely,
/s/ George J. Limbach
George J. Limbach
Vice President & Product Manager
- --------------------------------------------------------------------------------
PERCENTAGE CHANGE IN ACCUMULATION UNIT VALUES SINCE 12/31/94
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
T. ROWE PRICE ASSOCIATES, INC.
Flexibly Managed........................................................ 12.21%
High Yield Bond......................................................... 8.90%
QUEST FOR VALUE ADVISORS
(A SUBSIDIARY OF OPPENHEIMER CAPITAL)
Value Equity............................................................ 21.66%
VONTOBEL USA, INC.
International Equity.................................................... 0.76%
INDEPENDENCE CAPITAL MANAGEMENT, INC.
Growth Equity........................................................... 12.58%
Money Market............................................................ 2.11%
Quality Bond............................................................ 11.92%
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
TO OUR VARIABLE ANNUITY CONTRACT OWNERS:
It is my pleasure to present the Semi-Annual Reports of Penn Mutual Variable
Annuity Account III, Penn Series Funds, Inc., Neuberger & Berman Advisers
Management Trust, TCI Portfolios, Inc., and Fidelity Investments Variable
Insurance Products Fund and Variable Insurance Products Fund II for the six
month period ending June 30, 1995.
The six months of 1995 was as dramatically different from the first six
months of 1994 as anyone could have imagined. After last year's poor
performance in the stock market, and an equally dismal bond performance, this
year investors have been rewarded with exceptional returns in both areas. An
accommodating Federal Reserve, continuing strong economy and positive investor
sentiment have combined to push the Dow index to a new record high.
The recent lessons in volatility remind us of the risks, however, and the
need to adequately plan. Without a plan, short term swings--whether up or
down--may seem like trends, and prompt an investor to react to shorter term
events. While it is human nature to focus on the down turns more than the up,
one of the real risks in investing is not being in the market during these
positive periods. Because stock and bond market gains tend to be concentrated
in brief periods that are difficult to predict, much of the market's rewards
can be lost by standing on the sidelines waiting for a "safe" time to invest.
Market performance this year was a compelling example of this principle.
While INVESTMENT RETURNS for the period are attractive, the important measuring
stick for an individual is the INVESTOR'S RETURNS. You are well advised to draw
on the expertise of your representative in developing a well-designed
retirement investment program, and using that plan to guide you through the
short-term changes in the markets.
Your Diversifier II contract has many features that give you and your
representative the tools to manage this process effectively: a variety of fund
options with different investment profiles, professional expertise from a wide
cross-section of investment advisors, and product features that allow you to
design and manage your retirement investment program.
We encourage you, working with your representative, to use all of the tools
available to you through your DIVERSIFIER II contract in pursuit of your
retirement savings goals. These tools include the experience of six highly
regarded investment advisors, and ten investment options.
Percentage changes in accumulation unit values of each of the variable
accounts offered under DIVERSIFIER II contracts for the six month period ending
June 30, 1995 are set forth in the accompanying table.
Management discussions of the performance of the funds are included in the
accompanying reports.
We at Penn Mutual thank you for the opportunity to serve your financial
needs. For more information on how Penn Mutual can help you, please contact
your sales representative.
Sincerely,
/s/ George J. Limbach
George J. Limbach
Vice President & Product Manager
- --------------------------------------------------------------------------------
PERCENTAGE CHANGE IN
ACCUMULATION UNIT VALUES
SINCE 12/31/94
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
T. ROWE PRICE ASSOCIATES, INC.
Flexibly Managed....................................................... 12.20%
High Yield Bond........................................................ 8.90%
QUEST FOR VALUE ADVISORS
(A SUBSIDIARY OF OPPENHEIMER CAPITAL)
Value Equity........................................................... 21.66%
Small Capitalization................................................... 5.08%*
VONTOBEL USA, INC.
International Equity................................................... 0.76%
INDEPENDENCE CAPITAL MANAGEMENT, INC.
Growth Equity
Non-Qualified.......................................................... 12.58%
Qualified.............................................................. 12.58%
Money Market........................................................... 2.11%
Quality Bond........................................................... 11.92%
NEUBERGER & BERMAN MANAGEMENT, INC.
Balanced............................................................... 15.20%
Limited Maturity Bond.................................................. 5.68%
TWENTIETH CENTURY (INVESTORS RESEARCH)
TCI Growth............................................................. 18.73%
FIDELITY MANAGEMENT & RESEARCH COMPANY
Growth................................................................. 13.72%*
Asset Manager.......................................................... 1.86%*
Equity Income.......................................................... 4.02%*
- --------------------------------------------------------------------------------
</TABLE>
* For the period beginning 5/1/95
<PAGE>
----------------------------------------------------
PENN MUTUAL
VARIABLE ANNUITY ACCOUNT III
SEMI-ANNUAL REPORT
JUNE 30, 1995
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF ASSETS AND LIABILITIES - JUNE 30, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
GROWTH EQUITY
MONEY MARKET QUALITY BOND HIGH YIELD FUND
TOTAL FUND+ FUND+ BOND FUND+ QUALIFIED+
------------ ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT IN COMMON
STOCK:
Number of shares......... 49,057,664 15,133,532 3,197,769 3,487,223 2,921,753
Identified cost.......... $465,112,407 $15,133,532 $32,665,634 $33,383,145 $54,273,944
ASSETS AND LIABILITIES:
Investments at value..... $520,992,056 $15,133,532 $32,553,289 $30,339,069 $60,568,300
Dividends receivable..... 67,609 67,609 0 0 0
Due to the Penn Mutual
Life Insurance Company.. (125,742) (1,042) (8,179) (8,682) (13,628)
------------ ----------- ----------- ----------- -----------
NET ASSETS................ $520,933,923 $15,200,099 $32,545,110 $30,330,387 $60,554,672
------------ ----------- ----------- ----------- -----------
Variable Annuity
Accumulation Units....... 855,079 1,868,615 1,230,036 2,060,703
----------- ----------- ----------- -----------
Accumulation unit values.. $ 17.78 $ 17.42 $ 24.66 $ 29.39
----------- ----------- ----------- -----------
<CAPTION>
- ------------------------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF OPERATIONS - FOR THE SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED)
GROWTH EQUITY
MONEY MARKET QUALITY BOND HIGH YIELD FUND
TOTAL FUND+ FUND+ BOND FUND+ QUALIFIED+
------------ ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................ $ 878,761 $ 363,060 $ 0 $ 0 $ 0
EXPENSE:
Mortality and expense
risk charges (Note 3)... 3,077,811 83,728 194,825 185,896 375,184
------------ ----------- ----------- ----------- -----------
Net investment income
(loss).................. (2,199,050) 279,332 (194,825) (185,896) (375,184)
------------ ----------- ----------- ----------- -----------
REALIZED AND UNREALIZED
GAINS (LOSSES) ON
INVESTMENTS:
Realized gains (losses)
from redemption of fund
shares.................. 11,206 0 53,744 16,810 125,310
Capital gain distribution
(Note 2)................ 78,617 0 0 0 0
------------ ----------- ----------- ----------- -----------
Net realized gains
(losses)................ 89,823 0 53,744 16,810 125,310
Net change in unrealized
appreciation/depreciation
of investments.......... 58,455,012 0 3,570,729 2,639,179 7,106,680
------------ ----------- ----------- ----------- -----------
Net realized and
unrealized gains
(losses)
on investments.......... 58,544,835 0 3,624,473 2,655,989 7,231,990
------------ ----------- ----------- ----------- -----------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS......... $ 56,345,785 $ 279,332 $ 3,429,648 $ 2,470,093 $ 6,856,806
------------ ----------- ----------- ----------- -----------
</TABLE>
- -----------------------
(a) For the period from May 1, 1995 (date funds became available for investment
to contractholders) to June 30, 1995.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust.
+++ Investment in TCI Portfolios, Inc.
++++ Investment in Fidelity Investments' Variable Insurance Products.
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH EQUITY FLEXIBLY INTERNATIONAL SMALL LIMITED
FUND VALUE EQUITY MANAGED EQUITY CAPITALIZATION MATURITY BOND BALANCED
NON-QUALIFIED+ FUND+ FUND+ FUND+ FUND+(A) PORTFOLIO++ PORTFOLIO++
- -------------- ------------ ------------ ------------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
962,471 5,839,931 10,608,275 3,309,048 13,604 325,949 936,899
$18,395,180 $ 70,148,001 $157,355,485 $42,522,099 $139,773 $4,702,769 $14,111,195
$19,952,842 $ 90,577,117 $181,931,958 $43,646,348 $143,387 $4,595,847 $15,374,506
0 0 0 0 0 0 0
(4,461) (20,486) (48,466) (10,541) (39) (1,209) (3,306)
----------- ------------ ------------ ----------- -------- ---------- -----------
$19,948,381 $90,556,631 $181,883,492 $43,635,807 $143,348 $4,594,638 $15,371,200
----------- ------------ ------------ ----------- -------- ---------- -----------
684,469 4,053,988 4,566,672 3,372,058 13,642 433,077 1,305,866
----------- ------------ ------------ ----------- -------- ---------- -----------
$ 29.14 $ 22.34 $ 39.83 $ 12.94 $ 10.51 $ 10.61 $ 11.77
----------- ------------ ------------ ----------- -------- ---------- -----------
- ---------------------------------------------------------------------------------------------------
<CAPTION>
GROWTH EQUITY FLEXIBLY INTERNATIONAL SMALL LIMITED
FUND VALUE EQUITY MANAGED EQUITY CAPITALIZATION MATURITY BOND BALANCED
NON-QUALIFIED+ FUND+ FUND+ FUND+ FUND+(A) PORTFOLIO++ PORTFOLIO++
- -------------- ------------ ------------ ------------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
$ 0 $ 0 $ 0 $ 0 $ 0 $ 252,911 $ 244,587
123,320 525,267 1,058,760 270,496 142 28,780 89,399
----------- ------------ ------------ ----------- -------- ---------- -----------
(123,320) (525,267) (1,058,760) (270,496) (142) 224,131 155,188
----------- ------------ ------------ ----------- -------- ---------- -----------
(29,106) 17,546 12,462 (207,928) (7) 4,414 4,605
0 0 0 0 0 0 78,617
----------- ------------ ------------ ----------- -------- ---------- -----------
(29,106) 17,546 12,462 (207,928) (7) 4,414 83,222
2,403,565 16,229,438 20,122,673 711,410 3,614 23,327 1,723,483
----------- ------------ ------------ ----------- -------- ---------- -----------
2,374,459 16,246,984 20,135,135 503,482 3,607 27,741 1,806,705
----------- ------------ ------------ ----------- -------- ---------- -----------
$ 2,251,139 $ 15,721,717 $ 19,076,375 $ 232,986 $ 3,465 $ 251,872 $ 1,961,893
----------- ------------ ------------ ----------- -------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF ASSETS AND LIABILITIES - JUNE 30, 1995 (UNAUDITED) (CONT'D.)
<TABLE>
<CAPTION>
GROWTH EQUITY INCOME GROWTH ASSET MANAGER
PORTFOLIO+++ PORTFOLIO++++(A) PORTFOLIO++++(A) PORTFOLIO++++(A)
------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
INVESTMENT IN COMMON
STOCK:
Number of shares......... 2,236,560 44,159 21,825 18,666
Identified cost.......... $20,718,129 $740,322 $557,679 $265,520
ASSETS AND LIABILITIES:
Investments at value..... $24,579,797 $745,843 $582,736 $267,485
Dividends receivable..... 0 0 0 0
Due to the Penn Mutual
Life Insurance Company.. (5,270) (195) (167) (71)
----------- -------- -------- --------
NET ASSETS................ $24,574,527 $745,648 $582,569 $267,414
----------- -------- -------- --------
Variable Annuity
Accumulation Units....... 1,906,348 71,681 51,227 26,254
----------- -------- -------- --------
Accumulation unit values.. $ 12.89 $ 10.40 $ 11.37 $ 10.19
----------- -------- -------- --------
<CAPTION>
- --------------------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENT OF OPERATIONS - FOR THE SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED)
(CONT'D.)
GROWTH EQUITY INCOME GROWTH ASSET MANAGER
PORTFOLIO+++ PORTFOLIO++++(A) PORTFOLIO++++(A) PORTFOLIO++++(A)
------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends................ $ 15,208 $ 2,995 $ 0 $ 0
EXPENSE:
Mortality and expense
risk charges (Note 3)... 140,688 582 459 285
----------- -------- -------- --------
Net investment income
(loss).................. (125,480) 2,413 (459) (285)
----------- -------- -------- --------
REALIZED AND UNREALIZED
GAINS (LOSSES) ON
INVESTMENTS:
Realized gains (losses)
from investment
transactions............ 12,619 296 442 (1)
Capital gain distribution
(Note 2)................ 0 0 0 0
----------- -------- -------- --------
Net realized gains
(losses)................ 12,619 296 442 (1)
Net change in unrealized
appreciation/depreciation
of investments.......... 3,888,371 5,521 25,057 1,965
----------- -------- -------- --------
Net realized and
unrealized gains
(losses)
on investments.......... 3,900,990 5,817 25,499 1,964
----------- -------- -------- --------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS......... $ 3,775,510 $ 8,230 $ 25,040 $ 1,679
----------- -------- -------- --------
</TABLE>
- -----------------------
(a) For the period from May 1, 1995 (date funds became available for investment
to contractholders) to June 30, 1995.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust.
+++ Investment in TCI Portfolios, Inc.
++++ Investment in Fidelity Investments' Variable Insurance Products.
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF CHANGES IN NET ASSETS - FOR THE SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED) AND THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
TOTAL MONEY MARKET FUND+ QUALITY BOND FUND+
-------------------------- ------------------------ ------------------------
1995 1994 1995 1994 1995 1994
------------ ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss).................. $ (2,120,433) $ 6,217,348 $ 279,332 $ 308,572 $ (194,825) $ 1,480,918
Net realized gain (loss)
from investment
transactions............ 11,206 8,825,107 0 0 53,744 (207,338)
Net change in unrealized
appreciation/depreciation
of investments.......... 58,455,012 (26,880,298) 0 0 3,570,729 (3,498,614)
------------ ------------ ----------- ----------- ----------- -----------
Net increase (decrease) in
net assets
resulting from
operations............... 56,345,785 (11,837,843) 279,332 308,572 3,429,648 (2,225,034)
------------ ------------ ----------- ----------- ----------- -----------
VARIABLE ANNUITY
ACTIVITIES:
Purchase payments under
variable annuity
contracts............... 33,445,046 93,502,143 2,591,347 6,556,863 1,068,890 5,534,942
Surrender benefits....... (17,907,675) (20,846,264) (492,987) (2,078,381) (815,447) (1,656,100)
Transfers between funds.. 2,234,810 19,503,429 (1,498,085) (1,323,504) (356,714) (4,367,636)
Death benefits........... (747,282) (1,447,359) (519) (180,481) (82,373) (106,371)
Contract administration
charges................. (367,220) (539,815) (9,464) (17,739) (18,379) (32,415)
Deferred sales charges... (372,288) (525,527) (9,446) (70,610) (18,256) (41,816)
Annuity benefits......... (552,714) (699,738) (32,785) (20,489) (88,745) (177,209)
------------ ------------ ----------- ----------- ----------- -----------
Net increase (decrease) in
net assets
resulting from variable
annuity activities....... 15,732,677 88,946,869 548,061 2,865,656 (311,024) (846,605)
------------ ------------ ----------- ----------- ----------- -----------
Total increase (decrease)
in net assets............ 72,078,462 77,109,026 827,393 3,174,228 3,118,624 (3,071,639)
NET ASSETS:
Beginning of period...... 448,855,461 371,746,435 14,372,706 11,198,478 29,426,486 32,498,125
------------ ------------ ----------- ----------- ----------- -----------
END OF PERIOD............ $520,933,923 $448,855,461 $15,200,099 $14,372,706 $32,545,110 $29,426,486
------------ ------------ ----------- ----------- ----------- -----------
<CAPTION>
GROWTH EQUITY FUND GROWTH EQUITY FUND
HIGH YIELD BOND FUND+ QUALIFIED+ NON-QUALIFIED+
-------------------------- ------------------------ ------------------------
1995 1994 1995 1994 1995 1994
------------ ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss).................. $ (185,896) $ 2,560,555 $ (375,184) $ (293,548) $ (123,320) $ (100,592)
Net realized gain (loss)
from investment
transactions............ 16,810 (170,624) 125,310 1,136,154 (29,106) 378,020
Net change in unrealized
appreciation/depreciation
of investments.......... 2,639,179 (5,193,690) 7,106,680 (6,401,925) 2,403,565 (2,173,908)
------------ ------------ ----------- ----------- ----------- -----------
Net increase (decrease) in
net assets
resulting from
operations............... 2,470,093 (2,803,759) 6,856,806 (5,559,319) 2,251,139 (1,896,480)
------------ ------------ ----------- ----------- ----------- -----------
VARIABLE ANNUITY
ACTIVITIES:
Purchase payments under
variable annuity
contracts............... 1,255,582 6,654,141 3,025,006 7,413,734 310,432 1,934,231
Surrender benefits....... (1,161,909) (1,317,107) (3,463,697) (3,969,109) (731,894) (757,117)
Transfers between funds.. (769,110) (4,602,232) (1,009,203) (1,011,011) (290,777) (197,999)
Death benefits........... (2,099) (237,383) (18,979) (56,543) (121,138) (7,625)
Contract administration
charges................. (22,064) (35,290) (70,543) (113,420) (9,640) (18,044)
Deferred sales charges... (21,059) (32,100) (68,297) (88,285) (20,013) (22,462)
Annuity benefits......... (60,942) (92,082) (28,131) (24,171) (9,051) (10,320)
------------ ------------ ----------- ----------- ----------- -----------
Net increase (decrease) in
net assets
resulting from variable
annuity activities....... (781,601) 337,947 (1,633,844) 2,151,195 (872,081) 920,664
------------ ------------ ----------- ----------- ----------- -----------
Total increase (decrease)
in net assets............ 1,688,492 (2,465,812) 5,222,962 (3,408,124) 1,379,058 (975,816)
NET ASSETS:
Beginning of period...... 28,641,895 31,107,707 55,331,710 58,739,834 18,569,323 19,545,139
------------ ------------ ----------- ----------- ----------- -----------
END OF PERIOD............ $ 30,330,387 $ 28,641,895 $60,554,672 $55,331,710 $19,948,381 $18,569,323
------------ ------------ ----------- ----------- ----------- -----------
</TABLE>
- -----------------------
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust.
+++ Investment in TCI Portfolios, Inc.
++++ Investment in Fidelity Investments' Variable Insurance Products.
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
- --------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
STATEMENTS OF CHANGES IN NET ASSETS - FOR THE SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED) AND THE YEAR ENDED DECEMBER 31, 1994 (CONT'D.)
<TABLE>
<CAPTION>
INTERNATIONAL
VALUE EQUITY FUND+ FLEXIBLY MANAGED FUND+ EQUITY FUND+
------------------------ -------------------------- ---------------------------
1995 1994 1995 1994 1995 1994
----------- ----------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss).................. $ (525,267) $ 220,806 $ (1,058,760) $ 2,488,247 $ (270,496) $ (299,620)
Net realized gain (loss)
from investment
transactions............ 17,546 1,002,557 12,462 6,443,641 (207,928) (6,786)
Net change in unrealized
appreciation/depreciation
of investments.......... 16,229,438 (148,726) 20,122,673 (5,343,774) 711,410 (3,152,128)
----------- ----------- ------------ ------------ ----------- -----------
Net increase (decrease) in
net assets
resulting from
operations............... 15,721,717 1,074,637 19,076,375 3,588,114 232,986 (3,458,534)
----------- ----------- ------------ ------------ ----------- -----------
VARIABLE ANNUITY
ACTIVITIES:
Purchase payments under
variable annuity
contracts............... 3,919,203 8,736,389 13,684,488 29,059,165 3,714,289 14,229,731
Surrender benefits....... (2,661,565) (3,798,916) (5,676,125) (5,273,593) (1,714,635) (1,132,959)
Transfers between funds.. 2,629,098 (843,507) 6,432,372 14,092,038 (4,145,855) 10,628,364
Death benefits........... (217,115) (258,953) (249,901) (464,064) (8,591) (115,534)
Contract administration
charges................. (52,909) (86,298) (124,001) (172,266) (34,353) (40,975)
Deferred sales charges... (55,697) (88,160) (119,898) (136,658) (39,644) (23,932)
Annuity benefits......... (83,785) (93,120) (162,360) (167,822) (39,969) (64,187)
----------- ----------- ------------ ------------ ----------- -----------
Net increase (decrease) in
net assets
resulting from variable
annuity activities....... 3,477,230 3,567,435 13,784,575 36,936,800 (2,268,758) 23,480,508
----------- ----------- ------------ ------------ ----------- -----------
Total increase (decrease)
in net assets............ 19,198,947 4,642,072 32,860,950 40,524,914 (2,035,772) 20,021,974
NET ASSETS:
Beginning of period...... 71,357,684 66,715,612 149,022,542 108,497,628 45,671,579 25,649,605
----------- ----------- ------------ ------------ ----------- -----------
END OF PERIOD............ $90,556,631 $71,357,684 $181,883,492 $149,022,542 $43,635,807 $45,671,579
----------- ----------- ------------ ------------ ----------- -----------
<CAPTION>
EQUITY INCOME GROWTH
BALANCED PORTFOLIO++ GROWTH PORTFOLIO+++ PORTFOLIO++++ PORTFOLIO++++
------------------------ -------------------------- ------------- -------------
1995 1994 1995 1994 1995(A) 1995(A)
----------- ----------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss).................. $ 233,805 $ 64,189 $ (125,480) $ (177,764) $ 2,413 $ (459)
Net realized gain (loss)
from investment
transactions............ 4,605 116,979 12,619 (3,386) 296 442
Net change in unrealized
appreciation/depreciation
of investments.......... 1,723,483 (629,486) 3,888,371 (178,321) 5,521 25,057
----------- ----------- ------------ ------------ ----------- -----------
Net increase (decrease) in
net assets
resulting from
operations............... 1,961,893 (448,318) 3,775,510 (359,471) 8,230 25,040
----------- ----------- ------------ ------------ ----------- -----------
VARIABLE ANNUITY
ACTIVITIES:
Purchase payments under
variable annuity
contracts............... 1,130,135 4,944,710 2,095,418 7,276,860 131,945 96,349
Surrender benefits....... (191,109) (272,124) (848,887) (454,334) (1,000) 0
Transfers between funds.. 36,944 1,672,583 139,002 5,068,078 606,565 461,270
Death benefits........... (29,033) (5,837) (950) (12,478) (86) (90)
Contract administration
charges................. (9,187) (8,610) (14,609) (12,463) (6) 0
Deferred sales charges... (5,046) (7,844) (13,928) (8,759) 0 0
Annuity benefits......... (24,573) (25,095) (11,467) (12,406) 0 0
----------- ----------- ------------ ------------ ----------- -----------
Net increase (decrease) in
net assets
resulting from variable
annuity activities....... 908,131 6,297,783 1,344,579 11,844,498 737,418 557,529
----------- ----------- ------------ ------------ ----------- -----------
Total increase (decrease)
in net assets............ 2,870,024 5,849,465 5,120,089 11,485,027 745,648 582,569
NET ASSETS:
Beginning of period...... 12,501,176 6,651,711 19,454,438 7,969,411 0 0
----------- ----------- ------------ ------------ ----------- -----------
END OF PERIOD............ $15,371,200 $12,501,176 $ 24,574,527 $ 19,454,438 $ 745,648 $ 582,569
----------- ----------- ------------ ------------ ----------- -----------
</TABLE>
- -----------------------
(a) For the period from May 1, 1995 (date funds became available for investment
to contractholders) to June 30, 1995.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust.
+++ Investment in TCI Portfolios, Inc.
++++ Investment in Fidelity Investments' Variable Insurance Products.
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL
CAPITALIZATION LIMITED MATURITY
FUND+ BOND PORTFOLIO++
-------------- -----------------------
1995(A) 1995 1994
-------------- ---------- ----------
<S> <C> <C>
$ (142) $ 224,131 $ (34,415)
(7) 4,414 135,890
3,614 23,327 (159,726)
-------- ---------- ----------
3,465 251,872 (58,251)
-------- ---------- ----------
11,215 300,936 1,161,377
0 (148,420) (136,524)
128,767 (285,520) 388,258
(85) (16,238) (2,090)
(14) (2,004) (2,295)
0 (1,004) (4,901)
0 (10,906) (12,837)
-------- ---------- ----------
139,883 (163,156) 1,390,988
-------- ---------- ----------
143,348 88,716 1,332,737
0 4,505,922 3,173,185
-------- ---------- ----------
$143,348 $4,594,638 $4,505,922
-------- ---------- ----------
<CAPTION>
ASSET
MANAGER
PORTFOLIO++++
--------------
1995(A)
--------------
<S> <C>
$ (285)
(1)
1,965
--------
1,679
--------
109,811
0
156,056
(85)
(47)
0
0
--------
265,735
--------
267,414
0
--------
$267,414
--------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
- -------------------------------------------------------------------------------
PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
NOTES TO FINANCIAL STATEMENTS - JUNE 30, 1995
- -------------------------------------------------------------------------------
NOTE 1.
The significant accounting policies of Penn Mutual Variable Annuity Account
III (Account III) are as follows:
GENERAL - Account III was established by The Penn Mutual Life Insurance
Company (Penn Mutual) under the provisions of the Pennsylvania Insurance
Law. Penn Mutual has structured Account III as a unit investment trust
registered under the Investment Company Act of 1940. Account III offers
units to variable annuity contractholders to provide for the accumulation
of value and for the payment of annuities.
INVESTMENTS - Assets of Account III are invested in shares of Penn Series
Funds, Inc. (Penn Series): Money Market, Quality Bond, High Yield Bond,
Growth Equity, Value Equity, Flexibly Managed, International Equity Fund,
and Small Capitalization Funds; Neuberger and Berman Advisers Management
Trust (AMT):
- -------------------------------------------------------------------------------
NOTE 2.
For the six months ended June 30, 1995 and the year ended December 31, 1994
share transactions of Account III were as follows:
<TABLE>
<CAPTION>
HIGH YIELD
MONEY MARKET FUND+ QUALITY BOND FUND+ BOND FUND+
-------------------------- ---------------------- -----------------------
1995 1994 1995 1994 1995 1994
-------------- ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased........ 4,617,563 11,731,562 180,074 567,279 178,533 844,452
Shares received from
reinvestment of:
Net investment income. 357,645 428,156 0 205,998 0 371,269
Capital gains
distribution......... 0 0 0 0 0 0
----------- ----------- ---------- ---------- ---------- -----------
Total shares acquired... 4,975,208 12,159,718 180,074 773,277 178,533 1,215,721
Shares redeemed......... (4,144,320) (9,032,589) (237,771) (708,005) (298,985) (866,422)
----------- ----------- ---------- ---------- ---------- -----------
Net increase (decrease)
in shares owned........ 830,888 3,127,129 (57,697) 65,272 (120,452) 349,299
Shares owned, beginning
of period.............. 14,302,644 11,175,515 3,255,466 3,190,194 3,607,675 3,258,376
----------- ----------- ---------- ---------- ---------- -----------
Shares owned, end of
period................. 15,133,532 14,302,644 3,197,769 3,255,466 3,487,223 3,607,675
----------- ----------- ---------- ---------- ---------- -----------
Cost of shares acquired. $ 4,975,208 $12,159,718 $1,767,184 $7,467,034 $1,512,901 $10,893,594
----------- ----------- ---------- ---------- ---------- -----------
Proceeds from shares
redeemed............... $ 4,144,320 $ 9,032,589 $2,267,780 $6,839,749 $2,474,763 $ 8,001,826
----------- ----------- ---------- ---------- ---------- -----------
<CAPTION>
SMALL
CAPITALIZATION LIMITED MATURITY BALANCED
FUND+ BOND PORTFOLIO++ PORTFOLIO++
-------------- ----------------------- ----------------------
1995(A) 1995 1994 1995 1994
-------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Shares purchased........ 14,180 28,042 143,858 91,647 458,117
Shares received from
reinvestment of:
Net investment income. 0 18,583 9,643 16,504 7,544
Capital gains
distribution......... 0 0 1,429 5,305 12,464
----------- ----------- ---------- ---------- ----------
Total shares acquired... 14,180 46,625 154,930 113,456 478,125
Shares redeemed......... (576) (42,113) (50,012) (38,229) (42,430)
----------- ----------- ---------- ---------- ----------
Net increase (decrease)
in shares owned........ 13,604 4,512 104,918 75,227 435,695
Shares owned, beginning
of period.............. 0 321,437 216,519 861,672 425,977
----------- ----------- ---------- ---------- ----------
Shares owned, end of
period................. 13,604 325,949 321,437 936,899 861,672
----------- ----------- ---------- ---------- ----------
Cost of shares acquired. $ 145,686 $ 648,678 $2,189,576 $1,725,868 $7,101,185
----------- ----------- ---------- ---------- ----------
Proceeds from shares
redeemed............... $ 5,906 $ 587,111 $ 697,584 $ 582,309 $ 625,518
----------- ----------- ---------- ---------- ----------
</TABLE>
The cost of shares redeemed is determined on a last-in, first-out basis.
- -----------------------
(a) For the period from May 1, 1995 (date funds became available for investment
to contractholders) to June 30, 1995.
+ Investment in Penn Series Funds, Inc.
++ Investment in Neuberger & Berman Advisers Management Trust.
+++ Investment in TCI Portfolios, Inc.
++++ Investment in Fidelity Investments' Variable Insurance Products.
- -------------------------------------------------------------------------------
NOTE 3.
Operations are charged for mortality and expense risks assumed by Penn
Mutual as determined daily at an annual rate of 1.25% of the average value
of the Account III. No investment expenses are charged to Account III. Each
year on the date specified in the Contract
8
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1., CONT'D.
Limited Maturity Bond and Balanced Portfolios; TCI Portfolios, Inc. (TCI):
Growth Portfolio; and Fidelity Investments' Variable Insurance Products
(Fidelity): Equity Income, Growth, and Asset Manager Portfolios. Penn
Series, AMT, TCI, and Fidelity are open-end diversified investment
companies. The shares are carried at market value as determined by the
underlying net asset value of the respective Funds or Portfolios. Dividend
income is recorded on the ex-dividend date. Investment transactions are
accounted for on a trade date basis.
FEDERAL INCOME TAXES - Under current law, no federal income taxes are
imposed on income or gains from investments held in Account III.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
INTERNATIONAL
GROWTH EQUITY FUND+ VALUE EQUITY FUND+ FLEXIBLY MANAGED FUND+ EQUITY FUND+
- ----------------------- --------------------------- ------------------------- -----------------------
1995 1994 1995 1994 1995 1994 1995 1994
- ---------- ----------- ------------- ------------- ------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
96,335 401,705 362,717 567,306 998,315 2,439,626 149,765 1,791,592
0 28,387 0 84,952 0 270,376 0 13,569
0 84,644 0 79,862 0 424,847 0 0
- ---------- ----------- ---------- ---------- ----------- ----------- ---------- -----------
96,335 514,736 362,717 732,120 998,315 3,134,849 149,765 1,805,161
(250,910) (297,943) (155,357) (362,798) (201,634) (236,173) (351,616) (134,889)
- ---------- ----------- ---------- ---------- ----------- ----------- ---------- -----------
(154,575) 216,793 207,360 369,322 796,681 2,898,676 (201,851) 1,670,272
4,038,799 3,822,006 5,632,571 5,263,249 9,811,594 6,912,918 3,510,899 1,840,627
- ---------- ----------- ---------- ---------- ----------- ----------- ---------- -----------
3,884,224 4,038,799 5,839,931 5,632,571 10,608,275 9,811,594 3,309,048 3,510,899
- ---------- ----------- ---------- ---------- ----------- ----------- ---------- -----------
$1,899,385 $ 9,797,915 $5,173,813 $9,472,800 $16,125,091 $49,635,265 $1,920,793 $25,018,799
- ---------- ----------- ---------- ---------- ----------- ----------- ---------- -----------
$4,894,715 $ 5,590,164 $2,208,355 $4,688,111 $ 3,366,385 $ 3,776,398 $4,454,721 $ 1,841,428
- ---------- ----------- ---------- ---------- ----------- ----------- ---------- -----------
<CAPTION>
EQUITY INCOME GROWTH ASSET MANAGER
GROWTH PORTFOLIO+++ PORTFOLIO++++ PORTFOLIO++++ PORTFOLIO++++
- ----------------------- ------------- ------------- -------------
1995 1994 1995(A) 1995(A) 1995(A)
- ---------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
228,758 1,318,043 46,487 22,587 18,677
1,670 144 178 0 0
0 0 0 0 0
- ---------- ----------- ---------- ---------- -----------
230,428 1,318,187 46,665 22,587 18,677
(106,502) (60,908) (2,506) (762) (11)
- ---------- ----------- ---------- ---------- -----------
123,926 1,257,279 44,159 21,825 18,666
2,112,634 855,355 0 0 0
- ---------- ----------- ---------- ---------- -----------
2,236,560 2,112,634 44,159 21,825 18,666
- ---------- ----------- ---------- ---------- -----------
$2,267,700 $12,213,985 $ 781,786 $ 577,374 $ 265,669
- ---------- ----------- ---------- ---------- -----------
$1,046,249 $ 546,830 $ 41,759 $ 20,137 $ 149
- ---------- ----------- ---------- ---------- -----------
</TABLE>
- --------------------------------------------------------------------------------
NOTE 3., CONT'D.
(and on the date the Contract Value is withdrawn in full if other than date
specified), a $30 contract administration charge, or a lesser amount as
required under state insurance laws, is deducted from the Contract value.
A copy of the June 30, 1995 semi-annual report of Penn Series, AMT, TCI and
Fidelity accompanies this report.
9
